Financial Statements Demystified. September 9, 2012

Transcription

1 Financial Statements Demystified September 9, 2012

2 Overview of Session Review the types of basic financial statements Review terminology, ratios and indicators of financial well-being Look at what those statements tell us about an NPO Understand role of accountants and auditors

3 Typical NPO accounting includes: Bookkeeping Non Profit Accounting - Managing the Money! Generating financial statements Analyzing information from the statements What do you need to share with stakeholders

4 Financial Statements The Tools for Managing the Money Financial statements report either on an organization s financial position at a point in time or its operations over a period of time Four basic financial statements are: Balance Sheet (Statement of Financial Position) Income Statement (Statement of Activities) Statement of Cash Flows Statement of Functional Expense Pro forma financial statements (projections) are used to estimate the financial activity of the organization over a future period

5 Non Profit Accounting - Cash vs. Accrual (or cruel!) Small NPOs frequently operate on the cash-basis rather than accrual-basis Cash-basis means to post entries when the cash is received or disbursed Accrual-basis requires posting entries when the NPO earns revenue and when the NPO incurs an expense The difference between cash and accrual is primarily one of timing.

6 Balance Sheet (Statement of Financial Position) A balance sheet is a snapshot of a company s financial position at a given point in time Most NPOs only review balance sheets annually as part of a financial statement compilation or audit process The balance sheet is a valuable management and governance tool for NPOs on the accrual basis of accounting that reconcile their balance sheet routinely during fiscal year

7 Balance Sheet Statement of Financial Position The balance sheet consists of 2 parts which must balance to each other Assets: cash, cash equivalents, short term investments, accounts receivables, inventory, property and equipment (further grouped into short and long-term assets) Liabilities and Equity (net assets): Liabilities: accounts payable, notes payable, accrued wages and payroll taxes, other accrued liabilities (further grouped into short and long-term liabilities) Equity : Variance between Assets and Liabilities

8 Balance Sheet Assets What a company owns Current Assets nearest to Cash. Operating Uses current < 12 months Long Term Assets Furthest From Cash. Non-operating Uses; > 12 month

9 Sample Balance Sheet - Assets

10 Current Assets CASH what is the trend ACCOUNTS RECEIVABLE Use of cash, revenue is not cash, AR is not cash NOTES RECEIVABLE Loans to related entities or other parties, reasonableness of repayment, Company acting like a bank? INVENTORY Goods or products sold, CDCs carry housing inventory (not current if unable to convert to cash within 12 months) PREPAID EXPENSES Utility deposits, Lease deposits, typically small amounts OTHER ASSETS Catch-all; Interest income due to company, rents due to company

11 Sample Balance Sheet Liabilities and Equity

12 Liabilities and Equity (Net Assets) Current Liabilities - Accounts payable, Notes Payable bank loans or lines of credit to purchase short term assets, Accruals - wages, salaries, Taxes Payable, Current Portion of Long Term Debt amount of principal due within 12 months Long Term Liabilities primarily loans Equity or Net Assets - What is left over after subtracting liabilities from assets

13 Equity (Net Assets) Equity Unrestricted Temporarily Restricted Permanently Restricted

14 Top Three Balance Sheet Ratios WORKING CAPITAL - Current assets minus current liabilities. measures how much in liquid assets a business has available to build and fund their current business. CURRENT RATIO - Current assets/current liabilities LEVERAGE Debt to Equity

15 Income Statement (Statement of Activities) An income statement shows the financial performance over a period of time (typically monthly, quarterly, or annually) The income statement is also known as a Profit and Loss Statement (P&L) Revenues Expenses = Change in Net Assets (surplus or deficit). The income statement for a period of time is what connects the balance sheet at the start of the period to the one at the end of the period

16 SAMPLE INCOME STATEMENT

17 Income Statement vs. Cash Flow Revenue IS NOT Cash In Expense IS NOT Cash Out Using the accrual method of accounting is what distinguishes an Income Statement from a cash report.

18 Financial Statements: Statement of Cash Flows The Really Challenging One to Understand! Even if an organization reports an increase in net assets on the income statement (revenue > expenses), the amount of cash on the balance sheet may be lower than its beginning cash This is because net income is not just kept in the bank, it is used for various reasons such as: financing accounts receivable (payments due from funders), investing in fixed assets (i.e. purchase a new building for homeless housing), decreasing accounts payable aging (pay vendors more timely) The Statement of Cash Flows summarizes the changes in a company s cash position and what caused those changes

