For WizardKim-DPR2

Week 8 Discussion Post 2nd Response:

Instructions: Respond to the post below from your fellow classmate. Any opinions, or anything you would like to add to discuss about their post. Must be three substantial paragraphs, and three references.

An NFP (non-for-profits) organization is a legal entity or group formed for some purpose other than to make a profit and not owned by anyone or more individuals or entities. NFPs do not have owners, shareholders, or partners who derive a return or income from their investment. Instead, there are individuals entrusted with the responsibility of ensuring that the entity accomplishes its purpose for being in existence, otherwise known as their mission. (Scot, 2010). 

The Financial Accounting Standards Board (FASB) defines not-for-profit organizations as entities that possess the following characteristics not usually found in other organizations: (Larkin et.al., 2014) 

 1. They receive contributions from significant resource providers who do not expect a commensurate or proportionate monetary return.  

2. They operate for purposes other than to make a profit.  

3. There is an absence of ownership interests like those of business enterprises. 

Not-for-profit organizations include, but are not limited to, trade associations, professional associations, charities, foundations, chambers of commerce, boards of trade, hospitals, universities, and museums. 

Some not-for-profit entities are classified as governmental because they receive tax revenues or are controlled by a government. A state-operated hospital, for example, and a public university are both governmental not-for-profit organizations. However, most not-for-profit entities are nongovernmental. The American Cancer Society and Mothers Against Drunk Driving (MADD) are just two examples of charities that do not qualify as governmental. (Hoyle, 2017) 

With so much money at stake, the need for not-for-profit entities to provide adequate, fairly presented financial information is understandable. Current and potential contributors as well as other interested parties want to evaluate the financial stability of these operations. They want to judge how well resources are used, especially those received from donations. Future gifts and grants are often based, at least in part, on an entity’s ability to convince donors that available funds are spent wisely to accomplish the stated mission. Financial statements are vital for the dissemination of this information because they report the resources generated and reflect the operating decisions made by the entity’s management. (Hoyle, 2017) 

While not-for-profit organizations share many of the same accounting principles as commercial enterprises, their accounting and financial reporting are quite unique because the focus of financial reporting for not-for-profit organizations is not on the measurement of net income. (Larkin et.al., 2014) 

Certain NFP organizations are required by state attorney generals to present their financial statements to be reviewed or audited by an independent certified public accountant (CPA). All organizations with gross revenue and support in excess of $100,000 must have a review, and those in excess of $250,000 must have an audit. In the simplest terms, when a CPA performs a review, he or she performs analytical and numeric tests to determine that an organization’s financial statements are materially correct and free of misstatement. When an audit is performed, the auditor seeks to corroborate amounts and other information disclosed on the financial statements by examining documents (e.g., vendor invoices, bank statements) and performing other tests that provide assurance that the financial statements are materially correct. An audit provides a higher level of comfort than a review (but not absolute assurance) that the financial statements are accurate. (Scot, 2010). 

In addition to state attorney generals, the IRS, state taxing authorities, and, if applicable, the federal government through the Office of Management and Budget  (OMB), there might be other agencies or entities that perform some level of oversight over part or all the activities of NFPs. This includes state and local government granting agencies that provide grants and other support and require periodic financial or other reports, and sometimes perform their own field audits. Lastly, sometimes foundations and other NFP organizations will monitor or regulate the activities of NFPs they provide support or services to. (Scot, 2010). 

SFAS 117 requires all NFP organizations to provide three financial statements: a statement of financial position (balance sheet), a statement of activities (income statement), and a statement of cash flows. 

➢ Statement of Financial Position: Unique to not-for-profit organizations. This is simply another term for a balance sheet, a term used by commercial entities. This statement shows the organization’s assets and liabilities against those assets. Assets must always equal liabilities.  (McMillan, 2010) 

➢ Statement of Activity: Unique to not-for-profit organizations. It is similar to an income statement or statement of profit and loss, terms used by commercial organizations. It simply states the not-for-profit organization’s revenues, expenses, and results of operations. (McMillan, 2010) 

➢ Statement of Cash Flows: The purpose of this statement is to assist the reader in understanding how cash and cash equivalents were generated during the year.  This statement shows the cash receipts and cash disbursements during a specified period (e.g., one year), classified by three principal sources of use: operations, investing, and financing. (Scot, 2010). 

Although they are not required, comparative financial statements increase the usefulness of the financial information presented to the reader. Financial statement presentations are enhanced if they present financial statements for at least two years. Financial statement readers, including donors, boards of directors, audit committees, and creditors, etc., have come to expect to see comparative information in financial statements. (Larkin et.al., 2014) 

 References:

Hoyle, J. B., Schaefer, T. F., & Doupnik, T. S. (2017). Advanced accounting 13e.  McGraw-Hill Education. 

Larkin, R. F., DiTommaso, M., & Ruppel, W. (2014). Wiley not-for-profit GAAP 2015: Interpretation and application of generally accepted accounting principles. ProQuest Ebook Central  https://ebookcentral.proquest.com  

McMillan, E. J., & McMillan, C. C. E. J. (2010). Not-for-profit accounting, tax, and reporting requirements. ProQuest Ebook Central  https://ebookcentral.proquest.com  

Scot, L. (2010). The simplified guide to not-for-profit accounting, formation, and reporting. ProQuest Ebook Central  https://ebookcentral.proquest.com