Chap 014

Chapter 14 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

CHAPTER 14: NOT-FOR-PROFIT ORGANIZATIONS— REGULATORY, TAXATION, AND PERFORMANCE ISSUES

OUTLINE

Number Topic Type/Task Status(re: 15/e)

Questions:14-1 Regulatory authority of states and

federal governmentExplain 15-1 revised

14-2 Differences in tax-exempt categories Explain New14-3 Requirements for filing Form 990 Explain New14-4 Public charities and private

foundationsCompare and contrast Same

14-5 Political activity and tax-exempt status

Explain New

14-6 Unrelated business income tax Discuss Same14-7 Political action committees Define, explain New14-8 Intermediate sanctions Discuss Same 14-9 Performance measures Identify Same14-10 Incorporating documents Identify, explain Same

Cases:14-1 Analyzing a NFP Internet New14-2 UBIT and advertising Evaluate Same 14-3 Financial performance measures of

largest NPOsInternet 15-3 revised

14-4 Nonfinancial performance measures Internet 15-4 revised14-5 Performance evaluation of

a NFPInternet New

Exercises/Problems:14-1 Various Multiple Choice 15-1 revised14-2 Public charity Compute 15-2 revised 14-3 Tax-exempt categories Identify Question 15-3

revised14-4 UBIT Evaluate Same 14-5 Gift shop and UBIT Compute Same14-6 Intermediate sanctions Determine Same14-7 Performance measures Compute, analyze New

14-1


CHAPTER 14: NOT-FOR-PROFIT ORGANIZATIONS—REGULATORY, TAXATION, AND PERFORMANCE ISSUES

Answers to Questions

14-1. A state government grants legal existence to a not-for-profit organization in the form of a not-for-profit corporation, a limited liability company or as a charitable trust. As a result, the state has a responsibility to monitor the actions of the NFP’s managers. The public looks to the state to monitor the charitable organization so it operates for the public good. Part of the state’s monitoring responsibility includes detecting cases when managers or directors have diverted resources, mismanaged, or defrauded the charity and the public. Very often regulations in the nature of consumer protection, such as licenses for charitable solicitation, are required to assist in the monitoring process.

14-2. A 501(c)(3) tax-exempt organization is considered a public charity. As such, contributions a donor makes to a 501(c)(3) NFP are tax deductible on federal income tax returns. A 501(c)(7) is a social or recreational NFP. Although it is a tax-exempt organization, contributions made to a 501(c)(7) are not tax deductible on federal income tax returns. Thus, a major difference is whether the donor can deduct the contribution made to the NFP from his/her federal income tax return.

14-3. Generally all NFP organizations must file some type of Form 990 with the IRS. Some exceptions include religious organizations and governmental NFP organizations. The NFP would know which form to file based on its size. The filing requirements by size are: (1) Form 990-N or “e-postcard” is filed by NFPs with gross receipts of $50,000 or less per year, (2) Form 990-EZ is filed by NFPs with annual gross receipts of between $50,000 and $200,000, and with less than $500,000 in total assets, and (3) a Form 990 is filed by NFPs with receipts and assets too large to qualify for filing the Form 990-EZ.

14-4. Public charities are broadly supported by the general public in the form of contributions, dues, or charges for services, which is why the adjective “public” is appropriate. Private foundations are funded by gifts from a small set of donors, usually a family or corporation. A private foundation makes grants to public charities, which then operate programs. Both are tax-exempt under IRC Sec. 501(c)(3), but public charities receive the most preferred tax treatment because it is assumed that the public, both donors and beneficiaries of the programs, will monitor the actions of the organization.

