NOT-FOR-PROFIT ORGANIZATIONS d.

Statements of financial position as of the beginning and end of the reporting period,
Objectives of Nonbusiness Organizations
1. Which one of the following is ordinarily not considered one of the major distinguishing
characteristics of nonbusiness organizations?
a. Significant amounts of resources are provided by donors in nonreciprocal transactions.
b. There is an absence of defined, transferable ownership interests.
c. Performance indicators similar to a business enterprises profit are readily available.
d. The primary operating purpose is not to provide goods or services at a profit.
comparative statements of cash flows, and comparative statements of activities.
6. SFAS 117, Financial Statements of Not-for-Profit Organizations, focuses on
a. Basic information for the organization as a whole.
b. Standardization of funds nomenclature.
c. Inherent differences of not-for-profit organizations that affect reporting presentations.
Gleim d. Distinctions between current fund and non-current fund presentations.AICPA 1194 TMG-30

2. Which of the following is a characteristic of nonbusiness organizations? 7. In a statement of financial position, a not-for-profit organization should report amounts for
a. Noneconomic reasons seldom underlie the decision to provide resources to nonbusiness which of the following classes of net assets?
enterprises. I. Unrestricted.
b. Business and nonbusiness organizations usually obtain resources in the same way. II. Temporarily restricted.
c. Both nonbusiness and business organizations use scarce recourses in the production and III. Permanently restricted.
distribution of goods and services. a. I, II, and III. c. I and III only.
d. The operating environment of nonbusiness organizations ordinarily differs from that of b. I and II only. d. II and III only. Gleim
business organizations. Gleim
8. In its statement of activities, a not-for-profit organization may report expenses as decreases in
3. Financial reporting by nonbusiness organizations should provide information useful in which of the following classes of net assets?
a. Making resource allocation decisions. Gleim a. b. c. d.
b. Assessing services and the ability to continue to provide services. Unrestricted Yes Yes Yes Yes
c. Assessing management stewardship and performance. Permanently Restricted Yes No No Yes
d. All of the answers are correct. Gleim Temporarily Restricted No Yes No Yes

4. Typical users of financial reports of nonbusiness organizations include which of the following? 9. For which of the following assets held by a religious organization should depreciation be
a. Resource providers. c. Governing and oversight bodies. recognized in the organizations general-purpose external financial statements?
b. Constituents. d. All of the answers are correct. Gleim a. The house of worship. c. A nationally recognized historical treasure.
b. A priceless painting. d. Land used for a building site. Gleim
Not-for-Profit Organizations
5. SFAS 117, Financial Statements of Not-for-Profit Organizations, establishes standards for 10. The Addams family lost its home in a fire. On December 25, 2001, a philanthropist sent
general-purpose external financial statements issued by not-for-profit organizations. A money to the Benevolent Society to purchase furniture for the Addams family. The resource
complete set of financial statements should include provider did not explicitly grant the Society the unilateral power to redirect the use of the
a. Statements of financial position as of the beginning and end of the reporting period, a assets. During January 2002, the Society purchased this furniture for the Addams family. The
statement of cash flows, and a statement of activities. Society, a not-for-profit organization, should report the receipt of the money in its 2001
b. A statement of financial position as of the end of the reporting period, a statement of cash financial statements as a(n)
flows prepared on the direct basis, and a statement of activities. a. Unrestricted contribution. c. Permanently restricted contribution.
c. A statement of financial position as of the end of the reporting period, a statement of cash b. Temporarily restricted contribution d. Liability. AICPA 0595 TMG-58
flows, and a statement of activities. Gleim
11. The Art Museum, a not-for-profit organization, received a contribution of historical artifacts. It c. Permanently restricted net assets.
need not recognize the contribution if the artifacts are to be sold and the proceeds used to d. Either unrestricted or temporarily restricted net assets.
a. Support general museum activities. c. Repair existing collections.
b. Acquire other items for collections. d. Purchase buildings to house collections. 16. Three presentations in the lecture series were held in 2001. The speaker fees for the three
AICPA 0595 TMG-59 presentations amounted to $90,000. The not-for-profit organization used the $50,000 dividend
income to cover part of the total fees. Because the board of directors did not wish to sell part
12. According to SFAS 116, Accounting for Contributions Received and Contributions Made, what of the investments, the organization used $40,000 in unrestricted resources to pay the
classification(s), if any, should be used by not-for-profit organizations to report receipts of remainder of the speaker fees. In the 2001 statement of activity, the $50,000 of dividend
contributions? income should be recorded as an increase in
Gleim a. b. c. d. a. Unrestricted net assets.
