CPA Exam - FAR (Financial Accounting and Reporting)Not-for-Profit EntitiesMedium
A not-for-profit (NFP) organization, a local animal shelter, received a $25,000 cash donation from a supporter. The donor did not specify any restrictions on the use of the funds. The NFP's board of directors subsequently designated $10,000 of this donation for the purchase of a new veterinary examination table. How should this board-designated amount be classified in the NFP's financial statements?
- AAs temporarily restricted net assets.
- BAs permanently restricted net assets.
- CAs unrestricted net assets.
- DAs a component of program services expense.
Show answer & explanationAnswer & explanation
Correct answer: C. As unrestricted net assets.
Board-designated funds are not donor-imposed restrictions. They represent internal designations by the NFP's governing body, which can be changed at the board's discretion. Therefore, they remain classified as unrestricted net assets.
Why the other options are wrong
- A. Temporarily restricted net assets arise from donor-imposed restrictions, not internal board designations.
- B. Permanently restricted net assets are due to donor-imposed perpetual restrictions, which is not the case here.
- D. This is an internal designation of funds, not an expense incurred for program services.
Board-Designated Funds
Amounts of unrestricted net assets that the NFP's governing board has set aside for a specific purpose.
- Are not donor-imposed restrictions.
- Remain classified as unrestricted net assets.
- The board can modify or remove these designations at its discretion.
Memory trick: Board's choice, not donor's voice, keeps assets free.