Test bank of Accounting for Governmental and Nonprofit Entities, 14e Chapter 1 to Chapter3Accounting for governmental and nonprofit entities, 14e chapter 15 to chapter 17

Ch15-17
Student: ___________________________________________________________________________

1.

A state has the obligation to monitor and regulate a not-for-profit (NPO) organization because it gave the
NPO legal life through the not-for-profit corporation laws.
True

2.

The federal government's primary objective in regulating not-for-profit organizations through the income
tax laws is to limit the number of exempt organizations that operate at any one point in time.
True

3.

False

Board members of a not-for-profit organization have a fiduciary responsibility to provide fiscal guidance
and ongoing governance over the not-for-profit organization to ensure that its exempt mission is carried
out as described in the incorporating documents and exempt application.
True

9.

False

If a tax-exempt organization dissolves and goes out of business, it must distribute its assets to another
tax-exempt organization.
True

8.

False

Intermediate sanctions are often imposed by the Internal Revenue Service in addition to the revoking
tax-exempt status for organizations that confer excessive economic benefits on persons with substantial
influence over the organization.
True

7.

False

The unrelated business income tax is a significant penalty and therefore should be of concern to
tax-exempt organizations.
True

6.

False

The not-for-profit organization applying for tax-exempt status determines the appropriate subsection
under IRC Sec. 501 for which it wants to be considered and the Internal Revenue Services then approves
or does not approve the application.
True

5.

False

Not-for-profit corporations cannot lobby or attempt to influence legislation or politicians.
True

4.

False

False

All officers of a not-for-profit organization have the same responsibilities to the organization and its
constituents.
True

False

10. Not-for-profit organizations are so diverse in nature that it is not feasible to find benchmarks with which
to compare their financial and operating performance.
True

False

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11. Performance measures that can be used to evaluate NPOs include percentage of total expenses spent on
the programs versus on supporting the programs) and total dollars raised for fund-raising dollars spent.
True

False

12. Not-for-profit organizations risk loss of their tax-exempt status if they engage in any political activity.
True

False

13. "Excess benefit transactions" are those in which persons who have substantial influence over the
not-for-profit organization engage in transactions that result in economic benefits to them that are
excessive, such as unreasonable compensation, sale of assets at bargain prices, and lease arrangements.
True

False

14. One of the limitations of financial ratio analysis for not-for-profit organizations is that donors may
incorrectly assume that there are federal or state laws that govern the percentage of annual revenues that
a charity must spend on its programs.
True

False

15. The ratio unrestricted net assets as a percent of operating expenses is helpful in determining if the
not-for-profit organization can cover its debt service expense.
True

False

16. Which of the following is a not a true statement about tax-exempt organizations?
A. They must be organized to serve the charitable needs of the public at large.
B. They must first become a not-for-profit corporation or charitable trust.
C. They are permitted to do some political lobbying if guidelines are met.

D. Their unrelated business income is taxed at corporate income tax rates.
17. Tax-exempt organizations must complete a Form 990 and send it to the IRS
A. Only if they have unrelated business income.
B. If they are nongovernmental (and not a church) and their gross receipts are greater than $25,000.
C. Whether they are governmental or nongovernmental.
D. All of the above are true statements.
18. Which of the following not-for-profit organizations is most likely to be tax-exempt under IRC Sec.
501(c)(3)?
A. Beta Kappa Alpha Sorority.
B. Peaceful Dreams Cemetery Association.
C. Regional Association of Tree Trimmers.
D. Survivors of Breast Cancer Club.
19. Which of the following is a reason why an NPO might fail to qualify for tax-exempt status?
A. It is operated primarily for the benefit of its members.
B. Its officers are paid excessive wages.
C. Its primary purpose is to promote the passage of legislation favorable to institutions of higher
education.
D. It has unrelated business income.

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20. The Internal Revenue Service may impose intermediate sanctions on a tax-exempt organization that
gives an officer
A. Excessive compensation.
B. More than the fair rental value for property owned by the officer.
C. A bargain on the sale of assets.
D. All of the above are transactions that may result in intermediate sanctions.
21. The income most likely to be considered unrelated business income of a human service organization that
provides immunizations to children in the community is

A. Rental of extra space in the building.
B. Regular sale of sweatshirts with the organization's logo on it at a price considerably above cost.
C. Interest and dividend income on investments.
D. Gain on the sale of equipment no longer needed by the organization.
22. The term that means information skewed toward a particular belief with a tendency to have little or no
factual basis is
A. Political influence.
B. Legislation.
C. Propaganda.
D. Lobbying.
23. A tax-exempt organization that receives its support primarily from a large number of individuals or
corporations and a relatively small amount from investment income is called a
A. Public charity.
B. Private foundation.
C. Public foundation.
D. Voluntary health and welfare organization.
24. The incorporating documents that have an external focus and describe the purpose of the organization
without being too restrictive are called
A. By-laws.
B. IRS Form 990.
C. Articles of incorporation.
D. Minutes of the Board meetings.
25. The incorporating documents that have an internal focus and describe the functional rules of the
organization
A. IRS Form 990.
B. By-laws.
C. Minutes of the Board meetings.
D. Articles of incorporation.
26. A good measure of whether the NPO is spending too much on overhead, such as general and
administrative expenses, is

A. Percentage of unrestricted net assets to operating expenses.
B. Current ratio.
C. Total revenues divided by total expenses.
D. Percentage of total expenses spent on the program function as opposed to supporting the programs.

