Ccounting for Voluntary Health and Welfare Organizations objective7

To qualify as a voluntary health and welfare organization (VHWO), two criteria must be met. First, a primary source of revenue should be contributions from donors who do not themselves directly benefit from the organization's programs. A community symphony orchestra, for instance, would not qualify because it derives a large share of its revenue from box office receipts. Second, the program must be in the area of health, welfare, or community service, such as care for the elderly, the indigent, or the handicapped, or projects to protect the environment.

Accounting Principles and Procedures

The dependence upon public support for the majority of its resources influences the accounting for a VHWO. Two major categories are used to record and communicate inflows of resources: public support and revenues. Public support is the inflow of resources from voluntary donors who receive no direct, personal benefit from the organization's usual programs in exchange for their contributions. Revenues are inflows of resources resulting from a charge for service from financial activities or from other exchange transactions.

A significant aspect of accounting and reporting for VHWOs is that financial reports must show expenses on a program basis. As a result of this requirement, the costs of each program and supporting service are available, and the effectiveness with which the organization's resources have been managed can be measured.

Public Support

The following accounts are used to record receipts of assets in the public support category:

1. Contributions,

2. Special Events Support,

3. Legacies and Bequests, and

4. Received from Federated and Nonfederated Campaigns.

Contributions. Contributions are recognized as public support in the period received and as assets, decreases of liabilities, or expenses depending on the form of the benefits received.11 Although most contributions to VHWOs are made with no restrictions attached, some donations specify

State the requirements an organization must meet to be classified as voluntary health and welfare, and describe the accounting for public support.

11 A contribution is defined as an "unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner" (FASB Statement No. 116, para. 5).

the purpose for which they must be expended. Contributions also include unconditional promises to give (pledges). Therefore, unconditional promises to give must also be recognized as support in the period received. Contributions may be unrestricted or restricted for a specific purpose. Contributions that have no donor-imposed restrictions attached to them are reported as unrestricted. Contributions that have donor-imposed restrictions attached to them must be classified as temporarily or permanently restricted based on the nature of the restriction.

Cash collections that do not involve a previous promise to give are credited to the account Contributions. VHWOs also receive pledges for contributions, which are recorded at the gross amount as Contributions Receivable, with a credit to Contributions. A provision and an allowance for estimated uncollectible pledges are established, based on historical collection experience. The provision for uncollectible pledges is an expense account, while the allowance is a contra account to Pledges Receivable.

Expiration of donor restrictions must be recognized in the period in which the restriction expires. The expiration of a restriction may be based on the lapse of time, the fulfillment of a stipulated purpose, or both. Recognition of an expiration of donor restrictions is done with a reclassification entry. Reclassifications result in an increase in the unrestricted class of net assets and a decrease in temporarily restricted net assets class. Such a reclassification increases unrestricted net assets to match the decrease resulting from the stipulated expense.

Temporarily restricted unconditional promises to give (pledges) are reclassified to unrestricted in the period in which the unconditional promise is received or the restriction lapses. A gift or promise to give that involves a condition is not considered a contribution until the condition is met and is therefore not recognized as an increase in net assets in the period in which it is received but is disclosed in the footnotes.

Securities and other property received should be recorded at fair value at the time of receipt. These assets are most likely to be received as temporarily or permanently restricted contributions. The donor may restrict not only the purpose but also the timing of use. If the donation is not available for use until some future fiscal period, it is recorded as Contributions—Temporarily Restricted. The amount is released from restriction (unclassified) in the period when it becomes available.

Common to VHWOs is the donation of materials to be used in providing service or to be processed for subsequent sale. These materials should be recorded as inventory, with a credit to Unrestricted Contributions at their fair value when received, provided that they are substantial in amount and a measurable value for them can be established, either by sale shortly thereafter or by appraisal. An example would be the donation of clothing or household goods to Goodwill Industries.

Occasionally, a VHWO will be permitted to use building facilities rent free. In this situation, both the contribution and the rent expense should be recorded at fair rental value, usually equivalent to the amount that normally would be charged for rent. Donated fixed assets for which title is received, such as equipment, land, and buildings, should be entered as an unrestricted, temporarily restricted, or permanently restricted contribution at fair value depending upon the donor's stipulations. Expiration of donor restrictions will occur either at the time the asset is placed in service or over the asset's useful life. Permanent restrictions do not expire.

