NOT-FOR-PROFIT ACCOUNTING AND CONTROL
Answer the following Questions:
Question 1). River City government has a payroll department that handles the processing of payroll for all city employees. The responsibilities of the payroll department relate to full-time, part-time and contractual employees and include: obtaining information from new employees so they can be added to the payroll; having new employees complete payroll withholding and deduction forms; collecting time sheets; calculating gross pay, appropriate deductions and employer contributions for each pay period; and completing vouchers for contributions and withholdings. The annual budget of the payroll department is
Salaries and fringe benefits $117,000
Materials and supplies $ 16,000
Computer costs $ 11,000
Checks written 100,000
Square feet of office space utilized 1,000
The city charges the payroll department an indirect overhead cost rate based on the number of square feet of office space utilized. The overhead rate is currently $9 per square foot. The overhead rate is intended to cover maintenance costs, utilities, and equipment depreciation.
Recently, River City has begun to wonder if it would be more economical to contract for its payroll services. The City's budget administrator contacted a neighboring city and learned that the neighboring city was paying $1.50/check for its payroll function.
Required:
(a) Calculate River City payroll department's cost per check. Based on costs would it be cheaper to maintain the payroll department or contract out for the payroll services?
(b) Discuss what other information you would want before making a decision about retaining or contracting payroll.
2). Required:
The City of Stromfield had, among others, the following preclosing account balances in its General Fund as of June 30, 2004.
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Appropriations
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Debits
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Credits
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3,000,000
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Cash
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811,000
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Due to Other Funds
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35,000
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Encumbrances
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102,000
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Estimated Revenues
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3,550,000
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Expenditures
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2,970,000
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Beginning Fund Balance-
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As of 7/1/2003
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300,000
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Revenues
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3,601,000
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Taxes Receivable
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150,000
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Accounts Payable
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275,000
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Required:
Prepare, in good form, a Statement of Revenues, Expenditures, and Changes in Fund Balances for the General Fund for the year ended June 30, 2004.
3). Required:
Record the following transactions in the expenditure subsidiary ledger account template provided below:
1. Council approves an appropriation of $25,000 for the public works department.
2. Issuance of purchase orders of $3,000 for supplies.
3. Issuance of a purchase order of $1,500 for equipment.
4. Payment of salaries of $18,000.
5. Offices supplies ordered in 2 are received at an actual cost of $3,100.
Expenditure Subsidiary Ledger
Public Works
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Item
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Dr.
Encumbrances
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Dr.
Expenditures
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Cr.
Appropriations
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Cr. (Dr.)
Unencumbered
Balance
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1
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2
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3
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4
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5
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4). Required:
The following descriptions relate to an independent public accounting firm that has as clients some governmental entities and not-for-profit entities that receive federal financial assistance. For each of the following independent situations, describe the possible violations of GAO standards (Government Auditing Standards) and conclude whether or not the situation is a violation.
a) A college graduate who is not a CPA is assigned by her firm to the audit of Grover County. Because she is not a CPA, the firm did not send her to any continuing education courses this year or last year.
b) An auditor has prepared working papers using a new computer software package. The financial statements and audit reports generated by the software are well designed and incorporate all required accounting and auditing standards.
Because the program is so powerful, it is also quite complex. Printouts of the financial statements and supporting schedules do not include much of the information necessary to determine that the auditor was justified in his/her conclusion. Most of that information is part of the computer program, however.
c) While auditing a not-for-profit entity, the auditor discovered that a secretary had been embezzling money from the petty cash fund. In relation to the financial statements taken as a whole, the amount stolen was not material. The auditor discussed the issue with management of the entity. The theft was reported to the appropriate law enforcement personnel and the bonding company reimbursed the not-for-profit entity the full amount of its loss. Since there was no effect on the financial statements, the theft was not mentioned in the auditor's report.
d) The internal auditor of the City of Seaburg, who reports to the chief financial officer of the City, audited the health and welfare division of the City for purposes of expressing an opinion on the financial statements prepared by that division and submitted to a federal agency.
5). Required:
In January 2010, the Free Cancer Foundation accepted an endowment of $500,000, the income from which is restricted to promoting research related to recovery from cancer. All gains, whether realized or unrealized are available for distribution. During 2010 the market value of endowment's investment portfolio increased to $520,000.
Accordingly, at year-end $20,000 was credited to a temporarily restricted expendable fund. During 2011 the market value of the portfolio decreased to $480,000 and the foundation spent $12,000 on qualifying projects.
