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10
-
1

Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E


CHAPTER 2


2
-
5.

Budgets establish the amount of resources that are available for specific activities. However,
budgets do not merely limit the resources that can be spent. They represent the detailed plan that
supports the organization’s efforts to achieve

its mission, and help the organization determine
and achieve its goals and objectives. The budgeting process is one of exploring possibilities.
Organizations determine what things they can and cannot do. They examine alternatives and
choose those that are

likely to yield the best results. They become attuned to possible problems
and can work to find solutions.
Budgeting forces managers to think ahead, to have clear
expectations against which to measure performance, and to coordinate the activities of the
o
rganization so that everyone is working toward a common purpose.



Budgets are also used to control results. That is, budgets not only create plans, but they are
also used to help accomplish those plans. This is done by comparing actual results to the budg
et.
Looking at results, we can assess what needs to be corrected. How good a job did the
organization’s management do? How well did the organization itself do? In order to evaluate
performance, one must have a standard or benchmark to compare with actual r
esults. The budget
establishes the organization’s expectations.


2
-
6.

An organization may consider undertaking an activity that was not planned for when the annual
budget was prepared. At any time an organization can prepare a special budget for a specific

purpose. Appropriate approval should be obtained before implementing the budget.


2
-
12
.

If targets are placed out of reach,
people

probably will not
stretch
to their utmost limits to come
as close to the target as possible. When people work extremely hard

and
then
fail, they often
question why they bothered to work so hard. If hard work results in failure to achieve the target,
then why not ease off? If you are going to fail anyway, must it be so painful?


2
-
13
.

(1) The budget is first prepared. (2) After
review by the body with adoption authority, it is
adopted, either with or without changes. (3) Once approved
, the budget is implemented. It is the
responsibility of the management of the organization or the executive branch of the government
to assure that

the adopted budget is carried out. (4) Finally, the results must be evaluated.
Accountability is an element of this evaluation.


2
-
14.

In some organizations, support and revenues are only acknowledged if they have been received
in cash. In those cases, e
xpenses are recognized when they have been paid. For organizations that
record their revenues and expenses in that way, the cash budget would be identical to the
operating budget. They are said to use a
cash basis of accounting
. In contrast, if revenue is
recorded in the year the service is provided, whether cash has been received yet or not, then the
organization is said to be using an
accrual basis of accounting
.



Cash accounting is easier, but does it enable us to understand how well our organization is

doing? With accrual accounting we accrue, or anticipate, the eventual receipt of money for
services provided, as well as recording expenses for resources consumed, even if they have not
yet been paid for. When accrual accounting is used, the operating bud
get gives us a good idea of
how profitable we expect the organization to be. However, it does not give an accurate idea of
how much cash we will have.

10
-
2

Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E




2
-
17.




Cash



Accrual


Basis





Basis



Revenue


$ 15
,0
00


$ 20
,0
00


Expense


$ 16
,0
00



$ 18
,0
00


Surplus/(Deficit)

($ 1
,0
00)



$ 2
,0
00


Accrual better reflects the long
-
term stability of the organization.



2
-
1
9
. Monroe Outpatient Surgery Center

Operating Budget


June 2012


Revenues


$200,000

(80 procedures x $2,500/procedure)


Expenses


Professional Fees

$120,000

(80 procedures x $1,500/procedure)


Surgical Supplies


24,000

(80 procedures x $300/procedure)


Salaries



10,500

Given


Occupancy



8,200

Given


Communication


1,200

Given


Depreciation





4,000

($240,000/60 months)

Total Expenses

$167,900

Profit



$ 32,100



2
-
21
.

Operating budget





Cash budget



Revenue


$240,000



Beginning Balance


$26,000










Cash Receipts


Expenses





Collection fr
om Feb.


150,000

Personnel



160,000


Collection from March



60,000

Supplies




48,000


Cash from mortgage


250,000


Depreciation



12,000


Total Cash Receipts


460,000


Interest





6,000


Available Cash


486,000









Cash Di
sbursement


Total Expenses




226,000



Payroll payment


170,000







Payment to suppliers



45,000

Surplus/(Deficit)



$14,000


Payment for building



250,000









Total Disbursements


465,000











Ending Cash Balance


$ 21,000


10
-
3

Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E





Capital budget




Building

$250,000



Mortgage

$250,000






2
-
23
.

(Special Purpose Budget)


Budget


Revenue

700 screenings




Supermarket Subsidy

$1,000


Total Revenue

$1,000


Less Expenses




Equipment rental

$ 500



Nu
rses $50


10 hours


7 days

3,500



Test Costs 700


$1


700


Total Expenses

$4,700


Surplus/loss

$ (3,700)





No, it is not necessarily financially bad. This program may

discover patients with hypertension or other
medical problems who will become patients of the hospital, generating additional revenues. Also it
provides the hospital with a way to advertise their services, generating future patient volume and
revenue.

10
-
4

Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E



CHAPTER 3


3
-
4.

A top
-
down budget is one that is prepared by top management. The budgeted amount is given to
responsibility center managers, who are expected to achieve the budgeted result. However, it is
very difficult for top managers to be aware of all
of the likely factors affecting spending in each
responsibility unit. An alternative approach is bottom
-
up, in which responsibility unit managers
propose budgets for their unit and provide justification for the requested spending.



A bottom
-
up approach ma
kes better use of the expertise of employees throughout the
organization, is more likely to result in employees who want to achieve the budget, and is more
likely to be achieved. However, it requires top management willing to accept some degree of
decentra
lization. In very autocratic, centralized organizations where top management desires
retention of high levels of control, a top
-
down budget is more likely to be employed.



3
-
9.

Performance

budgeting

is

an

approach

designed

to

improve

the

budget

process

b
y

focusing

more

on

what

we

hope

to

accomplish

than

simply

on

inputs

used.

The

method

calls

upon

the

manager

and

organization

to

define

goals,

plan

the

amount

of

resources

needed

to

accomplish

those

goals,

and

then

assess

how

well

the

goals

have

been

achiev
ed.

The

method

is

particularly

useful

when

it

is

possible

to

apparently

do

the

same

amount

of

work

with

different

budgeted

amounts

of

resources

(e.g.,

maintain

ten

parks),

yet

the

underlying

quality

of

worked

performed

does

not

remain

constant.



The first

step is to clearly define objectives, referred to as performance areas. Next, one must
identify the operating budget. Then the percent of operating budget resources that will be devoted
to each objective must be determined. The operating budget resources
can then be allocated to the
performance areas. Measures of performance for each objective or performance area must be
established. Then a performance budget can be developed.



3
-
11.

This is a technique that argues that all costs in the budget must be ju
stified each year, not just
budget increases from year to year. The method also focuses on the evaluation of alternatives and
their costs and benefits.



3
-
13.

A flexible budget is an operating budget for varying workload levels. It gives managers an
understandi
ng of what is likely to happen to revenues, expenses, and profits (surpluses or
deficits) if the volume of services provided varies from the expected level.



3
-
19



1
. i Zero
-
Based



2
. vi Flexible





10
-
5

Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E



3
-
24.

(Flexible Budget)

.

Price

$

5.00

$ 6.00

$ 7.00


Volume




20,000




18,000




16,000


Revenue

$ 100,000

$ 108,000

$ 112,000


Less Fixed Cost

32,000

32,000

32,000


Less Variable Cost $4


Volume


80,000


72,000


64,000


Surplus/(Deficit)

$(12,000)

$ 4,000

$16,000








Change the price to $6. Assuming this is a Not
-
for
-
Profit organization with a mission to provide
care, a price of $5 puts it at risk

of closing. A price of $7 makes a larger profit, but fewer patients
receive care. The $6 price balances the need to make a profit with the desire to maximize care
offered.



