Chapter 14, Problem 21EP

a.

To determine

Ascertain the given performance measures using the Form 990.

Explanation of Solution

Not-for Profit Organization: A not for profit organization, is a business type operated by individuals or specific groups of people to carry out the beneficial activities to the society. They do not focus on profit generation.

Form 990: The Form 990 is filed by the not for profit organizations with tax-exempt status, to disclose their activities to the public and the government. They are filed for a period of three years.

The various performance measures are:

• Compute the current ratio:

$\begin{array}{c}\text{Current ratio = }\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{=}\frac{\$24,906+\$21,689+\$4,544+\$974}{\$12,915+\$5,044+\$619}\\ \text{=2}\text{.81 times}\end{array}$

The current ratio is 2.81 times; this indicates the Organization FA is liquid with three times assets over liabilities.

• Compute the Revenues over expenses:

$\begin{array}{c}\text{Revenue over expenses = }\frac{\text{Total revenues}}{\text{Total expenses}}\\ \text{=}\frac{\$1,893,359 }{\$1,886,999}\\ \text{=1}\text{.00}\end{array}$

The revenues over expenses ratio is 1.00 time; this indicates the Organization FA is able to meet its expenses with the revenue being generated.

• Compute the program expenses over total expenses:

$\begin{array}{c}\begin{array}{l}\text{Program expenses over}\\ \text{total expenses }\end{array}\}\text{ = }\frac{\text{Program expenses}}{\text{Total expenses}}\\ \text{=}\frac{\$1,858,065 }{\$1,886,999}\\ \text{=0}\text{.98}\end{array}$

The program expenses over total expenses ratio is 0.98 times; this indicates Organization FA is able to fund its program nearly 98% with the funds generated for the program and uses only 2% of funds from public support.

• Compute the fund raising expenses over public support:

$\begin{array}{c}\begin{array}{l}\text{Fund-raising expenses}\\ \text{over public support }\end{array}\}\text{ = }\frac{\text{Fund-raising expenses}}{\text{Public support}}\\ \text{=}\frac{\$22,112 }{\$1,855,399}\\ \text{=0}\text{.01}\end{array}$

The fund raising expenses over public support is 0.01 times; indicates Organization FA spends $0.01 for every dollar in fund raising.

b.

To determine

Ascertain the given performance measures using the financial statements.

Explanation of Solution

The various performance measures are:

• Compute the current ratio:

$\begin{array}{c}\text{Current ratio = }\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{=}\frac{\$49,707}{\$19,045}\\ \text{=2}\text{.61 times}\end{array}$

The current ratio is 2.61 times.

• Compute the Revenues over expenses:

$\begin{array}{c}\text{Revenue over expenses = }\frac{\text{Total revenues}}{\text{Total expenses}}\\ \text{=}\frac{\$1,944,436 }{\$1,939,393}\\ \text{=1}\text{.00}\end{array}$

The revenues over expenses ratio is 1.00 time.

• Compute the program expenses over total expenses:

$\begin{array}{c}\begin{array}{l}\text{Program expenses over}\\ \text{total expenses }\end{array}\}\text{ = }\frac{\text{Program expenses}}{\text{Total expenses}}\\ \text{=}\frac{\$1,910,102 }{\$1,939,393}\\ \text{=0}\text{.98}\end{array}$

The program expenses over total expenses ratio is 0.98 times.

• Compute the fund raising expenses over public support:

$\begin{array}{c}\begin{array}{l}\text{Fund-raising expenses}\\ \text{over public support }\end{array}\}\text{ = }\frac{\text{Fund-raising expenses}}{\text{Public support}}\\ \text{=}\frac{\$22,143 }{\$1,872,090}\\ \text{=0}\text{.01}\end{array}$

The fund raising expenses over public support is 0.01 times.

There is a variance in the amounts being used to compute the performance measures, however the result is the same under both the requirements.

c.

To determine

Provide the various advantages of using audited financial statements instead of the IRS Form 990 while analyzing the financial performance.

Explanation of Solution

Audit report: This is a summarized report issued by the auditor on the governmental activities, business-type activities, and the funds of the entity, and provides an opinion on the reliability and validity of these activities of the entity.

The audited financial statements are more authentic source of information for the calculation of the various financial performance measures as they are prepared with adherence to the accounting standards and verified by a professional for its fairness and truthful representation of the information.