Financial Statement Basics

Roy Williams – FHA Deputy Chief Underwriter

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HUD Guidance For Financial Statement Analysis

MAP Guide Chapter 8.4 – Firm Commitment Processing Financial Statements

MAP Guide Appendix 8C – How To Analyze Financial Statements

HUD Guidance For Financial Statement Analysis

CPA Audited or Reviewed Financial Statements

Internal Unaudited Financial Statements

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Types of Financial Statements

Balance Sheet Also referred to as Statement of Financial Position

Provides financial balances as of a specific date – “snapshot in time”

Account balances generally in order of liquidity Operating Statement

Also referred to as Income Statement or Profit and Loss (P&L)

Provides income and expenses during a particular period

Includes both cash and non-cash expenses Personal Financial Statement

Balance Sheet format for an individual

Individual income and expenses can be analyzed on Income Tax Return

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Balance Sheet Basics

Total Assets = Current Assets + Long-Term Assets

Current Assets – Cash and other assets convertible into cash during the normal operating cycle of business operations or 1 year, whichever is less (MAP Appendix 8C.A)

Long-Term Assets – Assets that are not easily converted into cash.

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Balance Sheet Basics

Total Liabilities = Current Liabilities + Long-Term Liabilities

Current Liabilities – Payables due during the normal operating period or 1 year, whichever is less (MAP Appendix 8C.B)

Long-Term Liabilities – Liabilities with a future benefit exceeding one year

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Current Assets

Cash and Cash Equivalents Cash In Bank – Operating and Savings Accounts

Money Market Holdings

Treasury Bills

Short-Term Bonds Near Maturity

Escrow Deposits – Taxes, Insurance, Reserve for Replacement

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Current Assets – Cont.

Marketable Securities Equity Securities – Common Stocks

Debt Securities - Bonds

Derivative Contracts – Forwards, Options, Futures and Swaps

Are these securities publically traded or privately held?

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Current Assets – Cont.

Accounts Receivable

Amounts owed to a business by its clients (customers or debtors) for goods or services purchased on credit

Detail support for account balance is listing of clients to whom credit has been extended and passage of time from the date credit was extended (A/R Aging Schedule)

Credit can be extended to officers, employees or related entities

Balance often shown net of Allowance for Bad Debts

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Current Assets – Cont.

Notes Receivable

Amounts owed to a business with a principal amount secured by a promissory note

Terms of note may stipulate that a portion of the principal is not due within one year of the balance sheet date

As with Accounts Receivable, notes can be entered into with officers, employees or related entities

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Current Assets – Cont.

Inventory

In process or finished goods held for sale

Not typically found on the financial statement of a real estate related entity

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Current Assets – Cont.

Work In Process – General Contractors Only

Costs in Excess of Billings – job costs for work that has been completed but has not been billed

Also referred to as under-billings

Billings in Excess of Costs – work has been billed but has not been completed

Also referred to as over-billings

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Current Assets – Cont.

Prepaid Expenses

An asset that arises on a balance sheet as a result of payments for goods or services for which the benefit will be received in the future

Insurance is the most common form of prepaid expense

The benefit of the good or service is re-classified to the Income Statement over time as the benefit is realized

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Non-Current Assets

Fixed Assets

Long-term property that is not easily converted to cash

Examples: Land, Buildings, Machinery, FF&E

Accounting rules stipulate that these assets are recorded on the balance sheet at cost

The cost is then depreciated over time based on the estimated life of the fixed asset

Land is similarly recorded at cost but is not depreciated

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Intangible Assets

Common examples are goodwill, patents and trademarks

An economic benefit of the intangible is estimated over a period of time

The benefit is then amortized over time based on the estimated life of the intangible

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Current Liabilities

Accounts Payable

Amounts owed by a business to its suppliers

Similar to receivables, detail support for account balance is listing of suppliers to whom monies are owed and passage of time from the date goods or services were purchased (A/P Aging Schedule)

Monies can be payable to officers, employees or related entities

Detail is a valuable indicator of an entity’s ability to meet its ongoing obligations

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Current Liabilities – Cont.

Accrued Expenses

Expenses which are anticipated thus are recognized on the balance sheet before they are actually paid for

Accrued expenses are typically paid for within 1 year

Common accrued expenses are bonuses, interest and taxes

An accrual should be made for any expense that is reasonably probable and that can be reasonably estimated

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Non-Current Liabilities

Long-Term Debt

Loans that have maturities more than one fiscal year into the future

Scheduled principal payments to be made during the current fiscal year are classified as current liabilities

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Non-Current Liabilities

Other Examples

Leases – Certain long-term leases are accounted for similarly to loans. These leases have a current and long-term portion depending on the schedule of lease payments to be made.

Employee Benefits – Companies may offer long-term benefit plans to employees which are not payable to the beneficiary until retirement

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Operating Statement Basics

Net Income = Revenue Less Expenses

Total revenue includes both operating revenue and financial revenue

Expenses include operating expenses, financial expenses and non-cash expenses

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Revenue

Operating Revenue

Rents

Miscellaneous Income Items – Application Fees, NSF Charges, Pet Fees, Laundry & Vending Income

Financial Revenue

Interest Income

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Expenses

Operating Expenses

Administrative – Advertising, Management Fees, Other

Operating – Utilities, Payroll, Other

Maintenance – Repairs, Exterminating, Insurance, Grounds

Replacement Reserve Deposits

Real Estate Taxes

Other Taxes – Payroll, Personal Property

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Expenses – Cont.

Financial Expenses

Interest

Mortgage Insurance Premiums

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Expenses – Cont.

Non-Cash Expenses

Depreciation

Amortization

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Financial Statement Ratios

Balance Sheet

Working Capital = Current Assets less Current Liabilities

Equity or Net Worth = Total Assets less Total Liabilities

Income Statement

Operating Expense Ratio = Operating Expenses divided by Operating Revenue

Personal Financial Statements

Follow format outlined on HUD Form 92417

Personal Financial Statements are typically not audited but are compiled by a CPA based on information provided

In the absence of a current statement an individual can sign a certification of no significant change

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