Final answer:
Cash designated for future use by a donor to a not-for-profit increases temporarily restricted net assets in the year received, and upon fulfillment of restrictions, it increases unrestricted net assets, reflecting the proper use according to the donor's stipulation.
Step-by-step explanation:
The question pertains to the recognition of donor-restricted funds by a nongovernmental not-for-profit organization and how these are classified in financial statements. According to the donor's stipulation, the cash received in year 1 to cover the operating expenses of the following year should be recognized as an increase in temporarily restricted net assets in year 1. This is because the donor has specified a time-based restriction, that is, the funds are to be used in year 2 for operating expenses and cannot be used in year 1. Then, in year 2, when the restriction is satisfied and the funds are used for the intended purpose, this amount would be recognized as net assets released from restrictions, which reduces the temporarily restricted net assets and increases the unrestricted net assets. The correct option here is Option 4: an increase in temporarily restricted net assets in year 1 and an increase in unrestricted net assets in year 2, as the restricted funds become available for use and the restriction is satisfied.