A public charity will file an annual Form 990 while a private foundation files a similar form, Form 990-PF, which includes schedules related to excise taxes on certain prohibited behavior. A private foundation is subject to many excise taxes for prohibited behavior because there is a higher risk that this type of organization will serve the interests of a relatively few donors at the expense of the public. For example, a wealthy donor could establish a private foundation, receive a charitable income tax deduction for a contribution of appreciated stock in the current period, place family members on the board who make spending decisions, rent office space to the foundation, and pay out

14-2


Ch. 14, Answers, 14-4 (Cont’d)

relatively small amounts to charities over time. Students may remember from an introductory taxation course that the charitable contribution itemized deduction is more generous for gifts given to public charities than private foundations.

14-5. A degree of exempt lobbying activity is allowed. The key is that the NFP organization should not substantially engage in lobbying activity. To assist with the definition of substantial the IRC provides guidance on the amount that can be spent on lobbying activity without incurring taxes or jeopardizing tax-exempt status. Depending on the size of the NFP organization, it can expend up to $1,000,000 on lobbying activity (influencing legislation) without incurring taxes. Size is defined in terms of expenditures rather than revenue/contributions. Specifically, the amount that can be spent on lobbying is calculated as a percentage of how much the NFP expended on its exempt purpose up to the limit of $1,000,000. Additionally, the NFP can expend up to 25 percent of the amount spent on lobbying activity for grass-roots lobbying activity (influencing the opinions of the general public).

The board member should be cautioned that the NFP have a clear understanding of the definition of lobbying activity. Political campaigning is not a lobbying activity and charitable NFPs are barred from political campaigning. Campaigning includes contributions to political campaign funds, public statements of position on behalf of the organization in favor of (or in opposition to) any candidate for public office, and the publication or distribution of political statements. However, certain voter education activities or public forums conducted in a nonpartisan manner may not be considered prohibited political activity. The key is whether the activities encourage people to vote for or against a particular candidate.

14-6. A gift shop that is considered unrelated to the tax-exempt mission of the museum and regularly carries on business activities will be subject to the unrelated business income tax (UBIT) if its net income is greater than $1,000. The UBIT rate is equal to corporate income tax rates. In order to ensure that the museum does not incur a UBIT liability, the managers should carefully review the incorporating documents to determine if the tax-exempt mission of the organization includes selling items related to exhibits. The museum can also escape this tax if the gift shop is staffed by volunteers, if the entire inventory is donated, or if its net income is less than $1,000.

14-7. IRC Sec. 527 includes such organizations as political action committees, political parties and political campaigns. In fact, Sec. 527 organizations are considered tax-exempt under the IRC. Campaign finance laws typically have an impact on Sec. 527 organizations. As a result of such laws, organizations that meet the definition of a political organization are required to notify the IRS that they wish to be considered a Sec. 527 tax-exempt

14-3


Ch. 14, Answers, 14-7 (Cont’d)

organization. Additionally, Sec. 527 NFPs must periodically complete Form 8872, notifying the IRS of the names and addresses of persons contributing more than $200 to the NFP, and those persons receiving more than $500 from the NFP.

14-8. Intermediate sanctions refer to the power given to the Internal Revenue Service (IRS) in Internal Revenue Code (IRC) Sec. 4958 to assess a tax on excess benefit transactions. These are transactions in which a substantial benefit is given to a disqualified person (i.e., one who has the ability to influence the organization, such as an officer or manager). These transactions result in a tax on the person receiving the benefit and possibly an additional tax on the organization, if the organization knew the transaction was improper. Examples include excess compensation and sales of goods at bargain prices to managers. Prior to the introduction of this tool in the 1996 Taxpayer Bill of Rights 2 (P.L. 104-168), the only sanction the IRS had when abuse by NFPs was detected was to revoke their tax-exempt status. This harsh penalty often hurt the public beneficiaries who lost the services of the charity, more so than the abusive officers.