3
-
32. SALARIES, BENEF
ITS, SUPPLIES, RENT,

INTEREST, ETC.



3
-
33.

A.

FLEXIB
LE

B.

CAPITAL BUDGETS

C.

ZERO
-
BASED

D.

ACCRUAL



3
-
34.

Revenue

10% Decrease

Base [5000]

10% Increase


Grant

$100,000

$100,000

$100,000



Fares (V*.8*.75)

2,700

3,000

3,300





$102,700

$103,000

$103,300

Expenses


Supervisor

$36,000

$36,000

$
36,000


Coordinators (6
*17*10*50)

51,000

51,000

51,000


Insurance (1750*2)

3,500

3,500

3,500



Supplies/copying

2,500

2,500

2,500


Mileage (V*.35*5)

7,875

8,750

9,625



$100,875

$101,750

$102,625

Excess/(Deficit)

$1,825


$ 1,250








$675

10
-
6

Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E



CHAPTER 4


4
-
2.

Full cost

refers to the total of all costs associated with a cost objective. This includes direct and
indirect costs.
Direct costs
are the costs incurred within the organizational unit for which the
manager has responsibility,
or the costs of resources for direct production of a good or service.
Indirect costs
are costs that are assigned to an organizational unit from elsewhere in the
organization, or costs of resources that are not used for direct production of a good or servi
ce.
Direct and indirect costs are particularly difficult to understand because their definitions relate to
the object of the analysis. If one is interested in the direct cost of the public works department, it
is appropriate to include department supervis
ory personnel in that cost. In contrast, if one is
interested in the direct cost per mile of road plowed, that would include the plow, the driver, and
the cost of the salt spread on the road, but not the cost of supervisory personnel. In that example,
the
supervisors are direct costs of the public works department (i.e., what it costs to operate the
public works department) but indirect costs of plowing the road (i.e., what it costs to plow the
roads). The various scheduling and other administrative activi
ties carried out by supervisory
personnel are essential to running the
department
, but they are not a direct cost of
plowing snow
.


4
-
3.

Average cost
is the full cost of any cost objective divided by the number of units of service
provided.
Fixed costs
: those
costs that do not change in total as the volume of service units
changes over a relevant range of activity.
Variable costs
: those costs that vary directly with
changes in the volume of service units over a relevant range of activity. If all of the costs
of
plowing snow, both direct and indirect, are added and the total is divided by the number of units,
the result is the cost per unit or the
average cost
. So, the total cost could be divided by the
number of miles to find the cost per mile plowed. Once Mea
ls for the Homeless (Meals) rents
space for a soup kitchen, the rent will not change from day to day, even if the number of meals
provided varies by a substantial amount. Perhaps Meals is serving 300 people a day at a given
soup kitchen. If Meals were to f
eed another person, the rent would stay the same. Therefore, it is
a
fixed cost
. In contrast, the amount of food that Meals must purchase represents a
variable cost
.
If more people are served, meals will need more food. Activity represents the volume of se
rvices
provided.


4
-
4.

Marginal costs

are the extra costs incurred as a result of providing one more service unit (such as
one more meal). At first,
marginal costs

would appear to be identical to variable costs. In both
cases, if there is one more unit of acti
vity, there will be an increase only in variable costs.
Marginal costs, however, more broadly look at all costs that might change as a result of a
decision. Suppose that HOS has an x
-
ray machine that can take 5,000 x
-
rays per year. What is
the cost of doin
g one more x
-
ray? If HOS has to buy another machine to do the 5,001
st

x
-
ray,
then on the margin, the cost
s

of the additional patient
are

the variable cost of one more patient
plus the cost of acquiring another machine.


4
-
5.

Cost per unit depends on volume. I
f volume is low, the cost per unit is higher than if volume is
high. This is because as volume rises, fixed costs get shared resulting in less fixed cost per unit.
Furthermore, for historical purposes measuring the average cost may be adequate. For
prospe
ctive decision making, we are often interested in the marginal costs. Therefore the
appropriate measure of cost depends in part on the reason we want to know the cost.



4
-
12.

a
. Fixed:
depreciation,

doctor, nurse, cooks and camp director

10
-
7

Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E



b
. Step
-
Fixe
d or Semi
-
Variable costs:
counselors


c
. Variable:
food and transportation


d
. Not included in the camp’s cash budget:
depreciation



4
-
15.
1
.
BEQ = FC/(VR


VC) = ($5,000

per week
/5

days per week
)/((15
-
5)) = 1000/
10














= 100

pe
r day


2
.

b. decreases



4
-
20.

1
. Full Cost
.


2
. Average Cost
.


3
. Marginal Cost
.



4
-
22.

1
.
d.
Unit variable cost remains constant and unit fixed cost decrease

2
.
d.
Relevant range



4
-
26.

1.
___
total revenue
__ equals __
total expense
____


2
. ___pri
ce or variable revenue___ minus __variable cost_____.


3
.
b.
decreases



4
-
28.

b.
reduce the contribution margin per unit of service.



4
-
34.

Weighted Average Price






.30 * $100


= 30









.70*.80*$100

=
56













$86


FC = $
210,000






VC = $65 per exam






P = $86 per exam


BEQ = $210,000 / (86


65) = 10,000 exams


Or: (100
-
65) x .3 + (80
-
65) x .7 = $21 = WACM


4
-
36.

1.


Breakeven

10
-
8

Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E




Number of = Total Fixed Expenses/Unit Contribution Margin

People
=

($5,000 + $1,000) / ($150
-

$50) = 60 people


2.


Average cost = Total cost / volume



TC= 6,000 +

(50*100) = 11,000



AC= 11,000 / 100 = $110 per person


4
-
37.

1
.


Fixed costs = $180 VC= 5 Q=12

Q = FC/(P


VC)

12=180/(P
-
5)


12(P
-
5)=180

12P
-
60=180


12P=240


P=
$
20


2
.

Fixed costs = $180+300

= $480


treat profit as a fixed cost

VC= 5



Q=12

Q = FC/(P


VC)

12=480/(P
-
5)

12(P
-
5)=480

12P
-
60=480

12P=540

P=
$
45



4
-
40.

1. BEQ = (FC
-
City revenue)/(Weighted VR


Weighted VC) or

BEQ = (FC
-
City

revenue)/(Weighted CM)





2
.
a. i
ncrease
s

Base Reading
Daily Price
$10.00 $3.00
Daily VC
$3.00 $5.00
Days per week
5
Fixed Costs $36,000
City Contract
$30,000
Weekly Weekly Weekly Weekly
Mix Price VC CM Weighted CM
non reading 70.0% $50.00 $15.00 $35.00 $24.50
reading 30.0% $65.00 $40.00 $25.00 $7.50
Total Weighted CM
$32.00
Break Even 188
10
-
9

Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E



CHAPTER 5


5
-
6.

Compound interest simply refers to the fact that when money is invested going forward in time, at
some point the interest earned on the money starts to earn interest itself. Discounting is just
the
reversal of this process as we go backward in time.


