Chapter 12
Nonprofit Organizations A nonprofit (not-for-profit) organization is a legal accounting entity that is operated for the benefit of the public as a whole, rather than for the benefit of its owners. Nonprofit organizations include civic organizations, colleges and universities, hospitals, private foundations, religious organizations, and social and country clubs. To be familiar and proficient with the problems involving nonprofit organizations, candidates should have an understanding of the following aspects of accounting for nonprofit organizations: 1. Fund Accounting by Nonprofit Organizations 2. Financial Statements for Nonprofit Organizations FUND ACCOUNTING BY NONPROFIT ORGANIZATIONS The accounting unit for nonprofit organizations just like in the national government is the fund, with self-balancing set of accounts, recording cash and other financial resources, together with related liabilities and residual equity balances, and changes therein, which are accounted for separately in order to carry on specific activities or to attain certain objectives in accordance with special regulations, restrictions, or limitations. Funds of nonprofit organizations usually consist of contributions from donors, investment income, and government grants. Funds are accounted for separately to distinguish between assets that may be used as authorized by the board of directors and assets whose use is restricted by donors. Funds commonly used by nonprofit organizations include the following:
Unrestricted Fund Restricted Fund
UNRESTRICTED FUND In many aspects, unrestricted fund is similar to the general fund of a government entity, which is discussed in Chapter 8. The unrestricted fund includes all the assets of a nonprofit organization that are available for use as authorized by the board of directors and are not restricted for specific purposes. Revenues and Gains of Unrestricted Fund
The revenues and gains of an unrestricted fund are derived from different sources. For example, a hospital derives unrestricted fund revenues from patient services. A university’s sources of unrestricted fund revenues include student tuition and fees. Revenues of unrestricted fund may also include contributed materials and services, unrestricted gifts, and governmental grants. Expenses and Losses of Unrestricted Funds Expenses of nonprofit organizations are usually classified in two groups” program services and supporting services. Program services are the activities of the organization that result in the distribution of goods and services to customers, beneficiaries, or members that serve the purposes of the organization. Supporting services are all activities of the organization other than programs services, such as management and general, fund-raising, and membership development activities. Assets and Liabilities if Unrestricted Fund Most assets and liabilities of a nonprofit organization’s unrestricted fund are similar to the current assets and liabilities of a business enterprise. Cash, investments, accounts receivable, inventories and prepayments are the usual assets of an unrestricted fund. RESTRICTED FUND The assets of restricted funds are not derived from the operations of the nonprofit organization. These are obtained from restricted gifts or grants from individuals or government entities, and income from restricted fund investments. Restricted funds of nonprofit organizations are classified into temporarily restricted and permanently restricted. TEMPORARILY RESTRICTED FUND This consists of assets available for current use but expendable only as authorized by the donor of the assets. These assets are transferred to the unrestricted fund at the time the designated expenditure is made. PERMANENTLY RESTRICTED FUND (ENDOWMENT FUND) This consists of assets maintained indefinitely in revenue-producing investments. Only the revenues from the investments may be expended by the nonprofit organization as instructed by the donor or the board of directors. If there are no restrictions on the use of the income from the fund, it is transferred to the nonprofit organization’s unrestricted fund. Otherwise, the revenues are transferred to an appropriate restricted fund.
FINANCIAL STATEMENTS OF NONPROFIT ORGANIZATIONS The financial statements of nonprofit organizations are the statement of financial positions, statement of activities, and the statement of cash flows. Statement of Financial Position This statement shall report (1) the amount of the organization’s total assets, total liabilities, and total net assets, and (2) the amount for each of the three classes of the organization’s net assets: permanently restricted, temporarily restricted, and unrestricted. Statement of Activities This statement shall report (1) the amount of the change in the organization’s net assets for the period with a caption such as changes in net assets or changes in equity, (2) the amount of the changes in each of the three classes of the organization’s net assets; permanently restricted, temporarily restricted, and unrestricted, (3) gross amounts of revenues and expenses of the organization, except that investment revenues may be reported net of expenses and gains or losses on disposal of plant assets may be reported net, and (4) expenses by functional classifications such as program activities and supporting services. Statement of Cash Flows The statement of cash flows shall be similar to one that is issued by a business enterprise. This statement shall report (1) cash provided by operating activities, (2) cash flows from investing activities, and (3) cash flows from financing activities.
