Understanding Financial Statements
OD Network
Business Acumen Program
Tonia Papke
President, MDI Consulting
May 3, 2007
Table of Contents
Introduction / 3Key Accounting Concepts / 4
**The Accounting Equation / 5
**Cash vs. Accrual Accounting / 6
**Depreciation / 7
Basic Financial Statements / 8
**Statement of Financial Position (Balance Sheet) / 9
**Statement of Activity (Income and Expense Report) / 11
**Cash Flow Projections / 14
Financial Analysis / 16
**Trend Analysis / 16
**Ratio Analysis / 17
Glossary of Terms / 18
A. INTRODUCTION
The purpose of this workshop is to help you develop the skills and confidence you need to interpret the financial statements of your business or a nonprofit client.
Specifically, this workshop will—
Introduce key accounting concepts
Introduce the language of financial statements
Teach you to read the balance sheet and income statement of a nonprofit organization, telling a story from the numbers
Teach you simple techniques you can use to evaluate the financial strength of a nonprofit
Introduce cash flow projections report and how that report can help you run your organization
B. KEY CONCEPTS OF NONPROFIT ACCOUNTING
1. The Accounting Equation
2. Cash vs. Accrual Accounting
3. Depreciation
C. THE ACCOUNTING EQUATION
Assets = Liabilities + Net Assets (Equity)
Assets are things we have, such as cash in the bank, buildings, computers, vehicles, stock and bonds, furniture, IOU’s from others. Some assets cannot be measured objectively in monetary terms, such as reputation for good clinical services. Because an accounting system can only include those assets which can be valued objectively, financial statements will only give us part of the information we need to understand an organization’s financial position.
Liabilities are debts, promised that we have made to pay others. Many liabilities come from incurring expenses. For example, we send packages with Fed EX and we receive a bill at the end of the month for all deliveries. Not all expenses are tied to liabilities. For example, depreciation does not result in a debt to anyone. Other liabilities may be in the form of loans from institutions or individuals.
The difference between what we have (assets) and what we owe (liabilities) is what we are worth—our net worth or net assets for nonprofits or equity for businesses. Income of all types increase our net assets which expenses decrease it.
D. CASH VS. ACCRUAL ACCOUNTING
The differences between cash and accrual based accounting are as follows:
Cash Basis Accounting**Income is recorded when cash is received
**An expense is recorded when the bill is paid / Accrual Basis Accounting
**Income is recorded when earned
**An expense is recorded when it is incurred.
Cash basis accounting is easier on a day to day basis and can be used for our businesses. Accrual accounting gives a more complete picture of an organization’s finances. Nonprofit organizations are required to use the accrual method for financial reporting.
Modified Cash and Modified Accrual Accounting are methods that strike a compromise between the ease of cash basis accounting and the accuracy of accrual basis accounting. The elements of a modified system may include:
1. Recording small transactions on a cash basis and larger transactions on an accrual basis.
2. Recording income on a cash basis and expenses on an accrual basis.
3. Keeping the books on a cash basis and preparing reports on an accrual basis.
E. DEPRECIATION
Depreciation is an accounting method for spreading the cost of assets such as buildings, equipment, and vehicles over the useful life of the assets. A portion of the total cost of an asset is recorded as an expense in each year in which the asset is expected to be used. This expense is called depreciation. As asset is said to be fully depreciated once the full cost of the asset has been expensed out over the asset’s useful life.
F. BASIC FINANICAL STATEMENTS
There are three formal financial reports:
1. Statement of Financial Position (Balance Sheet). This report presents the financial position of the organization at a given point in time.
2. Statement of Financial Activity (Income and Expense Statement). This report presents the financial results of operations over a given period of time.
3. Statement of Cash Flows This report reconciles the organization’s beginning cash balance with the end of year cash balance and clearly.
This workshop will discuss the first two; the third is found primarily in annual audit reports. In addition, every business and nonprofit should prepare cash flow projections, which outline the estimate inflows and outflows of cash during the year, broken down by month.