5
-
8. The net present cost method is very helpful for comparing projects that have identical lifetimes. If
projects have differing lifetimes, you are not comparing equal benefits unless you equalize t
he
lifetimes. We could use the lowest common denominator of the lifetimes, extending both
alternatives until their lifetimes are equal. However, the uncertainties in replacement and operating
costs going forward in time may be substantial. The annualized c
ost method overcomes these
problems. In that approach, one first finds the Net Present Cost for each alternative. Then, that cost
is translated into a periodic payment for the number of years of that individual project’s lifetime.
The project with the lowe
r annualized cost is less expensive, on an annual basis, in today’s dollars.


5
-
9.

Aside from the complexity of calculations, when cash flows are uneven from year to year, there
are two important limitations. IRR assumes that
cash inflows

during the projec
t are
reinvested at
the same rate that the project earns
. Second, sometimes use of the IRR method will cause you to
chose incorrectly from two mutually exclusive projects by picking a smaller project with a higher
IRR rather than a larger project with a so
mewhat smaller IRR.


5
-
10.

The objection to the method is that it ignores everything that happens after the payback period. It
also does not consider the time value of money.



5
-
22

(Annualized Cost)



French Corp




Annual Costs
:
PM
T = $10,000, N = 10,
I = 10%


PV =
$61,446


Net Present Cost
:

$275,000 (purchase cost) +
$61,446 = $336,446


Annualized Cost
:


PV =
$336,446,
N = 10, I = 10%

PMT =
$54,755




Japan Rail Car




Annual Costs
:
PMT = $15,000, N = 6, I = 10%

PV
=
$65,329


Net Present Cost
:

$195,000 (purchase cost) +
$65,329= $260,329








Annualized Cost: PV = $260,329, N = 6, I = 10%

PMT = $59,773





Select French Corp. Their cars have a lower annualized cost

10
-
10

Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E





5
-
24.
(Annualized Cost)



Model A

Model B

Outlay


($80,000)

($100,00
0)

Annual Payment


$5,000


$2,500



i

=


5%

5%


N

=


20 years

30 years


PV

of a
PMT

of


$5,000

$2,500

At 5% for


20 years

30 years


=

$62,311

$38,431

Plus Outlay


80,000

100,000


=

$142,311

$138,431





Annualized
PMT

for




N


20 years

30 yea
rs

I


5%

5%

PV


$142,311

$138,431

Annualized cost


$11,419

$9,005




Spreadsheet Formula Solution


Model A Present Value

= PV(rate,nper,pmt,fv,type)
-
80000

= PV(5%,20,5000)
-
80000

= ($142,311.05)


Model A Annualized Cost

= PMT(rate,nper,pv,fv,type)

= PMT
(5%,20,142311.05)

= $(11,419.41)


Model B Present Value

= PV(rate,nper,pmt,fv,type)
-
100000

= PV(5%,30,2500)
-
100000

= ($138,431,13)


Model B Annualized Cost

= PMT(rate,nper,pv,fv,type)

= PMT(5%,30,138431.13)

= ($9,005.14)


10
-
11

Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E


Model A will cost $11,419 per yea
r in today’s dollars, and Model B will cost $9,005, so
Model B is less expensive.



5
-
25. (NET PRESENT VALUE)






NPV(12%, values…)

-
650 =
(173.60)






NPV










102
68
91
68
81
85
200
19
650
173
60
.
.
.
.
.






Decision: Do NOT pursue the investment. It has a negative net present value.



5
-
31.


(IRR)



Spreadsheet Formula Solution


= Rate(nper,pmt,pv,fv,type,guess)




= Rate(7,800,
-
5000)







= 2.92%


5
-
32.
(IRR)


Spr
eadsheet Formula Solution


= Rate(nper,pmt,pv,fv,type,guess)




= Rate(36,5000,
-
125000)






= 2.12% per month




= 25.5%









Annual rate exceeds 18%, so accept the contract.


Cash In

Cash Out

Net cash flow

Year

0

650


㘵S
=
M
=
ㄴN
=

=

ㄱN
=
N
=
ㄴN
=

=

ㄱN
=
O
=
ㄴN
=

=

ㄱN
=
P
=
㌴P
=

=

㌱P
=
4
=
10
-
12

Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E


CHAPTER 6


6
-
1.

Long
-
term debt includes unsecured notes, notes secured wi
th collateral, mortgages, bonds, and
leases.


6
-
2.

Collateral is a specific asset that the lender will be able to take possession of if the borrower fails
to make payment of amounts due. For example, if the organization has made an investment,
buying 10,00
0 shares of Microsoft stock, it may offer that stock as collateral when it borrows
money. By providing the lender with specific valuable collateral, the loan is less risky. Therefore,
the lender is more likely to be willing to make the loan and to charge a

lower interest rate.


6
-
5.

Leasing is more flexible, can save money, can protect you from unexpected events, can provide a
higher level of financing, and can have tax advantages. If you expect to need a piece of equipment
for only half of its useful li
fe, you can set the lease term for that period and will not have to get
involved with selling it, as you would if you purchased the item. Leases may protect you from
obsolescence. They provide 100% financing. In some cases, a for
-
profit organization can sa
ve
taxes by purchasing certain items and pass some of that tax savings on to the not
-
for
-
profit
organization in the form of lower lease payments.



6
-
8.


1.

PMT=5,000,000*(6%/2)= 150,000





2a.
$5,000,000


NO CALCULATION NECESSARY





2b.




FV=5
,000,000







PMT=150,000







N=60







I=2.9












PV =
$5,141,393.25



6
-
9.


N= 20 years remaining * 2 payments per year = 40





I = 4.6% /2 compounding periods per year = 2.3%





Payment = $3,000,000 = 6%/2 * $100,000,000





Future Value =

$100,000,000












Par Value of Bond
$100,000,000
Coupon Interest Rate
6%
Market Interest Rate
4.6%
Years remaining
20
Compounding periods/year
2
I 2.30%
N 40
Payment $3,000,000
FV $100,000,000
PV of interest payments
$77,909,539.62
PV of Principal repayment $40,269,352.96
Value of the Bond $118,178,892.58
10
-
13

Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E


6
-
12.
(Bonds)




Spreadsheet Formula Solution



a.

= PV(rate,nper,pmt,fv,type)




= PV(6.5%,30,
-
300,
-
5000)




= $4,673.53




b.

$4,673.53 x 10,000 = $46,735,331






6
-
14.
(Bond)



B. Spreadsheet Formula Solution



= PV(rate,np
er,pmt,fv,type)



= PV(5%,20,
-
4000,
-
100000)



= $87,537.79





6
-
16
(see separate Excel Spreadsheet)




10
-
14

Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E


CHAPTER 7





7
-
29


Payer

Total A/R

Current

31
-
60 days

61
-
90 days

91+ days

Medicare


5,000,000


2,500,000


1,000,000


1,500
,000


-


Medicaid


3,000,000


900,000


900,000


900,000


300,000

Insurance


4,000,000


2,000,000


2,000,000


-



-


Self Pa
y


2,000,000


500,000


500,000


500,000


500,000



14,000,000


5,900,000


4,400,000


2,900,000


800,000




7
-
30


Implicit Interest Lost by Paying Early = (Discount/Discount P
rice) x 365/(Days Sooner)


=
(
3
,
600*0.01
*0.20
)/(3,
600*0.99
*0.20
) x
(
365/20
) = 18.4% > 7% … don’t take discount



7
-
32


I = P x R x T = 28,000 x 7% x (3/12) = $490


$ 28,000 Principal

$

490 Interest

$ 28, 490 Repayment



7
-
33


If ordering @ EOQ
:


EOQ = [(2O
N)/C]^.5


= [(2 * $20 * 30,000) / (.3 + (5% *$4))]^.5 =
1, 550 cans (rounded)


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-
for
-
Profit Organizations, 3E



# Orders per year = N/EOQ = 30,000/1,550 =
19.35 = 20 orders (rounded)




Carrying Cost = CQ/2 = (.5

* 1550) / 2 =
$388 (rounded)


Ordering Cost = ON/Q = ($20)(30,000)/1,550

=
$387

(rounded)


Product Cost = P x N = $4 x 30,000 =
$120,000


Total Inventory Cost =
CC + OC + PC = 388
+387+120,000 =

$120,775



If ordering all cans @ beginning of the year:


Carrying Cost = 30,000 x .50 = $15,000


Ordering Cost = $20 x 1 order = $20


Product Cost = P x N = $4 x 30,000 =
$120,000


Total Inventory Cost = $135,020 > $120,775 (lowest possible)


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16

Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E


CHAPTER 8



8
-
10.