Although the range of personal services that volunteers donate varies between VHWOs, these services should be recorded if they are significant and if the following criteria are met:

1. The services received create or enhance nonfinancial assets, or

2. The services received require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. (Usually the individuals performing such services are treated in a similar fashion to employees; they have schedules, assigned duties, are supervised, etc.)

Promises to give services are also included. Recognizing contributed services that are specialized and would need to be purchased indicates to readers of the financial statements the impact these contributions have on the organization. It also indicates the need for future cash outflows in the event these services are no longer contributed.

If the criteria are met, donated services are recorded with a debit to an expense account, such as Salary Expense, and a credit to Contributions. Contributed services received that are not re quired to be recognized as revenues are disclosed at their fair value in the footnotes to the financial statements.

Special Events Support. Another subdivision of the public support category covers an organization's special fund-raising events in which the participant has the opportunity to receive something of value in exchange for a contribution. Raffles, dinners, bingo games, and bake sales are examples of special events. The gross inflow of resources is credited to Special Events Support in the fund that it is to benefit. Direct costs of the event, excluding promotional costs, are charged to Cost of Special Events. Comparing these two balances permits one to judge the effectiveness of the event. It also determines that portion of the proceeds that is a contribution to the organization. If such special events are peripheral or incidental, they may be disclosed net of costs (which used to be the general practice), but if they are ongoing and major activities, then gross revenue is recorded and direct costs of those activities are considered fund-raising expenses. Promotional costs, such as advertising or the salaries of employees involved in the event, are charged against fund-raising expense. The portion of the budget consumed by fund-raising expenses must also be revealed.

Legacies and Bequests. Every VHWO hopes that its programs will be so deserving that they will encourage donors to make major contributions of personal property or real property through their wills. Since these items tend to be more substantial in amount, the audit guide recommends that such contributions be shown as a separate item of public support under Legacies and Bequests. They are entered as a credit to that account when the organization is reasonably certain of the amount to be received. Such contributions are classified as unrestricted, temporarily restricted, or permanently restricted based on donor stipulations.

Received from Federated and Nonfederated Campaigns. The final item considered as public support is the amount received from federated (associated) and nonfederated organizations. This amount is credited to Received from Federated and Nonfederated Campaigns. An amount allocated by United Way to a health and welfare organization would be an example of support received from a federated organization. An amount raised by independent, professional fund-raising groups would be an illustration of resources received from nonfederated campaigns. Usually, contributions received from federated and nonfederated campaigns are unrestricted.


In addition to public support, resources may be received from exchange transactions that are classified as unrestricted revenue. These resources would include the following accounts:

1. Membership Dues Revenue for dues charged members to join and use facilities or receive publications.

2. Program Services Fees for amounts charged clients for services of the organization, such as consulting, testing, or advising.

3. Sales of Publications and Supplies for proceeds from the sales of these items.

Investment transaction revenue, classified as unrestricted or restricted, could include the following accounts:

1. Investment Revenue for interest, dividends, and other earnings.

2. Realized Gain on Investment Transactions for gains from the sale or exchange of investments.

3. Net Increase (or Decrease) in Carrying Value of Investments for the unrealized appreciation (or depreciation) of investments if they are carried at fair value.

Each of the items of investment transactions revenue would be recorded as unrestricted or restricted depending on donor stipulations. Thus, the unrestricted revenue from an endowment would be recorded with a credit to Investment Revenue—Unrestricted. Restricted investment revenue is reported as temporarily or permanently restricted in compliance with the donor's wishes.

VHWOs are required to carry their investments at fair value.12 Cost includes not only the total cost of purchased investments but also the fair value at the date of receipt of donated objective: 8

Explain how to account for revenues and costs in a VHWO.

12 FASB Statement No. 124, Investments of Not-for-Profit Organizations (Norwalk, CT: Financial Accounting Standards Board, 1995).

investments. When a relatively permanent reduction in fair value occurs, the impairment to cost should be recorded. The unrealized appreciation (or depreciation) is shown separately in Net Increase (or Decrease) in Carrying Value of Investments. Realized and unrealized gains and losses on all investments are considered increases or decreases in unrestricted net assets unless restricted by donor or law.