Unrestricted Support No No Yes Yes b. Temporarily restricted net assets.
Restricted Support No Yes No Yes c. Permanently restricted net assets.
d. Either unrestricted or temporarily restricted net assets.
13. SFAS 116 requires not-for-profit organizations to recognize a conditional promise to give when
a. The promise is received. 17. The NPOs accounting policy is to record increases in net assets, for which a donor-imposed
b. The promise is received in writing. restriction is met in the same accounting period as gains and investment income are
c. The conditions are met. recognized, as increases in unrestricted net assets. In the 2001 statement of activity, the
d. It is reasonably possible that the conditions will be met. Gleim $120,000 unrealized gain should be recognized as
a. A $40,000 increase in unrestricted net assets and an $80,000 increase in temporarily
14. Napro Charities, a not-for-profit agency, receives free electricity on a continuous basis from a restricted net assets.
local utility company. The utility companys contribution is made subject to cancellation by the b. A $120,000 increase in unrestricted net assets.
donor. Napro Charities should account for this contribution as a(n) c. A $120,000 increase in temporarily restricted net assets.
a. Unrestricted revenue only. d. A $120,000 increase in permanently restricted net assets.
b. Restricted revenue only.
c. Unrestricted revenue and an expense. 18. If the lecture series were not scheduled to begin until 2002, the $50,000 dividend income
d. Restricted revenue and an expense. Gleim would be recorded in the 2001 statement of activity as an increase in
a. Unrestricted net assets.
Questions 22 through 26 are based on the following information. Gleim b. Temporarily restricted net assets.
Early in 2001, a not-for-profit organization (NPO) received a $2,000,000 gift from a wealthy c. Permanently restricted net assets.
benefactor. This benefactor specified that the gift be invested in perpetuity with income restricted d. Either unrestricted or temporarily restricted net assets.
to provide speaker fees for a lecture series named for the benefactor. The NPO is permitted to
choose suitable investments and is responsible for all other costs associated with initiating and 19. If the lecture series were not scheduled to begin until 2002, the $120,000 unrealized gain
administering this series. Netierh the donors stipulation nor the law addresses gains and losses should be recorded in the 2002 statement of activity as an increase in
on this permanent endowment. In 2001, the investments purchased with the gift earned $50,000 in a. Unrestricted net assets.
dividend income. The fair value of the investments increased by $120,000. b. Temporarily restricted net assets.
c. Permanently restricted net assets.
15. The $2,000,000 gift should be recorded in the 2001 statement of activity as an increase in d. Either unrestricted or temporarily restricted net assets.
a. Unrestricted net assets.
b. Temporarily restricted net assets.
20. Following the destruction of its house of worship by fire, a religious organization held a b. $184,000 should be reported as revenue.
rebuilding party. Part of the labor was donated by professional carpenters. The remainder c. $16,000 should be reported as revenue. AICPA 0590 II-11
was donated by members of the organization. Capitalization is required for the value of the d. The gift and its terms should be disclosed only in notes to the financial statements.
services provided by
a. The professional carpenters only. 25. Maple Church has cash available for investments from contributions with different restrictions.
b. The members only. Maples policy is to maximize its financial resources. How may Maple pool its investments?
c. The professional carpenters and the members. a. Maple may not pool its investments.
d. Neither the professional carpenters nor the members. Gleim b. Maple may pool all investments but must equitably allocate realized and unrealized gains
and loses among participants.