Variances are calculated for three principal reasons. By understanding why results were not as
expected, the budget process can

be improved and made more accurate in future planning. Second,
by understanding why variances are occurring, actions can be taken to avoid additional
unfavorable variances over the coming months. The third reason for variance analysis is to
evaluate the p
erformance of units or departments and their managers.



8
-
15.

This may or may not be the case. It depends largely on how revenues change as volume changes.
Volume increases that increase revenues may be good for the organization, even though some
expense
s are rising as well. If some costs are fixed, it is possible for volume increases to cause
revenues to increase by more than expenses increase, resulting in larger profits or smaller losses.



8
-
17.

Using the flexible budget technique, the variance for a
ny line item can be subdivided into three
pieces: a
volume variance
, a
price variance
, and a
quantity variance
. The volume variance is
defined as the portion of the variance in any line item that is caused by the fact that the output level
differed from th
e budgeted expectation. The price, or rate, variance is the portion of the total
variance for any line item that is caused by spending more per unit of some input resource than had
been anticipated. The quantity, or use, variance is the portion of the over
all variance for a
particular line item that results from using more of a resource than was expected for a given output
level. These three variances together equal the traditional variance for a line item.



8
-
19.

The more we aggregate information, the gre
ater the chance that we will misinterpret what has
happened. An entire organization may spend nearly the same amount for a given month as it
expected. In total, there is nearly no variance. However, that does not mean that there are no
problems that need t
o be investigated. Some departments might have large favorable variances and
other departments might have large unfavorable variances. Within just one department, two line
items might have offsetting variances, both of which should be investigated. Even wi
thin one line
item, there may be offsetting price, quantity, and volume variances that warrant attention.



8
-
22.

No. Variances can result from uncontrollable, random events. If a variance is very small, it is often
not worth the manager’s time to investig
ate. However, it requires skill and experience to know
when a variance is large enough to indicate the possibility of problems that require management
investigation.




8
-
2
5
.

The total variance is $90,000


(400 * 4 * $55) or $88,000 = 2,000

U



The va
riance is unfavorable because the expense was higher than they had anticipated


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Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E



8
-
27. (Expense Variances)


Calculate the volume, quantity, and rate variances, and provide some possible explanations for each.


Original Budget:



Budgeted Volume

x Budgete
d Quantity x Budgeted Rate

Flex Budget:




Actual Volume

x Budgeted Quantity x Budgeted Rate

or





125 x 10 x $20

=

$25,000





-

150 x 10 x $20

=
-

$30,000





Volume Variance

=

$ (5,000) U


Flex Budget:




Actual Volume x
Budge
ted Quantity
x Budgeted Rate

VQA Budget:




Actual Volume x
Actual Quantity

x Budgeted Rate

or





150 x 10 x $20

=

$30,000





-

150 x 8 x $20

=
-

$24,000




Quantity Variance =

$ 6,000 F


VQA Budget:




Actual Volum
e x Actual Quantity x

Budgeted Rate

Actual:


Actual Volume x Actual Quantity x
Actual Rate

or





150 x 8 x $20

=

$24,000





-

150 x 8 x $25

=
-

$30,000




Price Variance =

$ (6,000) U



Investigation of why there were 20% mo
re trials is required. The $5,000 Unfavorable Volume
Variance might reflect an increased amount of crime, or simply greater efficiency of the Courts in
providing a speedy trial. The Judge is correct in arguing that more cases tend to raise costs, other
t
hings being equal. However, everything else did not stay the same. The trials have become
shorter resulting in a Favorable Quantity Variance of $6,000. Shorter trials require less labor
hours. This could reflect greater efficiency, or simply a mix of c
ases that tend to be shorter. If it is
the result of efficiency, that improvement should be noted and rewarded to encourage its
continuation. In any case, the shorter trials more than made up for the increased number of trials.
The Unfavorable Rate Vari
ance caused spending of $6,000 over the expected level. One might
argue that the additional volume of cases required overtime, accounting for the higher wage.
However, because the trials were shorter we actually used only 2,400 labor hours as compared to

the 2,500 budgeted. The variance could be due to a new union contract, or perhaps we hired
stenographers with more experience who earn a higher wage. Perhaps there was a payroll error,
and the stenographers were paid at the wrong hourly wage. In any ev
ent, investigation of this rate
variance is clearly warranted.



8
-
29. (Revenue Variances)



Budget

Actual

Variance

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-
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Instructor’s Manual
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Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E




300


$3,000

400


$2,700



Revenue

$900,000

$1,080,000

180,000 F



Price variance

average sale price per car


Volume variance

number of cars donated


Original Budget:

Budgeted Volume x Budgeted Mix x Budgeted Price



Cars
:


300

x
10
0% x $3,000

=


$

9
00,000


Flex Budget:


Actual Volume x Budgeted Mix x Budgeted Price



Cars:


400

x
10
0% x $3,000

=


$
1,200
,000


Original Budget:









$

90
0,000

Flex Budget:









-


1,200
,000



Volume Variance




=


$ 300,000

F


VMA Budget:


Actual Volume x Actual Mix x Budgeted Price



Cars
:


400

x
100%

x $3,000

=


$
1,20
0,000


Flex

Budget:










$
1,200,000

VMA

Budget:









-


1,200,000



Mix Variance




=


$ 0

U


Since there is only one type of product, the mix variance must be zero.



Actual:



Actual Volume x Actual Mix x Actual Price



Cars
:


400

x
100%

x $
2
,
7
00

=


$
1,080,000


VMA Budget
:










$
1,200,000

Actual
:









-


1,080,000



Price Variance




=


$ 120,000

U


10
-
19

Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E


CHAPTER 9



9
-
1.

Assets

are anything of value that the organization owns.
Liabilities

are obligations o
wed to
outsiders.
Owner’s

equity

represents the share of the organization’s assets owned by its owners.



9
-
5.

GAAP, or Generally Accepted Accounting Principles, are a set of rules and conventions. They are
established by the Financial Accounting Standard
s Board (FASB) and the Governmental
Accounting Standards Board (GASB). The CPA’s audit examines the financial statements and the
underlying financial records of an organization. Based on their examination, they issue a letter that
gives their opinion as to

whether the financial statements are free of material (substantial)
misstatements and whether they conform to Generally Accepted Accounting Principles (GAAP).
GAAP help create some degree of uniformity.


9
-
11.

CPAs try to find and eliminate all
material

errors. However, it is virtually impossible to find every
error. Material errors are those that might affect a decision made by a user of the financial report.