3


27. A good measure of whether the NPO is a "going concern" and can sustain its operations into the future
is
A. Total revenues divided by total expenses.
B. Percentage of unrestricted net assets to operating expenses.
C. Percentage of total expenses spent on the program function as opposed to support function.
D. Both A and B.
28. A good measure of whether the NPO is "liquid" and can meet its short-term obligations is
A. Percentage of total expenses spent on the program function as opposed to support function.
B. Total revenues divided by total expenses.
C. Current assets divided by current liabilities.
D. Percentage of unrestricted net assets to operating expenses.
29. A good measure of whether the NPO is efficient in its fund-raising efforts is
A. Public support as a percentage of fund-raising expenses.
B. Current ratio.
C. Total revenues divided by total expenses.
D. Percentage of total expenses spent on the program function as opposed to support function.
30. Nongovernmental (private) colleges and universities follow FASB standards; governmental (public)
colleges and universities should follow GASB standards.
True

False

31. Public colleges and universities are considered general purpose governments and are expected to be
engaged in governmental activities only for purposes of their stand-alone reports.
True

False

32. Revenues and expenses of both public and private colleges and universities are accounted for on the
accrual basis.
True

False

33. A gift designated by the board of regents of a public university for agricultural research would be
recorded as an unrestricted contribution.
True

False

34. Contributions or grants restricted by an external donor for a particular operating purpose would be
reported as increases to restricted fund balances by a public college or university and as an addition to
temporarily restricted net assets by a private college or university.
True

False

35. College summer school revenues of a public university should be recognized totally within the fiscal
year in which the term is predominantly conducted.
True

False

36. Depreciation of a residence hall should be reported as an expense in a private college's operating
statement but might not be reported in the operating statement of a public college.
True

False

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37. An unrestricted endowment established by the governing board of a public college is considered a
permanent fund and would be reported as unrestricted net assets.
True

False

38. Earnings on endowment investments may increase unrestricted or restricted net assets, or both.
True

False

39. A receipt of $500,000 by a private college to be used to endow a "chaired" professorship in accounting
would be recorded as an increase in temporarily restricted net assets.
True

False

40. The sale of bonds for construction of a college residence hall would always result in a credit to proceeds
of bonds in the accounts.
True

False

41. A statement of cash flows is required by GAAP for all colleges and universities.
True

False

42. Private colleges and universities must provide aggregated entity-wide financial statements prepared in
conformity with FASB Statement No. 117. Consequently, private colleges and universities no longer
utilize fund accounting.
True

False

43. Public colleges and universities that use business-type reporting must present segment information in the
notes to the financial statements.
True

False

44. Which of the following statements is true regarding generally accepted accounting principles (GAAP)
for colleges and universities?
A. The FASB has set standards for private colleges and universities from the time of its inception in
1974.
B. The National Association of Colleges and University Business Officers (NACUBO) only recently
began to play a role in establishing accounting and reporting standards for colleges and universities.
C. Public and private colleges and universities must comply with the 1973 AICPA Audit and
Accounting Guide Audits of Colleges and Universities for guidance in financial reporting.
D. The GASB is responsible for establishing GAAP for public colleges and universities.

45. What type of college or university should report expenses by functional classification?
A. Both private and public colleges and universities.
B. Private colleges and universities.
C. Public colleges and universities.
D. Neither private nor public colleges and universities.

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46. If a public college or university has an independent not-for-profit fund-raising foundation, then the
financial position and activity of the foundation should be
A. Disclosed in the notes to the university's financial statements.
B. Consolidated with the university's financial information.
C. It depends on the degree of control, economic interest, and influence the university has over the
foundation.
D. Considered a component unit of the university.
47. GASBS 34/35 accounting and reporting standards applicable to public colleges and universities
A. Are the same as FASB standards to permit consistent reporting.
B. Permit public colleges and universities to use the AICPA model which differs substantially from the
reporting model used by private colleges and universities subject to FASB jurisdiction.
C. Permit public colleges and universities to optionally follow FASB standards.
D. None of the above is correct regarding GASB standards.
48. The cost of professors' salaries would normally be recorded in which functional area?
A. Research.
B. Instruction.
C. Service.
D. Institutional support.
49. Cactus College, a small private college, received a research grant from NACUBO to study whether
service efforts and accomplishments measures improve institutional performance. Under the provisions
of SFAS No. 116 the grant would be reported as an increase in:

A. Unrestricted net assets.
B. The fund balance of restricted current funds.
C. Permanently restricted net assets.
D. Temporarily restricted net assets.
50. Which of the following receipts may properly be accounted for as an increase in unrestricted net assets?
A. Student tuition and fees.
B. Gift from an alumnus for a new college of business building.
C. Federal grant for genetic research.
D. Acceptance of assets the income from which will be paid to the donor.
51. Economic rationality would argue against a university accepting a split interest agreement in which a
fixed annuity is payable to the donor if:
A. The donor has attached conditions to the gift.
B. The university has no immediate need for the assets.
C. The sum of future annuity payments plus interest thereon exceeds the fair market value of the assets.
D. The present value of the future annuity payments and other liabilities exceed the fair market value of
the assets.
52. FASB standards applicable to private colleges and universities require that their financial statements
A. Provide separate columns for each fund group.
B. Provide aggregated financial information on an entity-wide basis.
C. Include a statement of changes in fund balances.
D. Include a statement of cash flows prepared using the direct method.