21. When a nonprofit organization combines fund-raising efforts with educational materials or c. Maple may pool only unrestricted investments but must equitably allocate realized and
program services, the total combined costs incurred are unrealized gains and losses among participating funds.
a. Reported as program services expenses. d. Maple may pool only restricted investments but must equitably allocate realized and
b. Allocated between fund-raising and program services expenses using an appropriate unrealized gains and losses among participating funds. AICPA 0593 II-40
allocation basis.
c. Reported as fund-raising costs. Health Care Organizations
d. Reported as management and general expenses. AICPA 0593 T-60 26. Monies from educational programs of a hospital normally are included in
a. Ancillary service revenue. c. Nonoperating gains.
22. Eleemosynary Institution (EI) received a donation of equity securities with readily determinable b. Patient service revenue. d. Other revenue. AICPA 1189 T-59
fair values. The securities had appreciated in value after they were purchase by the donor,
and they continued to appreciate through the end of EIs fiscal year. At what amount should EI 27. Which of the following should normally be considered ongoing or central transactions for a not-
report its investment in donated securities in its year-end balance sheet? for-profit hospital?
a. Donors cost. I. Room and board fees from patients.
b. Fair value at the date of receipt. II. Recovery room fees.
c. Fair value at the balance sheet date. a. Neither I nor II. c. II only.
d. Fair value at either the date of receipt or the balance sheet date. AICPA 0593 II-38 b. Both I and II. d. I only. AICPA 1195 TMG-75

23. Environs, a community foundation, incurred $10,000 in management and general expenses 28. Valleys community hospital normally includes proceeds from the sale of cafeteria meals in
during 2001. In Environs statement of activities for the year ended December 31, 2001, the a. Deductions from dietary service expenses.
$10,000 should be reported as AICPA 0592 II-40 b. Ancillary service revenues.
a. A direct reduction of fund balance. c. Part of program services. c. Patient service revenues.
b. Part of supporting services. d. A contra account to offset revenue. d. Other revenues. AICPA 0594 TMG-60

24. In July 2000, Ross irrevocably donated $200,000 cash to be invested and held in trust by a
church. Ross stipulated that the revenue generated from this gift to be paid to Ross during
Rosss lifetime. After Ross dies, the principal is to be used by the church for any purpose
chosen by its governing body. The church received interest of $16,000 on the $200,000 for
the year ended June 30, 2001, and the interest was remitted to Ross. In the churchs June 30,
2001 annual financial statements
a. $200,000 should be reported as revenue.
29. In health care accounting, restricted net assets are
a. Not available unless the directors remove the restrictions.
b. Restricted as to use only for board-designated purposes.
c. Not available for current operating use; however, the income generated is available for
current operating use. AICPA 0593 II-29
d. Restricted as to use by the donor, grantor, or other source of the resources.
30. In April 2001, Delta Hospital purchased medicines from Field Pharmaceutical Co. at a cost of
$5,000. However, Field notified Delta that the invoice was being canceled and that the organizations obtain resources from contributors and are accountable to the providers of those
medicines were being donated to Delta. Delta should record this donation of medicines as resources or to their representatives. Answer (D) is incorrect because the operating
a. A memorandum entry only. environments of nonbusiness and business organizations are similar.
b. A $5,000 credit to nonoperating expenses.
c. A $5,000 credit to operating expenses. 3. REQUIRED: The objective(s) of financial reporting by nonbusiness organizations.
d. Other operating revenue of $5,000. AICPA 0595 TMG-60 DISCUSSION: (D) Answers (A) through (C) are included among the business objectives of
financial reporting for nonbusiness organizations stated in SFAC 4. Additional objectives are
31. Which of the following normally would be included in the health care revenues of a hospital? to provide information about the liquidity of the organization, economic resources, obligations,
AICPA 1194 TMG-28 a. b. c. d. net resources, and changes in them, including managers explanations and interpretations.