Illustrative Financial Statements The following financial statements illustrate a format that complies with the current standards: Nonprofit Organization Statement of Activities Year Ended December 31, 2013 Changes in Unrestricted net Assets: Revenues and Gains: Contributions Fees Investment income Net gains on investments Others Total unrestricted revenue and gains Net assets released from restrictions Total unrestricted revenues, gains, and other support Expenses: Programs Management and general Fund raising Total expenses Increase in unrestricted net assets Changes in Temporarily Restricted Net Assets: Contributions Investment income Net gains on investment Net assets released from restrictions Decrease in temporarily restricted net assets Changes in Permanently Restricted Net Assets: Contributions Investment income Net gains on investments Increase in permanently restricted net assets Increase in net assets Net assets, beginning of year Net assets, end of year
P18,000 12,000 14,000 16,000 2,000 P62,000 32,000 P94,000 56,000 6,000 4,000 66,000 P28,000 P18,000 6,000 6,000 (32,000) P(2,000) P4,000 20,000 12,000 P36,000 P62,000 504,400 P566,400
Nonprofit Organization Statement of Financial Position December 31, 2013 Assets Cash and cash equivalents Receivables (net) Inventories Investments Plant assets (net)
Liabilities and Net Assets Liabilities: Accounts payable Long-term debt Net assets: Unrestricted Temporarily restricted Permanently restricted
P3,400 10,600 1,400 440,000 134,600 P589,800
P11,400 12,000 23,400 184,000 100,000 282,400 566,400 P589,800
Nonprofit Organization Statement of Cash Flows Year Ended December 31, 2013 Cash flow from operating activities: Increase in net assets Items not affecting cash: Depreciation expense Changes in operating assets and liabilities: Increase in receivables Decrease in inventories Decrease in accounts payable Net gains on investments in securities Net cash provided by operating activities Cash flows from investing activities: Acquisition of investments in securities Acquisition of plant assets Disposal of plant assets Net cash used in investing activities Cash flows from financing activities: Contributions received Interest and dividends received and reinvested Payment of long-term debit Net cash used in financing activities Increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year
P62,000 14,000 (4,000) 4,000 (4,000) (34,000) P38,000 P(58,000) (24,000) 25,200 P(36,800) P6,000 2,000 (10,000) P(2,000) P(800) 4,200 P3,400
PROBLEMS 1. Albert University, a private nonprofit university, had the following cash inflows during the year ended December 31, 2013: I. P500,000 from students for tuition. II. P300,000 from a donor who stipulated that the money be invested indefinitely. III. P100,000 from a donor who stipulated that the money be spent in accordance to the wishes of Albert’s board of directors. On Albert University’s statement of cash flows for the year ended December 31, 2013, what amount of these cash flows should be reported as operating activities: a. b. c. d.
P900,000 P400,000 P800,000 P600,000
2. Santa Clara Hospital, a private nonprofit hospital, earned P250,000 revenues from its gift shop located at the lobby and spent P50,000 on research during the year ended December 31, 2013. The P50,000 spent on research was part of a P75,000 contribution received during December of 2010 from a donor who stipulated that the donation be used for medical research. Assume none of the gift shop revenues were spent in 2013. For the year ended December 31, 2013 what was the increase in unrestricted net assets from the events that occurred during 2013? a. b. c. d.
P300,000 P200,000 P250,000 P275,000
3. Luneta Park, a nonprofit organization, received contributions restricted for research totalling P50,000 in 2013. Assume the P50,000 was not expensed in 2013. These contributions were used to purchase P35,000 of research equipment in 2013. As a result of these transactions, for the year ended December 31, 2013. Luneta Park will report, on its statement of activities, a: a. b. c. d.
P15,000 increase in temporarily restricted net assets. P50,000 increase in temporarily restricted net assets. P35,000 increase in unrestricted net assets. P15,000 increase in unrestricted net assets.
4. Santa Fe Hospital, a private nonprofit hospital, had the following cash receipts for the year ended December 31, 2013:
Patient service revenue Gift shop revenue Interest income restricted by donor for the acquisition of computer equipment
P300,000 25,000 50,000
As a result of these cash receipts, the hospital’s statement of cash flows for the year ended December 31, 2013 would report an increase in operating activities of a. b. c. d.
P325,000 P375,000 P350,000 P350,000
5. San Luis Hospital, nonprofit hospital affiliated with a religious group, reported the following information for the year ended December 31, 2013: Gross patient service revenue at the full rates Bad debts expense Contractual adjustments, value added tax (VAT) Allowance for discounts to hospital employees
P980,000 20,000 89,090 15,000
On hospital’s statement of activities for the year ended December 31, 201, what amount should be reported as net patient service revenue? a. b. c. d.