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53. Which of the following items would not be reported in the section on revenues and gains in the
statement of activities of a private college or university?
A. Student tuition and fees.
B. Gifts and donations.
C. Net assets released from restriction.

D. None of the above; that is, all are reported as a revenue, support, or gain.
54. Which of the following is not a condition that would permit a public college or private college or
university to avoid accounting recognition of the value of its collections of art, historical treasures, and
similar assets?
A. The assets are held for public exhibition, education, or research in furtherance of public service rather
than financial gain.
B. The assets are protected, kept unencumbered, cared for, and preserved.
C. The assets are subject to an organizational policy that ensures the proceeds of sales of collectible
assets are used for operations of the organization.
D. None of above; all three items are conditions that will avoid accounting recognition.
55. Which of the following is required as part of a complete set of financial statements for a private college
or university?
A. Statement of changes in financial position.
B. Statement of revenues, expenses, and changes in net assets.
C. Statement of activities.
D. All of these statements are required.
56. Assets that the governing board of a public university, rather than a donor or other outside agency, has
determined are to be retained and invested for future scholarships would be reported as
A. An endowment.
B. Unrestricted net assets.
C. Deposits held in custody for others.
D. Restricted net assets.
57. Which of the following statements usually will not be included in the annual financial report of a
governmentally owned public university engaged only in business-type activities?
A. Statement of cash flows.
B. Statement of net assets.
C. Statement of activities.
D. Statement of revenues, expenses, and changes in net assets.

7

58. Pinewood College, a public college, has a 10-week summer session that starts on June 25, 2008, so that
one week is held during FY 2008 and the other nine weeks meet during FY 2009. Tuition and fees in the
amount of $900,000 were collected from students for classes to be conducted in this session. What
amount should Pinewood College recognize as unrestricted revenue in each of the years ended June 30,
2008 and June 30, 2009.

A. Item A
B. Item B
C. Item C
D. Item D
59. Tuition scholarships for which there is no intention of collection from the student should be classified by
a private university as
A. Revenues and expenditures.
B. A reduction of gross revenue to arrive at net revenue.
C. Revenues and expenses.
D. Any of the above.
60. An alumnus donates securities to St. Aloysius College, a private college, and stipulates that the principal
be held in perpetuity and income from the securities be used for faculty travel. Dividends received from
the securities should be recognized as increases in:
A. Endowments.
B. Unrestricted net assets.
C. Permanently restricted net assets.
D. Temporarily restricted net assets.
61. During the years ended June 30, 2008 and 2009, Jasper University, a public university, conducted a
cancer research project financed by a $1,000,000 gift from an alumnus. The entire amount was pledged
by the donor on July 10, 2007, although she paid only $200,000 at that date. The gift was restricted to
the financing of this particular research project. During the two-year research period, Jasper's related gift
receipts and research expenditures were as follows:

How much gift revenue should Jasper University report for the year ended June 30, 2009?
A. $1,000,000
B. $900,000
C. $800,000
D. $0

8


62. Are public and private colleges and universities required to report depreciation expense in their financial
statements?
A. Public: No; Private: No
B. Public: Yes; Private: No
C. Public: Yes; Private: Yes
D. Public: No; Private: Yes
63. During the year ended June 30, 2009, Hopkins College, a private college, received a federal government
grant of $800,000 for research on the role of music in improving math skills for students. Expenses for
this research amounted to $100,000 during the same year. Under applicable FASB standards, assuming
this is a nonexchange transaction, Hopkins College would report what amount(s) as revenues or support
for the year ended June 30, 2009?

A. Item A
B. Item B
C. Item C
D. Item D
64. Which of the following is not a classification of revenues for a college or university as provided by the
National Association of College and University Business Officers (NACUBO)?
A. Private gifts.
B. Federal appropriations.

C. Sales and services of educational activities.
D. All of the above are included in NACUBO's suggested chart of accounts.
65. State appropriations received by a public university are classified as which of the following on the
statement of revenues, expenses, and changes in net assets?
A. Nonoperating revenue.
B. Operating revenue.
C. Other financing source.
D. Increase in unrestricted net assets.
66. Which of the following is a typical classification of a functional expense in a college or university?
A. Recreation and culture.
B. Public safety.
C. Academic support.
D. Depreciation.
67. Which of the following measures may be useful to decision makers evaluating the financial condition of
a college or university?
A. Number of graduates.
B. Faculty productivity.
C. Current ratio.
D. All of the above.

