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Athenaeum School
Author(s):
Young, David W.
Functional Area(s):
   Financial Accounting
Setting(s):
   Nonprofit
Difficulty Level: Intermediate
Pages: 14
Teaching Note: Available. 
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First Page and the Assignment Questions:

In November 1996, Rachel Cognatta, a member of the board of directors of The Athenaeum School was reviewing the organization’s 1996 financial statements and auditors’ report. The next meeting of the board was to be devoted entirely to a discussion of the financial statements. In complying with her fiduciary responsibilities, Ms. Cognatta wished to make sure that everything was in order, and that the organization’s finances were being managed appropriately.

BACKGROUND

The Athenaeum School was located in a former public school building in Waterville, Oregon. It bordered a park with a playground and playing field. The Athenaeum offered educational programs for pre-kindergarten through sixth grade children. Afterschool care was also offered for all children, pre-kindergarten through sixth grade, beginning immediately after each regular school day.

The school’s underlying theme was “respect the environment, respect others, respect yourself.” It strove for cultural diversity among its students. Indeed, diversity was seen as an essential aspect of education, and the school welcomed children of any race, color, national or ethnic origin. Like other schools of its type, The Athenaeum charged tuition according to grade, ranging from $5,500 for kindergarten and pre-kindergarten to $7,025 for grades 4 through 6. Financial aid was awarded on the basis of need. However, unlike its peer schools, The Athenaeum selected qualified applicants for admission through a lottery.

The School offered a full and integrated curriculum that included mathematics, language, arts and music, natural, social and physical sciences, and physical education. In keeping with its philosophy concerning diversity, the school mixed ages in classrooms, small groups, and lunchrooms, and it encouraged team teaching, partnered classes, senior citizen aides, and parental involvement.

RECENT DEVELOPMENTS

When he assumed the directorship of The Athenaeum School in April 1994, Vic Daniels inherited an organization in some considerable financial difficulty. Although he attempted to institute some controls on spending immediately after being hired, there was little he could do about the school’s financial condition for that fiscal year. As a result, the year showed a deficiency of revenue over expenses of some $34,000. He commented on the situation he faced:

The $34,000 is a bit misleading since it included expenses for a paid sabbatical leave for my predecessor, but even without it, we had an operating deficit of some $25,000. Nevertheless, the deficit was the full $34,000, and because of it, our fund balance [net assets] fell from a negative $55,000 at the beginning of 1994 to a negative $89,000 as of the end of the year.

We also had some fairly serious accounting problems. Prior to 1994, we were using a cash accounting system, and each year we depended on tuition payments for the next year to keep the checkbook in a positive state. No one really knew how deeply we had been digging into each year’s surplus to keep . . .

Assignment

  1. Bearing in mind that the terms “fund balance” and “net assets” are synonymous,” explain why the negative $75,856 fund balance on the 1995 balance sheet in the 1995 audit became a positive $143,472 net assets on the 1995 balance sheet in the 1996 audit. Please be specific. Exactly what items changed to account for the difference? Which of the two gives a more accurate portrayal of the school’s financial condition?
  2. What questions should Ms. Cognatta ask the accountants about the school’s financial statements?
  3. What should Ms. Cognatta ask the director about the school’s financial situation?
  4. What is your assessment of the financial condition of The Athenaeum School?