CAF-1 · Chapter 13

Accounting for NPOs MCQs with Answers

15 multiple-choice questions on Accounting for NPOs for CAF-1 Financial Accounting and Reporting. Try each one before revealing the answer and explanation.

1. Question 1

   What is the primary difference between a Non-Profit Organization (NPO) and a commercial entity?

   • A) An NPO is not allowed to generate any cash inflows.
   • B) The main objective of an NPO is to provide services rather than to earn profits.
   • C) NPOs are not required to prepare a statement of financial position.
   • D) NPOs issue shares to their members.
   Show answer & explanation

   Answer: B) The main objective of an NPO is to provide services rather than to earn profits.

   Unlike commercial entities, the main objective of an NPO is to provide services to its members or the public, not to earn profits, and they do not have ownership interests like shares.

2. Question 2

   In the financial statements of an NPO, what is the equivalent of 'Equity' or 'Retained Earnings'?

   • A) Net Assets or Accumulated Fund.
   • B) Paid-up Share Capital.
   • C) Gross Profit.
   • D) Deferred Government Grants.
   Show answer & explanation

   Answer: A) Net Assets or Accumulated Fund.

   In an NPO, the residual interest in assets after deducting liabilities is referred to as Net Assets or the Accumulated Fund, rather than equity.

3. Question 3

   If a club member pays their annual subscription for the upcoming year in advance, how is this recorded in the current year's financial statements?

   • A) As an immediate income in the statement of income and expenditure.
   • B) As a current liability in the statement of financial position.
   • C) As a non-current asset.
   • D) It is ignored until the next year.
   Show answer & explanation

   Answer: B) As a current liability in the statement of financial position.

   Subscriptions received in advance represent an obligation to provide services in the future, so they are classified as a liability (typically current) at the year-end.

4. Question 4

   A sports club has members whose subscriptions are in arrears (unpaid) at the year-end. If the club expects to receive these amounts, how are they classified?

   • A) As an expense.
   • B) As deferred income.
   • C) As an asset (receivable).
   • D) As an addition to the accumulated fund directly.
   Show answer & explanation

   Answer: C) As an asset (receivable).

   Subscriptions in arrears are amounts owed by members to the NPO for services already available to them. They are treated as receivables (assets).

5. Question 5

   Under the deferral method, how should an NPO account for a tangible capital asset procured using a restricted government grant?

   • A) The grant is immediately recognized as income in full.
   • B) The grant may be recognized by deducting it from the carrying amount of the asset or recorded as deferred income.
   • C) The grant is credited directly to the unrestricted accumulated fund.
   • D) The asset is not recorded on the balance sheet.
   Show answer & explanation

   Answer: B) The grant may be recognized by deducting it from the carrying amount of the asset or recorded as deferred income.

   A tangible capital asset procured from a grant may be recognized at its carrying amount by deducting the grant, or by setting up the grant as deferred income to be recognized over the asset's life.

6. Question 6

   An NPO runs a small coffee bar to generate extra funds. How should the financial results of this trading activity be presented?

   • A) They should be kept completely out of the NPO's financial statements.
   • B) The net profit or loss from the trading activity is transferred to the statement of income and expenditure.
   • C) The sales revenue must be added directly to member subscriptions.
   • D) The coffee bar assets must be expensed immediately.
   Show answer & explanation

   Answer: B) The net profit or loss from the trading activity is transferred to the statement of income and expenditure.

   Trading activities (like a coffee bar) are accounted for separately, and the resulting net profit or loss is then included in the NPO's main statement of income and expenditure.

7. Question 7

   An NPO receives a donation of medicines to be distributed to a community at no charge. How should this inventory be measured in the financial statements?

   • A) At the higher of cost and net realizable value.
   • B) At the lower of cost and current replacement cost.
   • C) At fair value exclusively.
   • D) It should not be recognized as an asset.
   Show answer & explanation

   Answer: B) At the lower of cost and current replacement cost.

   An NPO shall measure inventories at the lower of cost and current replacement cost when they are held for distribution at no charge or for a nominal charge.

8. Question 8

   Which of the following statements replaces the 'Statement of Profit or Loss' for a Non-Profit Organization?