G. BALANCE SHEET
Balance Sheet
June 30, 2006 / June 30, 2005
Assets
Current Assets
Cash & Cash Equivalents
Bank of America Operating Account / 49,374.34 / 78,666.31
Petty Cash / 342.34 / 645.68
Bank of America MMA / 80,636.10 / 14,344.02
Total Cash & Cash Equivalents / 130,352.78 / 93,656.01
Accounts Receivable
Grants Receivable / 165,315.68 / 87,815.32
Other Receivables / 2,074.00 / 2,074.00
Total Accounts Receivable / 167,389.68 / 89,889.32
Other Current Assets
Investments / 305,922.09 / 820,203.23
General Exchange Account / 673.58
Prepaid Insurance / 6,047.85
PrePaid Health Insurance / 4,397.69
Security Deposits / 100.00 / 100.00
Total Other Current Assets / 306,695.67 / 830,748.77
Total Current Assets / 1,014,294.10 / 1,014,294.10
Fixed Assets
Leasehold Improvements / 250,000.00 / 250,000.00
Accumulated Deprecation / (62,500.00) / (50,000.00)
Equipment / 32,500.00 / 32,500.00
Accumulated Deprecation / (16,250.00) / (9,750.00)
Total Fixed Assets / 203,750.00 / 222,750.00
Total Assets / 1,515,786.56 / 1,420,589.43
Liabilities & Fund Balance
Current Liabilities
Accounts Payable / 8,822.63 / 2,350.00
FSA Payable / 530.91
EZ Flex Payable / 2,089.99 / 37.24
Pension Payable / 476.26 / 925.56
Vacation Payable / 4,152.42 / 2,712.92
Accrued Expenses / 24,900.00
Total Current Liabilities / 15,541.30 / 31,456.63
Fund Balance
Unrestricted Net Assets / 1,388,333.95 / 1,096,848.97
Temporarily Restricted Net Assets / 111,911.31 / 292,283.83
Total Fund Balance / 1,500,245.26 / 1,389,132.80
Total Liabilities & Fund Balance / 1,515,786.56 / 1,420,589.43
H. STATEMENT OF ACTIVITIES
Financial Statements
1/1/06-6/30/06
Actuals / Budget to Date / Variance / Yearly Budget / Remaining
01/06 - 06/06 / 01/06 - 06/06 / 01/06 - 06/06 / 01/06 - 12/06 / Budget Amount
Revenue
Grants & Contributions
Released from Restrictions / 465,626.15 / 511,474.46 / (45,848.31) / 511,474.46 / 45,848.31
Corporate Grants / 20,500.00 / 30,925.32 / (10,425.32) / 61,851.00 / 41,351.00
Foundation Grants / 72,907.52 / 79,601.94 / (6,694.42) / 500,000.00 / 86,296.48
Government Grants / 137,083.54 / 218,336.30 / (81,252.76) / 536,764.49 / 399,680.95
Corporate Donations / 1,000.00 / 0.00 / 1,000.00 / 0.00 / (1,000.00)
Board Donations / 719.25 / 742.87 / (23.62) / 2,000.00 / 1,280.75
Other Individual Donations / 4,580.80 / 921.42 / 3,659.38 / 3,440.00 / (1,140.80)
Total Grants & Contributions / 702,417.26 / 842,002.31 / (139,585.05) / 1,615,529.95 / 572,316.69
Other Income
Indirect Income / 11,531.47 / 0.00 / 11,531.47 / 25,000.00 / 13,468.53
Interest / 8,988.90 / 4,295.47 / 4,693.43 / 10,000.00 / 1,011.10
Entrance Fees / 64,667.31 / 32,500.02 / 32,167.29 / 65,000.00 / 332.69
Total Other Income / 73,656.21 / 36,795.49 / 36,860.72 / 75,000.00 / 1,343.79
Total Revenue / 776,073.47 / 878,797.80 / (102,724.33) / 1,690,529.95 / 573,660.48
