CPA Exam - FAR (Financial Accounting and Reporting)Not-for-Profit EntitiesEasy
A not-for-profit (NFP) organization received a cash contribution of $100,000 to be used for general operating expenses in the upcoming fiscal year. The donor specified that the funds should not be spent until July 1st of the next year. How should this contribution be classified in the NFP's financial statements for the current year ending December 31st?
- AAs permanently restricted net assets.
- BAs revenue from exchange transactions.
- CAs temporarily restricted net assets.
- DAs unrestricted net assets.
Show answer & explanationAnswer & explanation
Correct answer: C. As temporarily restricted net assets.
Contributions with donor-imposed time restrictions are classified as temporarily restricted net assets until the restriction is met. In this case, the restriction is that the funds cannot be spent until the next fiscal year.
Why the other options are wrong
- A. Permanently restricted net assets are for restrictions that never expire, such as endowments.
- B. This is a contribution, not an exchange transaction where the NFP provides goods or services of commensurate value.
- D. Unrestricted net assets have no donor-imposed restrictions on their use.
Time-Restricted Contribution
A contribution where the donor specifies that the resources are not available for use until a future period or after a specific date.
- Classified as temporarily restricted net assets.
- Released from restriction when the specified time period begins or the date passes.
- Often used for future operating expenses or capital projects.
Memory trick: Time's ticking, so it's temporary treasure!