9
-
12.

GAAP require organizations to report their financial position and results of operations
on an
accrual

basis. This means that revenues are recorded in the year that the organization provides
goods or services and becomes legally entitled to payment. Expenses are recorded in the year that
assets have been consumed in the process of providing go
ods and services. This contrasts sharply
with the
cash

basis of accounting, which would record revenue when cash is received and expense
when cash is paid. The rationale for using accrual accounting is that it provides a better measure of
how well the orga
nization has done for the year. The cash basis can be quite misleading because
there may be a poor matching of revenue and expense in any one year. This can lead to
substantially over or understated measures of income.



9
-
13.

The primary requirement for
classification as a current asset is management’s expectation or
intention to convert the asset to cash or use it up within a year. Thus, an investment in Microsoft
stock would be a current asset only if we expect to sell it in the coming year. Otherwise t
he stock
would be treated as a
long
-
term

asset.


9
-
2
6
. (Transactions Analysis)




Date

Assets (
A
)

=

Liabilities (
L
)

+

Net Assets (NA)


1.

Cash


Note Payable





+ $50,000

=

+ $50,000

+

No change









2.

Cash








=
␵〬〰A
=
=
=
乯⁣桡nge
=
+

No change








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-
for
-
Profit Organizations, 3E




Furniture







+ $50,000













3.

Cash







+ $500,000

=

No change

+

No change










Pledges Receivable









$500,000













4.

Cash

=

No change

+

No change





$10,000














Brochures Inventory







+ $1
0,000













5.

No transaction
recorded.













6.

Cash


Grants Payable







$700,000

=



$700,000

+

No change


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-
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-
for
-
Profit Organizations, 3E





Journal Entries




Dr.

Cr.


1.

Cash

$50,000





Notes Payable


$50,000







2.

Furniture

$50,000





Cash


$50,000







3.

Cash

$500,000





Pledges Receivable


$500,000







4.

Brochures Inventory

$10,000





Cash


$10,000







5.

No transaction is recorded.








6.

Grants Payable

$700,000





Cash


$700,000



9
-
27. (Transactions Analysis Worksheet)




Assets

=

Liabilities and Net Assets










Liabilities

Net Assets





Cash

Pledges
Receiv
-

Able

Brochures

Inven
-

tory


Invest
-

ments



Furniture



Grants

Payable


Notes

Payable


Unre
-

Stricted

Tempo
-

rarily

restricted

Perma
-

nently

restricted


Begin
ning
Balance

$ 270,000


$500,000


$ 1,000

$830,000

$ 0


$700,000


$ 0


$101,000


$700,000


$100,000


Transaction # 1

50,000









50,000





Transaction # 2


(50,000)





50,000








Transaction # 3

500,000

(500,000)















Transaction # 4

(10,000)


10,000











Transaction # 5














Transaction # 6

(700,000)


























(700,000)
























Ending Balance

$ 60,000

$ 0



$11,000

$830,000

$50,000


$ 0


$50,000


$101,000


$700,000


$100,000















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-
for
-
Profit Organizations, 3E



9
-
28

(Balance Sheet)


FAAD

Statement of Financial Position

as of the End of the Fiscal Year


Ass
ets




Current assets





Cash

$ 60,000




Brochures Inventory



11,000




Total current assets

$ 71,000



Long
-
term assets





Investments

$830,000




Furniture


50,000




Total long
-
term assets

$880,000


Total Assets

$951,000





L
iabilities & Net Assets



Liabilities




Long
-
term liabilities





Notes payable

$ 50,000




Total long
-
term liabilities

$ 50,000



Total Liabilities

$ 50,000





Net assets




Unrestricted

$ 101,000



Temporarily restricted

700,000



Permanently restricted


100,000



Total net assets

$901,000





Liabilities and Net Assets

$951,000





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-
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for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E


CHAPTER 10



10
-
3.

Revenues and expenses can only be recorded if certain conditions are met. Revenues are
recorded if they have been earned a
nd realized. The first requirement, being earned, is met only
if the organization has
provided goods or services to the customer
. If a legal transfer has
occurred, raising a
legal right to collect payment
, then the revenues have been earned. To be
realized

we must be
able to objectively measure the amount of money owed
, and there must be a
reasonable likelihood of eventual collection
.



Support recognition is allowed even though the gift has not been received, and even though
no goods or services have actua
lly been provided. In fact, pledges are enforceable contracts. We
record pledges as support if there is a
specific amount and a reasonable likelihood of collection
.



10
-
8.

No. The primary goal of depreciation is not determining the current value of the as
set to place on
the balance sheet. Depreciation strives to allocate the cost of the asset over the asset’s useful life.
In accord with the matching principle of GAAP, the goal of depreciation is to assign expense for
use of the asset into the periods that
the asset is used up, generating revenue. Depreciation is
based on assigning the cost incurred when we acquired the asset, rather than on some measure of
replacement cost if we were to buy the asset now.



10
-
9.

At best, estimates are subjective guesses. W
e can try to base them on historical experience, but
they still introduce the possibility of errors into the financial statements. Another problem is that
estimates open the door to manipulating results. If we want to look poor to encourage donations,
we m
ight be tempted to overstate bad debt expense or to underestimate the salvage value of a
piece of equipment. Both of those actions would tend to lower current net income, making us
look poorer now. Estimates increase the chances that the financial statemen
ts will not be free of
material misstatements.



10
-
11.

The statement shows Cash Flows from Operating Activities, Cash Flows from Investing
Activities, and Cash Flows from Financing Activities. Cash from operating activities helps us
understand the organiz
ation’s ability to continue operations over time. If this number is positive,
then the routine operations are self
-
sustaining. Cash from investing activities allows us to
determine if the organization is spending cash to either acquire productive assets or

investments
in stocks and bonds. Alternatively, we might learn that the organization is selling its fixed assets
to raise cash. That would send a warning signal of potential problems. Cash from financing
activities shows sources of cash such as loans and
issuance of stock. If the organization is taking
out long
-
term loans to finance cash losses from current operations, that would also send a
warning signal.



10
-
12.

The balance sheet, activity statement, and cash flow statement are interconnected. The
info
rmation from each relies to some extent on information from the others. Suppose that we use
10
-
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for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E


up inventory as we provide services during the year. Our asset

inventory

goes down on the
balance sheet. Our expense related to supply use increases on the activity

statements. Just the
reverse happens with revenues. When we charge clients for our services, accounts receivable
rise, increasing assets and the balance sheet. Revenues also rise, affecting the activity statement.
The net of the revenues and expenses help
s account for the change in net assets on the balance
sheet from the beginning to the end of the year.



The cash flow statement has linkages to both the activity statement and balance sheet. The
first line on the cash flow statement is the change in net a
ssets, taken from the activity statement.
The ending balance of the cash flow statement is the cash balance, which appears at the
beginning of the balance sheet.



The balance sheet provides information on the current assets and current liabilities (worki
ng
capital). The change in each working capital account has an impact on the organization’s cash
balances. These changes primarily show in the adjustments that are made in the cash from
operations section of the cash flow statement. Changes in fixed assets

and investments on the
balance sheet are reflected in the cash from investing activities section of the cash flow
statement. Similarly, financing activities will appear on the cash flow statement, but also are
reflected in changes in long
-
term liability v
alues on the balance sheet.



10
-
14.

(Transactions Analysis)


1.

Jan. 2.

No journal entry. There has been no exchange by either party.


2.

