Chapter 10, Problem 38E

1.

To determine

Define the endowment fund in a non-profit organization framework.

Explanation of Solution

A budget is an estimate for the takeover and use of financial and other resources, for example, a year, a month or a quarter, over a specified period of time. Budgeting is a method of having one or more budgets prepared. Budgeting is the method of drawing up a budget or more.

Non-profit organizations are privately held corporations that do not provide financial benefits to their members or creditors and are formed for public or mutual benefit other than to generate profits for shareholders or investors whereas a business enterprise is a for-profit entity associated with the production, selling or distribution of goods or services.

An endowment fund is a financial asset usually owned by a non-profit organization that includes capital assets and associated earnings leveraged to finance the general purpose of the non-profit organization. It is treated as a donation (contribution) whose principal must be retained but whose revenue can be spent.

2.

To determine

Complete the 2016 cash budget, for each quarter and for the entire year.

Explanation of Solution

A budget is an estimate for the takeover and use of financial and other resources, for example, a year, a month or a quarter, over a specified period of time. Budgeting is a method of having one or more budgets prepared. Budgeting is the method of drawing up a budget or more.

Non-profit organizations are privately held corporations that do not provide financial benefits to their members or creditors and are formed for public or mutual benefit other than to generate profits for shareholders or investors whereas a business enterprise is a for-profit entity associated with the production, selling or distribution of goods or services.

A cash budget illustrates the effects of all budgeted activities on cash. The cash budget draws data from nearly every part of the master budget. Preparing a cash budget requires that all budgets be carefully reviewed to recognize all revenues, expenses, and other cash-influencing operations. It includes three major sections which are as follows:

• Net cash flows from operating activities;
• Net cash flows from investing activities; and
• Net cash flows from financing activities

The cash budget will provide data to the user related to the company's cash management capability.

The budget for cash receipts provides details of anticipated cash collections from operations for a coming period. Cash receipts from investment and fundraising activities are shown on the cash budget elsewhere. It has three different sources of cash receipts from operations:

• Cash sales,
• Bank credit card sales, and
• Collection of credit sales (i.e., sales made by the company on “open account”).

T-C Social Service AgencyCash Budget 2016 (in thousands)
		Quarters
		I		II		III		IV		Year
Cash Balance, beginning		$11		$8						$11
Receipts:
Grants		$80		$70		$75		$75		$300
Contracts (evenly during year)		$20		$20		$20		$20		$80
Mental Health Income		$20		$25		$30		$30		$105
Charitable donations		$250		$350		$200		$400		$1,200
Total Cash Available		$381		$473		$333		$533		$1,696
Less: Disbursements:
Salaries and Benefits		$335		$342		$342		$346		$1,365
Office expenses		$70		$65		$71		$50		$256
Equipment purchases & maintenance		$2		$4		$6		$5		$17
Specific assistance		$20		$15		$18		$20		$73
Total disbursements		$427		$426		$437		$421		$1,711
Excess (deficiency) of cash available over disbursements		($46)		$47		($104)		112		($15)
Financing:
Borrow from endowment fund		$54		$0		$112		$0		$166
Repayments		$0		($39)		$0		($104)		($143)
Total financing effects		$54		($39)		$112		($104)		$23
Cash Balance, ending		$8		$8		$8		$8		$8

Working notes:

Calculate annual total:

$\begin{array}{c}\text{Annual total}=\$80,000÷4\\ =\text{\$20,000}\end{array}$

Calculate total cash available:

$\begin{array}{c}\text{Total cash available}=\$\text{11},000+\$\text{8}0,000+\$\text{2}0,000+\$\text{2}0,000+\$\text{25}0,000\\ =\text{\$381,000}\end{array}$

Calculate total disbursements:

$\begin{array}{c}\text{Total disbursements}=\$\text{381},000–\left(\$\text{46},000\right)\\ =\text{\$427,000}\end{array}$

Calculate the amount for salaries and benefits:

$\begin{array}{c}\text{Amount of salaries and benefits}=\$\text{427},000–\$\text{2}0,000–\$\text{2},000–\$\text{7}0,000\\ =\$\text{335},000\end{array}$

Calculate the amount borrowed from the endowment fund:

$\begin{array}{c}\text{Amount borrowed from endowment fund}=\left(-\$46,000–\$\text{8},000\right)\\ =\$\text{54},000\end{array}$

Repayments will be $0.

