reading & understanding financial statements. march 2006 session objectives learn techniques to...
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READING & UNDERSTANDING
FINANCIAL STATEMENTS
March 2006
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
March 2006
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
March 2006
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 organization’s 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 < 1 year
Fixed Assets: typical useful life > 1 year
Depreciation: non-cash asset that reflects the decline in an asset’s useful life
Assets
March 2006
Statement of Financial Position
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
Liabilities
March 2006
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
March 2006
Sample Statement of Financial Position
March 2006
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
March 2006
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
March 2006
Sample Statement of Activities
March 2006
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
March 2006
Example Statement of Cash Flows
March 2006
Schedule of Functional Expenses
• Expenses are categorized by type (e.g. salaries and employee benefits, rent, supplies, and depreciation)
• Program Services– Organization’s 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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March 2006
Notes to the Financial Statements
Provide information about the nature ofan organization’s 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
March 2006
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
Quick Ratio
Current Ratio
Debt toEquity Ratio
March 2006
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 Servicesto Expense
G&A to Total Expense
Total Expense to TotalRevenues & Support
March 2006
FORMULA RATIOS: AMERICAN RED CROSS FOR YEAR ENDING 2004
Total Current assets $1,186,209 2.33 Working Capital
Total Current Liabilities $508,443
Cash & Cash Equivalents $354,204 0.70 Quick Ratio (Acid Test)
Total Current Liabilities $508,443
Total Liabilities $1,173,487 0.53 Debt/Equity
Total Net Assets $2,200,981
Program Services $2,914,756 0.91 Program Services/Total Expenses
Total Expenses $3,199,452
General & Administrative $173,518 0.05 General and Admin/Total Expenses
Total Expenses $3,199,452
Total Expenses $3,199,452 1.03 Total Expenses/Total Support & Revenue
Total Support & Revenue $3,091,496
Sample
March 2006
“More people should learn to tell their dollars where to go instead of asking
them where they went.”
- Roger Ward Babson, (1875–1967) American financial statistician