Jan. 14




Assets (
A
)

=

Liabilities (
L
)

+

Net Assets (
NA
)



Cash







+ $100,000

=

No change

+

No change










Pledges receivable








=
␱〰ⰰ〰
=
=
=
=
=
=


Date


Dr.

Cr.



1/14

Cash

$100,000






Pledges receivable


$100,000




Collection of pledges




3.

Feb 19




Assets (
A
)

=

Liabilities (
L
)

+

Net Assets (
NA
)



Inventory


Accounts payable





+ $35,000

=

+ $15,000

+

No change










Cash








=
␲〬〰A
=
=
=
=
=
=
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-
for
-
Profit Organizations, 3E




Date


Dr.

Cr.



2/19

Inventory

$35,000






Cash


$20,000





Accounts payable


$15,000










Purchase gift shop inventory




4.

May 15




Assets (
A
)

=

Liabilit
ies (
L
)

+

Net Assets (
NA
)



Deposit







+ $30,000

=

No change

+

No change










Cash








=
␳〬〰A
=
=
=
=
=
=
=
=


Date


Dr.

Cr.



5/15

Deposit

$30,000






Cash


$30,000










Deposit on ordered equipment




5.

July 12




Assets
(
A
)

=

Liabilities (
L
)

+

Net Assets (
NA
)



Equipment







+ $80,000

=

No change

+

No change










Deposit









$30,000














Cash









$50,000








Date


Dr.

Cr.



7/12

Equipment

$80,000






Deposit


$30,000





Cash


$50,000










Received equipment




6.

Dec. 28




Assets (
A
)

=

Liabilities (
L
)

+

Net Assets (
NA
)

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-
for
-
Profit Organizations, 3E




Cash




Admission revenue



+ $74,000

=


+

+ $74,000




Date


Dr.

Cr.



11/1

Cash

$74,000






Admission revenue



$74,000










Admission revenues for the year.





Please note that in real life admission revenues would be collected throughout the year, and recorded on an ongoing
basis, rather than all at once at the end. That is true with many of these transactions. Th
is summarized approach is
used for simplification purposes only.






7.

Dec. 28




Assets (
A
)

=

Liabilities (
L
)

+

Net Assets (
NA
)



Cash


Wages payable


Wage expense





$68,000

=



$2,000



$73,000












Wages payable







+ $7,000





Al
ternatively one could combine the $2,000 reduction in the Wages Payable from last year with the $7,000 increase in
wages payable this year, and just show Wages Payable going up by $5,000.





Date


Dr.

Cr.



12/28

Wage expense

$73,000






Wages payabl
e


$ 5,000





Cash



68,000










Record wage expense and payment




8.

December 30




Assets (
A
)

=

Liabilities (
L
)

+

Net Assets (
NA
)



Cash




Sales revenue



+ $56,000

=


+

+ $53,000










Accounts receivable









$6,000














Accounts receivable







+ $3,000





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-
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Instructor’s Manual
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-
for
-
Profit Organizations, 3E






Assets (
A
)

=

Liabilities (
L
)

+

Net Assets (
NA
)



Inventory




Cost of goods sold





$32,000

=




$32,000





Date


Dr.

Cr.



12/1

Cash

$56,000





Cost of goods sold


32,000






Ac
counts receivable


$ 3,000





Sales revenue



53,000





Inventory



32,000










Record gift shop sales



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-
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-
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9.

December 31




Assets (
A
)

=

Liabilities (
L
)

+

Net Assets (
NA
)



Cash

=

Notes payable


Interest expense





$134,000




$127,000



$7,000




Date


Dr.

Cr.



12/31

Interest expense

$ 7,000





Notes payable


127,000






Cash


$134,000










Payment on note and interest expense




10.

December 31




Assets (
A
)

=

Liabilities (
L
)

+

Net Assets (
NA
)



Buil
ding & equip., net

=




Deprec. expense





$60,000




$60,000




Date


Dr.

Cr.



12/31

Depreciation expense

$60,000






Building & equipment, net


$60,000










Record depreciation expense




11.

December 31




Assets (
A
)

=

Liabilities (
L
)

+

Net Assets (
NA
)



Accounts receivable, net

=




Bad debt expense





$1,000




$1,000




Date


Dr.

Cr.



12/31

Bad debt expense

$1,000






Accounts receivable, net


$1,000










Record estimated uncollectible receivables




OR



As
sets (
A
)

=

Liabilities (
L
)

+

Net Assets (
NA
)



Allowance for

Uncollectible Accounts

=




Bad debt expense





$1,000




$1,000




Date


Dr.

Cr.



12/31

Bad debt expense

$1,000






Allowance for Uncollectible Accounts


$1,000

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-
for
-
Profit Organizations, 3E


10
-
15. (Transa
ctions Analysis Worksheet)



(000’s omitted)

Assets

=

Liabilities and Net Assets













Net Assets







Cash




Pledges

Receivable



Accounts
Receiv
-
able
, Net





Inventory





Deposits

Building

and

Equip
-

ment,

net





Ac
counts

Payable




Wag
es

Payable




Notes

Payable





Unrestricted




Tempo
-

rarily

Restricted



Perma
-

nently

Restricted


Beginning
Balance

$80

$320

$
6

$ 0

$ 0

$550


$2

$2

$250

$ 3
72


$30

$300


















Transaction #1
















Transaction #2

100

(
100)














Transaction #3


(20)



35





15








Transaction #4

(
3
0)





3
0











Transaction #5

(
5
0)





(30)

80










Transaction #6

74










74

Admission
revenue




Transaction #7

(68)









5


(73)

Wage
expense




Transaction #8

5
6


(3)








53

Sales revenue





#8, continued




(32)







(32)

Cost

of goods
sold




Transaction #9


(134)










(127)

(7)

Interest
expense




Transaction #10






(60)





(60)

Depreciation


Expense




Tr
ansaction #11

___

___


(1)

___

____

____


___

___

___

(1)

Bad debt
expense

____

____


Ending Balance

$
8

$220

$
2

$3

$0

$570

=

$17

$7

$123

$32
6


$30

$300


Trial Balance

















Alternatively the “Accounts Receivable, Net” column could be sp
lit into two columns, one for “Accounts Receivable” which
would have the beginning balance and transaction 8, and one for “Allowance for Uncollectible Accounts” which would have
transaction 11. The Accounts Receivable ending balance would be $3. The Allo
wance for Uncollectible Acccounts would
have an ending balance of ($1). On the balance sheet they would reported as a combined Accounts Receivable, Net amount
of $2.
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Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E


10
-
16. (Financial Statements)



American Natural History Center

Activity Statement

for t
he Year Ending December 31, Year 2


Revenues and support




Admission revenue

$74,000



Sales or Gift Shop revenue


53,000


Total revenues and support

$127,000





Expenses:




Cost of goods sold

$ 32,000



Wage expense

73,000



Int
erest expense

7,000



Bad debts

1,000



Depreciation


60,000


Total expenses

$173,000





Increase/(Decrease) in net assets

($46,000)






American Natural History Center

Statement of Financial Position

as of December 31, Year 2 and Year 1


Assets


Liabilities & Net Assets



Year 2

Year 1



Year 2

Year 1


Current assets




Liabilities





Cash

$ 8,000

$ 80,000


Current liabilities





Accounts receivable, net





Accounts payable

$ 17,000

$ 2,000




of estimated

uncollectibles










of $1,000 in Year 2

2,000

6,000



Wages payable


7,000


2,000



Pledges receivable

220,000

320,000







Inventory


3,000


0






Total current assets

$ 233,000

$ 406,000


Total current liab.