P875,910 P890,910 P855,000 P955,000
6. San Jose Hospital, a nonprofit hospital affiliated with San Carlos College, had the following cash receipts for the year ended December 31, 2013: Patient service revenue Contribution from donor to be invested indefinitely (endowment fund) Tuition fees from nursing school Dividends received from permanent investments
P750,000 250,000 50,000 80,000
The dividends received are restricted by the donor for hospital building improvements. No improvements were made during 2013. On the hospital’s statement of cash flows for the year ended December 31, 2013, what amount of these cash receipts would be included in the amount reported for net cash provided (used) by operating activities? a. P880,000
b. P800,000 c. P1,050,000 d. P750,000 7. Santa Rosa College, a private nonprofit college, received the following contributions during 2013: I. P5,000,000 from alumni for construction of a new wing on the building to be constructed in 2013. II. P1,000,000 from a donor who stipulated that the earnings be used for scholarships. As of December 31, 2013, earnings from investments amounted to P50,000. For the year ended December 31, 2013, what amount of these contributions should be reported as temporarily restricted revenues on the statement of activities? a. b. c. d.
P50,000 P5,050,000 P5,000,000 P6,050,000
8. On December 30, 2013, Saint Peter Hospital, a nonprofit organization, received a P7,000,000 donation of BW Co. shares of stock with a donor stipulated requirements as follows: Shares valued at P5,000,000 are to be sold, with the proceeds used to erect a building. Shares valued at P2,000,000 are to be retained, with the dividends used to support current operations. As a result of the receipt of the BW shares how much should Saint Peter Hospital report as temporarily restricted net assets on its 2013 statement of financial position? a. b. c. d.
P -0P2,000,000 P5,000,000 P7,000,000
9. San Miguel Hospital, a nonprofit hospital affiliated with a private university, reported the following data for the year ended December 31, 2013. Cash contributions received from donors for acquisition of computer equipment on 2014 Proceeds from sales of hospital gift shop and snack bar Dividend income not restricted by donor
P150,000 75,000 25,000
Using the information provided, what amount should be reported as “other revenue and gains” on the hospital’s statement of activities for the year ended December 31, 2013? a. b. c. d.
P25,000 P75,000 P100,000 P250,000
10. A nonprofit organization had the following cash contributions and expenditures in 2013” Unrestricted cash contributions Restricted cash contributions for the acquisition of property Cash expenditures to acquire property
P500,000 200,000 200,000
The statement of cash flows should include which of the following amounts?
a. b. c. d.
Operating activities P700,000 500,000 500,000 0
Investing activities P(200,000) 0 (200,000) 500,000
Financing activities P0 0 200,000 200,000
11. UST Hospital, an nonprofit hospital affiliated with UST, received the following cash contributions from donors during the year ended December 31, 2012: Contributions restricted by donors for research Contributions restricted by donors for acquisition of hospital equipment
P50,000 250,000
Neither of the contributions was spent during 2012, however, during 2013, the hospital spent the entire P50,000 contribution on research and the entire P250,000 contribution on hospital equipment which was used during the year. On UST Hospital’s statement of operations for the year ended December 31, 2013, what total amount should be reported for “net assets released from restrictions.”? a. b. c. d.
P300,000 P50,000 P250,000 P0
12. Miriam Hospital, a nonprofit hospital affiliated with Miriam College, had the following cash receipts for the year ended December 31, 2013: Collections of Philhealth care receivable Contribution from donor to establish a term endowment Tuition fee from nursing school Dividends received from investments in permanent endowment
P750,000 250,000 50,000 80,000
The dividends received are restricted by the donor for hospital building improvements. No improvements were made during 2013. On the hospital’s statement of cash flows for the year ended December 31, 2013, what amount of these cash receipts would be included in the amount reported for net cash provided (used) by operating activities? a. b. c. d.
P880,000 P800,000 P1,050,000 P750,000
13. Christian Hospital, a nonprofit hospital affiliated with a religious group, received the following cash contributions from donors during the year ended December 31, 2013: Capital acquisitions of hospital equipment For permanent endowment
P400,000 300,000
The cash received for acquisition of hospital equipment will be spent in 2012, while the cash received for the permanent endowment was used to acquire investments during 2013. What effect did these cash contributions have on the amount reported for cash flows from investing activities and cash flows from financing activities on the statement of cash flows for the year ended December 31, 2013:
a. b. c. d.
Cash flows from Investing Activities Decrease P300,000 Decrease P700,000 Decrease P300,000 Decrease P300,000
Cash flows from Financing activities Increase P400,000 Increase P700,000 Increase P300,000 Increase P400,000
14. For the 2013 summer session, San Carlos University, a nonprofit university assessed its students P300,000 for tuition and miscellaneous fees, net amount realized was only P290,000 because of the following reductions:
Tuition remissions granted to faculty member families Class cancellation refunds
P3,000 7,000
How much unrestricted current fund revenues from tuition and miscellaneous fees should San Carlos University report for the period? a. b. c. d.