Owing to these events and transactions, what should be the reported net asset balance of the following categories during 2011 (assuming a zero beginning balance in unrestricted net assets):
a) Permanently restricted
b) Temporarily restricted
c) Unrestricted
6). Required:
For each of the cases below state whether the contributed services would be recognized, how much would be recognized, and how it would be recognized. Explain your answer in terms of the existing standard. Also explain why, in your opinion, the standard permits/prohibits recognition of this particular type of contribution.
a. A church votes to construct a new educational wing on its existing facility. The church will hire an architect to design the new wing and a construction supervisor to oversee the construction. Church members will provide most of the labor for the construction. Labor donated by members who have construction experience or who are considered professional craftsmen at the prevailing wage for their trade or craft is $500,000. Labor donated by persons possessing non-building specialized skills (doctors, teachers, lawyers, etc.) at their prevailing wage rates is $700,000.
Labor donated by non-professionals measured at the minimum wage is $300,000. The appraised value of the building when completed is $3 million. The architect was paid $700,000, the construction supervisor was paid $50,000 and the materials purchased for use in the building cost $1 million.
b. An investment advisor, a member of the Board of a not-for-profit entity, provides pro bona investment advice to the NFP. The NFP does not have a particularly large investment portfolio and without the advice of the Board member the NFP would probably invest its idle cash in certificates of deposits at an insured commercial bank to protect itself against loss of its principal. If the investment advisor had provided similar services to his customers he would have charged $2,000.
c. Members of a religious order provide professional nursing services for a healthcare facility that is run by their order. The members are not compensated but their order provides lodging, food, and other necessities. The cost of the lodging, food, etc., is paid by the healthcare entity and classified as Nursing Service Expense. At the end of the year the balance in the Nursing Service Expense account is $3 million.
The value of the nursing services provided, measured at the prevailing wage for nurses, is $5 million.
7). Preparation of Financial Statements
The Science Learning Institute (SLI), a not-for-profit educational center that provides science tutoring to middle school students, uses accrual accounting to prepare its annual financial statements. The SLI ended FY 2010 with the following balances in its accounts:
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Accounts Payable
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0
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Cash
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103,100
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Grants Receivable, net
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35.100
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Inventory
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2,300
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Net Assets
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273,500
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Notes Payable
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595.000
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Pledges Receivable, net
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10,000
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PP&E, net
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735,000
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Wages Payable
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17,000
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The SLI recorded the following transactions during FY 2011, which ended on August 31, 2011.
1. SLI took out an $850,000 bank loan on September 1, 2007. The loan has an annual interest rate of 6.5% and is the only borrowing the organization has done since its inception. Principal repayments are due in 10 equal installments beginning on the last day of FY 2008. Interest payments on the loan must be made in full on the last day of the fiscal year. SLI is in full compliance with the terms of the loan.
2. SLI used the proceeds from the bank loan to purchase its office space on March 1, 2008. The office space cost $775,000. It is expected to have a useful life of 25 years and no salvage value. The organization uses the straight-line method of depreciation.
3. On the first day of FY 2011, SLI purchased new classroom equipment worth $20,000. The equipment is expected to have a useful life of 8 years and a salvage value of $2,000. Equipment and furniture SLI purchased in previous years depreciated by $9,000 in FY 2011.
4. SLI earned $325,000 in state grants during FY 2011, spread evenly throughout the year. This was an increase from the $304,200 in state grants that SLI earned evenly throughout FY 2010. In both FY 2010 and FY 2011, the state paid SLI with a six-week lag.
5. During FY 2011, SLI received $75,000 in donor pledges, 80% of which was collected in cash. The organization also collected $7,500 in outstanding pledges from the previous fiscal year. SLI has a policy of writing down 2% of its total outstanding pledges at the end of the year as bad debt.
6. SLI's employees earned $17,500 per month in FY 2011, a monthly increase of $500 from FY 2010. In both FY 2010 and FY 2011, SLI paid its employees with a one-month lag.
7. During FY 2011, SLI ordered $40,000 worth of classroom supplies on credit and used $35,000 of those supplies throughout the year. At the end of FY 2011, SLI still owed its vendors $7,000 for the supplies it ordered.
8. SLI pays $900 a month in utilities. Utilities are paid timely.
Record these events and then create a balance sheet, activity statement, and cash flow statement for FY2011. The required schedules are listed below:
a) balance sheet
b) activity statement
c) cash flow statement