Program and Supporting Services Costs

VHWOs exist to render service or to conduct programs. Their operating statements will not show typical expenses, such as salaries or rent, but will show the cost of each program or service the organization provides—the costs in which the general public, the contributors, and the controlling agencies are primarily interested. For example, the operating statement of an environmental protection association might show the cost of conducting a program to reduce river pollution or to provide an animal and bird sanctuary. These projects fall in an expense grouping called Program Services. The other expense grouping shown on an operating statement is referred to as Supporting Services, which includes fund-raising costs, management and general costs, and membership development activities for the overall direction of the organization. Management and general activities include all management, financing, and administrative activities, except for direct activities of programs or fund raising. Fund-raising activities include publicizing and conducting fund-raising campaigns, maintaining donor mailing lists, conducting special fund-raising events, preparing and distributing fund-raising materials, and other activities involved with soliciting contributions. Membership development activities include soliciting for prospective members and membership dues, membership relations, and similar activities.

Individual expenses, such as salaries or rent, are recorded in the respective natural expense accounts in much the same way that they would be recorded in the accounts of profit entities. All expenses are considered reductions in unrestricted net assets. Therefore, when expenses are recorded for purposes stipulated by donors, a reclassification of temporarily restricted to unrestricted net assets is recorded. At the end of the fiscal year, the expenses are allocated to the individual programs conducted and to the supporting services of management, fund raising, and membership development. Allocation of joint costs should be on some rational basis, such as assigning salaries on the basis of time expended, allotting rental charges on the basis of floor space, or apportioning supplies expense on the basis of consumption. However, it is not always simple to allocate costs.

The public has been deluged with informational materials that attempt to educate the reader about proper health habits to avoid disease or infection, birth control and other family planning issues, and the need to protect endangered species or the environment. Included in much of this material is a fund-raising appeal. A question arises as to whether the total cost of sending such literature should be charged to the program publicized or to fund raising, or whether it should be allocated between them. Since board members, donors, and the general public pay particular attention to the percentages of revenue consumed by administrative and fund-raising purposes, the desire to keep those percentages at a minimum is understandable. AICPA guidance on joint-cost allocation described in the previous section must be followed by all VHWOs.

Closing Entries

After all expenses have been assigned, an entry is made to close the expense accounts and charge each of the expenses to the individual programs and supporting services. For the environmental protection association used earlier as an example, the following entry might be recorded:

River Pollution Program Expense XXX

Animal and Bird Sanctuary Program Expense XXX

Management and General Services Expense XXX

Fund-Raising Services Expense XXX

Salary Expense, Supplies Expense, etc XXX

The final closing entries close support and revenue accounts, as well as the program and services accounts, to the appropriate net asset classification. The closing entry for the Unrestricted Net Assets of the environmental protection association might be as follows:

Contributions—Unrestricted XXX

Legacies and Bequests—Unrestricted XXX

Membership Dues Revenue XXX

Investment Revenue—Unrestricted XXX

Reclassification In—Unrestricted—Satisfaction of Donor Restrictions XXX

River Pollution Program Expense XXX

Animal and Bird Sanctuary Program Expense XXX

Management and General Services Expense XXX

Fund-Raising Services Expense XXX

Unrestricted Net Assets XXX

If the board of directors should decide to designate a specified sum of the Unrestricted Net Assets for a future program to reduce air pollution, the following entries are recorded:

Undesignated Net Assets XXX

Unrestricted Net Assets—Designated for Air Pollution Program XXX

Similar entries to close temporarily restricted and permanently restricted accounts include the following:

Contributions—Temporarily Restricted XXX

Legacies and Bequests—Temporarily Restricted XXX

Investment Revenue—Temporarily Restricted XXX

Reclassifications Out—Temporarily Restricted—Satisfaction of

Donor Restrictions XXX

Temporarily Restricted Net Assets XXX

Contributions—Permanently Restricted XXX

Legacies and Bequests—Permanently Restricted XXX

Permanently Restricted Net Assets XXX

objective: 9

Prepare financial statements for not-for-profit organizations.

Financial Statements

Consistent with other not-for-profits, the financial statements for VHWOs are a statement of financial position, a statement of activities, and a statement of cash flows. In addition, VHWOs must provide a statement of functional expenses. A statement of financial position is prepared either in single-column form or with a column for each asset class. Organization-wide totals of assets, liabilities, and net assets are presented. An activities statement can be prepared after the expense allocation entry has been recorded. It is structured with a column for each asset class and shows how effectively the organization operated during the period. Since program costs and not the typical expenses, such as salaries, are shown in an operating statement, a summary of expenses by object-of-expense classification is provided in a separate statement. This statement of functional expenses supplements the operating statement. It presents the total of each functional expense to programs and supporting services.

