CNC Fund Accounting & GAAP for NPOs 2 — Questions and Answers
Question 1: Under ASC 958, how must a nonprofit classify a donor-imposed restriction that expires when a specific asset is purchased?
- As permanently restricted net assets
- As net assets with donor restrictions until the asset is acquired (Correct answer)
- As unrestricted net assets immediately
- As a liability until the restriction is met
Correct answer: As net assets with donor restrictions until the asset is acquired
ASC 958 requires that purpose restrictions on net assets remain classified as net assets with donor restrictions until the stipulated condition (purchasing the asset) is fulfilled.
Question 2: Which statement best describes the 'functional expense' reporting requirement for nonprofits under GAAP?
- Only health and human services nonprofits must report expenses by function
- All nonprofits must present expenses by both nature and function either on the face of statements or in notes (Correct answer)
- Functional expense reporting is optional for nonprofits with revenues below $1 million
- Expenses must be reported by function only in the statement of activities
Correct answer: All nonprofits must present expenses by both nature and function either on the face of statements or in notes
ASU 2016-14 requires all nonprofits to present an analysis of expenses by both their nature and function, either on the face of the financial statements or in the notes.
Question 3: A nonprofit receives a $50,000 grant restricted for building renovations. The renovation is completed in the same fiscal year. How should the release from restriction be reported?
- As contribution revenue in the prior year when the grant was received
- As a reclassification from net assets with donor restrictions to net assets without donor restrictions (Correct answer)
- As a gain on the statement of activities
- As a reduction of the renovation expense
Correct answer: As a reclassification from net assets with donor restrictions to net assets without donor restrictions
When a donor restriction is satisfied, GAAP requires reclassifying the net assets from 'with donor restrictions' to 'without donor restrictions' on the statement of activities.
Question 4: What is the primary purpose of fund accounting in a nonprofit organization?
- To maximize investment returns across multiple portfolios
- To segregate resources according to donor restrictions and legal requirements for accountability (Correct answer)
- To simplify annual tax filing with the IRS
- To consolidate all financial activity into a single general fund
Correct answer: To segregate resources according to donor restrictions and legal requirements for accountability
Fund accounting segregates resources into funds based on donor restrictions or legal requirements, ensuring accountability and proper stewardship of each fund's assets.
Question 5: Under GAAP, how should a nonprofit record a conditional promise to give where the condition has NOT yet been met?
- Record as contribution revenue with a corresponding liability
- Disclose in notes but do not record as an asset or revenue (Correct answer)
- Record as deferred revenue on the balance sheet
- Record immediately as net assets with donor restrictions
Correct answer: Disclose in notes but do not record as an asset or revenue
Conditional promises to give are not recognized as revenue or assets until the conditions are substantially met; they are only disclosed in the notes.
Question 6: Which of the following is an example of an 'endowment fund' in nonprofit fund accounting?
- A fund restricted by the board to cover next year's operating deficit
- A fund where the donor specifies the principal must be maintained in perpetuity and only income may be spent (Correct answer)
- A fund set aside for a capital campaign lasting three years
- A fund that holds restricted grants from government contracts
Correct answer: A fund where the donor specifies the principal must be maintained in perpetuity and only income may be spent
A true (donor-restricted) endowment requires the principal to be maintained in perpetuity, with only the investment income available for spending per donor stipulation.
Question 7: A nonprofit's board of directors designates $200,000 of unrestricted net assets for a future building project. How are these funds classified on the statement of financial position?
- Net assets with donor restrictions — purpose restricted
- Net assets without donor restrictions — board designated (Correct answer)
- Long-term liabilities for future obligations
- Temporarily restricted net assets
Correct answer: Net assets without donor restrictions — board designated
Board designations create 'net assets without donor restrictions — board designated' because only donors (not the board) can impose donor restrictions; the board can reverse its own designation.
CNC Fund Accounting & GAAP for NPOs 2
Under ASC 958, how must a nonprofit classify a donor-imposed restriction that expires when a specific asset is purchased?