Mary Joyce, CPA Shareholder The Myers Associates, P.C. February 10, 2011

Historical cost Revenue recognition Matching principles Conservatism Materiality Accrual accounting FASB (GAAP) and AICPA (professional standards)

Budgets Financial projections Internal (unaudited) financials – for management and board use only External (unaudited) financials – typically for fund development use only Audited financials IRS Form 990

Management and Board: Use budgets and financial projections Internal (unaudited) financial statements are usually formatted differently than external financial statements Internal formats usually include comparisons of budgeted figures against actual results, changes relative to a prior period and notes about variances.

Donors/Funders: Use external unaudited and audited financials and IRS Form 990 to evaluate whether or not the organization will wisely use resources provided Generally look for indicators of general financial health of the organization.

Lenders/Bankers: Use budgets, financial projections, external unaudited financials and audited financial statements Generally compare performance against projections to form an expectation about how reliable future projections will be They tend to focus on cash flows, liquidity and the ratio of current assets to current liabilities.

Independent Auditors: Perform tests to determine whether the financials prepared by management are fairly presented in all material respects The audit process also includes assessing the potential risk of material error, understanding internal controls, and conducting tests designed to respond to identified risks

IRS and other Governmental Agencies: Rely on IRS Form 990, and sometimes audited financials and other tax-related filings Look for evidence of compliance with tax-exempt status and other laws.

Shows the assets and liabilities of an organization at a point in time Total Assets = Total Liabilities + Total Net Assets Net assets appear where the equity section would be on a for-profit statement of financial position Net assets section identifies use or spending restrictions on resources

Three classes of net assets, based on donor restrictions: Unrestricted – may include board- designated reserves Temporarily Restricted – time or purpose restrictions Permanently Restricted – corpus maintained in perpetuity

Debt - understand the organization’s debt structure and access to credit to know whether financial demands from an economic downturn or other financial crisis will be manageable Unrestricted Net Assets - a prolonged deficiency in unrestricted net assets is not sustainable

Comparative Trends – current to prior Is the current ratio decreasing? Is rapid growth in debt foretelling an impending financial crisis? Are restricted net assets increasing significantly, which may affect the operating budget?.56

Shows the result of financial operations for a period of time Two key sources of income: Revenue = reciprocal (exchange) transactions (ticket sales, fees for services, investment return) Support = nonreciprocal (gift) transactions (contributions, grants, in-kind goods and services)

Columnar or layered? Change in Total Net Assets = difference between revenue, including support, and expenses Change in Total Net Assets must be reported by Class The size of the two restricted classes relative to the unrestricted class provides a measure of how much choice the organization has in the use of its resources to accomplish its mission

Expenses are reported as decreases in unrestricted net assets Expenses by function: Program Administration Fundraising Releases of restrictions simultaneously increase unrestricted net assets and decrease restricted net assets

Actual versus Plan: Are there significant unplanned variances? Is the cause and effect identifiable? Understand actions needed to address the effect of the unplanned variances Revenue & Support: Are there concentrations - heavy reliance on a single source?

Comparative Trends: Expenses that are rising more rapidly than the corresponding revenue or support Change in Total Net Assets (the Bottom Line): Did the net total change meet expectations, both overall and across classes?

Does fundraising expense seem reasonable compared to total support recognized? Does the organization have a strong program percent? 82% CY; 84% PY

The most valuable of all the basic financial statements, particularly for smaller entities Converts accrual-based activity into a cash-basis format Shows the actual flow of cash into and out of the organization

Three categories, each of which shows its own inflows (sources) and outflows (uses): Operating - day-to-day activities Investing - capital asset activities; portfolio activities Financing - long-term funding activities The three net cash flow amounts, when totaled, equal the difference between the beginning and ending cash balances found on the statement of financial position.

Even when the Statements of Activities and Financial Position look strong, an organization can go out of business because of weak cash flow An increase in total cash may or may not be a positive indicator

Do operating activities generate enough cash to cover the net cash used by investing and financing activities? If yes, the organization is not relying on debt or investments to fund its day-to-day activities How does the overall cash activity compare to the prior year?

Required if organization has significant fundraising activities

Classifies all expenses both by nature (payroll, rent, supplies) and function (program, administration, fundraising)

Allocation to functions can be based upon a variety of metrics

What types of expenses are the primary costs of accomplishing the mission (personnel, occupancy, security, records management)

Four possible opinions: Unqualified The auditors believe the financial statements are fairly presented Qualified The auditors disagree with the accounting treatment of a specific transaction or are unable to determine what the outcome might be of a material uncertainty A “going concern opinion” is a qualified opinion Disclaimer The auditors cannot give an opinion due to the inability to gather certain relevant facts Adverse The auditors do not believe the financial statements are fairly presented

Look for information that might change your perception of the organization’s financial health (Example: multi-year gift instruments)

Look for information of interest to a banker’s perspective Example: 5-year debt maturities

Look for items that might make donors have second thoughts

Explains any significant deficiencies or material weaknesses in internal control

Speed Reading Checklist (continued)

Are there large variances between budget and actual? Are there concentrations in funding sources? Is revenue increasing at least as fast as expenses? Does the bottom line meet expectations? Are the expenses totaled by function reasonable as a percent of total expenses? Speed Reading Checklist (continued)

Is cash flow from operating activities positive? Does cash generated exceed cash used? How does the overall cash activity compare to the prior year? Is there at least 60 days of operating cash on hand? Speed Reading Checklist (continued)

Is the auditor’s opinion unqualified? Do any of the footnotes cause concern or change perception? Is the organization in compliance with loan covenants? What impression would a donor or lender have after reading the statements? Speed Reading Checklist (continued)