14-9. Performance measures should be developed that capture the outcomes desired of the organization, as well as inputs to and outputs from operations. For example, a community’s child care center may have a goal of being an exceptional choice for parents in providing safe, nurturing care for children from ages 0-4. The inputs could be the staff (e.g., hours and dollars), supplies (e.g., food and educational play toys), and the outputs could be number of children served each week. To measure outcomes, however, the organization should incorporate parent surveys or accreditation/regulation reports. An effective report to the board will provide a small set of measures that can be tracked over time and compared to other similar organizations. The National Taxonomy of Exempt Entities (NTEE) classification scheme (presented in Illustration 14-5) is a good starting point for identifying similar organizations. The version of the taxonomy available on the NCCS Web site will provide more detail for determining whether the comparable category should be B for Education or O for Youth Development, or even K for Nutrition. Using the Web site www.urban.org/center provides performance measures that can be used for the category identified as appropriate for the child care center.

14-10. Incorporating documents that have an external focus and describe the purpose of the not-for-profit organization are the articles of incorporation. Another set of incorporating documents, usually prepared at the same time as the articles of incorporation, are the by-laws. The by-laws are internally focused and describe the manner in which the not-for-profit organization will conduct its business. For example, by-laws will indicate how officers of the board are elected, whether an audit is required, and the minimum number of meetings the organization will hold each year. In addition, the minutes to those board meetings are critical in documenting the decisions and policies of the board that impact managers of the organization. Stakeholders external to the organization are most interested in the charitable or public mission of the organization found in the articles of incorporation.

14-4

http://www.urban.org/center


Ch. 14, Solutions (Cont’d)

Solutions to Cases

14-1. Note: The answers provided to this case are based on the 2010 annual report of the American Institute of Certified Public Accountants.

a. The American Institute of Certified Public Accountants (AICPA) receives its exempt status under IRC Sec. 501(c)(6). Illustration 14-3 identifies this code section as appropriate for business leagues, chambers of commerce and real estate boards. The AICPA would be an example of a business league.

b. The AICPA has opted not to make its Form 990 available on its Web site. All organizations filing the Form 990 are required to make the form available to the public. Therefore, the fact that the purpose of the AICPA is to serve its dues paying members does not affect its responsibility to make its Form 990 available to the public. The IRS does not require that the form be made available on an NFP’s Web site. For those interested, footnote 6 in Chapter 14 provides additional information about public availability of the Form 990.

c. Yes. A review of the AICPA’s statement of cash flow reveals that this tax-exempt organization has paid income taxes, indicating unrelated business income (UBIT). Additionally, a review of the footnotes indicates that the AICPA is subject to UBIT. The AICPA has two for-profit entities, one of which is a limited liability company (LLC). NorthStar Conferences, LLC, provided professional development programs and conferences to various industries. Because the AICPA is the sole member of this LLC the income generated by NorthStar flows directly and totally to the AICPA and is subject to UBIT.

d. The effectiveness ratio is calculated as Program Expenses/Total Expenses. Using the 2010 combined statements of activities found in the annual report for the AICPA the following ratio was calculated:

Total Program Services Expense/Total Expenses= $144,976/$198,050=73%

The AICPA’s program effectiveness ratio is at the low end of the ratios provided by the ten largest charitable NFPs. Only the American Cancer Society has a lower ratio.

The answer to whether the AICPA should be as effective will vary by student. AICPA members pay dues in the expectation that they are receiving value for the dollars paid. Some may argue that because the AICPA is a business league administrative costs should be higher due to higher salaries and the perquisites of office. Others will argue that members do not pay dues for such non-value added services and the AICPA effectiveness should be similar to other NFPs.

14-5


Ch. 14, Solutions, Case 14-1 (Cont’d)

As a caution, effectiveness of any organization should be based on factors other than a single ratio. For example, membership in the AICPA is voluntary; therefore, much as with for-profit entities, members have the option of not purchasing the services (i.e., not paying dues) offered by the AICPA if they do not believe they are receiving value for their money. The fact that members continue to pay dues indicates they are somewhat satisfied with the services provided by the AICPA.

e. Accounting students would be surprised and disappointed if there wasn’t some evidence the AICPA was practicing good governance. There are several indicators of good governance provided by the annual report and the Web site. Some of the items mentioned include:

Use of an audit committee. The audit committee is made up of independent directors. The audit committee meets separately with the internal auditor. The AICPA applies the COSO framework to internal control. Management provides an internal control assurance. The auditor provides an opinion on management’s internal control

assurance. The AICPA has a strategic plan.

