CPA Exam — Financial Accounting and Reporting (FAR) — All Questions

Under ASC 958 as amended by ASU 2016-14, how does a nongovernmental, not-for-profit entity classify net assets on its statement of financial position?

• a.Four classes: unrestricted, board-designated, temporary, and permanent
• b.Three classes: unrestricted, temporarily restricted, and permanently restricted
• c.Two classes: donor-restricted and board-designated
• d.Two classes: with donor restrictions and without donor restrictions✓

ASU 2016-14 replaced the three-class model with two classes, net assets with donor restrictions and net assets without donor restrictions (ASC 958-210-45-1). The unrestricted/temporarily/permanently restricted scheme is the superseded model. Board designations are internal decisions and stay within net assets without donor restrictions, so they are not a separate class.

In Year 1, a not-for-profit (nongovernmental) clinic received a $50,000 cash gift that the donor restricted to buying laboratory supplies. In Year 2, the clinic spent $30,000 of it on such supplies. What does the clinic's Year 2 statement of activities report for this gift?

• a.$30,000 of contribution revenue in net assets without donor restrictions
• b.A $30,000 expense reported within the net assets with donor restrictions class
• c.No entry until the full $50,000 has been spent on laboratory supplies
• d.A $30,000 release from net assets with donor restrictions to those without✓

The contribution was recognized as revenue with donor restrictions in Year 1. When the purpose is met in Year 2, ASC 958-205-45-9 requires a reclassification (release) of $30,000 from net assets with donor restrictions to net assets without donor restrictions, and the supplies expense is reported as a decrease in net assets without donor restrictions (ASC 958-225). Recognizing contribution revenue again double counts the gift, waiting for full use ignores the portion satisfied, and expenses are not reported in the with-donor-restrictions class.

A nongovernmental, not-for-profit entity reports for Year 1: contributions without donor restrictions $400,000; contributions with donor restrictions $150,000; net assets released from restrictions $90,000; program expenses $380,000; management and general expenses $60,000; fundraising expenses $40,000. What is the change in net assets without donor restrictions?

• a.Increase of $50,000
• b.Increase of $10,000✓
• c.Decrease of $80,000
• d.Increase of $70,000

Net assets without donor restrictions increase by unrestricted contributions and releases and decrease by all expenses (ASC 958-225, statement of activities): $400,000 + $90,000 - ($380,000 + $60,000 + $40,000) = +$10,000. Omitting the release gives -$80,000, $70,000 is the change in total net assets, and $50,000 leaves out fundraising expense.

Which statement about expense reporting by a nongovernmental, not-for-profit entity is correct under current GAAP?

• a.It must present an analysis of expenses by both nature and function in one location✓
• b.Expenses paid with restricted gifts are reported in net assets with donor restrictions
• c.Only voluntary health and welfare entities must analyze expenses by their nature
• d.Fundraising costs may be netted against the contribution revenue they generate

ASC 958-720-45-15 (added by ASU 2016-14) requires every NFP to present an analysis of expenses by both nature and function, on the face of the statement of activities, in a separate statement, or in the notes, in one location. The voluntary-health-and-welfare-only requirement is the superseded rule. Expenses are always reported as decreases in net assets without donor restrictions, and fundraising costs are reported as expenses rather than netted against revenue.

A nongovernmental, not-for-profit university receives $1,000,000 in cash from a donor who stipulates that the gift be invested in perpetuity as an endowment. How is the cash receipt classified in the university's statement of cash flows?

• a.Noncash disclosure only
• b.Operating activity
• c.Financing activity✓
• d.Investing activity

ASC 230-10-45-14(c) classifies receipts of resources that by donor stipulation are restricted to long-term purposes, such as contributions to establish a permanent endowment, as financing cash inflows. They are not operating receipts even though they are contributions, not investing receipts even though the cash will be invested, and not noncash transactions because cash was received.

Which measurement focus and basis of accounting does a city use in the fund financial statements of its general fund?