Revenues from Educational Programs No No Yes Yes Answers (A), (B), and (C) are incorrect because financial reporting by nonbusiness
Unrestricted Gifts No Yes No Yes organizations should provide information useful in making resource allocation decisions,
assessing services and the ability to continue to provide services, and assessing management
32. General purpose external financial reporting by a health care organization requires stewardship and performance.
presentation of
a. Fund group information by a not-for-profit organization. 4. REQUIRED: The typical users of financial reports prepared by nonbusiness organizations.
b. A statement of operations. DISCUSSION: (D) In addition to those users listed in answers (A) through (C), others
c. A separate statement of changes in equity or net assets. potentially interested in the financial information provided by nonbusiness organizations
d. A performance indicator only by for-profit entities. Gleim include managers, organization members, taxpayers, contributors, grantors, lenders,
suppliers, creditors, employees, directors and trustees, service beneficiaries, financial analysts
and advisers, brokers, underwriters, lawyers, economists, taxing authorities, regulatory
1. REQUIRED: The statement not ordinarily considered a major characteristic of nonbusiness authorities, legislators, the financial press, labor unions, trade associations, researchers,
organizations. teachers, and students.
DISCUSSION: (C) SFAC 4, Objectives of Financial Reporting by Nonbusiness Organizations, Answers (A), (B), and (C) are incorrect because resource providers, constituents, and
states that the objectives of financial reporting are derived from the common interests of those governing and oversight bodies are typical users.
who provide the resources to nonbusiness organizations. Such organizations ordinarily have
no single indicator of performance comparable to a business enterprises profit. Thus, 5. REQUIRED: The statements included in a complete set of financial statements of not-for-
nonbusiness organization performance is usually evaluated in terms of management profit organizations.
stewardship. DISCUSSION: (C) SFAS 117 states that a complete set of financial statements of a not-for-
Answers (A), (B), and (D) are incorrect because SFAC 4 specifically gives each as a profit organizations shall include a statement of financial position as of the end of the reporting
distinguishing characteristic of nonbusiness organizations. period, a statement of activities and a statement of cash flows for the reporting period, and
accompanying notes to financial statements.
2. REQUIRED: The characteristic of nonbusiness organizations. Answer (A) is incorrect because the statement of financial position should be as of the end of
DISCUSSION: (C) The operating environments of nonbusiness and business organizations the reporting period. Answer (B) is incorrect because SFAS 117 does not specify how the
are similar in many ways. Both produce and distribute goods and services using scarce statement of cash flows is to be prepared. Answer (D) is incorrect because the statement of
resources. financial position should be as of the end of the reporting period, and comparative statements
Answer (A) is incorrect because many noneconomic factors affect decisions to provide are not required.
resources to nonbusiness enterprises. Answer (B) is incorrect because business
organizations obtain resources by providing goods and services. Many nonbusiness 6. REQUIRED: The focus of SFAS 117.
 DISCUSSION: (A) SFAS 117 is intended to promote the relevance, understandability, and
comparability of financial statements issued by not-for-profit organizations by requiring that
certain basic information be reported. The focus of the financial statements required by SFAS
117 is on the not-for-profit organization as a whole.
Answers (B), (C), and (D) are incorrect because, according to SFAS 117, the focus is on the
not-for-profit organization as a whole and on reporting assets, liabilities, and net assets;
changes in net assets; flows of economic resources; cash flows, borrowing and repayment of
borrowing, and other factors affecting liquidity; and service efforts.
7. REQUIRED: The classes of net assets reported in a statement of financial position of a not-
for-profit organization.
DISCUSSION: (A) SFAS 117, Financial Statements of Not-for-Profit Organizations, requires a
not-for-profit organization to report amounts for all three classes: permanently restricted net
assets, temporarily restricted net assets, and unrestricted net assets. Information regarding
the nature and amounts of permanently or temporarily restricted net assets should be provided
by reporting amounts on the face of the statement or by including details in the notes to
financial statements.
Answers (B), (C), and (D) are incorrect because a not-for-profit organization should report
amounts for all three classes.
8. REQUIRED: The reporting of expenses in a not-for-profit organizations statement of
activities.
DISCUSSION: (C) In a statement of activities, revenues and expenses ordinarily should be
reported as gross amounts. Revenues may be reported as increases in either unrestricted or
restricted (temporarily or permanently) net assets. Expenses ordinarily should be reported as
decreases in unrestricted net assets. However, investment revenues, reported as increases in
unrestricted or restricted net assets, may be reported net of related fees such as custodial fees
and investment advisory fees provided that these fees are disclosed either on the face of the
statement or in the related notes.