9


68. Financial reporting standards for all government owned and operated hospitals would be found in GASB
pronouncements.
True

False

69. Patient service revenues and related receivables include charges for charity care services.

True

False

70. In accounting for health care entities, the bad debt estimate should always be recorded as a revenue
deduction, rather than as an expense.
True

False

71. Investor-owned health care entities recognize all revenues and expenses on the accrual basis of
accounting, whereas all governmentally owned health care entities recognize revenues and expenditures
on the modified accrual basis.
True

False

72. An expense for diabetes research that was in accordance with the stipulation of the donor would be
recorded as a decrease of unrestricted net assets of a not-for-profit health care organization.
True

False

73. Long-term debt related to a construction project in a public hospital that follows business-type
accounting should be recorded in the capital projects fund.
True

False

74. Health care is provided by organizations that may be for-profit, not-for-profit, or governmental; although

roughly half of all health care provided by not-for-profit entities.
True

False

75. In a public hospital, when resources restricted by donors for the purchase of capital assets are expended
for that purpose in a public hospital, then the equity account called "net assets--invested in capital assets"
is increased.
True

False

76. Endowment income expended during the current period for purposes specified by the donor would be
recorded as a decrease in temporarily restricted net assets using the account "net assets released from
restrictions."
True

False

77. Assets set aside by the governing board for the eventual construction of a hospital addition should be
recorded as "assets limited as to use".
True

False

78. Equipment purchased from the restricted resources of a private hospital should not be depreciated.
True

False

10


79. Continuing care retirement communities (CCRC) provide residential care in a facility, along with some
level of long-term medical care that is less intensive that hospital care.
True

False

80. A health care organization reports its investments at fair value and records any unrealized gains or losses
on the statement of operations.
True

False

81. Contingencies that are unique to health care providers arise from malpractice claims, risk contracting,
and third-party payor payment programs, obligations to provide uncompensated care, and contractual
agreements with physicians.
True

False

82. The asset section of the balance sheet will indicate whether the health care organization is for-profit,
not-for-profit, or governmental.
True

False

83. A gift to a hospital given with the stipulation that the principal be maintained intact for ten years and
then it may be expended would be an example of a permanent endowment.

True

False

84. Health care organizations often collaborate and combine with related entities in providing health care
services.
True

False

85. The goal of financial and operational analysis of a health care organization is to determine if the entity is
profitable.
True

False

86. The required financial statements for a not-for-profit hospital are a balance sheet, statement of revenues
and expenses of the General Fund, a statement of changes in fund balances, and a statement of cash
flows of the General Fund.
True

False

87. An appropriate performance indicator for a not-for-profit hospital is the excess of revenues over
expenses.
True

False

88. Which statement is false regarding generally accepted accounting principles (GAAP) applicable to

health care organizations?
A. Private hospitals follow guidance from the GASB.
B. Public health care organizations follow guidance from the GASB.
C. The AICPA Audit and Accounting Guide Health Care Organizations provides guidance for public,
private, and for-profit health care entities.
D. All of these statements are true.

11


89. The AICPA Audit and Accounting Guide Health Care Organizations requires that the following
statements be prepared for health care organizations:
A. Balance sheet, statement of activities, statement of changes in equity, statement of cash flows.
B. Balance sheet, statement of revenues and expenses, statement of changes in equity, statement of cash
flows.
C. Balance sheet, statement of operations, statement of changes in equity, statement of cash flows.
D. Balance sheet, statement of operations, statement of changes in equity, statement of cash flows,
statement of functional expenses.
90. If the equity section of the balance sheet is comprised of unrestricted net assets, temporarily restricted
net assets, and permanently restricted net assets, then the health care organization is
A. Public, governmental.
B. Private, nongovernmental.
C. Commercial or proprietary.
D. Cannot be determined.
91. Contractual adjustments that arise from differences between the gross charge for patient services and the
amount paid by a third party payor are reported as
A. Bad debt expense.
B. Disclosures in the notes to the financial statements.
C. It depends on how material the differences are.
D. Deductions from gross patient revenue in arriving at net patient revenue.

92. Which of the following statements is true about diagnosis-related groups (DRGs)?
A. DRGs are the basis for a cost accounting method that groups costs together by departments
performing the services.
B. The federal Medicare system of retroactive payment for services depends on DRGs.
C. A DRG is a case-mix classification scheme that is used to determine the payment provided to the
hospital for inpatient services, regardless of how much the hospital spends to treat a patient.
D. None of the above is a true statement.
93. Assets whose use is limited by contracts or agreements with outside parties other than donors or grantors
are labeled
A. Assets limited as to use.
B. Designated assets.
C. Temporarily restricted net assets.
D. Restricted assets.
94. The primary source of revenue for hospitals is
A. Nonexchange transactions, such as contributions.
B. Exchange transactions, such as fees for services.
C. Investment income.
D. Capitation fees from health maintenance organizations.
95. A contribution that is restricted by the donor to be held in perpetuity and for which the investment
income can be spent at the discretion of a nongovernmental, not-for-profit hospital's governing board,
will be reported as an increase to
A. Endowments.
B. Current restricted funds.
C. Permanently restricted net assets.
D. Specific purpose assets.

12


96. Charity service and bad debts in a public hospital that follows business-type accounting are reported

A. The same, both as deductions from gross patient revenue in arriving at net patient revenue.
B. The same, both are reported as expenses.
C. Differently, charity service is reported as a deduction from gross patient revenue and bad debts are
reported as an expense.
D. Differently, charity service is merely disclosed in the notes to the financial statements, and bad debts
are reported as a deduction from revenue.
97. For which of the following volunteers in a hospital is there most likely going to be reported contribution
income and salary expense?
A. Community members who plant flowers on the grounds once a year in the spring.
B. Volunteers in the gift shop who work a few hours a day serving customers.
C. Nurses who are affiliated with a religious organization and do not receive a salary.
D. An accountant who is a member of the board of directors.
98. Which of the following would not be considered a health care organization required to follow guidance
in the AICPA Audit and Accounting Guide Health Care Organizations?
A. A heart research and education foundation.
B. A home health agency.
C. A hospice.
D. A health maintenance organization.
99. Which of the following would usually be considered as temporarily restricted funds in a
nongovernmental not-for-profit hospital?
A. Investment income.
B. Donated services by senior citizens.
C. A permanent endowment received from the city's leading citizen.
D. A research grant from the federal government to study high blood pressure.
100.Independent health care organizations that associate for the specific purpose of obtaining financing are
called a (an)
A. Consolidation.
B. Obligated group.
C. Affiliation.
D. Joint venture.