Day Star Activity and Respite Center serves older adults afflicted with Alzheimer's Disease or other memory impairment and their families. Day Star operates an adult day care center, which provides a respite from constant caregiving for primary caregivers. Day Star also provides limited home care for clients. The expenses that were incurred by Day Star are as follows:

Expense Amount

Salaries and payroll taxes $17,000

Crafts and activities 4,000

Meals on Wheels 4,000

Office expenses 2,000

Repairs and maintenance 1,500

Depreciation expense 5,000

Total expenses $33,500

Day Star management has estimated the allocation of financial resources to organization activities and prepared the following allocation scheme:

Day Care Home Care Management

Operating expenses 40% 35% 25%

Capital-related expenses 90 10 0

Expenses are allocated to programs and supporting services in the following manner. Then, they are presented in the statement of activities.


Total Day Care Home Care and General

Operating expenses $28,500 $11,400 $9,975 $7,125

Capital-related expenses 5,000 4,500 500

Expenses also are allocated to programs and supporting services using the allocation matrix for presentation in the statement of functional expenses. The following example shows this procedure for three object-of-expense categories:


Object of Expense Total Day Care Home Care and General

Salaries and payroll taxes $17,000 $ ó,800 $ 5,950 $4,250

Crafts and activities 4,000 1,ó00 1,400 1,000

Office expenses 2,000 800 700 500

Repairs and maintenance 1,500 ó00 525 375

Depreciation 5,000 4,500 500 _

Illustrative Transactions for a Voluntary Health and Welfare objective: 10 Organization

Prepare journal entries To illustrate the recording of events and the preparation of financial reports for a VHWO, assume related to typical events the People's Environmental Protection (PEP) Association, a voluntary community organization, of a not-for-profit has three programs: Valley Air Project, Fish in the Lakes, and Flood Control. The statement of organization financial position of PEP on December 31, 20X6, is shown in Illustration 18-1.

Illustration 18-1 People's Environmental Protection (PEP) Association Statement of Financial Position As of December 31, 20X6


Cash and cash equivalents $ 253,500

Contributions receivable (net of $3,100 allowance) 21,500

Inventories 10,000

Short-term investments 152,000

Property, plant, and equipment (net of $16,700 accumulated depreciation) 676,000

Long-term endowment investments 253,000

Total assets $1,366,000

Liabilities and net assets:

Accounts payable $ 37,000

Notes payable 100,000

Total liabilities $ 137,000

Net assets:

Unrestricted $ 289,000

Temporarily restricted 687,000

Permanently restricted 253,000

Total net assets $1,229,000

Total liabilities and net assets $ 1,366,000

The following events occur during the calendar year 20X7. They are summarized to conserve space and minimize duplication. Entries are shown following each transaction. Although no fund designations are recorded, VHWOs may choose to use fund accounting for donor-restricted resources, plant, and permanently restricted endowments. Fund-based financial statements for VHWOs are illustrated in the appendix to this chapter.

Event Entry

1. As a result of its fund-raising program, cash Cash 325,000

contributions of $325,000 were received. Contributions—Unrestricted 315,000

$315,000 was unrestricted, and $10,000 Contributions—Temporarily Restricted 10,000

was restricted for Valley Air project operating costs. In addition, unconditional promises to Contributions Receivable 100,000

give totaled $100,000, of which $80,000 Contributions—Unrestricted 80,000

was unrestricted and $20,000 restricted for Contributions—Temporarily Restricted 20,000

acquisition of equipment.

2. Based on past experience, 5% of the promises Provision for Uncollectible Contributions 5,000

to give was estimated to be uncollectible. Allowance for Uncollectible Contributions 5,000

3. During the year, cash was collected from some Cash 95,500

unconditional promises to give, while others Allowance for Uncollectible Contributions 5,600

were written off as uncollectible. Contributions Receivable 101,100

Event Entry

4. A cash donation of $40,000 was received, with Cash 40,000

the donor stipulation that it be used to acquire Contributions—Temporarily Restricted 40,000

equipment for water quality improvement.

5. With the donor's approval, the $40,000 served Land, Building, and Equipment 50,000

as a partial payment on the purchase of a filter Cash 40,000

system costing $50,000. A note was signed for Notes Payable on Equipment 10,000

the unpaid balance. PEP chooses to release the donor restriction over the life of the asset.

6. PEP received $5,000 from an individual who Cash 5,000

restricted its use to a special project within a Refundable Advances 5,000

Fish in the Lakes program. If that special project is not accomplished within six months, the individual requested that the money be returned. PEP has not yet undertaken the project. Two months remain in the time period specified by the donor.