Answers (A), (B), and (D) are incorrect because not-for-profit organizations should report
expenses as decreases in unrestricted net assets. Expenses do not decrease permanently
and temporarily restricted net assets.
9. REQUIRED: The asset held by a nonprofit organization for which depreciation should be
recognized.
DISCUSSION: (A) SFAS 93, Recognition of Depreciation by Not-for-Profit Organizations,
requires all nonprofit organization to recognize the cost of using up long-lived tangible assets
(depreciation) in their general purpose external financial statements. Hence, a building used
for religious activity is ordinarily depreciable.
Answers (B) and (C) are incorrect because depreciation does not have to be recognized for
certain works of art and historical treasures whose economic benefit or service potential is
used up so slowly that their estimated useful lives are extraordinarily long. Answer (D) is
incorrect because land is normally not depreciated by any organization.
10. REQUIRED: The reporting of a transfer to an NPO with a direction that the assets be used to
aid a specific beneficiary.
DISCUSSION: (D) SFAS 136, Transfer of Assets to a Not-for-Profit Organization or Charitable
Trust that Raises or Holds Contributions for Others, applies when a donor makes a
contribution to a recipient entity that agrees either to user the assets for the benefit of another
entity designated by the donor or to transfer the assets of the beneficiary. The recipient entity
should recognize the receipt of the assets as a contribution if the donor explicitly grants the
entity variance power to redirect the use of the assets or if the recipient and the beneficiary are
financially interrelated. However, if neither of these conditions applies, the recipient entity
should recognize the fair value of the assets as a liability/
Answers (A), (B), and (C) are incorrect because the recipient has not been granted variance
power, and the recipient and beneficiary are not financially interrelated organizations. Thus,
the transfer should be accounted for as a liability.
11. REQUIRED: The circumstances under which a contribution of artifacts to be sold need not be
recognized.
DISCUSSION: (B) Contributions of such items as art works and historical treasures need not
be capitalized and recognized as revenues if they are added to collections that are (1) subject
to a policy that requires the proceeds of sale of collection items to be used to acquire another
collection items; (2) protected, kept unencumbered, cared for, and preserved; and (3) held for
public exhibition, education, or research for public service purposes rather than financial gain
(SFAS 116).
Answers (A), (C), and (D) are incorrect because, if the proceeds are used to support general
museum activities, repair existing collections, or purchase buildings to house collections, the
contribution must be recognized.
12. REQUIRED: The classification(s), if any, of contributions received by not-for-profit
organizations.
DISCUSSION: (D) SFAS 116 requires that contributions received by not-for-profit
organizations be reported as restricted support or unrestricted support. Contributions with
donor-imposed restrictions are reported as restricted support. Restricted support increases
 permanently restricted net assets or temporarily restricted net assets. Contributions without
donor-imposed restrictions are reported as unrestricted support.
Answers (A), (B), and (C) are incorrect because not-for-profit organizations must record
contributions as unrestricted support or restricted support.
13. REQUIRED: The timing of recognition of a conditional promise to give.
DISCUSSION: (C) A conditional promise to give is one that depends on the occurrence of a
specified future, uncertain event to establish the promisors obligations. It is recognized when
the conditions are substantially met, i.e., when the conditional promise becomes unconditional.
If the possibility is remote that the condition will not be met, the recognition criterion is
satisfied.
Answers (A) and (B) are incorrect because receipt of the promise is not sufficient for
recognition of a contribution. Answer (D) is incorrect because the possibility that the condition
will not be met must be remote before a contribution is recognized.
14. REQUIRED: The amount at which a contribution of electricity should be recorded by the
donee.
DISCUSSION: (C) SFAS 116 defines a contribution of utilities, such as electricity, as a
contribution of other assets, not a contribution of services. A simultaneous receipt and use of
utilities should be recognized as both an unrestricted revenue and an expense in the period of
receipt and use. The revenue and expense should be measured at estimated fair value. This
estimate can be obtained from the rate schedule used by the utility company to determine
rates charged to a similar customer.
