PUBPOL 522 – AUTUMN 2025

TRANSACTIONS AND BASIC FINANCIAL STATEMENTS

PROMOTING ALL STUDENT SUCCESS (PASS)

BACKGROUND

The small not-for-profit Christine Chang started in graduate school, Promoting All Students’ Success (PASS), was more successful than she had imagined. She had taken an education policy course in graduate school in which she learned about the disparities in achievement gaps as a result of chronic underfunding in public schools. Her interest in after-school tutoring followed recent changes in state policy that would require students to pass a series of end-of-year exams to qualify for graduation. However, the last three years of operating budget deficits resulted in cutbacks in after-school programs and services, including after-school tutoring and test-prep courses. The state was also unwilling to fund these programs, arguing that learning and test prep should happen during regular school hours. Students, particularly those from low- and middle-income families who needed assistance, often failed their qualifying exams because they lacked access to free or low-cost after-school tutoring sessions.

Recognizing this need, Chang enlisted a group of friends, including students taking courses at the School of Education, and began offering free after-school tutoring services at local high schools. They started by reaching out to schools over the summer, and by August 2018, they had more students than they could handle. It was evident to her that there was an urgent need to provide after-school tutoring services – it was time for her to launch Promoting All Students’ Success, or PASS!

FINANCIAL INFORMATION

In November 2018, a local newspaper ran a story about PASS’s efforts, which attracted the interest of a local entrepreneur, Charles Duncan. Duncan had been a borderline student in high school and had been lucky to graduate, so he contacted Chang to discuss her program.

Chang and Duncan met up the day before Christmas. At that meeting, Chang briefed Duncan on her initial thoughts on PASS’s operational structure, including inviting Duncan to serve as the chair of the Board of Directors for PASS. Duncan was impressed enough with Chang’s vision and offered to invest in Chang and PASS, providing her with $25,000 in unrestricted funding and a $100,000 low-interest loan. As he wrote her the checks, Duncan noted that there would be a conflict of interest, as he was the initial and sole investor in PASS. Nevertheless, he knew Chang needed his support, and he would be able to use his networks to solicit additional financial support for the organization.

Chang immediately deposited the funds in a checking account. She went home to celebrate the holiday with her family, knowing she had an exciting year ahead of her (for FY 2018, see Statement of Financial Position in PASS Template File.xlsx).

1.    Chang was a bit daunted by Duncan's generosity - but knew there was a lot of work to be done. She resigned from her position at a local nonprofit and rented office space, signing a one-year $2,250 per month lease.

Rent for the space is due on the first of each month.

2.    On January 5, 2019, PASS officially opened for business. Chang's first order of business was to invest

$50,000 of the $125,000 she had received from Duncan. She wanted to make sure she could earn interest on these funds. After conversations with a local bank manager, she decided to engage the services of an investment manager and invest the funds in a low-risk US equities mutual fund. She wrote a check for $50,000 on January 8th.

3.    Utilities (e.g., electric, water and sewer, garbage) for the new office space are expected to average $342 per month. Payments on outstanding balances were due on the 15th of the following month.

4.    Chang was initially the only employee at PASS, serving as the Executive Director, lead tutor, and chief fundraiser. On January 10, 2019, the board voted to pay Chang a salary of $3,790 per month and to contribute an additional $596 per month towards her health insurance. Payroll was processed at the end of each month. All salaries and benefits were paid on the 7th of the following month.

5.    Following the approval of an operating budget at the first board meeting, Chang decided to take advantage of an after-Christmas sale at Best Buy. The computers, laptops, tablets, phones, and printers worth $11,762 were paid for in cash.

Chang expected the computing equipment would have a useful life of 4 years and no salvage value. She anticipates applying the straight-line depreciation method to account for depreciation expense.

6.    Chang also took advantage of a back-to-school sale at a local office supply and bookstore. She purchased $1,337 in student workbooks and teaching supplies to distribute to students enrolled in area schools and used others in the tutoring sessions.

The bookstore owner heard about PASS and Chang's work and offered to donate $271 in teaching supplies per month. Chang expected the first delivery on February 1, 2019. Deliveries were due no later than the 10th of each month.

Given the number of students participating in the program and visits to school districts and other learning centers, Chang does not expect excess teaching supplies or resources to remain at the end of each fiscal year.

7.    By March 2019, Chang and Duncan had some fundraising successes. Duncan had received commitments

from his network of family, friends, and business associates. They had agreed to provide PASS with $28,375 in unrestricted public support.

The donors agreed to make payments on these commitments in July ($4,550), August ($5,500), October ($7,250), and December ($3,750).

Duncan suspected a few of the donors would likely not make payments on their commitments. PASS would need to report adjustments in revenues in the amount of $850 to account for uncollectable pledges.

The remainder of the pledges would be received no later than February 2020.

8.    Chang worked hard to prepare and submit a grant proposal to the McNamara Foundation. After an

intensive vetting process, she received the news that the foundation would support PASS's efforts in closing the achievement gap.

On April 2, 2019, she received a check for $45,000 from the foundation. The foundation did not impose any restrictions on the $45,000 grant.

9.    Despite initial successes, Chang and the Board of Directors realized they would not be able to run the

program strictly through grants and contributions - the school districts would need to cover a share of the costs ofthe tutoring program.

