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financial reportingfinancial reporting

2008 National Leadership Conference

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Association FinancesAssociation Finances

• Essential Financial Concepts & Terminology

• Association Financial Statements• Financial Analysis &

Benchmarking• The Importance of Internal

Controls• Operating Policies in Sarbox

World

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Essential Financial Concepts & TerminologyEssential Financial Concepts & Terminology

• What is Finance? Finance is the economic activity of an

organization.

• What is Accounting? Recording of financial activity Classifying the financial activity Reporting upon the financial activity

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Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles

• Materiality• Business Entity• Objectivity• Money Management• Cost principle• Consistency• Going concern• Conservatism• Full disclosure• Matching principle

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What Accounting Looks AtWhat Accounting Looks At

• Assets• Liabilities• Equity• Income• Expense

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EquityEquity

• Equity = Net worth of an organization.

• Formula What you own LESS what you owe = what

you’re worth

• What is the net asset figure? Total Assets $1,000,000 Total, Liabilities 970,000 Net Assets $

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Net Asset CategoriesNet Asset Categories

• Unrestricted Net Assets Including board designated funds Money can be used for any legal purpose

• Temporarily Restricted Net Assets Money whose use is limited by time or purpose

• Permanently Restricted Net Assets. Including endowment funds The principal can never be spent

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Accounting EquationAccounting Equation

• Assets – Liabilities = Equity• Most always shown as:

Assets = Liabilities + Equity

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CategoriesCategories

• Income = Revenue Dues income Contribution income Interest income Exhibit income

• Expenses Employee salaries & benefits Meeting space, meals and AV Printing, postage, etc Travel

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Accounting & Chart of AccountsAccounting & Chart of Accounts

• Each individual item in each category (assets, liabilities, equity, revenue and expenses) is an “account”: An account is the smallest subcategory in

which financial activity is tracked

• A “Chart of Accounts” is simply a listing of all accounts an organization uses.

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System of AccountingSystem of Accounting

• Method or system used is generally depends on size and complexity or organization.

• Orgs with budgets less than $1M can often create acceptable and accurate financial statements using simple system called “cash basis” accounting. Transactions only recorded when cash moves. Income is treated

as earned when money received; expenses counted when money is spent.

• Larger, more complex organizations use the “accrual basis” to make sure that financial reports correctly reflect financial activity and position. System that tracks when income is earned and when expenses are

incurred.

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Accrual Method of AccountingAccrual Method of Accounting

• Accounts Receivable• Prepaid Expense• Accounts Payable• Unearned Revenue• Depreciation• Amortization• Accumulated Depreciation

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Grouping of AccountsGrouping of Accounts

• Current Assets• Fixed Assets• Current Liabilities• Long Term Liabilities

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Association Financial StatementsAssociation Financial Statements

1. Statement of Financial Position (or Balance Sheet) – Shows what the assets,

liabilities and net assets of association were at a given point in time.

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Association Financial ReportsAssociation Financial Reports

2. Statement of Activities (Statement of Revenue and Expenses) – Shows what comprised the

income and expenses of the operation for a given period of time, and whether there was a gain or loss in net assets.

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Association Financial ReportsAssociation Financial Reports

3. Statement of Cash Flows – Tells where the organization got

the funds it used and what it spent them on. Old format had its analysis based on the chapters in assets and liabilities; the new format focuses mainly on where cash came from and how it was used.

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How to Read a StatementHow to Read a Statement

1. Always check the heading first. They will tell you.

a. What unit, organization or group or organizations is reported on.

b. What type of statement is being provided.c. What is the relevant period of time

(Statement of Activities, Statement of Cash Flows) or date (Statement of Financial Position).

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How to Read a StatementHow to Read a Statement

d. What comparable information is being provided: For a Statement of Financial Position,

usually the org’s position at the same time in the prior year.

For a Statement of Activities or Cash Flows, usually the same period in the prior years

Budgeted figures or percentages may be provided on Statements of Activities

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How to Read a StatementHow to Read a Statement

2. Scan the page as a whole – most statements are shown complete on one page. Once you understand major Divisions of the statement, you can work more confidently on the detail in each section.

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Statement of Financial PositionStatement of Financial Position

1. Almost always broken into two major categories – assets on top and liabilities and net assets on bottom.

a. Assets are broken down into subcategories:i. Current assets

ii. Fixed assets

iii. Other assets

b. It is called a balance sheet because assets must equal (balance with) liabilities plus net assets.

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Statement of Financial PositionStatement of Financial Position

• What kinds of things to look for: Have the current assets increased or

decreased? Any major fixed assets purchased or sold? Any new debt taken on or old debt paid off? Any new unusual liabilities show up? If statement has more than one time period,

how has the org changed during that time?

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Statement of ActivitiesStatement of Activities

1. Almost always broken into two major categories – income (on top) and expenses underneath.

a. Income will be shown by type, and then totaled.

b. Expenses will be shown by type, and then totaled.

c. Sometimes the Change in New Assets will be shown as the “bottom line”.

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Statement of ActivitiesStatement of Activities

• What kinds of things to look for: Has the gross income gone up or down? How have the key sources of income changed? Are total expenses up or down? Which individual

expenses have changed significantly? How does the change in expenses relate to the

change in income? How does this period’s Change in Net Assets

compare to that of prior periods?

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Statement of Cash FlowsStatement of Cash Flows

• Divided into Three Parts: Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities

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Notes to Financial StatementsNotes to Financial Statements

• Notes are important in helping a reader understand an organization’s financial situation.

• Notes will highlight significant accounting policies to start with and then go to detailed reports on matters of significance.

• Major acquisitions or changes in operations are highlighted as are pension funding requirements, pending law suits and other significant information.

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Financial Analysis & BenchmarkingFinancial Analysis & Benchmarking

• Financial Analysis What is state of org’s key indicators?

(critical revenue streams, number of members, registrants for key meetings, etc.)

What are the most important financial changes you should be made aware of? Which are positive and which negative?

Are there related items whose trends should be considered?

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Financial AnalysisFinancial Analysis

• Comparative Analysis Figures be provided for two different time periods for

the same financial statements All line items be calculated exactly the same. Best offered for similar time periods – This month

this year to this month last year.

• Common Size Statements Figures presented are calculated as a percentage of

some common figure. Presented in combination with regular financial

statements. Using this information, it is easy to identify trends.

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Internal ControlsInternal Controls

• Help safeguard assets from fraud, misuse and waste.

• Promote operational efficiency and effective implementation of management’s intentions.

• Identify and correct errors or irregularities on a timely basis, as a part of normal operations.

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Important Things Nonprofits Should Important Things Nonprofits Should Consider in Era of SOXConsider in Era of SOX

1. Org must have and enforce both whistle-blower and document retention policies.

2. Create an audit committee.3. Have CEO or CFO publicly attest to

accuracy, completeness and fairness of financial statements.

4. Publicly disclose you have adopted and follow a code of ethics for Board.

5. Consider very carefully all transactions between org and any “insider”.

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Important Things Nonprofits Should Important Things Nonprofits Should Consider in Era of SOXConsider in Era of SOX

6. Prohibit loans to officers, employees and trustees if not already in Bylaws.

7. Instruct attorney to report all wrongdoing anywhere in the org to senior management of Board.

8. Have auditor issue report on your internal controls and make public.

9. Inquire of your outside auditor whether they have adopted the requirements of SOX.