P290,000 P293,000 P297,000 P300,000
15. For the summer session for 2013, Mindanao State University assessed its students P1,700,000 (net of refunds), covering tuition and fees for educational and general purposes. However, only P1,500,000 was expected to be realized because scholarships totaling P150,000 were granted to students, and tuition remissions of P50,000 were to faculty members’ children attending the university. What amount should Mindanao State University include in the unrestricted current funds as revenues from student and fees? a. b. c. d.
P1,500,000 P1,550,000 P1,650,000 P1,700,000
16. The following receipts were among those recorded by Baliwag College, a nonprofit organization, during 2013: Unrestricted gifts Restricted current funds (extended for current operating purposes) Restricted current funds (not yet expended)
P500,000 200,000 100,000
What amount should be included as? Revenues a. b. c. d.
P800,000 700,000 600,000 500,000
Current Fund Revenue P700,000 800,000 600,000 500,000
17. Love and Care, a nonprofit organization, received the following contributions in 2013:
I. P50,000 from a donor who stipulated that the money not be spent until 2012. II. P100,000 from a donor who stipulated that the contributions be used for the acquisition of equipment, none of which was acquired in 2011. What is the increase in temporarily restricted net asset for the year ending December 31, 2013? a. b. c. d.
P50,000 150,000 100,000 0
18. Gentle Care Foundation, a nonprofit organization, received the following pledges: Unrestricted Restricted for acquisition of equipments
P200,000 150,000
All pledges are legally enforceable, however, the foundation’s experience indicates that 10% of all pledges prove to be uncollectible. What amount should the foundation report as pledges receivable, net of any required allowance account? a. b. c. d.
P135,000 180,000 315,000 350,000
19. Bantay Bata Foundation, a nonprofit organization, receives revenue from various sources during the year to support its child care center. The following cash contributions were received during 2013: a. P40,000 restricted by the donor to be used for meals of children. b. P15,000 received by subscriptions to a monthly child care magazine with a fair value to subscribe of P10,000. c. P10,000 to be used only upon completion of a new playroom that was 75% complete at December 31, 2013. What amount should Bantay Bata Foundation record as contribution revenues in its 2013 Statement of Activities? a. P20,000 b. 25,000 c. 10,000
d. 11,000 20. During the year ended December 31, 2013, Cultural Center of the Philippines, a nonprofit organization, received the following donor-restricted contributions and investment income: a. Cash contribution of P100,000 to be permanently invested. b. Cash dividends and interest of P5,000 to be used for the acquisition of theater equipment. As a result of these cash receipts, the statement of cash flows for the year ended December 31, 2013, would report an increase of: a. P105,000 from operating activities. b. 105,000 from financing activities. c. 5,000 form operating activities and an increase of 100,000 from financing activities. d. 100,000 from operating activities and an increase of 5,000 from financing activities.
ANSWERS 1. 2. 3. 4. 5.
D C A A A
6. 7. 8. 9. 10.
B B C C C
11. 12. 13. 14. 15.
A B B B D
16. 17. 18. 19. 20.