Although the AICPA provides a strategic plan it does not provide users with measureable goals and objectives. As a result, it does not provide financial or nonfinancial performance measures to evaluate (benchmark) whether strategic goals and objectives are being achieved.

14-2. a. The following are questions the executive director of the association should be prepared to answer:

Is there a frequency and continuity of the advertising that appears to be pursued in a manner similar to comparable commercial activities of businesses?

Does the advertising activity contribute importantly to accomplishing the exempt purpose of the organization?

Is the advertising space purchased in the same manner as conventional advertising by a business?

Is the advertising sold to a business merely to identify the purchaser without a commercial message? For example, are the advertisers just listed or are separate spaces sold?

Does the purchaser of the advertising derive goodwill from being identified as a patron of the organization, which can be considered commercial benefit?

14-6



Does the advertising activity meet any of the exceptions under UBIT, such as using volunteer labor, operated for the convenience of members, or selling donated merchandise?

Describe these other factors that will be considered by the IRS in considering whether an activity is unrelated business income:

o The normal manner in which the publication is circulated.o The territorial scope of the circulation.o The extent to which its readers or promoters could reasonably be

expected to further the commercial interest of the advertisers.o The eligibility of the publishing organization to receive tax-

deductible contributions.o The commercial or noncommercial methods used to solicit the

advertisers. Would the net income derived from the sale of advertising be large enough

to subject the NFP to UBIT?

Derived from IRS Pub. 598, (March 2010, p. 5). See answer to part b.

b. The IRS Publication 598 “Tax on Unrelated Business Income of Exempt Organizations” will help students identify whether this activity is considered “unrelated business income” subject to a tax. This publication is available at www.irs.gov. Under Chapter 3, “Unrelated Trade or Business,” there is a subsection within the Examples on “Sales of Advertising Space,” along with other types of activity that has been deemed unrelated business income by the IRS.

c. The memo students prepare should incorporate the questions identified in part a taken from the IRS Publication described in part b and any other guidance students can find on the Internet or from other resources. Emphasize to students that, as a board member, Mr. Smith will use their analysis and memo to help him speak to the board as a whole so the board can deliberate the advantages and disadvantages of allowing advertising in the annual conference publication. Students can suggest an approach, but they should point out that their analysis is derived from publicly available IRS guidance (and cite any other literature they used in their analysis), and that they are not tax professionals, nor do they have expertise in tax-exempt issues. There is no information given in the case to calculate the costs or benefits of allowing commercial advertising in the annual meeting publication.

14-3. a. Students will choose different sets of charities. Web sites for the organizations listed on Illustration 14-7 can be readily obtained through a search engine such as Google.

14-7

http://www.irs.gov/



The most widely published ratio expected to be available on NFPs Web sites is the percent of total expenses spent on the program as opposed to supporting the program. Generally, organizations strive to have this percentage be between 60% and 90%. The availability of data for calculating ratios will vary by the NFP. Comparing to the 2010 ratios provided in Illustration 14-7, students will probably observe that NFP organizations try to maintain fairly high effectiveness ratios.

b. Readers of financial statements can calculate the ratios presented in Illustration 14-6 from the audited annual financial statements and IRS Form 990. For example, donors can calculate the organization’s fund-raising ratio by looking at the statement of activities to see if the dollars from contributions and support adjusted for fund-raising costs, divided by total contributions and support, is close to one and exceeds a target set by the organization. Generally, a higher ratio is better. The fund-raising efficiency measure can also be calculated from the statement of activities. Liquidity ratios come from the statement of financial position. Other ratios in Illustration 14-6 require output measures not on the audited financial statements, but perhaps in the Form 990 or in other sections of the annual report. An example of such information would be number of clients served.