101.Which of the following statements is true?
A. Hospital accounting and financial reporting is identical to that used by for-profit businesses.
B. Hospitals use modified accrual accounting.
C. Hospitals record revenues based upon full charges and report contractual adjustments as a deduction
from revenues
D. None of the above is true.
102.Contractual adjustments is properly characterized as
A. An expense.
B. An other financing use.
C. A liability.
D. A deduction from revenues.

13


103.An unrestricted pledge from an annual contributor to a not-for-profit hospital with a December 31 year
end that was made in October 2007 to be paid in cash March 2008 would generally be credited to:
A. Contributions--Temporarily Restricted in 2007.
B. Contributions--Unrestricted in 2007.
C. Contributions--Temporarily Restricted in 2008.
D. Contributions--Unrestricted in equal amounts in 2007 and 2008.
104.Donated medicines that normally would be purchased by a hospital should be recorded at fair market
value and should be credited to
A. Net patient Service Revenue.
B. Nonoperating Gains.
C. Other Revenue.
D. Deferred Revenues.
105.Under SFAS No. 116, pledges received by a nongovernmentally owned not-for-profit hospital during its
building construction fund drive, and restricted for that purpose, would be recognized as an increase in
temporarily restricted net assets (support)

A. When the building is constructed.
B. When the pledge is made.
C. When the pledge is collected.
D. During each period of construction using the percentage-of-completion method.
106.SFAS No. 117 requires that interest received on endowment funds be reported in the statement of cash
flows as a(n)
A. Reconciliation of change in net assets to cash.
B. Operating activity.
C. Investing activity.
D. Financing activity.
107.The statement of activities required by SFAS No. 117 for health care entities subject to its jurisdiction
must display changes for the period in which of the following categories of net assets?
A. Unrestricted.
B. Temporarily restricted.
C. Permanently restricted.
D. All of the above.
108.Which of the following would be an appropriate performance indicator for a not-for-profit health care
organization?
A. Revenues.
B. Excess of revenues and gains over expenses and losses.
C. Expenses and losses.
D. Contributions to long-lived assets.

14


Ch15-17 Key
1.

A state has the obligation to monitor and regulate a not-for-profit (NPO) organization because it gave

the NPO legal life through the not-for-profit corporation laws.
TRUE
Just as commercial businesses apply to the state to become corporations, so do not-for-profit
organizations, although they apply under the not-for-profit incorporation laws.
Content: Concept
Level: Medium
Wilson - Chapter 15 #1

2.

The federal government's primary objective in regulating not-for-profit organizations through the
income tax laws is to limit the number of exempt organizations that operate at any one point in time.
FALSE
Congress has always encouraged not-for-profit associations and charitable contributions to these
organizations. The primary purpose in regulating exempt organizations at the federal level is to
ensure that the public is being served by relieving public charities of the liability for income taxes.
Content: Concept
Level: Medium
Wilson - Chapter 15 #2

3.

Not-for-profit corporations cannot lobby or attempt to influence legislation or politicians.
FALSE
This statement is too strong. At both the state and federal level, it is important that a NPO not be
organized primarily for the purposes of carrying on a political agenda, unless it is tax-exempt under
IRC Sec. 527. Some lobbying and political activity is allowed if the organization registers with the
state, properly discloses this activity on appropriate annual reports (including the Form 990 to the
federal government), and makes sure the amount is not significant or excessive.
Content: Concept

Level: Medium
Wilson - Chapter 15 #3

1


4.

The not-for-profit organization applying for tax-exempt status determines the appropriate subsection
under IRC Sec. 501 for which it wants to be considered and the Internal Revenue Services then
approves or does not approve the application.
TRUE
It is the NPO that determines under which subsection of IRC Sec. 501 it wants to be considered for
tax-exempt status.
Content: Concept
Level: Medium
Wilson - Chapter 15 #4

5.

The unrelated business income tax is a significant penalty and therefore should be of concern to
tax-exempt organizations.
TRUE
The unrelated business income (UBI) is taxed at corporate tax rates that can be significant (ranging
from 15% to 35%). Most exempt organizations will manage their affairs so as to avoid this cost.
Content: Concept
Level: Medium
Wilson - Chapter 15 #5

6.

Intermediate sanctions are often imposed by the Internal Revenue Service in addition to the revoking
tax-exempt status for organizations that confer excessive economic benefits on persons with
substantial influence over the organization.
FALSE
Intermediate sanctions, introduced in 1996, are a tool the IRS may use in curbing excess benefit
transactions favoring certain people related to an NPO so that the NPO does not have to lose its
tax-exempt status. Loss of tax-exempt status is considered unduly harsh, but the only sanction that
the IRS had before the Taxpayer Bill of Rights 2 in 1996.
Content: Concept
Level: Medium
Wilson - Chapter 15 #6

7.

