Page 572 - Encyclopedia of Business and Finance

eobf_N 7/5/06 3:16 PM Page 549

Not-for-Profit Accounting

statements prepared according to generally accepted matted in one of a number of ways. There are alternatives
accounting principles are provided. Among the guidance for recording fixed assets. Additionally, there are some spe-
in this statement are the following: cific requirements for certain types of NPOs, such as uni-
versities and health-care organizations.
1. Three financial statements are required to be issued:
a statement of financial position (balance sheet), a
statement of activities (income statement), and a THE GUIDANCE PROVIDED BY THE
statement of cash flows. AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS
2. Net assets in the statement of financial position
must be classified into three categories, based on the From time to time, the American Institute of Certified
presence of donor-imposed restrictions: unrestricted Public Accountants (AICPA) issues statements of position
net assets (when no donor restrictions exist), tem- that relate to NPOs. Among these statements of position
are: (1) accounting for advertising costs and (2) costs of
porarily restricted net assets (for assets that will be
activities, which includes fund-raising costs and the han-
used for explicit purposes or periods), and perma-
dling of joint costs and their appropriate allocation. For
nently restricted net assets (typically endowments).
example, specific details are provided for determining the
3. Revenues must be reported as increases in one of the allocating of costs to “program” and to “fund-raising” at
three categories of net assets (as mentioned in item an event to raise funds when there is a presentation about
2, above). All expenses, however, must be reported the organization’s program goals.
as decreases in unrestricted net assets. Thus, an
NPO must make two journal entries whenever it
ANALYSIS OF FINANCIAL DATA
expenses a restricted asset: one to record an increase
in assets released from restriction (and a decrease in A number of measures are used to assess the performance
cash or other asset), a second to record a decrease in of an NPO. Among financial measures that are relevant
unrestricted net assets (and an increase in expense). are: (1) the ratio of program expenditures to total expen-
ditures; (2) the ratio of administrative overhead to total
4. Cash flows must be classified into three categories: expenditures; (3) the ratio of fund-raising expenditures to
(1) cash flows from operations, (2) cash flows from
total expenditures.
financing, and (3) cash flows from investing. Cash
flows from financing must include contributions
restricted for long-term purposes and the interest SUMMARY
and dividends from these contributions. Contribu- NPOs in the United States provide valuable services to large
tions not restricted for long-term purposes and the numbers of individuals and groups. Considered in total,
related interest and dividends must be presented in they are successful in securing funds from individuals and
cash flows from operating activities. business entities as well as from governmental sources.
Responsible accounting in accordance with the guidance
5. Voluntary health and welfare organizations (which
include most social service organizations) are provided is critical in knowing how effectively such organi-
required to prepare a separate statement of func- zations are meeting their missions and goals. Reporting,
based on comparable accounting standards and principles,
tional expenses in which they classify its expenses by
is a valuable means of presenting relevant information to
function (such as program, fund-raising, and man-
agement) and by object (such as salaries and inter- state agencies that provide oversight to such organizations
est), in a matrix format. and to individuals and businesses that are selecting those
organizations they wish to support with funds.
The Sarbanes-Oxley Act of 2002 is applicable only to
FLEXIBILITY ALLOWED
publicly owned businesses. Nevertheless, there has been
Because of the variations among NPOs, the FASB has some questioning about its possible value, in some
provided flexibility in the presentation of financial infor-
respects, for NPOs. A number of state legislatures (as of
mation in the statements. For example, the statement of
January 2006) and attorneys general were considering
activities (equivalent to the income statement of a for- proposals to increase the accountability of NPOs.
profit entity) must report expenses by functional classifi-
cations, either in the statements or in notes. The SEE ALSO Accounting; Government Accounting
guidance, however, does not have a list of required func-
tional classifications. This allows the NPO to determine BIBLIOGRAPHY
those classifications that will reflect their activities most American Institute of Certified Public Accountants. (n.d.). State-
accurately. The statement of financial position may be for- ment of position. New York: Author.

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 549