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Chapter 11 Solutions - 11-1 Instructors Manual for...

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11-1 Instructor’s Manual for Financial Management for Public, Health, and Not-for-Profit Organizations, 3E Chapter 11 UNIQUE ASPECTS OF ACCOUNTING FOR HEALTH AND NOT-FOR-PROFIT ORGANIZATIONS QUESTIONS FOR DISCUSSION 11-1. A not-for-profit (NFP) organization is an entity that receives donations, does not consider profits to be an end (although they will likely be a means to the organization’s ends), and does not have owners. Voluntary health and welfare organizations are not-for-profit organizations that are primarily supported by donations, as opposed to revenues from the sale of goods or services. Their activities are generally focused on health and welfare problems. The Red Cross is an example of a voluntary health and welfare organization. Hospitals do not fall into this category because they generate substantial revenues from the sale of their services. 11-2. The net assets section of the balance sheet must show three different groups of net assets: permanently restricted , temporarily restricted , or unrestricted . Permanently restricted net assets generally arise as the result of endowment gifts. In contrast, temporarily restricted net assets are created when donors give gifts that have restrictions. The restrictions relate either to a specific use for the assets donated, a specific action the organization must undertake, or a specific time when the assets can be used. All net assets that are neither permanently nor temporarily restricted are unrestricted. It is important to note that there is a distinction between donor-imposed restrictions and self-imposed restrictions. Self-imposed restrictions often arise when the board of trustees or directors decides that money should be segregated and saved for a future purpose, such as building replacement. It is allowable to indicate such board-designated restrictions on assets and net assets. However, only donor-imposed restrictions create permanently or temporarily restricted net assets. Self-imposed restrictions would create a subtotal within the unrestricted net assets category. 11-3. A not-for-profit organization that has decided to put money aside as a safety reserve generally could reverse that decision and use the money for general operations. In the case of a union, this is more complex. The money in the strike fund often comes from union members. It is possible that the strike fund could be considered to be donor-restricted money. There may also be laws that restrict the use of money once it is placed in a strike fund. 11-4. Although an activity statement includes revenues and expenses as an income statement would, it is more comprehensive, showing all changes in net assets. It uses terms such as Change in Net Assets or Change in Equity , rather than net income. Thus the Activity Statement includes the information that for-profits show in the Income Statement as well as information that would be contained in a for-profit organization’s Statement of Changes in Owner’s Equity. An income
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