Net Assets With Donor Restrictions. (LO14-2) For several years, Baytown Rehabilitative Camp for Disabled Children (hereafter referred to as the camp) has applied for an operating grant from the Baytown Area United Way. As the finance adviser for the local United Way allocation panel, it is your responsibility to evaluate the camps budget request for the forthcoming year and its audited financial statements. The camps most recent comparative statement of financial position and statement of activities are presented below.

Additional Information: As reflected in the camps 2020 statement of activities, the United Way agency allocated $25,000 to the camp for fiscal year 2020. However, the amount allocated was $5,000 less than the camp had requested in its fiscal year 2020 budget, reflecting the allocation panels. concern about the camps financial reserves (representing about 12 days in 2019) and low ratio of program services expense to total expense (only 57 percent in 2019). As a condition for receiving the $25,000 fiscal year 2020 allocation, Baytown Rehabilitative Camp agreed to take actions to improve its financial reserves and its ratio of program services expense to total expense, including an increase in its fund-raising efforts and a reduction in its support payroll.

Another area of concern to the allocation panel has been the camps long delay in using a restricted contribution of $100,000 received several years earlier. This gift was restricted by the donor for future expansion of a building used as a dining hall and for rehabilitative activities. This contribution has been invested in CDs and has grown to $122,368 as of December 31, 2019.

The camp is requesting a $35,000 United Way allocation for fiscal year 2021, based on a growing demand for its services and improvement made in its financial condition. As financial adviser for the local United Way allocation panel, however, you note that much of the improvement in net assets without donor restrictions resulted from $37,500 of net assets with donor restrictions that were released from restriction during fiscal year 2020, with no corresponding increase in the balance of the Buildings and Building Improvements account. (Note: $20,000 of the $57,500 released from restriction related to $20,000 of contributions with donor restrictions received during 2020.) You immediately contact the camp administrator for an explanation, whereupon she explains that the board of directors voted to use $37,500 of previously restricted investments for operating purposes after the administrator reported to the board that the original agreement with the donor could not be located and the donor was now deceased. She further indicated that the board may continue to use this pool of resources to further improve the camps financial condition.

Required

a. As financial adviser, evaluate the camps statement of financial position and statement of activities and prepare a report for the chair of the allocation committee indicating the extent to which the camps financial situation has improved or worsened. In your analysis, you should look at the camps financial position without donor restrictions, both including and excluding the use of the $37,500 of net assets with donor restrictions for operating purposes. As part of your analysis, you should consider liquidity (current and/or quick ratio), days of financial reserves, and effectiveness (program expenses/total expenses). Financial reserves ratio is calculated as working capital (current assets current liabilities) divided by expenses. To calculate the number of days of financial reserves available to cover expenses, multiply the financial reserves ratio by 365 days.

b. What is your reaction to the board of directors decision to use, for operating purposes, the $100,000 net assets with donor restrictions provided by a donor for building expansion? c. What amount of United Way funds would you recommend be allocated to the camp for fiscal year 2021? Explain your recommendation.

BAYTOWN REHABILITATIVE CAMP FOR DISABLED CHILDREN Statement of Financial Position December 31, 2020 and 2019 BAYTOOWN REHBILITATTIVE CAMP FOOR DISABLED CHILDREN Statement of Activities For the Year Ended December 31, 2020