If a tax-exempt organization dissolves and goes out of business, it must distribute its assets to another
tax-exempt organization.
TRUE
State laws, IRS regulations, and most likely the governing documents (i.e., articles of incorporation
and by-laws) of the NPO require that the assets of an exempt organization be distributed to other
exempt organizations upon the dissolution of the exempt organization.
Content: Concept
Level: Easy
Wilson - Chapter 15 #7

2


8.

Board members of a not-for-profit organization have a fiduciary responsibility to provide fiscal
guidance and ongoing governance over the not-for-profit organization to ensure that its exempt
mission is carried out as described in the incorporating documents and exempt application.
TRUE
Not all Board members may understand their fiduciary responsibility. It is advised that Board
members carry errors and omissions insurance to protect them from harm in lawsuits.
Content: Concept
Level: Medium
Wilson - Chapter 15 #8

9.

All officers of a not-for-profit organization have the same responsibilities to the organization and its
constituents.
FALSE
The treasurer of the board has specific responsibilities to the NPO in the area of financial
management, in particular to safeguard the assets and approve all disbursements, that go beyond that
expected of the president, vice-president, and secretary.
Content: Concept
Level: Medium
Wilson - Chapter 15 #9

10.

Not-for-profit organizations are so diverse in nature that it is not feasible to find benchmarks with
which to compare their financial and operating performance.
FALSE
It is difficult, but important that NPOs be compared to either their own record over time, or to other
organizations providing similar services. There are several classification schemes, such as the
National Taxonomy of Exempt Entities (NTE), used to group NPOs providing similar services or

having similar missions.
Content: Concept
Level: Medium
Wilson - Chapter 15 #10

11.

Performance measures that can be used to evaluate NPOs include percentage of total expenses spent
on the programs versus on supporting the programs) and total dollars raised for fund-raising dollars
spent.
TRUE
These are two measures that are tracked by watchdog groups, such as the National Charities
Information Bureau and the BBB Wise Giving Alliance.
Content: Concept
Level: Medium
Wilson - Chapter 15 #11

3


12.

Not-for-profit organizations risk loss of their tax-exempt status if they engage in any political
activity.
FALSE
Although state and federal regulations are somewhat different with respect to political activities, both
allow some level of participation in legislative efforts and lobbying as long as it is not a material
amount or directed toward influencing legislation or participating in a political campaign of a
particular candidate for office.
Content: Concept

Level: Medium
Wilson - Chapter 15 #12

13.

"Excess benefit transactions" are those in which persons who have substantial influence over the
not-for-profit organization engage in transactions that result in economic benefits to them that are
excessive, such as unreasonable compensation, sale of assets at bargain prices, and lease
arrangements.
TRUE
This is the definition of excess benefit transactions given in Chapter 15 and described in the Taxpayer
Bill of Rights 2 in 1996.
Content: Concept
Level: Medium
Wilson - Chapter 15 #13

14.

One of the limitations of financial ratio analysis for not-for-profit organizations is that donors may
incorrectly assume that there are federal or state laws that govern the percentage of annual revenues
that a charity must spend on its programs.
TRUE
A common ratio "program expenses as a percent of total expenses" is often misinterpreted as a way to
gauge whether the NPO is spending what it is legally required to do.
Content: Concept
Level: Medium
Wilson - Chapter 15 #14

15.

The ratio unrestricted net assets as a percent of operating expenses is helpful in determining if the
not-for-profit organization can cover its debt service expense.
FALSE
Unrestricted net assets divided by operating expenses can be used to assess whether the NPO is a
going concern, but a better measure to determine if the NPO's debt service expense is adequately
covered by income is revenue, support, gain plus interest and depreciation expense divided by annual
debt service expense.
Content: Concept
Level: Medium
Wilson - Chapter 15 #15

4


16.

Which of the following is a not a true statement about tax-exempt organizations?
A.
B.
C.
D.

They must be organized to serve the charitable needs of the public at large.
They must first become a not-for-profit corporation or charitable trust.
They are permitted to do some political lobbying if guidelines are met.
Their unrelated business income is taxed at corporate income tax rates.
Content: Concept
Level: Medium
Wilson - Chapter 15 #16

17.

Tax-exempt organizations must complete a Form 990 and send it to the IRS
A.
B.
C.
D.

Only if they have unrelated business income.
If they are nongovernmental (and not a church) and their gross receipts are greater than $25,000.
Whether they are governmental or nongovernmental.
All of the above are true statements.
Content: Concept
Level: Easy
Wilson - Chapter 15 #17

18.

Which of the following not-for-profit organizations is most likely to be tax-exempt under IRC Sec.
501(c)(3)?
A.
B.
C.
D.

Beta Kappa Alpha Sorority.
Peaceful Dreams Cemetery Association.
Regional Association of Tree Trimmers.
Survivors of Breast Cancer Club.
Content: Concept

Level: Medium
Wilson - Chapter 15 #18

19.

Which of the following is a reason why an NPO might fail to qualify for tax-exempt status?
A. It is operated primarily for the benefit of its members.
B. Its officers are paid excessive wages.
C. Its primary purpose is to promote the passage of legislation favorable to institutions of higher
education.
D. It has unrelated business income.
Content: Concept
Level: Medium
Wilson - Chapter 15 #19

20.

