A not-for-profit entity (NFP) is preparing its Statement of Cash Flows using the direct method. The NFP received $200,000 in unrestricted cash contributions, $50,000 in cash for a temporarily restricted program, and spent $10,000 on investment expenses related to its endowment. How should these items be presented in the operating activities section?
- ACash received from contributions: $200,000; Investment expenses are financing activities.
- BCash received from contributions: $250,000; Investment expenses are investing activities.
- CCash received from contributions: $250,000; Cash paid for investment expenses: $(10,000).
- DCash received from contributions: $200,000; Cash paid for investment expenses: $(10,000).
Show answer & explanationAnswer & explanation
Correct answer: C. Cash received from contributions: $250,000; Cash paid for investment expenses: $(10,000).
Under the direct method for NFPs, cash flows from operating activities include both unrestricted and donor-restricted contributions that are available for current operations. The $200,000 unrestricted and $50,000 temporarily restricted contributions (assuming they are available for current operations, which is implied by being received for a 'program') are both included. Cash paid for investment expenses related to the endowment is generally classified as an operating activity, unless the investment is for a specific capital project or related to financing activities.
Why the other options are wrong
- A. This incorrectly excludes temporarily restricted contributions and misclassifies investment expenses as financing activities.
- B. This incorrectly classifies investment expenses as investing activities; for NFPs, these typically fall under operating.
- D. This incorrectly excludes the temporarily restricted contributions from operating activities.
NFP Cash Flow - Operating Activities
Includes cash flows from all transactions and other events that are not defined as investing or financing activities, encompassing both unrestricted and certain donor-restricted contributions.
- Both unrestricted and donor-restricted (for current use) contributions are operating inflows.
- Investment income and expenses are typically operating activities.
- Can use direct or indirect method, direct is preferred.
Memory trick: Operating cash is everything not investing or financing, even restricted if for current use.