Calculate the amount for total financing effects:

$\begin{array}{c}\text{Amount for financial effects}=\$54,000+\$0\\ =\$\text{54},000\end{array}$

Calculate the ending cash balance:

$\begin{array}{c}\text{Ending cash balance}=\$54,000+(-\$46,000)\\ =\$\text{8},000\end{array}$

3.

To determine

Calculate the endowment fund balance to be owed by the organization at year-end.

Explanation of Solution

A budget is an estimate for the takeover and use of financial and other resources, for example, a year, a month or a quarter, over a specified period of time. Budgeting is a method of having one or more budgets prepared. Budgeting is the method of drawing up a budget or more.

Non-profit organizations are privately held corporations that do not provide financial benefits to their members or creditors and are formed for public or mutual benefit other than to generate profits for shareholders or investors whereas a business enterprise is a for-profit entity associated with the production, selling or distribution of goods or services.

An endowment fund is a financial asset usually owned by a non-profit organization that includes capital assets and associated earnings leveraged to finance the general purpose of the non-profit organization. It is treated as a donation (contribution) whose principal must be retained but whose revenue can be spent.

The amount borrowed from the endowment fund is $166,000.

Repayment amount is $143,000.

Calculate the endowment fund balance to be owed by the organization at year-end:

$\begin{array}{c}\text{Endowment fund balance}=\$166,000-\$143,000\\ =\$\text{23},000\end{array}$

Hence, the endowment fund balance to be owed by the organization at year-end is $23,000.

4.

To determine

State that borrowing will be an issue for the agency and mention the options the agency needs to raise revenues.

Explanation of Solution

A budget is an estimate for the takeover and use of financial and other resources, for example, a year, a month or a quarter, over a specified period of time. Budgeting is a method of having one or more budgets prepared. Budgeting is the method of drawing up a budget or more.

Non-profit organizations are privately held corporations that do not provide financial benefits to their members or creditors and are formed for public or mutual benefit other than to generate profits for shareholders or investors whereas a business enterprise is a for-profit entity associated with the production, selling or distribution of goods or services.

An endowment fund is a financial asset usually owned by a non-profit organization that includes capital assets and associated earnings leveraged to finance the general purpose of the non-profit organization. It is treated as a donation (contribution) whose principal must be retained but whose revenue can be spent. It is possible that all donations and service requests will be dispersed unequally throughout the year. The organization may need to raise donation requests and seek additional grants to raise revenues.

5.

To determine

Mention that an obligation to pay interest on the borrowings will have a positive effect on the operations of the agency. If so, then explain why.

Explanation of Solution

A budget is an estimate for the takeover and use of financial and other resources, for example, a year, a month or a quarter, over a specified period of time. Budgeting is a method of having one or more budgets prepared. Budgeting is the method of drawing up a budget or more.

Non-profit organizations are privately held corporations that do not provide financial benefits to their members or creditors and are formed for public or mutual benefit other than to generate profits for shareholders or investors whereas a business enterprise is a for-profit entity associated with the production, selling or distribution of goods or services.

An endowment fund is a financial asset usually owned by a non-profit organization that includes capital assets and associated earnings leveraged to finance the general purpose of the non-profit organization. It is treated as a donation (contribution) whose principal must be retained but whose revenue can be spent.

No, there will be no positive effect on the operations of the agency. Under superior fiscal management, borrowing takes place only when appropriate.