$ 24,
000

$ 4,000










Long
-
term assets




Long
-
term liabilities





Fixed assets





Notes payable

$ 123,000

$ 250,000



Buildings and




Total long
-
term liab.

$ 123,000

$ 250,000




Equipment, net

$ 570,000

$ 550,000










Tot
al liabilities

$ 147,000

$ 254,000


Total long
-
term assets

$ 570,000

$ 550,000


Net assets









Unrestricted

$ 326,000

$ 372,000







Temp. restricted

30,000

30,000







Perm. restricted


300,000


300,000






Total net assets

$ 656,000

$ 702,000


Total assets

$ 803,000

$ 956,000


Total equities

$ 803,000

$ 956,000









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Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E




American Natural History Center

Statement of Cash Flows

for the Year Ending December 31, Year 2



Cash flows from operating activities




Decr
ease in unrestricted net assets

$ (46,000)



Add expenses not requiring cash:





Depreciation

60,000



Other adjustments:





Add the decrease in receivables

4,000




Add the decrease in pledges receivable

100,000




Add the increase in wag
es payable

5,000




Add the increase in accounts payable

15,000




Subtract the increase in inventory


(3,000)





Net cash from operating activities

$ 135,000





Cash flows from investing activities




Purchase of equipment

$ (80
,000)




Net cash from investing activities

$ (80,000)





Cash flows from financing activities




Repayments of notes

$ (127,000)





Net cash from financing activities

$ (127,000)





Net increase/(decrease) in cas
h

$ (72,000)


Cash, beginning of year


80,000


Cash, end of year

$ 8,000






10
-
17. (LIFO/FIFO Inventory)





Consumption


Balance left




FIFO

LIFO


FIFO

LIFO


Beginning bal.

1,000 @ $17

1,000

400


0

600


Purchase Jan. 2


30
0 @ 21


200

300


100


0


Purchase July 1


500 @ 23


500


500


0













Expense


Expense


Inventory
Value

Inventory
Value





1,000


␱$


㐰〠


␱$



6
〰0


␱$




+†′〰


␲$

+″〰


␲$


1
〰0



1






+‵〰


␲$


5
〰0


␲$





$

,
2


$

,
6




3
,
6



0
,
2




10
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Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E


Note: Under LIFO
500 doses purchased on July 1 are assumed to have been used, even
though only 400 doses were consumed after that date. This seems counter
-
intuitive. The key
is that LIFO is a cost flow assumption used only to calculate inventory
-
related expense and
endin
g inventory balances. It does not identify the specific inventory units that were actually
consumed.


10
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Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E


CHAPTER 11


11
-
4.

Although an activity statement includes revenues and expenses as an income statement
would, it is more comprehensive, showing all chan
ges in net assets. It uses terms such as
Change in Net Assets

or
Change in Equity
, rather than net income. Thus the Activity
Statement includes the information that for
-
profits show in the Income Statement as well
as information that would be contained in
a for
-
profit organization’s Statement of
Changes in Owner’s Equity. An income statement per se reflects revenues and expenses,
gains and losses. There are other things that can affect stockholders’ equity or net assets,
such as dividends, issuance of stock
, or restricted donations. When items similar to these
exist, they appear on an activity statement, but often do not appear on an income
statement.



11
-
6.

As “used in nonprofit accounting, a fund is an accounting entity with a self
-
balancing set
of accoun
ts for recording assets, liabilities, the fund balance, and changes in the fund
balance. Separate accounts are maintained for each fund to ensure that the limitations and
restrictions on the use of resources are observed. Though the fund concept involves
s
eparate accounting records, it does not entail the physical segregation of resources. Fund
accounting is basically a mechanism to assist in exercising control over the purpose of
particular resources and amounts of those resources available for use.”
1




1
1
-
7.

A variety of different funds are used in organizations, depending on the specific types of
restrictions faced by the organization. Funds are divided into two main categories

unrestricted
and restricted. Virtually all not
-
for
-
profit organizations have
a current unrestricted or general
fund. The main categories of restricted funds are donor restricted versus board restricted. Donor
-
restricted funds are funds that exist to comply with various requirements donors have placed at
the time of donation. These
might include building replacement funds, building expansion funds,
endowment funds, custodian funds, and strike funds among other restricted funds. Board
-
restricted funds are those that are established to track the use of resources that the board has
deci
ded to devote to a specific purpose. If board
-
restricted resources are needed for other
purposes, the board can remove the restriction, and the resources can be transferred to an
unrestricted fund.




1

Vincent M. O’R
eilly, Murray B. Hirsch, Philip L. Defliese, and Henry R. Jaenicke, Montgomery’s Auditing,
11th. (New York: John Wiley and Sons, 1990), 791.

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Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E



11
-
8.

Three types of events can occur that concern more t
han one fund in an organization. One
is a loan, where one fund borrows money from another. A second is the sale of services, where
one fund consumes services provided by another fund. The third type of event is a transfer,
where one fund gives resources to

another.



Loans between funds are treated the same as a loan from a bank. The borrowing
fund has a liability on its balance sheet, reflecting the need to repay the loan, and the lending
fund has a receivable. These are called “Due to” and “Due from.”



When one fund purchases services from another, the event is recorded by both
funds just as if the organizations were totally separate.



A transfer between funds is a permanent movement of resources from one fund to
another. The assets and fund balance

or net assets of one fund are reduced, and for another fund
they are increased. Some transfers are done at the discretion of management. Other transfers may
be mandatory.



11
-
11.

Under FAS 124, investments in equity securities that have readily determin
able fair
values and all debt securities are reported at their fair value in the statement of financial position
(balance sheet). Gains and losses, both realized and unrealized, on investments are shown in the
activity statement. If a security has been sol
d during the year, the gain or loss has been realized
and the security will not appear on the balance sheet at the end of the period, because the
organization no longer owns it.


11
-
14.

1.


c.
permanently restricted

2.


a. unrestricted

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Instructor’s Manual
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Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E




1
1
-
1
5
. (Net Assets)


a. Unrestricted

b.

Temporarily restricted

c.

Unrestricted if there is a reasonable expectation of eventual collection

d.

Permanently restricted

e.

Unrestricted

f.

Temporarily restricted




11
-
17.

1.


Unrestricted, temporarily restricted, permanently r
estricted

2.


Unrestricted may be used for any reasonable operating purposes, temporarily
restricted may not be used except for certain purposes or at a certain point in time,
permanently
restricted
net assets may not be expensed


only their earnings may

be
used.


3.

Unrestricted


sale of items from a gift shop, Temporarily restricted


a grant that
may only be used for a specific research project; permanently restricted


an
endowment gift that may be invested and the interest used for a particular pur
pose.


10
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Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E


CHAPTER 14



14
-
2.

The first paragraph of the audit letter points out that although the auditor can provide an
expert opinion, management holds primary responsibility for the contents of the financial
statements. In some organizations, the auditors
, in practice, provide a substantial amount
of help in compiling the financial statements. It is important for managers to bear in mind
that if there are later problems with the information contained in the financial statements,
it is the organization’s ma
nagement, rather than the auditors, who bear the primary
responsibility for their content.


14
-
5.