Answers (A), (B), and (D) are incorrect because the simultaneous receipt and use of electricity
should be recorded as an unrestricted revenue and an expense in the period of receipt and
use.
15. REQUIRED: The classification of a gift to be invested in perpetuity.
DISCUSSION: (C) A donor-imposed restriction limits the use of contributed assets. This gift
is unconditional in the sense that no condition is imposed on the transfer, but it includes a
permanent restriction on the use of the assets. Under SFAS 117, the gift should therefore be
classified as an increase in permanently restricted net assets.
Answers (A), (B), and (D) are incorrect because the donor stipulated that the gift invested in
perpetuity, a permanent restriction.
16. REQUIRED: The classification of expended dividend income generated from investments held
in perpetuity.
DISCUSSION: (D) SFAS 117 and 124 require that income from donor-restricted permanent
endowments be classified as an increase in temporarily restricted or permanently restricted
net assets if the donor restricts its use. However, if the donor-imposed restrictions are met in
the same reporting period as the gains and investment income are recognized, the gains and
income may be reported as increases in unrestricted net assets, provided that the organization
has a similar policy for reporting contributions received, reports on a consistent basis from
period to period, and adequately discloses its accounting policy. The temporary restriction on
the $50,000 of investment income was met by expenditure in 2001, the year the gain and
income were recognized. Thus, the dividend revenue may be classified as an increase in
either unrestricted or temporarily restricted net assets, depending on the NPOs accounting
policy.
Answers (A), (B), and (C) are incorrect because investment income may be reported as an
increase in either unrestricted or temporarily restricted net assets in these circumstances.
17. REQUIRED: The classification of unrealized gain from investments held in perpetuity.
DISCUSSION: SFAS 117 and 124 permit the recognition of gains and investment income as
increases in unrestricted net assets if the donor-imposed restrictions are met in the same
reporting period as the gains and investment income are recognized, provided that the
organization has a similar policy for reporting contributions received, reports on a consistent
basis from period to period, and adequately discloses its accounting policy. The temporary
restriction on the income was met by expenditure in 2001, the year the income and the gain
were recognized. Thus, consistent with its policy, the NPO should treat the gain as an
increase in unrestricted net assets. Given that the donor of the endowment allows the NPO to
choose suitable investments and that no permanent restriction is imposed on the gain by the
donor or by the law, the classification of the gain is the same as that of the income.
Answers (A), (C), and (D) are incorrect because NPOs policy is to report the gain as an
increase in unrestricted net assets if the donor restriction is met in the period the gain and
income are recognized.
18. REQUIRED: The classification of unexpended dividend income generated from investments
held in perpetuity.
DISCUSSION: (B) SFAS 117 requires that gains and investment income from donor-restricted
permanent endowments be classified as increases in temporarily restricted net assets if the
donor restricts the use of these resources to a specific purpose that either expires with the
passage of time or can be met by actions of the organization. The restriction is temporary
because it will expire when the income is expended in a future period.
Answers (A), (C), and (D) are incorrect because the donor-imposed restriction is temporary. It
will expire when the income is expended. Moreover, the income cannot be classified as
 unrestricted because recognition and the expiration of the restriction do not occur in the same
period.
Answers (A), (C), and (D) are incorrect because the donor-imposed restriction is temporary. It
will expire when the income is expended. Moreover, the income cannot be classified as
unrestricted because recognition and the expiration of the restriction do not occur in the same
period.
19. REQUIRED: The classification of an unrealized gain on investments held in perpetuity.
DISCUSSION: (B) given that the NPO has the discretion to choose suitable investments (as
opposed to holding specific securities in perpetuity), the gain is not permanently restricted
absent a donor stipulation or a legal requirement. Rather, the gain has the same classification
as the income. The latter is temporarily restricted because it is to be expended in a future
period. Hence, the gain is also temporarily restricted.
Answers (A), (C), and (D) are incorrect because the income and the gain are temporarily
restricted.