Expenses
Personnel Expenses
Salaries / 317,888.19 / 323,901.70 / 6,013.51 / 665,743.00 / 347,854.81
Fringe Benefits
Fringe Benefits / 37,399.80 / 80,957.58 / 43,557.78 / 166,400.00 / 129,000.20
FICA Expense / 14,319.44 / 0.00 / (14,319.44) / 0.00 / (14,319.44)
Unemployment Insurance / 5,476.68 / 0.00 / (5,476.68) / 0.00 / (5,476.68)
Disability Insurance / 196.04 / 0.00 / (196.04) / 0.00 / (196.04)
Health & Life Insurance / 23,795.01 / 0.00 / (23,795.01) / 0.00 / (23,795.01)
Workers Comp / 13,510.49 / 0.00 / (13,510.49) / 0.00 / (13,510.49)
Pension / 4,671.28 / 0.00 / (4,671.28) / 0.00 / (4,671.28)
Staff Development / 592.50 / 187.50 / (405.00) / 375.00 / (217.50)
Smartflex Service / 530.00 / 0.00 / (530.00) / 0.00 / (530.00)
Payroll Service Fee / 1,230.17 / 0.00 / (1,230.17) / 0.00 / (1,230.17)
Total Fringe Benefits / 101,721.41 / 81,145.08 / (20,576.33) / 166,775.00 / 65,053.59
Total Personnel Expenses / 419,609.60 / 405,046.78 / (14,562.82) / 832,518.00 / 412,908.40
Program Consultants
Canoe Guide Consultant / 0.00 / 4,999.98 / 4,999.98 / 10,000.00 / 10,000.00
Curriculum Development / 2,750.00 / 3,250.00 / 500.00 / 6,500.00 / 3,750.00
Graphic Design / 5,650.00 / 15,000.00 / 9,350.00 / 30,000.00 / 24,350.00
Engineering Design Consultant / 0.00 / 48,755.53 / 48,755.53 / 103,673.00 / 103,673.00
Other Program Consultants / 60,397.00 / 36,847.03 / (23,549.97) / 62,407.01 / 2,010.01
Total Program Consultants / 68,797.00 / 108,852.54 / 40,055.54 / 212,580.01 / 143,783.01
Administrative Consultants
Fundraising Services / 1,130.00 / 2,250.00 / 1,120.00 / 4,500.00 / 3,370.00
Sustainability Planning / 2,906.25 / 0.00 / (2,906.25) / 0.00 / (2,906.25)
Audit / 9,635.35 / 10,000.00 / 364.65 / 10,000.00 / 364.65
Accounting Services / 8,880.00 / 4,999.98 / (3,880.02) / 10,000.00 / 1,120.00
Other Admin. Consultants / 562.50 / 1,750.00 / 1,187.50 / 3,500.00 / 2,937.50
Total Administrative Consultants / 23,114.10 / 18,999.98 / (4,114.12) / 28,000.00 / 4,885.90
Occupancy
Rent / 13,250.40 / 13,250.00 / (0.40) / 26,500.00 / 13,249.60
Utilities / 5,500.00 / 6,000.00 / 500.00 / 12,000.00 / 6,500.00
Depreciation / 9,500.00 / 9,500.00 / 0.00 / 19,000.00 / 9,500.00
Telephone / 265.00 / 1,200.00 / 935.00 / 2,400.00 / 2,135.00
Total Occupancy / 28,515.40 / 29,950.00 / 1,434.60 / 59,900.00 / 31,384.60
Travel and Per Diem
Local Travel / 1,347.55 / 466.50 / (881.05) / 933.00 / (414.55)
Meeting Costs / 60.76 / 0.00 / (60.76) / 0.00 / (60.76)
Other Training / 690.00 / 0.00 / (690.00) / 0.00 / (690.00)
Automobile Expense / 10,000.32 / 9,999.96 / (0.36) / 20,000.00 / 9,999.68
Total Travel and Per Diem / 12,098.63 / 10,466.46 / (1,632.17) / 20,933.00 / 8,834.37
Equipment and Supplies
Field Supplies / 19,883.17 / 28,624.70 / 8,741.53 / 34,776.00 / 14,892.83