Financial statements, in themselves, do not provide a complete picture of the
organization’s finances. Financial statements are limited in their ability to c
onvey
information. For example, fixed assets are recorded based on their historical cost,
adjusted for depreciation. Therefore, the balance sheet does not convey the value of the
fixed assets. Inventory may be valued on the financial statements based on a
LIFO (last
-
in, first
-
out), FIFO (first
-
in, first
-
out), or weighted average cost assumption. There may
be commitments to make lease payments or there may be outstanding lawsuits. There are
many types of information that do not fit neatly into the financial
statements, but are
needed for the financial statements taken as a whole to provide the user with a fair
representation of the organization’s finances.



Given the wide range of possible ways to report information, it is vital to examine the
notes in order

to gain an understanding of which choices were made and the likely impact
of those choices. A good understanding of financial position and results requires more
information than the financial statements themselves can convey. For example, “what
contingent

liabilities are there and are they material in amount? How old are the
organization’s buildings and equipment?”


14
-
6.

Ratios

are

used

because

the

comparison

between

two

numbers

generates

information

that

is

more

useful

than

either

or

both

of

the

numbers

separately.

Ratios

can

be

grouped

in

a

variety

of

different

ways.

The

chapter

grouped

them

into

the

following

six

principal

types:

(1)

common

size

(2)

liquidity

(3) asset turnover (4) leverage (5) coverage, and (6)
profitability.



A common size ratio comp
ares all the numbers on a financial statement to one key
number. For example, each asset on the balance sheet is compared to total assets. One of
the difficult aspects of comparing different organizations is that they may be substantially
different in size
. A common size ratio attempts to make the numbers on the financial
statement more comparable by stating them terms of a key number such as total assets or
total revenue.



Liquidity ratios focus on whether the organization has enough cash and other liquid

resources to meet its obligations in the near term. At the same time, we can use liquidity
ratios to assess whether the organization is wastefully maintaining too much liquidity. If
liquidity is excessive, long
-
term investments with high relevance to the
organization’s
mission and perhaps high profit potential may be lost.



A set of ratios called asset turnover ratios (sometimes called efficiency ratios) can
help assure that resources are being used efficiently. The ratios in this category are related
10
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Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E


to

timely collection of receivables, appropriateness of inventory levels, and appropriate
amounts of fixed assets and total assets.



Leverage refers to the extent to which an organization supports its activities by using
debt. The greater the debt, the ris
kier the organization becomes. In contrast to the liquidity
ratios, which seek to assess short
-
term risk, the leverage ratios provide insight into the
ability of the organization to meet its long
-
term obligations.



Some would argue that coverage ratios a
re even more critical. They examine the
organization’s capacity to make debt service payments (interest and/or principal) as they
come due.



Virtually all organizations need to earn a profit to be financially healthy

to be able
to replace equipment, acqu
ire new technologies, and expand services and to be able to meet
the challenges of the future. At the same time, it might be inappropriate for many not
-
for
-
profit organizations to make an excessive profit. Profitability ratios can help the manager
and outs
ide users assess whether the organization is making an adequate, but not excessive,
profit.



14
-
10. (Financial Analysis)


Part A.



DAV





Statements of Financial Position




Common Size Ratios






December 30, 200
7

December 30, 200
6


%

$

%

$

ASSETS





CASH AND CASH EQUIVALENTS

14.35%

1,909,606

9.38%

1,044,193

INTEREST AND DIVIDENDS
RECEIVABLE

0.46%

61,244

0.
47
%

5
2,582

CAMPAIGNS’ PLEDGES RECEIVABLE

2.81%

373,788

3.22%

358,632

PREPAID EXPENSES AND OTHER

0.12%

16,244

0.23%

25,367

INVE
STMENTS

82.26%

10,944,924

86.70%

9,653,039






TOTAL

100.00%

13,305,806

100.00%

11,133,813






LIABILITIES AND NET ASSETS




LIABILITIES:






Accounts payable


DAV

1.52%

201,721

1.54%

171,550


Accounts payable


other

0.01%

910

0.01%

1,0
17


Annuity payment liability

28.99%

3,857,262

33.04%

3,679,148


Total liabilities

30.51%

4,059,893

34.59%

3,851,715







UNRESTRICTED NET ASSETS

69.49%

9,245,913

65.41%

7,282,098







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-
for
-
Profit Organizations, 3E


TOTAL

100.00%

13,305,806

100.00%

11,133,8
13






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Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E








DAV





Statements ofActivities





Common Size Ratios






December 30, 200
7

December 30, 200
6


%

$

%

$

SUPPORT AND REVENUE:






Contributions

59.96%

4,771,172

7.44%

2,654,400


Contributions of charitable gift annuities

3.03
%

241,245

0.50%

178,626


Bequests

27.38%

2,178,924

90.98%

32,436,803


Investment income


net

9.63%

766,580

1.08%

384,670








Total support and revenue

100.00%

7,957,921

100.00%

35,654,499







EXPENSES:






Program services

76.
07%

6,053,675

97.48%

34,754,236


Management and general

1.08%

85,933

0.21%

75,499


Fundraising

2.25%

179,277

0.47%

168,316








Total expenses

79.40%

6,318,885

98.16%

34,998,051







CHANGE IN NET ASSETS BEFORE
CHANGE IN UNREALIZED
APPRECIATION OF INVESTMENTS

20.60%

1,639,036

1.84%

656,448







CHANGE IN UNREALIZED
APPRECIATION OF INVESTMENTS

4.08%

324,779

1.20%

428,159







CHANGE IN NET ASSETS

24.68%

1,963,815

3.04%

1,084,607







NET ASSETS


Beginnin
g of year

91.51%

7,282,098

17.38%

6,197,491







NET ASSETS


End of year

116.19%

9,245,913

20.42%

7,282,098


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Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E















2007



2006

Part B











Current Assets


$2,360,882



$1,480,774

Current Ratio


-----------------------



-------
-----------



----------------



Current Liabilities


$4,059,893



$3,851,715













=

0.58



0.38









Part C










Cash + Short
-
term Investments


$1,9
09
,
606




$1,0
44
,
193

Days Cash

---------------------------
--------------



---------
---------


---------------

on
Hand


(Operating Expense
-

Deprec.)/365

$17,312



$95,885














=

11
0
.
31



1
0
.
89










Part D











Total Debt


$4,059,893



$3,851,715

Debt Ratio


-----------------



---------------




---------------




Total Assets


$13,305,806



$11,133,813













=

0.31



0.35





or



Or





30.51%



34.59%









Part E











Total Debt


$4,059,893



$3,851,715

Debt to Equity


-----------------
-----



---------------




---------------



Total Net Assets


$9,24
5,913



$7,282,098













=

0.44



0.53





or



Or





43.91
%



52.89%









Part F











Increase in Net Assets


$1,963,815



$1,084,607

Total margin

------------------
-----------------



---------------




---------------



Total Operating Revenues


$7,957,921



$35,654,499













=

0.25



0.03





or



Or





24.68%



3.04%


















10
-
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Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E


Part G











Program Service Expense


$6,053,675



$34,754,236

Program Services


---------
--
----------------
--------



---------------




---------------




Total Expense


$6,318,885



$34,998,051













=

0.96



0.99





or



or





95.80%



99.30%

10
-
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Instructor’s Manual
for

Financial Management for Public, Health, and Not
-
for
-
Profit Organizations, 3E




Ratio analysis is a field that was developed primarily to serve for
-
pr
ofit organizations. Managers in public service organizations should be pro
-
active in developing additional useful ratios. For example, the not
-
for
-
profit industry in recent years has started to actively report the program services
ratio.