• a.Economic resources focus; modified accrual basis
• b.Current financial resources focus; accrual basis
• c.Economic resources focus; accrual basis
• d.Current financial resources focus; modified accrual basis✓

Governmental funds, including the general fund, report using the current financial resources measurement focus and the modified accrual basis (GASB Statement 34; GASB Codification Sec. 1600). The economic resources focus with the accrual basis is used in the government-wide statements and in proprietary and fiduciary funds. The other two pairings mix a focus and a basis that GASB does not combine.

Which of a city's funds report using the economic resources measurement focus and the accrual basis of accounting?

• a.Debt service and capital projects funds
• b.Permanent and special revenue funds
• c.Enterprise and internal service funds✓
• d.General and special revenue funds

Proprietary funds, which are enterprise and internal service funds, use the economic resources measurement focus and accrual basis (GASB Statement 34; GASB Codification Sec. 1600). General, special revenue, debt service, capital projects and permanent funds are governmental funds, which use the current financial resources focus and modified accrual basis.

A city levied $1,000,000 of property taxes for its current fiscal year. By year-end it had collected $900,000; it expects to collect $40,000 within the first 60 days after year-end, $50,000 later in the next year, and $10,000 is uncollectible. What property tax revenue should the city report in its general fund for the year?

• a.$940,000✓
• b.$900,000
• c.$990,000
• d.$1,000,000

Under modified accrual, property tax revenue is recognized when levied for the period and available, meaning collected within the period or soon enough after it to pay current liabilities, not more than 60 days after year-end (NCGA Interpretation 3 as amended by GASB Interpretation 5; GASB Codification Sec. P70): $900,000 + $40,000 = $940,000. $990,000 is the net levy, which is the government-wide (accrual) amount, $900,000 ignores the amounts that meet the availability test, and $1,000,000 ignores the uncollectible portion as well.

A city accumulates resources that are restricted to paying principal and interest on its general obligation bonds. In which fund should these resources be reported?

• a.Debt service fund✓
• b.Enterprise fund
• c.Permanent fund
• d.Capital projects fund

GASB Statement 54 describes debt service funds as the governmental funds used for resources restricted, committed or assigned to expenditure for principal and interest. Capital projects funds account for resources used to acquire or build capital assets, permanent funds hold resources of which only the earnings may be spent, and an enterprise fund would report debt only when it is the enterprise's own debt.

A city issues general obligation bonds to finance construction of a new fire station, a general government facility. In which fund should the bond proceeds and construction expenditures be reported?

• a.Internal service fund
• b.Capital projects fund✓
• c.Special revenue fund
• d.Debt service fund

GASB Statement 54 describes capital projects funds as the funds used for financial resources restricted, committed or assigned to expenditure for capital outlays, including the acquisition or construction of capital facilities, other than those financed by proprietary or trust funds. A debt service fund later accumulates resources to repay the bonds; special revenue funds account for specific revenue sources restricted or committed to purposes other than debt service or capital projects; internal service funds bill other departments for services.

A town receives a donation whose principal must be kept intact; only the investment earnings may be spent, and only to maintain the town-owned public cemetery. In which fund should the town report this donation?

• a.Special revenue fund
• b.Investment trust fund
• c.Permanent fund✓
• d.Private-purpose trust fund

GASB Statement 54 describes permanent funds as governmental funds for resources restricted so that only earnings, not principal, may be used for purposes that support the reporting government's programs, and GASB Statement 34 gives cemetery perpetual care as an example. A private-purpose trust fund is used when the earnings benefit individuals, private organizations or other governments rather than the government's own programs. A special revenue fund does not preserve principal, and an investment trust fund reports the external portion of an investment pool.

A county collects sales taxes on behalf of several towns within its borders and remits the collections to them monthly. The county has no administrative involvement with or direct financial benefit from the taxes, and the resources are not held in a trust. In which fund type should the county report these resources?

• a.Agency fund
• b.Custodial fund✓
• c.Private-purpose trust fund
• d.Special revenue fund

GASB Statement 84 requires fiduciary activities not held in a trust that meets its criteria to be reported in custodial funds. Agency funds were the category GASB 84 eliminated. A special revenue fund reports the government's own revenue, and a private-purpose trust fund requires a trust arrangement.