1). READ THE ATTACHED 3 FILES AND PREPARE A 1-PAGE EXECUTIVE SUMMARY THAT ADDRESSES QUESTION #1 IN THIS CASE. (a) Using the narrative information from the case and the financial information in Exhibit 1, identify each organization from Exhibit 1. Justify your answer 2). NO ASSIGNMENT LONGER THAN 1-PAGE IN LENGTH WILL BE ACCEPTED.
New England Trust DUE DATE: WEDNESDAY 7/3/2019 HARVARD UNIVERSITY EXTENSION SCHOOL MGMT S-1300: NONPROFIT & GOVERNMENTAL ACCOUNTING CASE ANALYSIS #1: NEW ENGLAND TRUST 1). PREPARE A 1-PAGE EXECUTIVE SUMMARY THAT ADDRESSES QUESTION #1 IN THIS CASE. (a) Using the narrative information from the case and the financial information in Exhibit 1, identify each organization from Exhibit 1. Justify your answer 2). NO ASSIGNMENT LONGER THAN 1-PAGE IN LENGTH WILL BE ACCEPTED. THE FOLLOWING IS A SUMMARY OF THE USE OF RATIOS IN THE CASE: Financial analysis/Use of ratios: -Evaluating a firm’s financial performance -Analyzing ratios or numerical calculations -Comparing a company to its industry Which ratio is the most important – it all depends upon your perspective: •Suppliers and banks (lenders) are most interested in liquidity ratios. •Stockholders are most interested in profitability ratios. •A long-run trend analysis over a 5-10 year period is usually performed by an analyst. Profitability Ratios: Show how profitable a company is. -Profit Margin Net Income/Sales -Return on Assets Net Income/Total Assets -Return on Equity Net Income/Total Equity [Fund Balance] Asset Utilization Ratios: Show how effectively a company uses its assets. -Receivable Turnover Sales (Credit)/Receivables -Average Collection Period Accounts Receivable/Average Daily Credit Sales -Inventory Turnover Sales/Inventory -Fixed Asset Turnover Sales/Fixed Assets -Total Asset Turnover Sales/Total Assets Liquidity Ratios: Show how liquid a company is or how much funding it has available to meet short-term financial needs. -Current Ratio Current Assets/Current Liabilities -Quick Ratio (Current Assets – Inventory)/Current Liabilities Debt Utilization Ratios: Show how well a company is managing or using debt. -Debt Ratio Total Debt/Total Assets -Debt/Equity Ratio Total Debt/Total Equity [Fund Balance] CHARACTERISTICS OF NONPROFIT ORGANIZATIONS (A nonprofit organization is an organization whose goal is something other than earning a profit for its owners. Usually its goal is to provide services. -In a for-profit organization, success is measured, to a significant degree, by the amount of profit that the organization earns. -In a nonprofit organization, decisions made by management ordinarily are intended to produce the best possible service with the available resources. -Success in a nonprofit organization is measured primarily by how much service the organization provides and by how well these services are rendered or by how much it contributes to the public well-being. -Distinction between a for-profit and nonprofit is primarily based on the different uses of funds rather than on the need for funds because both for-profit and nonprofit must receive funds from operating revenues or other sources to continue in existence. -Since service is a more vague, less measurable concept than profit, it is more difficult to measure performance in a nonprofit organization. It is also more difficult to make clear-cut choices among alternative courses of action in such an organization; relationships between service costs and benefits and even the amount of benefits, usually are hard to measure. (Nonprofit Organizations: 1). Governmental (Federal/State/Local) / (Agencies/Commissions/Authorities) 2). Private (Charitable)/Tax-Deductible for Donor Contributions…Health, Educational, Social Service, Religious, Cultural, Scientific Private (Commerical/Membership)/Not Tax-Deductible for Donor Contributions…Social Clubs, Fraternal Organizations, Labor Unions, Chambers of Commerce, Trade Associations, Business Leagues, Other -donations MUST be a contribution and not a payment for services and it must be for the tax-exempt purpose; otherwise, this could lead to unrelated business income, which is the profit from units whose purpose is earning income rather than providing tax-exempt services. (Characteristics of Nonprofit Organizations 1). The Absence of a Profit Measure: the absence of a single, satisfactory, overall measure of performance comparable to the profit measure is the most serious problem nonprofit managers face in developing effective control systems for their organiztions. (a). Single Criterion: The profit measure provides a single criterion that can be used in evaluating proposed courses of action. In a nonprofit, there is often no clear-cut objective criterion that can be used in analyzing proposed courses of action. Members of the management team of a nonprofit organization often will not agree on the relative importance of various objectives. (b). Quantitative Analysis: The profit measure permits a quantitative analysis of those proposals in which benefits can be directly compared with costs. In a nonprofit, managers have no accurate way of estimating the relationship between costs and benefits and have difficulty judging the expenditure of X dollars will have on achieving the goals of the organization. Issues of this type are difficult to analyze in quantitative terms because there is no good way of estimating the benefits of given increment in spending. (c). Performance Measurement: The profit measure provides a single, broad measure of performance. The key consideration is not the details of the operating statement but the bottom line. The principal goal of a nonprofit is to render service. Since the amount and quality of service cannot be quantified easily, however, performance with respect to goals is difficult and sometimes impossible to measure. (d). Decentralization: The profit measure facilitates decentralization and delegation of many decisions to lower levels in the organization. If a nonprofit has multiple goals and no good way to measure performance in attaining them, it cannot delegate as many decisions to lower level managers. [Governmental organizations] (e). Comparison of Unlike Units: The profit measure permits comparisons of performance among entities that are performing dissimilar functions. [Which one was more profitable? This usually is measured in terms of return on equity or return on assets] -Nonprofits can only be compared with one another if they have similar functions. 