7. The following bequests were received: Cash 120,000

$100,000 unrestricted and $20,000 to be Legacies and Bequests—Unrestricted 100,000

invested in an endowment whose earnings are Legacies and Bequests—Permanently Restricted . . 20,000 to be unrestricted.

8. PEP received donated goods with a fair value Inventories 2,350

of $2,350. Of those donated goods, $750 is Contributions—Unrestricted 1,600

restricted by the donor for use in the Fish in the Contributions—Temporarily Restricted 750

Lakes program; the remaining gifts can be used at management's discretion.

9. PEP held a special summer event to promote Cash 9,000

its activities, the net proceeds of which were Special Events Support—Unrestricted 9,000

unrestricted. Gross revenues totaled $9,000, with direct costs for the event amounting to Costs of Special Events 2,000

10. PEP uses volunteers to distribute brochures about its operations, to assist the staff with routine office work, and to make phone calls during the annual fund-raising appeal. The volunteers provided 1,000 hours of service this year. If the volunteers were not available, the tasks would either be performed by staff at a later date or not done at all.

11. Members were assessed and all paid Cash 118,000

membership dues of $118,000. Membership Dues Revenues 118,000

12. The local PEP unit receives unrestricted cash Cash 16,000

of $16,000 as its share of a campaign run Received from Federated and Nonfederated by its national affiliate. Campaigns—Unrestricted 16,000

13. Earnings on endowment investments total Cash 28,000

$28,000, of which $21,000 is not restricted Investment Revenue—Unrestricted 21,000

and $7,000 is restricted to investment in Investment Revenue—Temporarily Restricted . . . . 7,000 equipment for flood control.

Event Entry

14. PEP carries its investments in all funds at fair Cash 27,000

value. Endowment investments are sold for Investment (at fair) 25,000

$27,000. They had a cost of $20,000 and a Gain on Sale of Investments—Permanently carrying value of $25,000 in the investment Restricted 2,000

account. All endowment gains are to be permanently restricted according to donor specifications.

15. An additional $46,000 of investments are Investments—Permanently Restricted 46,000

purchased from endowment funds. Cash 46,000

16. Unrestricted investments have shown no Investments 29,000

material change in fair value over the year. Net Increase in Carrying Value of Investments—

At year-end, the fair value of permanently Permanently Restricted 29,000

restricted endowment investments has increased from $265,000 to $294,000. All endowment gains are to be permanently restricted according to the donor specification.

17. A lawyer provided five hours of service to PEP Professional Services 500

to draw up an endowment agreement. She Contributions—Unrestricted 500

did not charge for her services. She normally would charge a client $500 for consultation on a similar type of agreement. In the absence of the donated professional services, PEP would have hired a lawyer to draft the agreement.

18. A special recreational building and dock costing Land, Building, and Equipment 96,000

$96,000 were purchased with unrestricted cash. Cash 96,000

19. Contributions received in the prior period with Reclassification Out—Temporarily Restricted—

the stipulation that they be used for expenses of Satisfaction of Time Requirements 10,000

this period are now available. Reclassification In—Unrestricted—

Satisfaction of Time Requirements 10,000

20. Accounts payable and expenses were paid or Accounts Payable (January 1) 37,000

established. Operating expenses related to Salaries Expense 200,000

donor-specific programs totaled $103,000. Payroll Taxes 30,000

Mailing and Postage Expense 50,000

Rent Expense 28,000

Telephone Expense 6,000

Research Expense 215,000

Professional Services: Legal and Audit 34,000

Supplies Expense 13,000

Miscellaneous Expense 5,000

Accounts Payable 32,000

Cash 586,000

Reclassification Out—Temporarily Restricted—

Satisfaction of Program Requirements 103,000

Reclassification In—Unrestricted— Satisfaction of Program Requirements 103,000

Event Entry

21. Contributed goods of $1,450 were used during Supplies Expense 1,450

the year for the Fish in the Lakes program. This Inventories 1,450

amount includes the $750 donor-restricted contribution in item 8. Rec|assification °ut—Temp°ranly IWi-fcted—

Satisfaction of Program Requirements 750

Reclassification In—Unrestricted—

Satisfaction of Program Requirements 750

22. Depreciation on equipment purchased with Depreciation Expense 22,000

donor-restricted contributions amounted to Accumulated Depreciation 22,000

$22,000 for the year. (Valley Air project—

$2,000; Fish in the Lakes program—$3,000; Reclassification °ut—Temporarily Restricted— flood control program—$16,000; management Satisfaction of Equipment Acquisition and general services—$1,000). An equivalent Requirements 22,°°°

amount of temporarily unspecified net assets is Reclassification In—Unrestricted—

released from restrictions. Satisfaction of Equipment Acquisition

Requirements 22,000

23. Early in the year, cash contributions for current Cash 2,000

operations were received, but they cannot be Contributions—Temporarily Restricted 2,000

used until late in the following year.

