Question

1. What are the major differences in recording transactions for a for-profit organization versus a not-for-profit, or are there any?
2. List and record each transaction for S. Zee Outpatient Clinic under the accrual basis of accounting at December 31, 20X1. then develop a balance sheet as of December 31, 20X1, and a statement of operations for the year ended December 31, 20X1.
   • The clinic received a $3,000,000 of unrestricted cash contribution from the community. (Hint: this transaction increases the unrestricted net assets account.)
   • The clinic purchased $2,000,000 of equipment. The clinic paid cash for the equipment.
   • The clinic borrowed $1,000,000 from the bank a long-term basis,
   • The clinic purchased $1,500,000 of supplies on credit.
   • The clinic provided $5,500,000 services on credit.
   • In the provision of these services, the clinic used $1,000,000 of supplies.
   • The clinic received $500,000 in advance to care for capacitated patients.
   • The clinic incurred $2,000,000 in labor expenses and paid cash for them.
   • The clinic incurred $1,500,000 in general expenses and paid cash for them.
   • The clinic received $4,500,000 form patients and their third parties in payment of outstanding accounts.
   • The clinic met $300,000 of its obligation to capacitated patients in Transaction g.
   • The clinic made a $100,000 cash payment on the long-term loan.
   • The clinic also made a cash interest payment of $50,000.
   • A donor made a temporarily restricted donation of $100,000 to be used for operations.
   • The clinic recognized $200,000 in depreciation for the year.
   • The clinic recognized $500,000 of patient accounts would not be received.
3. How do capital structure rations and liquidity rations differ in providing insight into an organization’s ability to pay debt obligations?
4. Identify and explain two situations where an organization might have increasing activity rations but declining profitability.

Answer 1

1.) % (Percentage) or Shared Ownership

The basic accounting differences b/w a profit company and a not for profit company derives from its ownership.

Individuals and entities can own shares of a profit making company, known as equity. An owner’s stock or percentage of ownership is recorded in the company’s accounting system and is increased or decreased over a period of time. The owners recorded on the books of the company are liable to benefit from the company’s activities by receiving dividends over a period of time which is linked to the company’s successful performance in the marketplace.

However, a Not-for-profit is not owned by anyone. Even though one may have founded the organization or he may sit on the board of directors but they don’t own any percentage of the entity.

Under the laws of state in which you operate the nonprofit, the company is run by its board, officers and staff as a public trust. This means in the organization’s book of accounting, there is no owner’s equity or an account for retained earnings

Financial Reports differences

Financial reports b/w accounting systems of for a profit making v/s a non profit corporations also differ. A profit making company keeps a balance sheet that reflects the assets the company owns which can be distributed as retained earnings to its shareholders.

However,, a not for profit keeps a statement of financial position which reflects assets on the hand that can be used to further the mission of an organization.

Likewise, a profit making organization uses its accounting system to track net income, whereas a not for profit tracks the excess of Revenue/ Income over expenditures.

3.) Capital Structure Ratios vs. Liquidity Ratios:

Liquidity ratios and Capital Structure ratios are a tool for investors to make investment decisions.

Liquidity ratios measure a company's ability to convert its assets to cash. whereas, Capital Structure measure a company's ability to meet its financial obligations.

Capital Structure ratios include financial obligations in both the long and short term, whereas liquidity ratios focus more on a company's short-term debt obligations and its current assets.

Liquidity ratio analysis may not be as effective when looking across industries. It is because various businesses require different structure of financing. It is less effective for comparing businesses of different sizes in different locations across the globe.

4.) The two most logical activity ratios to consider would be:

a.) Accounts Receivable turnover and/or collection period, and

b.) Inventory turnover period. Both of these ratios are rely on Sales/ Revenue.

For an eg:, if sales increase, then it is logical to determine that inventory turnover will increase as well --- if we sell more then we will need to have more inventories in hand to sell in order to meet demand in the market. Again, if sales increase and we are selling our products with credit terms, then it is logical to assume that accounts receivable will also increase, and coincidentally, the ability of the firm to collect these accounts receivable.

Now let us understand the role of inventory and accounts receivable. Both of them are current assets of a company which means that firm will use them constantly over the normal operational cycle in order to increase cash flow; other wise known as profitability.