c. Students could present information in this manner:

Performance measures:

Charity 1

Charity 2

Charity 3

Charity 4

Charity 5

Comments:

LiquidityGoing concernCapital structureProgram effectivenessEfficiencyLeverage and debt coverageFund-raising ratioInvestment performance

Students should be cautioned that using ratios for a single year is just a first step in assessing the efficiency and effectiveness of an organization. Certainly trend information is important, as well as other economic, financial, and program information that may not be readily available in the annual financial statements. Of course, often all a donor has is publicly available information on which to base a contribution decision, so the NFP has a strong incentive to provide useful information on its Web site.

Ch. 14, Solutions (Cont’d)

14-8


14-4. a. The Outcome Indicator Project available at the Urban Institute’s Center for Nonprofits and Philanthropy Web site provides comprehensive examples of performance models showing the program description, outcomes sequence chart, and indicators for 14 program areas. Performing Arts is one of those areas. The

chart suggested is more clearly seen in the version at www.urban.org/nonprofits; however, the components are as follows:

Intermediate Outcomes End OutcomesIncreased awareness of arts programs and activities

Increased Knowledge

Increased social bonds in community

OUTPUTArts programs are produced and promoted

Increased access to diverse audience

Increasedattendance

Increasedappreciationfor the arts

Arts program receives external recognition

Enriched life experience

Increased communalmeaning/understanding

b. Indicators that can be used to measure whether the association achieved the outcomes it desired are:

Intermediate Outcomes End Outcomes1. Number and

percentage of community aware of performing arts opportunities

Percentage of facility capacity filled per performance

Number and percentage of audience who report gaining increased knowledge of local culture as a result of attending events

Number of outside programs offered by arts group

2. Number of free tickets provided

Number of subscriptions renewed as a percent of sales

Number and percentage of audience who decide to pursue additional arts programs after attending an event

Number of community organization partnerships


14-9

http://www.urban.org/nonprofits


c. The contributors may ask what system is in place for gathering information on performance indicators. Are there staff and resources available to count and calculate the number and percentage of individuals attending programs? Is there a survey mechanism in place for following up with attendees to ask about their perceptions and subsequent behavior (e.g., attending more performances or renewing subscriptions for future events)? Contributors may also ask about benchmarks for each of the indicators to be able to assess whether this organization is performing well compared to its peers or competitors. Students may not have much experience in addressing these questions, so encourage them to interview managers from a local performing arts association or explore Web sites of similar not-for-profit organizations to see if performance measures are available.

14-5. Note: Answers to case 14-5 are based on Internet access dated 6/15/2011 and may differ slightly at the time the case is assigned.a. The Sierra Club Foundation received an A+ rating. The rating is assigned based

on the following criteria: Program effectiveness (program expenses/total expenses)—to receive such a

high rating the Sierra Club would need to have an effectiveness ratio of 75 percent or greater.

Cost to raise $100 in related contributions (basically fund-raising expenses/public support)—to receive such a high rating the Sierra Club would be expending $25 or less on every $100 raised.

A reasonable level of available assets. Too many available assets will result in a lower rating. The Sierra Club would need to have available assets of less than three years to receive such a high rating. Available assets is the amount of assets (including investments designated by the board) available to cover the current year’s budget.

Of less interest in deciding whether to contribute to the Sierra Club is the fourth criterion which is “open-book” status. This refers to disclosure of information to the AIP for use in rating the Sierra Club.