2). Different Tax and Legal Considerations (TAX: -Nonprofit organizations are ordinarily exempt from income, property and sales taxes on income related to their nonprofit activity. They do, however, pay taxes on income generated from unrelated business activities such as lobbying or participation in political campaigns. -A nonprofit organization can lose its tax-exempt status if it engages in activities that are not considered “appropriate”. These include substantial lobbying or participation in political campaigns. A nonprofit organization can also lose its tax-exempt status if a “substantial part” of its income results from activities that are unrelated to its charter. -There are essentially two ways that a nonprofit organization can conduct for-profit activities and maintain its tax exempt status: it can pursue a venture that is either 1). Related to its tax-exempt purpose or 2). Unrelated, but insubstantial. [These activities are typically carried out in separate, wholly owned subsidiaries.] -Many nonprofit organizations (government, charitable, religious, scientific, educational organizations) are exempt from local property taxes and exempt from sales taxes on the goods and services that they sell. In comparing the costs of a nonprofit organization with those of a for-profit one in the same industry, the nonprofit’s costs are inherently lower because of these exemptions. (LEGAL: a). Ownership of the entity: nonprofits cannot obtain equity capital from outside investors; the equity capital from outside sources must be from donations; a nonprofit cannot distribute assets or income to any individual; when a nonprofit is dissolved, the entity’s value is transferred to another nonprofit organization or to the state/municipality where the organization operates. b). Generation and distribution of a profit or surplus: Legally, a nonprofit organization is allowed to earn an excess of revenues over expenses, sometimes called a surplus or an increase in net assets. This is its principal means of accumulating the equity capital that may be needed for (a). expansion, (b). the replacement of fixed assets, or (c). a buffer in the case of hard times. A nonprofit organization is prohibited from paying out any of is surplus as cash dividends. c). Legal obligations under a nonprofit charter: in exchange for their tax-exempt status, nonprofit organizations are required to provide benefits to their communities. A subject of some considerable debate among nonprofits concerns the nature and extent of these benefits. 3). A tendency to be service organizations (Issues such as: a). Services cannot be stored (no inventory) b). Service organizations tend to be labor intensive (manage the people who deliver the services), c). It is not always easy to measure the quantity of services (how much service does a physician provide to a patient), d). The quality of a service cannot be inspected in advance (At best, the quality of service can be inspected during the time it is rendered to the client. Judgments as to the quality of most services are subjective.) 4). Greater constraints on goals and strategies ( a). Most nonprofit managers have much less freedom of choice and tend to change strategies slowly, if at all. b). Many nonprofit must provide services and conform to spending guidelines and limitations as directed by an outside agency rather than as decided by their own management or governing board. Moreover, the charters of many nonprofit organizations specify in fairly explicit terms the types of services that they can provide. c). Federal and state legislatures may limit total spending for an organization/program and donors to nonprofits may restrict management’s options on the uses to which their contributions may be put. 5). Less dependence on clients for financial support ( -Some nonprofit organizations receive significant financial support from sources other than revenue for services rendered. In these public-supported organizations, there is no direct connection between the amount of services received by clients and the amount of resources provided to the organization (e.g. individuals receive the same support from a government unit whether they pay high taxes or no taxes). -Some nonprofit organizations also obtain all, or substantially all, of their financial resources from sales revenue (community hospitals, private schools/colleges). These client-supported nonprofit organizations are subject to much the same forces as are their for-profit counterparts. -Just as the success of a client-supported organization depends upon its ability to satisfy clients, the success of a public-supported organization depends on its ability to satisfy those who provide resources. 6). The dominance of professionals ( In many nonprofit organizations, success in achieving goals depends upon the behavior of professionals (e.g. teachers, physicians, scientists, …). Professionals often have motivations that are inconsistent with good resource utilization. This creates a dilemma that has important implications for senior mangers in nonprofit organizations. -Professionals are motivated by two sets of standards a). Those of their organization and b). Those of their colleagues. Therefore, their motivations may be inconsistent with resource utilization and organizational objectives. -Many professionals prefer to work independently (not suited to the role of manager); traditionally, a professional’s education has