The Internal Revenue Service may impose intermediate sanctions on a tax-exempt organization that
gives an officer
A.
B.
C.
D.

Excessive compensation.
More than the fair rental value for property owned by the officer.
A bargain on the sale of assets.
All of the above are transactions that may result in intermediate sanctions.
Content: Concept
Level: Medium

Wilson - Chapter 15 #20

5


21.

The income most likely to be considered unrelated business income of a human service organization
that provides immunizations to children in the community is
A.
B.
C.
D.

Rental of extra space in the building.
Regular sale of sweatshirts with the organization's logo on it at a price considerably above cost.
Interest and dividend income on investments.
Gain on the sale of equipment no longer needed by the organization.
Content: Concept
Level: Medium
Wilson - Chapter 15 #21

22.

The term that means information skewed toward a particular belief with a tendency to have little or
no factual basis is
A.
B.
C.
D.

Political influence.
Legislation.
Propaganda.
Lobbying.
Content: Concept
Level: Medium
Wilson - Chapter 15 #22

23.

A tax-exempt organization that receives its support primarily from a large number of individuals or
corporations and a relatively small amount from investment income is called a
A.
B.
C.
D.

Public charity.
Private foundation.
Public foundation.
Voluntary health and welfare organization.
Content: Concept
Level: Medium
Wilson - Chapter 15 #23

24.

The incorporating documents that have an external focus and describe the purpose of the organization
without being too restrictive are called

A.
B.
C.
D.

By-laws.
IRS Form 990.
Articles of incorporation.
Minutes of the Board meetings.
Content: Concept
Level: Medium
Wilson - Chapter 15 #24

25.

The incorporating documents that have an internal focus and describe the functional rules of the
organization
A.
B.
C.
D.

IRS Form 990.
By-laws.
Minutes of the Board meetings.
Articles of incorporation.
Content: Concept
Level: Medium
Wilson - Chapter 15 #25

6


26.

A good measure of whether the NPO is spending too much on overhead, such as general and
administrative expenses, is
A.
B.
C.
D.

Percentage of unrestricted net assets to operating expenses.
Current ratio.
Total revenues divided by total expenses.
Percentage of total expenses spent on the program function as opposed to supporting the
programs.
Content: Concept
Level: Medium
Wilson - Chapter 15 #26

27.

A good measure of whether the NPO is a "going concern" and can sustain its operations into the
future is
A.
B.
C.
D.

Total revenues divided by total expenses.
Percentage of unrestricted net assets to operating expenses.
Percentage of total expenses spent on the program function as opposed to support function.
Both A and B.
Content: Concept
Level: Medium
Wilson - Chapter 15 #27

28.

A good measure of whether the NPO is "liquid" and can meet its short-term obligations is
A.
B.
C.
D.

Percentage of total expenses spent on the program function as opposed to support function.
Total revenues divided by total expenses.
Current assets divided by current liabilities.
Percentage of unrestricted net assets to operating expenses.
Content: Concept
Level: Medium
Wilson - Chapter 15 #28

29.

A good measure of whether the NPO is efficient in its fund-raising efforts is
A.
B.
C.

D.

Public support as a percentage of fund-raising expenses.
Current ratio.
Total revenues divided by total expenses.
Percentage of total expenses spent on the program function as opposed to support function.
Content: Concept
Level: Easy
Wilson - Chapter 15 #29

30.

Nongovernmental (private) colleges and universities follow FASB standards; governmental (public)
colleges and universities should follow GASB standards.
TRUE
Since its formation in 1984 GASB has been responsible for setting financial reporting standards for
government colleges and universities. FASB has responsibility for all others.
Content: Concept
Level: Easy
Wilson - Chapter 16 #1

7


31.

Public colleges and universities are considered general purpose governments and are expected to be
engaged in governmental activities only for purposes of their stand-alone reports.
FALSE
Public colleges and universities are considered special purpose governments, and most are expected

to be engaged in business-type activities only. These public colleges and universities rely on tuition
and fees, state appropriations, gifts and grants, income from auxiliary activities, and investment
income to fund operations. Community colleges, and those other colleges with the power to tax, may
be engaged in both business-type and governmental activities.
Content: Concept
Level: Medium
Wilson - Chapter 16 #2

32.

Revenues and expenses of both public and private colleges and universities are accounted for on the
accrual basis.
TRUE
Under GASBS 34/35, public colleges and universities that are engaged in business-type activities use
full accrual accounting including capitalization and depreciation of capital assets, including
infrastructure assets. Private colleges and universities following SFAS No. 116 and SFAS No. 117, as
well as the AICPA Audit and Accounting Guide Not-for-Profit Organizations, also use accrual
accounting.
Content: Concept
Level: Medium
Wilson - Chapter 16 #3

33.

A gift designated by the board of regents of a public university for agricultural research would be
recorded as an unrestricted contribution.
TRUE
Resources designated for a particular operating purpose by the governing board should be reported as
changes in unrestricted net assets; only donors external to the entity can restrict the use of resources
such that the gift increases restricted net assets.

Content: Concept
Level: Medium
Wilson - Chapter 16 #4

34.