   • A) Statement of changes in net assets.
   • B) Statement of comprehensive revenues.
   • C) Statement of income and expenditure.
   • D) Statement of cash flows.
   Show answer & explanation

   Answer: C) Statement of income and expenditure.

   Instead of a statement of profit or loss, NPOs prepare a Statement of Income and Expenditure to show their financial performance and any surplus or deficit.

9. Question 9

   If an NPO decides to write off unpaid subscriptions from members who have left the club, how is this transaction recorded?

   • A) As a bad debt expense in the statement of income and expenditure and credited against the subscription account.
   • B) As a direct deduction from the cash balance.
   • C) By reducing the general reserve.
   • D) By increasing the subscription revenue for the year.
   Show answer & explanation

   Answer: A) As a bad debt expense in the statement of income and expenditure and credited against the subscription account.

   Writing off unpaid subscriptions involves recognizing a bad debt expense in the statement of income and expenditure and crediting the subscription arrears (receivable) account.

10. Question 10

    At year-end, the statement of income and expenditure shows a 'Surplus'. Where is this surplus transferred?

    • A) It is paid out to the founding members as a dividend.
    • B) It is added to the Accumulated Fund (Net Assets).
    • C) It is returned to the donors.
    • D) It is transferred to a deferred income account.
    Show answer & explanation

    Answer: B) It is added to the Accumulated Fund (Net Assets).

    A surplus (excess of income over expenditure) is added to the Accumulated Fund in the statement of financial position/statement of changes in net assets.

11. Question 11

    When an NPO uses fund accounting, how is depreciation expense treated?

    • A) It is never recognized because NPOs do not aim for profit.
    • B) It is charged directly against the cash balance.
    • C) It is charged to the fund or funds that provide the most meaningful presentation.
    • D) It is added to the accumulated fund.
    Show answer & explanation

    Answer: C) It is charged to the fund or funds that provide the most meaningful presentation.

    When a fund accounting basis is used, the choice of the fund to which depreciation is charged is based on providing the most meaningful presentation of the NPO's activities.

12. Question 12

    An NPO sets up a specific fund strictly to contribute to the school fees of local children using a grant of Rs. 24 million. How are these funds generally classified?

    • A) As unrestricted funds available for general operations.
    • B) As restricted funds subject to external limits on their use.
    • C) As part of general trading income.
    • D) As share capital.
    Show answer & explanation

    Answer: B) As restricted funds subject to external limits on their use.

    Funds established for specific purposes with restrictions on their use are classified as restricted funds in an NPO's financial statements.

13. Question 13

    Which of the following is typically NOT a source of income for a Non-Profit Organization?

    • A) Membership subscriptions.
    • B) Government grants and donations.
    • C) Proceeds from the issuance of equity shares.
    • D) Profits from minor trading activities like a tuck shop.
    Show answer & explanation

    Answer: C) Proceeds from the issuance of equity shares.

    NPOs do not have ownership interests in the form of equity shares, so they cannot raise funds by issuing shares.

14. Question 14

    If an NPO has a deficit for the year, how is it presented?

    • A) As a deduction from the Accumulated Fund.
    • B) As an addition to current liabilities.
    • C) As a non-current asset.
    • D) It triggers immediate liquidation of the NPO.
    Show answer & explanation

    Answer: A) As a deduction from the Accumulated Fund.

    A deficit (excess of expenditure over income) reduces the net assets and is deducted from the Accumulated Fund.

15. Question 15

    What is the formula used in a subscription T-account to find the subscription income for the year?

    • A) Cash received - Opening Arrears + Closing Arrears + Opening Advance - Closing Advance
    • B) Cash received + Opening Arrears - Closing Arrears + Opening Advance - Closing Advance
    • C) Cash received - Opening Arrears - Closing Arrears - Opening Advance - Closing Advance
    • D) Cash received only.
    Show answer & explanation

    Answer: A) Cash received - Opening Arrears + Closing Arrears + Opening Advance - Closing Advance

    To match income to the correct period, you take cash received, subtract amounts for last year (opening arrears), add amounts for this year not yet paid (closing arrears), add amounts paid last year for this year (opening advance), and subtract amounts paid this year for next year (closing advance).