FAR · Financial reporting · 6 practice questions
ASC 958 NFP Statements, Cash Flows, and Liquidity
Nongovernmental NFPs must present cash flows and disclose financial assets available for general expenditures within one year. Use the checklist below to test statement completeness, direct-method relief, and liquidity disclosures.
Try one first
Hint
Analyze the two reporting decisions separately: where expense classifications may be presented, and whether any basic financial statement can be skipped based on the nature of cash flows.
Answer A. Under current U.S. GAAP for nongovernmental not-for-profit entities (ASU 2016-14), a statement of cash flows is a required basic financial statement. Expenses must be reported by both natural and functional classifications, but GAAP permits presenting both classifications in one place, on the face of the statements, in the notes, or in a separate schedule, so Harbor House's dual-classification in the notes is acceptable.
Why not B: This distractor relies on an outdated notion that a separate statement of functional expenses is mandatory. Current GAAP requires disclosure of expenses by nature and function but allows those classifications to be presented in one location, including the notes, so the notes presentation is acceptable if both classifications are shown.
Why not C: This is tempting because the first clause is correct: functional expense information can appear in the notes. The second clause is incorrect: GAAP does not permit omitting the required statement of cash flows merely because most cash flows are operating or already reflected elsewhere.
Why not D: This choice correctly asserts that the statement of cash flows is required but incorrectly tightens the placement rule for functional expenses. GAAP does not require functional expense information on the face of the statement of activities; notes or a separate schedule may satisfy the requirement.
Step by step
- Inventory the required statements
Require a statement of financial position, a statement of activities, a statement of cash flows, and notes. Simple cash activity does not remove the cash-flow requirement.
- Present two net-asset classes
Present net assets with donor restrictions and net assets without donor restrictions. Restrictions expected to expire next year still affect classification at the statement date.
- Check the expense analysis
Report expenses by both natural and functional classification in one place. The analysis may appear on a statement, in a separate statement, or in the notes.
- Choose a cash-flow method
Either the direct or indirect method is permitted for operating cash flows. If the NFP chooses the direct method, it may omit the indirect-method reconciliation.
- Identify financial assets
Start with financial assets such as cash, investments, and receivables. Prepaid expenses are not financial assets, and liabilities are not subtracted from this available-assets measure.
- Test one-year general availability
Exclude assets unavailable for general expenditures within one year because of their nature, donor restrictions, contracts, or internal limits. Exclude board-designated quasi-endowments when the stated policy makes them unavailable.
- Calculate the available amount
Financial assets of $1,950,000 minus $750,000 unavailable leave $1,200,000 available. The exclusions are $250,000 for construction, $200,000 unavailable under a board designation, and $300,000 restricted to literacy.
- Explain liquidity management
Provide qualitative information explaining how the NFP manages resources available to meet general expenditure needs within one year. Neither the numerical availability amount nor the narrative replaces the other.
Key points
- Remember: NFPs may omit the direct-method reconciliation, not the cash-flow statement or the quantitative liquidity disclosure.
- An unused line of credit supports the liquidity narrative but is not a financial asset.
- An unrestricted receivable due after one year is excluded from the one-year available amount.
- Endowment appropriations approved before year-end count when donor terms and law permit general operating use within one year.
How the exam traps you
- Omitting cash flows because cash activity is simple or mostly operating. Include the statement of cash flows; detailed notes cannot replace it.
- Requiring an indirect reconciliation after choosing the direct method. Nongovernmental NFPs using the direct method may omit that reconciliation.
- Counting donor-restricted or board-designated funds merely because they can become cash. Exclude funds unavailable for general expenditures within one year under the stated donor restrictions or board policy.
