READING

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READING UNDERSTANDINGFINANCIAL STATEMENTS
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Session Objectives
Learn techniques to better understand financial
statements
Understanding the relationship between the basic
financial statements
Analyzing the key ratios used in assessing the
financial health of an organization
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Financial Statements (Nonprofit)

• Statement of Financial Position
• Statement of Activities
• Statement of Cash Flows
• Schedule of Functional Expenses
• Notes to the Financial Statements
• These basic financial statements
• Provide information on the organization as a
  whole
• Provide comparative figures for analysis

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Statement of Financial Position

• Previously known as the Balance Sheet
• Shows financial position of an organization at a
  particular point in time

• Presents information about the organizations
  resources, debts and net worth
• Assets Liabilities Net Assets

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Statement of Financial Position

• Present in order of liquidity or length of time
  it takes to
• convert them to cash
• Current assets typical useful life lt 1 year
• Fixed Assets typical useful life gt 1 year
• Depreciation non-cash asset that reflects the
  decline
• in an assets useful life

Assets
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Statement of Financial Position
Liabilities

• List in order of nearness to maturity
• Accounts Payable amount owed to business
  creditors
• on open accounts (e.g. utilities, supplies,
  rent, etc.)
• Notes Payable more formal, longer term debt
  owed
• to banks or other lenders
• Accrued Expenses estimates of liabilities not
  paid as
• of the statement date
• Deferred Revenues liabilities that have not
  been used for the purpose intended at that
  point in time

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Statement of Financial Position

• Difference between assets and liabilities equals
  net assets or net worth of the organization
• Net assets increase or decrease based on the
  operating results from the fiscal year

Net Assets
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Sample Statement of Financial Position
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Statement of Activities

• Previously known as the Income statement
• Presents changes in each class of net assets
  unrestricted, temporarily restricted, and
  permanently restricted

• Shows types of support and revenue received by
  the organization
• Shows amounts incurred for various program
  activities and supporting services

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Statement of Activities

• States operational activities from beginning to
  end of the fiscal year
• Provides information about cost of services
• Shows how an organization utilizes its revenues
  and public support
• Reflects whether an organization is operating
  within the constraints of its financial
  resources

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Sample Statement of Activities
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Statement of Cash Flows

• Shows funding activities and how cash is spent

• Grants, fees contributions
• Program expenses, supplies, payroll
• Sale of property, maturity of investments
• Purchase of property
• Short or long term loans
• Payment on debt, mortgage payments

Operating
Investing
Financing
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Example Statement of Cash Flows
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Schedule of Functional Expenses

• Expenses are categorized by type (e.g. salaries
  and employee benefits, rent, supplies, and
  depreciation)
• Program Services
• Organizations major programs or activities
• Select functions that are significant to the
  entire organization
• Supporting Services
• Oversight, finance and business management
• Fundraising

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Statement of Functional Expenses
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Notes to the Financial Statements
Provide information about the nature of an
organizations work
Summarize significant accounting policies
Provide explanation of amounts shown on the face
of the financial
Discuss concentrations of risk, commitments and
contingencies, related party transactions, and
other significant items
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Ratios What They Indicate

• Ability to pay current liabilities as they mature
  (higher number is better)
• Ability to pay current debt with only cash and
  cash equivalents (higher number is better)
• Indicates the balance between equity and debt
• The greater the number the more leveraged is
  the organization

Current Ratio
Quick Ratio
Debt to Equity Ratio
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Ratios What They Indicate

• Balance spent on mission in relation to total
  expenses (higher number is better)
• Relationship between overhead expenses to total
  expenses (varies depending on activities among
  similar entities lower is better)
• Ratios less than 1 but closer to 1.0 indicate a
  fairly healthy financial picture

Program Services to Expense
GA to Total Expense
Total Expense to Total Revenues Support
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Sample
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More people should learn to tell their dollars
where to go instead of asking them where they
went. - Roger Ward Babson, (18751967)
American financial statistician