19 SAMPLE STATEMENT OF CASH FLOWS

20 Financial Statements: Statement of Functional Expenses The Statement of Functional Expenses provides important detailed information regarding an NPO s operations The Statement of Functional Expenses divides NPO expenses into three general categories and then further into line item detail: Program Expenses: costs of goods and services directly related to each major program Administrative Expenses: costs of overall management and administrative activities, record keeping, budgeting, and finance Fundraising expenses: costs of fundraising campaigns and events Ratios of these three expense categories are used to measure efficiency: Example: 85% program expenses, 8% administrative expense and 7% fundraising expense

21 Interim Financial Statements Monthly, Quarterly, Semi-Annually, Year-To-Date Continuity with last annual statement Seasonality One-time events Comparison to Previous interim periods

22 Notes to Financial Statements Notes to the Financial Statements are additional notes and information added to the end of the financial statements Purpose is to supplement the reader with more information Help explain the computation of specific items in the financial statements Disclose pertinent information such as: concentration risks, inter-company transactions, credit risks, lines of credit, lease obligations, pension plan obligations Provide a context to the financial statements which should not be overlooked

23 A Few Words about Pro Formas, Budgets and Variance Analysis Pro Formas For an organization or a project. Guessing about the future Budgets What is the financial impact of the organizations activities over the period Variance Analysis - What went as expected and what did not.

24 Financial Statement Compilation A financial statement compilation represents the most basic level of service CPAs provide with respect to financial statements The CPA must comply with certain basic requirements of professional standards, including: having a knowledge of the industry and applicable accounting principles, having a clear understanding with the NPO as to the services to be provided reading the financial statements to determine whether there are any obvious departures from GAAP Before financial statements can be compiled, some NPOs may find it necessary for the CPA to perform additional accounting services such as: creating the general ledger (if only a check writing system is used) assisting the NPO with adjusting entries

25 Financial Statement Compilation A report on the financial statements is issued that states a compilation was performed in accordance with AICPA (American Institute of Certified Public Accountants) professional standards, but no assurance is expressed that the statements are in conformity with generally accepted accounting principles This is known as the expression of "no assurance Excerpt: A compilation is limited to presenting in the form of financial statements information that is the representation of owners. We have not audited or reviewed the accompanying financial statements, and accordingly, do not express an opinion or any other form of assurance on them. Do not mistake a compilation for an audit

26 Financial and Compliance Audit Generally an audit is series of tests on the various transactions that occurred during a company s fiscal year Test procedures in conjunction with questions and inquiries made by the auditor (CPA) lead to an opinion about the appropriateness of the financial statements

27 Financial and Compliance Audit Why have an audit? To obtain independent assurance that all financial statements fairly represent the financial condition of the NPO; To ensure that the fiscal year s financial activity has been properly recorded in accordance with GAAP; To ensure compliance with contractual mandates included in funding agreements with third parties (i.e. private foundations, government agencies) To ensure the presence of effective internal controls and adherence with policies and procedures established by the NPO; To maintain confidence in the integrity of the NPO s financial system and the management responsible over finances

28 Financial and Compliance Audit The audit is designed to reduce the possibility of a material misstatement A misstatement is defined as false or missing information, whether caused by fraud (including deliberate misstatement) or error The auditor expresses an opinion on the extent to which the financial statements are materially accurate It is an opinion the auditor is providing reasonable assurance, and not complete assurance

29 Financial and Compliance Audit AUDIT OPINIONS An unqualified audit opinion, or a "clean" opinion, is one without any restricting or limiting circumstance A management letter principally consists of an overview of internal control weaknesses and recommendations. When an auditor detects a "serious" internal control weakness, they are required to issue a management letter disclosing this fact to the board Commonly, the auditor requires a written response by management on how it will address the audit points noted in the management letter The Board should review auditor recommendations to assess their quality and interest and follow up with management

30 Financial and Compliance Audit AUDIT OPINIONS If the auditor believes that the financial statements contain a material misstatement, the auditor issues a qualified audit opinion For example: "In our opinion, except for the effects on the financial report of the matters referred to in my report above, the financial statements present fairly the financial position of COMPANY as at June 30, 200X and the results of its operations and its cash flows for the year then ended. A qualified audit opinion can seriously undermine confidence in management

31 SUMMARY The balance sheet reveals the financial status of an organization at a point in time The income statement reveals the activities of an organization over a period of time Understanding how to read financial statements is a basic skill required of a non-profit manager and makes it easier to successfully manage the organization Audits assist managers in presenting the most accurate picture of their financial operations

32 More Questions? FCLF Contact Information Nelson Black Tampa Director of Lending Cindy Ross Tampa Community Development Loan Officer Jim Walker Ft. Lauderdale Community Development Loan Officer Susan Holtrey Orlando Portfolio Administrator MAIN OFFICE: 501 NORTH MAGNOLIA AVENUE, SUITE 100 ORLANDO, FLORIDA PH