Question

P. 13-9

Financial statements of not-for-profit organizations may provide inadequate information to assess performance.

Review the Statement of Activities of Hamilton College for the year ended June 30, 2014, that is presented in Table 2-11. The statement indicates that during the year net assets increased by $158,581,000. Suppose that you are a member of the college's board of trustees.

1. From your perspective as a member of the college's board of trustees, does the increase in net assets indicate that the college was fiscally well managed during the year? That is, can it be said that the greater the increase in net assets the better the college was managed?

2. The “bottom line” (net income) of a comparable statement of change in net assets of a business is said to be consistent with the entity's primary goal—that is, to earn a profit. Can the same be said of a not-for-profit organization, such as a college? Explain.

3. The statement indicates that the college incurred instructional costs of $57,158,000. Suppose that such an amount were 5 percent greater than in the previous year but that the number of students enrolled in the college did not increase. Can you, as a trustee, make any determination as to whether the instructional money was well spent? If not, what other information would you need?

4. Suppose that as a trustee you had the authority to specify the types of financial (and related) reports that management prepares for you. Indicate in general terms the information that you would like to see in a statement that focuses on the costs incurred by the college.

5. The statements of not-for-profit organizations are directed mainly toward donors rather than members of governing boards. In your opinion do you think that donors might also benefit from the type of report you described in item 4 above? Explain.

Answer 1

Hamilton College (not-for-profit organization)

1. From your perspective as a member of the college's board of trustees, does the increase in net assets indicate that the college was fiscally well managed during the year? That is, can it be said that the greater the increase in net assets the better the college was managed?

- Though increase in net assets is one of the positive indicators, it cannot simply be said that the college was managed well because the net assets increased.

                                                                                                                                                                                                                                           - The ultimate use of the net assets is critical to be determined. For e.g., increase in the number of benches or laptops can be said to be fruitful only if it benefits students and their studies, which is the main purpose / the ultimate use.

- Further, the performance of the teachers is also critical because, ultimately, the increased assets have to be effectively managed by the teachers.

- Thus, it is not necessary that greater the increase in net assets, the better the college is managed.

2. The “bottom line” (net income) of a comparable statement of change in net assets of a business is said to be consistent with the entity's primary goal—that is, to earn a profit. Can the same be said of a not-for-profit organization, such as a college? Explain.

- Yes, the statement holds true because even a not-for-profit organization (NPO) like a college, needs surplus funds to run its activities effectively.

- The functioning of a college is not like a business which runs only for the sole motive of earning profit / surplus. Rather, it functions to fulfill a social cause which is to educate students and help the country to develop further.

- However, it needs surplus funds for it's day-to-day / routine expenditure like the admin expenses, salaries of staff, provide educational materials to students, etc. and thus, the given statement holds true for a NPO like college too.

3. The statement indicates that the college incurred instructional costs of $57,158,000. Suppose that such an amount were 5 percent greater than in the previous year but that the number of students enrolled in the college did not increase. Can you, as a trustee, make any determination as to whether the instructional money was well spent? If not, what other information would you need?

- As a trustee, I would look at the overall performance of the college.

- However, as far as the increase in instructional costs is concerned without the number of increase in students, such scenario is quite possible. This may be because the cost of the stationary must have been increased year-on-year basis due to inflation factor or may be the suppliers have increased the prices due to the demand-supply factor.

Thus, as a trustee, I would consider the budget and then, comparing the same with the actuals, would conduct variance analysis to justify the increase in instructional costs and then, take appropriate necessary action / steps.

4. Suppose that as a trustee you had the authority to specify the types of financial (and related) reports that management prepares for you. Indicate in general terms the information that you would like to see in a statement that focuses on the costs incurred by the college.

- Though for a trustee, it should not only be the monetary factors that should matter because a NPO such as a college is formed with some non-monetary motive.

- So, as far as the monetary information is concerned, a trustee may be interested to see the surplus generated in a particular year so as to be used in next year for it's further activities.

- He may also analyse the reasons for increase / decrease in costs and / or income. Major income would be the fees received from students, donations received from some affluent people, etc.

- Heavy variable expenditure may include like salaries of increased number of teachers or their increase in salaries, stationary, conducting exams, award shows, sports activities, cleaning and maintenance, etc.

5. The statements of not-for-profit organizations are directed mainly toward donors rather than members of governing boards. In your opinion do you think that donors might also benefit from the type of report you described in item 4 above? Explain.

- Yes, of course, the donors would also benefit from all the afore-said information.

- They, as a donor, would also like to know how and where their funds are being managed and they would be happy to see their funds being utilised for the purpose for which they were intended to be used. Also, it would give them mental satisfaction and assurance that the management of the NPO is focused on it's activities very well.