The A+ grade received by the Sierra Club Foundation indicates that the AIP believes the Sierra Club is highly efficient and effective in providing program services without incurring excessive fund-raising costs.

b. No, the Sierra Club does not meet the BBB’s standards for charity accountability. It fails to meet the standards because it did not meet one of the 20 standards on which the BBB rates charities. Specifically, the Sierra Club did not meet standard 7—board approval of the written report on effectiveness.

c. According to the BBB Web site, the Sierra Club’s program effectiveness percentage (program expenses/total expenses) was 90 percent, and its fund-raising efficiency percentage (fund-raising expenses/related contributions) was 6 percent.

14-10



The BBB rule of thumb for program effectiveness is at least 65 percent and its rule of thumb for fund-raising efficiency is less than 35 percent. Based on the rules of thumb provided by the BBB the Sierra Club appears to be operating effectively and efficiently with regard to programs and fund-raising expenses.

d. Yes, based on the limited analysis conducted it appears the Sierra Club is performing quite well. Program effectiveness percentages and the fund-raising efficiency percentages are good based on the criteria provided by both the AIP and the BBB. The AIP criteria also indicate that the Sierra Club is using its available assets for its mission rather than holding assets in investments.

Solutions to Exercises and Problems

14-1. 1. b. 6. a.2. a. 7. c.3. c. 8. a.4. b. 9. c.5. d. 10. d.

14-2. a. United Way support $ 40,000Contribution from the city 30,000Contributions:

small contributions: 50,000large contributions:5 gifts @ $9,800 (the limit)* 49,000

Public Support $169,000

* total support of $490,000*.02=$9,800. The answer is based on the revised 2008 IRS publication 557, Chapter 3, Comprehensive Examples, pp. 34 (effective for the 2010 tax year).

b. The organization is a public charity because it passes the public

support test. More than 1/3 of its revenue comes from the public at

large ($169,000/$490,000 = 34.5%).

c. No. Now the organization fails the public support test because less

than 1/3 of total support ($129,800/$490,000=26.5%) comes from the

public at large.

14-11


Ch. 14, Solutions, 14-2 (Cont’d)

United Way support $ 40,000Contribution from the city 30,000Contributions:

small contributions: 50,000large contributions:1 gift @ $9,800 (the limit) 9,800

Public Support $129,800

Note that a tax-exempt entity in its first five years will not have to prove that it meets the public support test; however, it will in the 6th year.

14-3.1. Ottowa County Credit Union IRC Sec. 501(c)(14)2. American Diabetes Association IRC Sec. 501(c)(3)3. Peaceful Place Cemetery IRC Sec. 501(c)(13)4. American Museum of Natural History IRC Sec. 501(c)(3)5. AICPA IRC Sec. 501(c)(6)6. Fredericksburg Civic League IRC Sec. 501(c)(4)7. Gulf Coast Yacht Club IRC Sec. 501(c)(7)8. Landscapers Professional Association IRC Sec. 501(c)(6)

14-4.Yes – subject to

UBITNo – not unrelated business income

1. Sale of Silverton Symphony Orchestra Concert CDs in the facility’s gift shop.

X

2. Rental of the facility to the high school drama club.

X

3. Rental of two apartments in the facility to the symphony

X

4. Sale of the season ticket membership list to a local music store.

X

5. Rental of the facility to the state CPA association for continuing professional education events.

X

6. Internet sales of gift shop items with the Silverton Symphony Orchestra logo.

X

7. Lease of the facility’s parking lot to the local university on football game days.

X

14-12



Note: From the information provided, we can infer that activities described in #1 and #2 appear to be related to the music and performance activities of the Silverton Symphony Orchestra Hall. Activities described in #3 through #7 are not related to music and performance arts.

14-5. a. Unrelated business income tax is $2,100 (15% of the net income of

the gift shop, $15,000, less $1,000). The organization may not be

subject to UBIT if the youth it is training works in the gift shop.

b. The UBIT would be the same. UBI depends primarily on the nature of

the money received, and not how it was used. Interest earned on

endowments is not subject to UBIT.