20. REQUIRED: The contributed services to be capitalized.
DISCUSSION: (C) Contributions of services by the professional carpenters should be
capitalized. Under SFAS 116, the contributions of services requiring specialized skills, such
as those of carpenters, electricians, etc., should be recognized if they are provided by
individuals possessing those skills and would typically need to be purchased if not provided by
donation. SFAS 116 also requires that donated services creating or enhancing nonfinancial
assets be recognized even though specialized skills are not involved. Because the members
labor helped rebuild the church, their contributions of services also should be capitalized.
Answers (A), (B), and (D) are incorrect because the church members donated labor and the
services of the professional carpenters should be capitalized.
21. REQUIRED: The correct accounting treatment of combined fund-raising and educational
materials or program services costs.
DISCUSSION: (B) When fund-raising costs are combined with program services costs or
educational materials, the total of these combined services should be systematically and
rationally allocated between the programs and fund-raising.
Answer (A) and (C) are incorrect because costs that do not completely relate to one category
should be allocated. Answer (D) is incorrect because the costs must be allocated to the
proper programs to which they relate.
22. REQUIRED: The valuation of donated equity securities.
DISCUSSION: (C) In its statement of financial position, a not-for-profit organization should
measure the following investments at fair value: (1) equity securities with readily determinable
fair values and (2) debt securities. Thus, the total change in the fair value of the donated
securities from the date of receipt to the balance sheet date must be reported in the statement
of activities (SFAS 12ld measure the following investments at fair value: (1) equity securities
with readily determinable fair values and (2) debt securities. Thus, the total change in the fair
value of the donated securities from the date of receipt to the balance sheet date must be
reported in the statement of activities (SFAS 124).
Answers (A), (B), and (D) are incorrect because all investments to which SFAS 124 applies
are reported at fair value.
23. REQUIRED: The expense classification for management and general expenses in the
statement of activities.
DISCUSSION: (B) Two functional categories of expenses for an NPO are program services
and supporting services expenses. Supporting services expenses, which do not relate to the
primary mission of the organization, may be further subdivided into (1) management and
general expenses, (2) fund-raising expenses, and (3) membership development costs.
Answer (A) is incorrect because a direct reduction of fund balance would be the result of a
transfer or a refund to a donor. Moreover, fund accounting information is not required to be
externally reported. Answer (C) is incorrect because program services expenses related
directly to the primary mission of the NPO. Answer (D) is incorrect because only costs directly
related to a certain source of support, such as a special event or estimated uncollectible
pledges, may be offset against revenue.
24. REQUIRED: The proper accounting for a split-interest agreement.
DISCUSSION: (A) An NPO should report an irrevocable split-interest agreement. Assets
under the control of the NPO are recorded at fair value at the time of initial recognition, and the
contribution is recognized as revenue. Because the NPO has a remainder interest, it should
not recognize revenue from receipt of the income of the trust. Thus, the NPO should
recognize revenue of $200,000 (the presumed fair value of the contributed cash).
Answer (B) is incorrect because the contribution is not reduced by the income paid to the
donor. Answer (C) is incorrect because the income paid to the donor is not revenue of the
NPO. Answer (D) is incorrect because the contribution should be recognized at fair value.
25. REQUIRED: The true statement about pooling of investments by an NPO.
DISCUSSION: (B) Investment pools, including investments from contributions with different
restrictions, are created for portfolio management. Ownership interests are assigned
(ordinarily in terms of units) to the pool categories (participants) based on the market value of
 the cash and securities obtained from each participant. Current market value also determines
the units allocated to additional assets placed in the pool and to value withdrawals. Investment
income, realized gains and losses, and recognized unrealized gains and losses are allocated
based on the units assigned.
Answer (A) is incorrect because pooling of investments is allowed to obtain investment
flexibility and reduce risk. Answers (C) and (D) are incorrect because no prohibition exists as
to the types of investments that may be pooled.
