CPA Exam - FAR (Financial Accounting and Reporting)Not-for-Profit EntitiesEasy
A not-for-profit educational institution incurred various expenses during the fiscal year. These included salaries for professors, administrative staff salaries, utilities for classrooms and administrative offices, and depreciation on the academic building and the administrative building. When preparing the Statement of Functional Expenses, how should the depreciation expense specifically related to the academic building be classified?
- AAs program services.
- BAs fundraising expenses.
- CAs supporting services.
- DAs management and general expenses.
Show answer & explanationAnswer & explanation
Correct answer: A. As program services.
Depreciation expense for an asset used directly in the NFP's primary mission, such as an academic building for an educational institution, is classified as a program service expense.
Why the other options are wrong
- B. Fundraising expenses are for soliciting contributions, which is not the purpose of an academic building.
- C. Supporting services include management and general, and fundraising expenses, not direct program costs.
- D. Management and general expenses relate to overall administration, not direct program delivery.
Functional Expenses Classification
Not-for-profit organizations must classify expenses by their functional purpose, primarily into program services and supporting services (management and general, fundraising).
- Program services relate to the NFP's mission.
- Supporting services facilitate the NFP's operations.
- Management and general are for overall administration.
- Fundraising is for soliciting contributions.
Memory trick: Program costs are direct mission, supporting costs are indirect assist.