Plant Supplies / 34,195.65 / 36,633.90 / 2,438.25 / 38,200.00 / 4,004.35
Science & Research Supplies / 956.97 / 1,644.48 / 687.51 / 3,289.00 / 2,332.03
Meeting Supplies / 1,337.97 / 251.65 / (1,086.32) / 1,000.00 / (337.97)
Event Supplies / 3,296.35 / 5,165.00 / 1,868.65 / 10,330.00 / 7,033.65
Computer Supplies / 106.99 / 0.00 / (106.99) / 0.00 / (106.99)
Expendable Office Supplies / 9,090.37 / 10,099.98 / 1,009.61 / 20,200.00 / 11,109.63
Equipment Rental / 546.91 / 0.00 / (546.91) / 0.00 / (546.91)
Field Equipment / 1,067.74 / 5,023.00 / 3,955.26 / 6,523.00 / 5,455.26
Total Equipment and Supplies / 70,482.12 / 87,442.71 / 16,960.59 / 114,318.00 / 43,835.88
Administrative Costs
Postage / 3,506.96 / 1,921.76 / (1,585.20) / 4,800.00 / 1,293.04
Printing & Copying / 8,111.59 / 12,258.65 / 4,147.06 / 25,075.00 / 16,963.41
Membership Dues / 995.00 / 0.00 / (995.00) / 0.00 / (995.00)
Bank Charges / 210.47 / 0.00 / (210.47) / 0.00 / (210.47)
Credit Card / 6.32 / 0.00 / (6.32) / 0.00 / (6.32)
Business Insurance / 2,208.80 / 3,375.00 / 1,166.20 / 3,600.00 / 1,391.20
D& O Insurance / 946.00 / 0.00 / (946.00) / 0.00 / (946.00)
Canoe Trip Insurance / 245.00 / 3,300.00 / 3,055.00 / 6,600.00 / 6,355.00
Other Administrative Expenses / 44.01 / 0.00 / (44.01) / 0.00 / (44.01)
Total Administrative Costs / 16,274.15 / 20,855.41 / 4,581.26 / 40,075.00 / 23,800.85
Total Expenses / 638,891.00 / 681,613.88 / 42,722.88 / 1,308,324.01 / 669,433.01
Excess or (Deficiency) of Revenue over Expenditures / 137,182.47 / 197,183.92 / (145,447.21) / 382,205.94 / (95,772.53)
I. CASH FLOW PROJECTIONS
Cash Flow Projections
Actual / Projected
Jan / Feb / Mar / Apr / May / June / July / Aug / Sep / Oct / Nov / Dec / Total
Opening Cash Balance / 216,599 / 266,573 / 228,152 / 164,440 / 43,349 / 24,233 / 130,294 / 154,159 / 97,862 / 69,212 / 190,459 / 319,404
Inflows
Corporate Grants / 36,500 / - / 1,000 / 500 / - / 2,500 / - / 9,900 / 1,350 / 1,350 / 4,051 / 4,700 / 61,851
Foundation Grants / - / 14,000 / 40,000 / - / 45,974 / 25,589 / 65,536 / - / - / 125,000 / 43,593 / 43,593 / 403,284
Government Grants / - / - / - / - / - / 4,167 / - / - / - / 192,962 / 833 / 197,962
Board Donations / 324 / 145 / - / 300 / (50) / - / - / - / 335 / 450 / - / 496 / 2,000
Other Individual Donations / 1,710 / 275 / 17 / 50 / 1,475 / 1,154 / 1,609 / 2,705 / 6,819 / 2,464 / - / - / 18,278
Earned Income / - / - / - / - / - / - / 1,480 / - / 7,438 / - / - / - / 8,918
Interest / 3,119 / 1,457 / 1,011 / 910 / 1,429 / 1,063 / 1,543 / 1,629 / 494 / 400 / 400 / 300 / 13,755
Other Income / 64,667 / - / - / - / - / - / - / - / - / - / 333 / - / 65,000
Other Inflows / 10 / 1,997 / 29,090 / 31,097
Total Inflows / 106,331 / 15,877 / 42,028 / 1,760 / 48,828 / 32,303 / 74,335 / 14,234 / 45,527 / 129,664 / 241,339 / 49,922 / 802,146