26. REQUIRED: The classification of monies derived from educational programs of a hospital.
DISCUSSION: (D) Revenues of a hospital are classified as patient service revenue and other
revenue. Other revenue includes the usual ongoing operating revenues derived by hospitals
from sources other than patient care and services. Major sources of other revenue are
student tuition and fees and revenue recognized upon expenditure of donor restricted gifts,
grants, or subsidies for specific purposes such as research and education. Thus, the monies
received from an educational program conducted by a hospital should be classified as other
revenue.
Answer (A) is incorrect because ancillary service revenue is included under patient service
revenues. Answer (B) is incorrect because educational program revenue is not directly related
to patient care and is, therefore, not includible in patient service revenues. Answer (C) is
incorrect because nonoperating gains typically arise from activities such as sales of
investments or fixed assets, or investment income.
27. REQUIRED: The item(s), if any, that are ongoing or central transactions for a not-for-profit
hospital.
DISCUSSION: Revenue from health care services include inpatient and outpatient services
provided directly to patients for their medical care. The resulting revenues derive from
furnishing room and board and nursing services. Health care service revenues are also
earned by the operating room, recovery room, labor and delivery room, and other ancillary
departments that give patient care.
Answers (A), (C), and (D) are incorrect because room and board fees from patients and
recovery room fees are ongoing or central transactions.
28. REQUIRED: The classification of revenue from cafeteria meals.
DISCUSSION: (D) Other revenues are derived from services other than providing health care
services or coverage to patients, residents, or enrollees. This category includes proceeds
from sale of cafeteria meals and guest trays to employees, medical staff, and visitors.
Answer (A) is incorrect because revenues from cafeteria sales are accounted for separately
and not as a component of any related expenses. Answer (B) is incorrect because ancillary
service revenues is not a proper classification for hospital revenues. Answer (C) is incorrect
because patient service revenues are health care service revenues.
29. REQUIRED: The definition of restricted net assets.
DISCUSSION: (D) In health care organization accounting, the term restricted is used to
describe resources that have been restricted as to their use by the donors or grantors of those
resources. Temporarily restricted net assets are those donor-restricted net assets that can be
used by the not-for-profit organization for their specified purpose once the donors restriction is
met. Permanently restricted net assets (for example, endowment funds) are those with donor
restrictions that do not expire with the passage of time and cannot be removed by any actions
taken by the entity.
Answer (A) is incorrect because donor restrictions are not removable by the board.
Temporary restrictions expire by passage of time or by actions by the entity consistent with the
donors restrictions. Answer (B) is incorrect because board-designated restrictions are board-
removable. Answer (C) is incorrect because income generated by restricted net assets can be
restricted for specific purposes.
30. REQUIRED: The accounting for a donation of medicine.
DISCUSSION: (D) Contributions of noncash assets that are not long-lived are reported at fair
value in the statement of operations. Donated medicines, office supplies, and other materials
that normally would be purchased by a hospital should be credited at fair value as other
revenue because they directly relate to ongoing major operation but are not derived from
services directly provided to patients.
Answer (A) is incorrect because donated assets should be recorded at their fair value when
received. Answers (B) and (C) are incorrect because this donation should be credited to
another revenue account or a gain account.
31. REQUIRED: The health care revenues of a hospital.
DISCUSSION: (C) Health care services revenues are derived from services other than health
care provided to patients and residents. Other revenues may include cafeteria sales, tuition
from educational programs, donated medicine, and office space rentals. However,
contributions, either unrestricted or for a specific purpose, are treated as gains unless fund-
raising is an ongoing major activity of the hospital. They are recognized at fair value.
Answers (A), (B), and (D) are incorrect because revenues from educational programs are
other revenues, but unrestricted gifts are usually gains.
32. REQUIRED: The true statement about external reporting by a health care organization.
DISCUSSION: (B) The basic financial statements of a health are organization include a
balance sheet, a statement of operations, a statement of changes in equity or net assets, and
a statement of cash flows.
Answer (A) is incorrect because fund accounting may be used for internal purposes but is not
required or encouraged for external reporting. Answer (C) is incorrect because the statement
of changes in equity or net assts may be combined with the statement of operations. Answer
(D) is incorrect because the statement of operations all HCOs, including NPOs, should report
a performance indicator and other changes in net assets.