A B C B B
SOLUTIONS AND EXPLANATIONS 1. Cash inflows related to revenues and expenses which are unrestricted should be reported in the operating activities sections of statement of cash flows. The cash inflows from both tuition (P500,000) and the unrestricted contribution (100,000) are both unrestricted and should be reported as operating activities. Restricted contributions of 300,000 for long-term purposes are reported as financing activities on the statement of cash flows. 2. Unrestricted net assets increased 250,000 for the year ended December 31, 2013. The 50,000 spent on research during 2013 would be reclassified (added) to unrestricted revenues when the money was spent on research. To 50,000 addition to unrestricted revenues, gains, and other support would be accompanied by a 50,000 reclassification (deduction) from temporarily restricted revenues. The expenses of 50,000 for research are deducted from unrestricted revenues, etc., which include the 50,000 reclassification. The 250,000 of gift shop revenue is unrestricted revenue because the board has control of this revenue. 3. Donor restricted contributions should be reported as revenue on the date received. These contributions should be reported as temporarily restricted revenues for the year ended December 31, 2013. The 35,000 spent in 2013 should be reported as a reclassification (deduction) from the temporarily restricted revenue to unrestricted revenues. This reclassification is required because all expenses are shown as deduction from unrestricted revenues, gains, and other support. For the year ended December 31, 2013, the 35,000 reclassification deducted from the 50,000 results in a 15,000 increase in the net assets of temporarily restricted assets for the year ended December 31, 2013. 4. Cash flows from operating activities would include both the cash received from patient service revenue of 300,000 and the cash received from gift shop sales of 25,000. Cash received from investment income that is restricted by donors for the acquisition of longlived fixed assets should be reported as financing activitites. 5. The provision for VAT (contractual adjustment) and discounts is recognized as deduction from gross patient service revenue to determine net patient revenue. Bad debts
expense is reported as an operating expense. Therefore, net patient service revenue for 2011 is P875,910. This amount is computed by deducting the VAT of P89,090 and the discounts of 15,000 from gross patient service revenue of 980,000. 6. The cash flows from revenues, gains, and other support which are reported on the hospital’s statement of activities, would be included in the net cash provided (used) by operating activities on the statement of cash flows. Both the patient service revenue (750,000) and tuition fees (50,000) are included in the amount reported for cash flows from operating activities. 7. Contributions should be reported as revenues in the period received, even though donors have placed time or used restrictions on the contributions. Therefore, the 5,000,000 contribution from alumni for a wing for the building and the 50,000 of earnings related to the investments should be reported as temporarily restricted revenues on the statement of activities for the year ended December 31, 2013. The 1,000,000 contribution from the donor, who stipulated that the contribution be invested indefinitely, should be reported as a permanently restricted revenue on the statement of activities for the year ended December 31, 2013. 8. The 5,000,000 contribution of BW Co. shares represents temporarily restricted net assets until the shares are sold and the proceeds used to erect a building. The 2,000,000 contribution of BW Co. shares represents permanently restricted net assets because the shares are to be retained permanently. Therefore the answer (d) is correct. 9. Other revenue, gains and losses are derived from services other than patient service revenue. Other revenue typically includes interest and dividends which are unrestricted as well as proceeds from sales from gift shops and snack bars. Cash contributions from donors which are restricted to the acquisition of computer equipment during 2014 are not reported on the statement of activities for 2013. Therefore, the amount that San Miguel should report as other revenue and gains on its statement of activities for 2013 is 100,000. 10. The 500,000 cash inflow from unrestricted contributions should be reported as an increase in the operating activities section. The 200,000 cash inflow restricted for the acquisition of property should be reported as an increase in the financing activities section, while the use of 200,000 to acquire property should be shown as a decrease in the investing activities section. The only answer that agrees with this analysis if the three cash flows is letter (c). 11. Expirations of donor-imposed restriction on temporarily restricted net assets should be reported on the statement of operations as “net assets released from restrictions”. Both the 50,000 and 250,000 was spent in 2013, therefore, reclassifications should be made. 12. The 750,000 and 50,000 should be classified as part of operating activities since they are restricted for any purposes.
13. Cash inflows (for financing activities) restricted for the acquisition of property should be reported as an increase in financing activities. The moment they are used then it will be shown as decrease in investing activities. 14. The university will recognize as revenue the total amount of tuition and miscellaneous fees net of cancellations, 293,000 (300,000 – 7,000). The 3,000 of tuition remissions granted to faculty members’ families will be treated as an expense. 15. Revenue should include the tuition assessed less any refunds, 1,700,000. The scholarships of 150,000 and the tuition remissions 50,000 are treated as expenditures and classified as student aid. 16. Revenues should include all gifts whether restricted or not (800,000). Current fund revenue will include all unrestricted contributions, 500,000 and restricted current funds to the extent that they have been expended for current operating purposes, 200,000. 17. Contributions should be reported as revenue in the year received, whether the donors place time or use restrictions on the contributions. Net assets reported should disclose whether they are unrestricted, temporarily restricted, and permanently restricted. Bothe the contributions received 150,000 would increase temporarily restricted net assets for the year ending December 31, 2013. 18. Pledges are recognized net of uncollectible amounts. Therefore, the net amount of 315,000 (350,000 – 35,000) will be reported as pledges receivable. 19. The computation of contribution revenue is: Contribution restricted to be used for meals of children Excess of the amount received over the fair value of subscriptions (15,000 – 10,000) Total
20,000 5,000 P25,000
The 10,000 contribution to be used upon completion of a new playroom is not part of 2013 revenue since the condition has not been fulfilled. 20. The receipt of cash from a donor to establish a permanent endowment should be presented as a financing activity in the statement of cash flows. The receipt from investment income that by donor stipulation are restricted for purposes of acquiring plant, equipment, and other long-lived assets should also be presented as a financing activity. Therefore, both items (105,000) are considered as financing activities.