14-6. 1. Yes. This is a classic example of excess economic benefit

transactions. Jane is a disqualified person because she is an officer

with substantial influence over the organization and she is receiving

more than the fair market value for the building. The organization can

avoid sanctions by getting other appraisals that document that the

building is really worth $250,000, or purchasing the building for

$200,000.

2. Yes. However, only when the excess benefit is paid. The

organization could avoid a problem by putting a limitation on the

amount of compensation the president could receive.

3. No. However, the law is silent on this particular example. She is

probably receiving the tickets as a member, if all members receive

the same number of admission tickets. If the organization intended it

to be compensation, then it needs to be explicitly stated in a board

resolution.

14-13



4. Possibly. If the incoming president’s duties are similar to the

outgoing president and comparable organizations, then the

compensation may be unreasonable. If the duties are similar,

however, Joe Curtis is able to perform them more efficiently then the

higher salary may be reasonable. The organization should be sure

his other offers are written and that he did not influence the other

offers so that the offers can substantiate his “worth.” The NFP

should also survey for comparable salaries and document the nature

of the president’s duties and how the duties may differ from the

previous president, as well as any difficulty in finding a candidate as

qualified as Joe Curtis.

14-7. a. Ratios Based on the 2010 Form 990

Measure Calculation (amounts in 000s)Rati

o

Current ratio $4+$6,350+$798+$40+$116,932+$529 13.86(part X, col. B, lines 1-9, 17 & 18) $5,357+$3,637

Revenues/expenses $795,079 0.93(part VIII, line 12 & part IX, line 25) $854,605

Program expenses/total expenses $844,468 0.99 (part IX, line 25) $854,605

Fund-raising expenses/public support $6,702 0.01(part IX, line 25, & part VIII, line 1h) $794,564

The current ratio indicates that AmeriCares is highly liquid, covering its

current liabilities almost 14 times. While its expenses are slightly greater

than revenues, in the short-term the inability to cover expenses with

14-14



revenues would not be a concern. A ratio equal to or greater than one

would be desirable. A review of the statement of financial position indicates

sufficient unrestricted net assets to cover the short-fall in the current

period. However, the large decline in unrestricted net assets from 2009 to

2010 indicates this is an area that should be monitored. AmeriCares

appears to be highly effective with 99 percent of expenses related to

programs and only 1 percent related to support. Fund-raising efficiency

also appears to be good, in that AmeriCares is spending about $.01 in fund-

raising for every dollar of public support received.

b. Ratios Based on the 2010 Audited Financial Statements

Measure Calculation (amounts in 000s)Rati

o

Current ratio $153,320 16.93$9,054

Revenues/expenses $804,223 0.93 (total support & revenue, and total exp.) $861,147

Program expenses/total expenses $850,430 0.99 (total program services and total exp.) $861,147

Fund-raising expenses/public support $7,185 0.01(total fund-raising & total public support) $801,044

Using annual report information to calculate ratios for AmeriCares provides

results very similar to those results obtained from the Form 990. There is

an increase in the current ratio value. The difference does not appear to be

large enough to warrant a change in the analysis of AmeriCares’

performance for 2010.

14-15



c. As a general rule, audited financial statements that conform to generally

accepted accounting principles should be preferred to Form 990 information

tax return data because of the assurance role that an independent auditor

provides. However, the Form 990 has more narrative and qualitative

information than does the audited annual financial statements. There is

valuable information in each and a sophisticated reader of financial

statements will want to have both on hand.

As seen with AmeriCares, performance measures can be very similar using

either source of data. AmeriCares prepares audited financial

statements and uses accrual accounting numbers in its Form 990, which

results in the similar performance measures calculated in parts a and b.

However, it is possible that the measures could be quite different given that

the IRS does not require that accrual accounting or audited financial

statements be used in preparing Form 990.

14-16

Chap 014

Documents

Transcript of Chap 014