Question 2
| Fund / Item | Amount |
|---|---|
| Cash and money market funds without donor restrictions | $400,000 |
| Unconditional contributions receivable without donor restrictions, due in 10 months | $180,000 |
| Grants receivable without donor restrictions, due in 18 months | $120,000 |
| Investments in a board-designated quasi-endowment | $300,000 |
| Cash restricted by donor for building renovation | $150,000 |
| Donor-restricted endowment investments, of which $90,000 was approved for appropriation by the governing board before year-end under the entity's spending policy and may be spent for Year 2 general operating expenditures in accordance with donor stipulations and applicable law | $500,000 |
| Unused line of credit | $200,000 |
Hint
Start with financial assets that are both on hand and due within one year (e.g., unrestricted cash and receivables due in 12 months). Include donor-restricted amounts only if the board has approved appropriation so they are available for general use. Remember an unused line of credit is a borrowing source (disclosed separately), not a financial asset to include.
Answer D. Include unrestricted cash ($400,000), unrestricted receivables due within one year ($180,000), and the $90,000 the governing board approved for appropriation from the donor-restricted endowment (available for Year 2 general operations), for a total of $670,000. Exclude the 18-month grant receivable, the board-designated quasi-endowment, and donor-restricted building cash because they are not available for general expenditures. Also note an unused line of credit is a borrowing source disclosed separately and is not a financial asset to include.
Why not A: Tempting because a candidate might treat any amount originating in donor-restricted assets as always unavailable. It fails because the governing board approved appropriation of $90,000 before year-end and donor law permits its use for general operations, so that $90,000 is available within one year and must be included.
Why not B: Tempting because board-designated quasi-endowment funds are often thought spendable at the board's discretion. It fails because the board did not approve removing the designation, and board-designated amounts are not treated as available for general expenditures in the liquidity disclosure unless the board has approved their removal.
Why not C: Tempting because the $150,000 cash for building renovation is on hand within one year and is therefore a financial asset. It fails because donor-imposed purpose restrictions prevent using that cash for general expenditures, so it cannot be counted as available for general purposes.
Question 3
Hint
Consider (1) which items are financial assets, (2) which are available for general expenditures at the statement date given restrictions or board policy, and (3) which items belong in qualitative liquidity discussion even if excluded from the quantitative total.
Answer D. ASU 2016-14 (ASC 958) requires not-for-profits to disclose quantitative and qualitative information about financial assets available to meet general expenditures within one year. The $180,000 contributions receivable is donor-restricted for a Year 3 program and therefore is not available for general expenditures. The $600,000 quasi-endowment was internally designated but, under the stated board policy, required a formal board resolution before amounts could be used at the statement date, so it is not available at year-end. An unused $400,000 line of credit is not a financial asset to include in the quantitative available-assets total and should be described in the qualitative liquidity discussion.
Why not A: This is tempting because the items appear liquid, but it conflates convertibility or borrowing capacity with availability. It incorrectly treats an unused line of credit as a financial asset and ignores donor restrictions and the board resolution requirement for the quasi-endowment.
Why not B: Although it correctly excludes the line of credit from the quantitative total, it wrongly includes the donor-restricted receivable (which is not available for general expenditures) and the quasi-endowment despite the absence of the required board resolution at the statement date.
Why not C: This distractor correctly treats donor restrictions and the line of credit, but it incorrectly treats the board-designated quasi-endowment as available at year-end; under the facts the board policy prevents use without a resolution, so the quasi-endowment should be excluded from the one-year quantitative amount.
Question 4
Hint
Look for the one narrow presentation concession in NFP GAAP (a permitted presentation shortcut), not an approach that substitutes notes for a required basic statement or replaces required face presentations.
Answer A. Current U.S. GAAP applicable to nongovernmental not-for-profit entities includes a narrow presentation relief that permits an NFP reporting operating cash flows by the direct method not to present the indirect-method reconciliation. That relief is limited to this aspect of cash-flow presentation for NFPs and does not allow omission of other required basic statements, the required two-class face presentation of net assets, or required liquidity-and-availability quantitative disclosures. The other choices would therefore omit or improperly replace required statements or required face/quantitative disclosures.