24. At year-end, the expenses were allocated to the Valley Air Project 132,000

various programs and supporting services. The Fish in the Lakes Program 184,450

direct cost of a special event is not included in Flood Control Program 251,000

the allocation process because it is subtracted Management and General Services 29,500

from the gross proceeds of that event. The Fund-Raising Services 11,000

special event is considered an incidental activity Membership Development 2,000

and reported "net" in the statement of activities. Salaries Expense 200,000

Payroll Taxes 30,000

Mailing and Postage Expense 50,000

Rent Expense 28,000

Telephone Expense 6,000

Research Expense 215,000

Professional Services: Legal and Audit 34,500

Supplies Expense 14,450

Miscellaneous Expense 5,000

Provision for Uncollectible Contributions 5,000

Depreciation Expense 22,000

25. Closing entries. Each class of asset is closed Contributions—Unrestricted 397,100

separately. Special Events Support 9,000

Legacies and Bequests—Unrestricted 100,000

Received from Federated and Nonfederated

Campaigns 16,000

Membership Dues Revenue 118,000

Investment Revenue 21,000

Reclassifications In—Unrestricted—Satisfaction of

Program Restrictions 103,750

Reclassifications In—Unrestricted—Satisfaction of

Equipment Acquisition Restrictions 22,000


Reclassifications In—Unrestricted—Satisfaction of

Time Restrictions 10,000

Valley Air Project 132,000

Fish in the Lakes Program 184,450

Flood Control Program 251,000

Management and General Services 29,500

Fund-Raising Services 11,000

Membership Development 2,000

Cost of Special Events 2,000

Unrestricted Net Assets 184,900

Contributions—Temporarily Restricted 72,750

Investment Revenue—Temporarily Restricted 7,000

Temporarily Restricted Net Assets 56,000

Reclassifications Out—Unrestricted—

Satisfaction of Program Restrictions 103,750

Reclassifications Out—Unrestricted— Satisfaction of Equipment Acquisition

Restrictions 22,000

Reclassifications Out—Unrestricted—

Satisfaction of Time Restrictions 10,000

Legacies and Bequests—Endowment—

Permanently Restricted 20,000

Net Increase in Carrying Value of Endowment

Investments—Permanently Restricted 29,000

Gain on Sale of Endowment Investments—

Permanently Restricted 2,000

Permanently Restricted Net Assets 51,000

The final entry at year-end closes the support and revenue accounts, as well as the program and supporting services expenses, into the appropriate net asset accounts. With expenses allocated to programs and supporting services, it is now possible to prepare the statement of activities (see Illustration 18-2 on page 18-20). The sequence of items is suggested by the title. Inflows of resources from public support, revenues, and reclassification are listed first, followed by the expense totals for each program and supporting service, taken directly from the closing and allocation entries. The beginning net asset balance for each class is added, resulting in the net asset balance at the end of the period.

Since the investments account is carried at fair value, it is entirely possible that the carrying value may decrease. If this situation occurs, the account Net Decrease in Carrying Value of Investments is debited, and the investments account is credited. The closing entry would credit Net Decrease in Carrying Value of Investments and debit unrestricted or permanently restricted net assets depending on donor specifications or law.

The statement of activities of a VHWO provides valuable data on the total cost per period of each program and of supporting services. To provide the reader of its financial statements with additional information, a statement of functional expenses is included in the reports. This statement shows the allocation of each expense (salaries, rent, etc.) and reveals the cost by function of carrying on the organization's activities. The statement of functional expenses for PEP is shown in Illustration 18-3 on page 18-21.

The statement of financial position for PEP on December 31, 20X7, is given in Illustration 18-4. The statement of cash flows shown in Illustration 18-5 includes, under financing activities, all cash inflows from contributions and investment income restricted by donor for long-term investments (or endowments) or for acquisition of fixed assets.

As is true in reporting for-profit enterprises, financial statements of VHWOs would be prepared with comparative figures for the preceding year. The statements also should be accompanied by notes that would summarize significant accounting policies.

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