In April, Chang reached out to the school districts she worked with and told them there would be a $150 in- school tutoring fee per student per month. Students would receive tutoring services from September through

May. Teachers and other school administrators knew this was well below what it would cost them to provide the services. Two of the five school districts agreed to pay the tutoring fee. They each signed up 30 students.

Beginning October 1, Chang billed the school districts monthly for services provided in the previous month. She gave the school districts one month to pay the invoice. In other words, if she sent a bill for September tutoring services on October 1, payment would be due no later than October 31.

Even though the districts never paid early, they did make payments within the 30-day grace period.

10.  Chang spent the summer preparing to expand the program in the fall. She hired six part-time tutors at $22.50 per hour for 80 hours each month (approximately 20 hours per week). Tutors signed 9-month contracts beginning September 1.

To keep costs down and ensure the workload was manageable, Chang and the volunteers from the School of Education continued to tutor students at the various school districts.

Payroll was processed at the end of each month, and all salaries and benefits were paid on the 7th of the following month.

11.  Chang also decided that transportation was the organization’s most pressing need, particularly with the six

new tutors on board. After shopping around, she decided to purchase two certified pre-owned vehicles for a total of $50,000. She made a down payment of $7,500 and took out a five-year loan at 6.50% interest to finance the rest. Monthly payments of $831.56 are due at the beginning of each month, starting on September 1 (see Exhibit 1).

In five years, the vehicles are expected to have a salvage value of $3,500. Vehicles are to be depreciated on a straight-line basis, with partial-year depreciation pro-rated based on the number of months in service.

12.  Insurance on the two vehicles was $1,875 per quarter. Payments were due in advance. Chang made two payments before the end of the year - on September 1 and again on December 1.

The team would coordinate their schedules so that the vehicles would be available for tutoring visits. They drove quite a few miles and used an average of $315 per month in gas.

13.  On December 1, 2019, Chang received more good news from the Sloane Stephens Foundation (SSF).

Having heard about PASS’s work in the community, the SSF awarded PASS a $85,000 grant.

The SSF grant comes with restrictions. PASS was to invest the money and use the earnings to subsidize as many participants as possible. Doing so would allow more students to participate in the program at no cost to the school districts. After depositing the check, she initiated a wire transfer to the low-risk US equities fund.

Upon receipt of the fund transfer, Chang had a brief conversation with the investment manager, who told her that these additional funds would not yield returns by the end of PASS’s fiscal year as the transfer occurred in the last month of the fiscal year.

14.  By Christmas 2019, Duncan was impressed enough with Chang’s work and PASS’s accomplishments that he agreed to forgive $10,000 of the $100,000 loan.

Notwithstanding, Duncan expected to receive payment on the balance of the loan and interest as agreed.

Chang anticipated she’d pay $10,000 of principal plus 5 percent interest on the outstanding balances no later than December 31, 2019.

Going forward, Chang anticipated making an annual payment on the outstanding principal of $7,500.

15.  Before the end of the year, Mrs. Hughes and four other parents came to Chang’s office. They had heard about PASS’s work and student achievements to date. They wanted to enroll their children in the tutoring program starting in January 2020. They knew they would not be able to cover the full cost of PASS’s services. They had raised $3,750 amongst themselves and hoped that Chang would agree to tutor their children in the upcoming year.

Chang was not sure she could provide the service directly to students without the additional vetting and review processes the school districts provided her. She accepted the deposit from the parents but knew this was an issue she needed to bring to the board's attention.

16.  On January 5, 2020, the investment manager reported to Chang and the nonprofit board that PASS’s investment account balance, which included endowment investments, was $129,375.

The Board expected to meet at the start of the new year to review the events of the past year. Chang was excited about all PASS’s achievements and the future. Ahead of the meeting, Duncan asked Chang for copies of PASS’s financial statements so he could evaluate the organization’s financial position and operating performance. Chang panicked. While she had kept good records, she had not prepared any formal financial documents. Looking back, she wished she hadn’t avoided that financial management class in graduate school!

ASSIGNMENT

A.    Demonstrate the impact of each transaction on the organization’s assets, liabilities, or net assets. A transaction sheet is included in the PASSTemplate File.xlsx posted on Canvas. (45% of grade)

B. Use these transactions to prepare the Basic Financial Statements for PASS, including

a)    The Statement of Financial Position (or Balance Sheet) – (15% of grade)

b)    The Statement of Activities (or Income Statement) – (15% of grade)

c)    The Statement of Cash Flows – (10% of grade)

In preparing the Basic Financial Statements, you may assume that on January 1, 2019, PASS reported

$125,000 in cash and $100,000 in long-term liabilities (with $10,000 due in 2019) and $25,000 in net assets (without donor restrictions). The fiscal year ended December 31, 2019.

C.    In 200 words or less, provide the board of directors  (BOD) with an assessment of PASS’s financial position and

operating performance for FY 2019. In assessing the financial position and operating performance of PASS, be sure to include at least five financial ratios in the spreadsheet and integrate these ratios in your assessment of the nonprofit’s financial health. (15% of grade)

Exhibit 1

Tutoring Service Vehicles: The vehicles were purchased for $50,000. In five years, they are expected to have a  salvage value of $3,500. Vehicles are to be depreciated on a straight-line basis, with partial-year depreciation pro- rated based on the number of months in service/use.

The payment schedule for the loan is as follows:

Note:       Car Loan Payment = Interest Payment + Principal Payment

Loan Balance = Outstanding Principal - Principal Payment