Why not B: This is tempting because extensive notes can be informative, but the statement of cash flows is a required basic financial statement for nongovernmental NFPs; GAAP does not permit omitting it simply because the notes describe balances and restrictions for material items.
Why not C: This lures candidates who recall the older three-class terminology, but current NFP presentation requirements require reporting net assets on the face of the statements in two classes (with and without donor restrictions); a face presentation using only the legacy three headings with a crosswalk does not satisfy that face-presentation requirement.
Why not D: This is tempting because donor restrictions appear on the statement of financial position, but current NFP disclosure requirements for liquidity and availability call for both qualitative and quantitative information; providing qualitative disclosures alone would be incomplete.
Question 5
Hint
Recall which basic financial statements nongovernmental NFPs must present and whether expense analyses may be shown on the face or in the notes.
Answer C. Under U.S. GAAP for nongovernmental not-for-profit entities, the basic financial statements include a statement of financial position, a statement of activities, and a statement of cash flows. An analysis of expenses by nature and function is required but may be shown in the notes instead of in a separate statement of functional expenses. Therefore omitting a separate statement of functional expenses is acceptable when the notes provide the required analysis, but the statement of cash flows must still be presented.
Why not A: This distractor tempts because it correctly states that the expense analysis can be in the notes; however, it is incorrect to conclude that a 'simple' pattern of cash transactions permits omitting the statement of cash flows, the statement of cash flows is one of the required basic financial statements.
Why not B: This distractor is plausible because many entities present a separate statement of functional expenses, but it fails because GAAP does not mandate a separate statement when the notes already provide the required analysis by nature and function.
Why not D: This option tempts by suggesting a note disclosure could substitute for the statement of cash flows, but it is incorrect: the statement of cash flows is a required basic financial statement and cannot be replaced merely by a note reconciliation.
Question 6
Hint
Which choice removes only a narrowly scoped reconciliation in the cash-flow presentation rather than removing a required net-asset class, expense classification, or an entire financial statement?
Answer D. ASU 2016-14 (Topic 958) provides a narrow presentation relief for nongovernmental NFPs: when operating cash flows are presented using the direct method, a separate indirect-method reconciliation to net cash provided by (used in) operating activities is not required. The other choices would remove or replace required face-of-statement elements (separate net-asset classes, both natural and functional expense classifications, or the statement of cash flows) that GAAP requires for a complete set of financial statements.
Why not A: Appealing because a zero-activity statement seems redundant, but a complete set of GAAP financial statements for an NFP must include a statement of cash flows; omission of the statement would not produce a complete set even if some categories show no amounts.
Why not B: Tempting because near-term satisfaction can feel like the restrictions will not matter, but classification is based on the status at the reporting date: if donor-restricted net assets exist at year-end, GAAP (ASC 958 as amended by ASU 2016-14) requires presenting net assets with donor restrictions and net assets without donor restrictions on the face of the statement of financial position; note disclosure alone cannot replace the required face presentation.
Why not C: Plausible if one assumes concentration makes breakdowns unnecessary, but ASU 2016-14 requires NFPs to present expenses by both natural and functional classification in a single location (either in the statements or in the notes); having most expenses in one program does not excuse omitting the functional classification.
Common questions
What financial statements are required under ASC 958 for a nonprofit?
A complete nongovernmental NFP presentation includes a statement of financial position, a statement of activities, a statement of cash flows, and notes. A separate statement of functional expenses is unnecessary if the required expense analysis appears elsewhere.
Can a nonprofit use the direct method without an indirect reconciliation?
Yes. A nongovernmental NFP may report operating cash flows using the direct method and omit the indirect-method reconciliation.
How do nonprofits calculate financial assets available within one year?
Start with financial assets and subtract amounts unavailable for general expenditures within one year because of timing, donor restrictions, contracts, or internal limits. Also explain how the NFP manages liquidity.
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