Contributions or grants restricted by an external donor for a particular operating purpose would be
reported as increases to restricted fund balances by a public college or university and as an addition
to temporarily restricted net assets by a private college or university.
FALSE
Public colleges and university would report a gift restricted by a donor as revenue--gifts and closed to
net assets--restricted. Restrictions are placed on net assets, not fund balances.
Content: Concept
Level: Medium
Wilson - Chapter 16 #5

8


35.

College summer school revenues of a public university should be recognized totally within the fiscal
year in which the term is predominantly conducted.
FALSE
Public colleges and universities should apply full accrual accounting in recognizing tuition revenue
for the percent of time appropriate to each fiscal year.
Content: Concept
Level: Medium
Wilson - Chapter 16 #6

36.

Depreciation of a residence hall should be reported as an expense in a private college's operating
statement but might not be reported in the operating statement of a public college.
FALSE
GASBS 34/35 requires depreciation of capital assets, other than land, for all public colleges and
universities.
Content: Concept
Level: Medium
Wilson - Chapter 16 #7

37.

An unrestricted endowment established by the governing board of a public college is considered a
permanent fund and would be reported as unrestricted net assets.
FALSE
A public college or university would report funds designated by the governing board to be held as an
endowment as an increase to unrestricted net assets. The term used to separate these net assets from
others is "funds functioning as endowments." Restricted net assets only arise when donors external to
the institution place restrictions on gifts.
Content: Concept
Level: Medium
Wilson - Chapter 16 #8

38.

Earnings on endowment investments may increase unrestricted or restricted net assets, or both.
TRUE
The wishes of the donor of endowment assets control the disposition of endowment revenue.
Content: Concept

Level: Medium
Wilson - Chapter 16 #9

9


39.

A receipt of $500,000 by a private college to be used to endow a "chaired" professorship in
accounting would be recorded as an increase in temporarily restricted net assets.
FALSE
The term endowment implies that the corpus of the gift is to remain intact in perpetuity, so this gift
would increase permanently restricted net assets in a private college.
Content: Concept
Level: Medium
Wilson - Chapter 16 #10

40.

The sale of bonds for construction of a college residence hall would always result in a credit to
proceeds of bonds in the accounts.
FALSE
The credit would be to bonds payable, not proceeds of bonds, in either private colleges and
universities or public colleges and universities engaged primarily in business-type activities. If the
public colleges and universities were also engaged in governmental activities because it receives tax
revenue, then it may credit proceeds of bonds as would other governmental fund-types.
Content: Concept
Level: Medium
Wilson - Chapter 16 #11

41.

A statement of cash flows is required by GAAP for all colleges and universities.
TRUE
Private colleges and universities are subject to FASB jurisdiction and required to provide a statement
of cash flows using the direct or indirect method. GASBS 35 extends GASBS 34 standards to public
colleges and university that requires a statement of cash flows be prepared for business-type activities
using the direct method only.
Content: Concept
Level: Medium
Wilson - Chapter 16 #12

42.

Private colleges and universities must provide aggregated entity-wide financial statements prepared
in conformity with FASB Statement No. 117. Consequently, private colleges and universities no
longer utilize fund accounting.
FALSE
The first part of the statement is true; however, FASB standards neither require nor preclude the use
of fund accounting. Many public and private colleges will continue to use fund accounting for
internal management and stewardship purposes.
Content: Concept
Level: Medium
Wilson - Chapter 16 #13

10


43.

Public colleges and universities that use business-type reporting must present segment information in
the notes to the financial statements.
FALSE
GASBS 34/35 requires reporting on segments for colleges and universities engaged in business-type
transactions.
Content: Concept
Level: Medium
Wilson - Chapter 16 #14

44.

Which of the following statements is true regarding generally accepted accounting principles
(GAAP) for colleges and universities?
A. The FASB has set standards for private colleges and universities from the time of its inception in
1974.
B. The National Association of Colleges and University Business Officers (NACUBO) only recently
began to play a role in establishing accounting and reporting standards for colleges and
universities.
C. Public and private colleges and universities must comply with the 1973 AICPA Audit and
Accounting Guide Audits of Colleges and Universities for guidance in financial reporting.
D. The GASB is responsible for establishing GAAP for public colleges and universities.
Content: Concept
Level: Medium
Wilson - Chapter 16 #15

45.

What type of college or university should report expenses by functional classification?
A.
B.

C.
D.

Both private and public colleges and universities.
Private colleges and universities.
Public colleges and universities.
Neither private nor public colleges and universities.
Content: Concept
Level: Medium
Wilson - Chapter 16 #16

46.

If a public college or university has an independent not-for-profit fund-raising foundation, then the
financial position and activity of the foundation should be
A. Disclosed in the notes to the university's financial statements.
B. Consolidated with the university's financial information.
C. It depends on the degree of control, economic interest, and influence the university has over the
foundation.
D. Considered a component unit of the university.
Content: Concept
Level: Medium
Wilson - Chapter 16 #17

47.

GASBS 34/35 accounting and reporting standards applicable to public colleges and universities
A. Are the same as FASB standards to permit consistent reporting.
B. Permit public colleges and universities to use the AICPA model which differs substantially from
the reporting model used by private colleges and universities subject to FASB jurisdiction.

C. Permit public colleges and universities to optionally follow FASB standards.
D. None of the above is correct regarding GASB standards.
Content: Concept
Level: Medium
Wilson - Chapter 16 #18

11