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Westbrook Community Housing, Inc.
Author(s):
Young, David W.
Functional Area(s):
   Finance/Financial Management
   Financial Accounting
Setting(s):
   Nonprofit
Difficulty Level: Intermediate
Pages: 5
Teaching Note: Available. 
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First Page and the Assignment Questions:

Adrienne Sheldon, loan officer of the Benrus Savings Bank, was reviewing the status of the bank’s mortgage loan to Westbrook Community Housing, Inc. (WCH). She was responding to a request by the bank’s loan committee that she assess the bank’s lending strategy with respect to WCH, and propose some specific action with regard to the outstanding mortgage.

BACKGROUND

Westbrook Community Housing, Inc., was a nonprofit organization formed in 2002. Its mission was to provide housing for the elderly. In August 2004, its auditors prepared financial statements for the six months ended June 30, 2004, and submitted their opinion letter. The financial statements are contained in Exhibit 1. The accompanying opinion letter prepared by the auditors read as follows:

To the Directors
Westbrook Community Housing, Inc.

We have examined the balance sheet of Westbrook Community Housing, Inc. as of June 30, 2004 and December 31, 2003 and the related statements of revenues, expenses and changes in net assets, and cash flows for the six months ended June 30, 2004 and the year ended December 31, 2003. Our examination was made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

The Corporation credits amortization of entry fees directly to the net assets balance and does not depreciate property, plant and equipment. Such treatment does not conform to generally accepted accounting principles.

In our opinion, except for the effects of the matters discussed in the preceding paragraph, the financial statements mentioned above present fairly the financial position of Westbrook Community Housing, Inc. at June 30, 2004 and December 31, 2003 and the results of its operations and the changes in its financial position for the six months ended June 30, 2004 and the year ended December 31, 2003, in conformity with generally accepted accounting principles applied on a basis consistent with the preceding year.

August 30, 2004

In response to a request by some members of the bank’s loan committee, Ms. Sheldon had prepared the following memorandum on the difference between for-profit and nonprofit financial statements.

MEMORANDUM
TO: Loan Committee
FROM: Adrienne Sheldon
SUBJECT: Differences Between For-Profit and Nonprofit Financial Statements
DATE: 5 September 2004

The accounting process for nonprofit organizations is not unlike that for for-profit corporations. There are a few differences, however, that are worth noting in conjunction with the bank’s analysis of Westbrook Community Housing’s financial statements. They are as follows:

Assignment

  1. What is your opinion of the financial statements of Westbrook Community Housing? Please be as specific as you can. What are the significant accounting issues? What are the significant financial management issues?
  2. Have the auditors done a good job? Why or why not?
  3. What should Ms. Sheldon recommend concerning the bank’s mortgage to Westbrook?