1. READING & UNDERSTANDING FINANCIAL STATEMENTS

3. 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

4. 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

5. 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 organizations resources, debts and net worth Assets = Liabilities + Net Assets

6. March 2006 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 assets useful life Assets

7. 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

8. 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

9. March 2006 Sample Statement of Financial Position

10. 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

11. 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

12. March 2006 Sample Statement of Activities

13. 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

14. March 2006 Example Statement of Cash Flows

15. March 2006 Schedule of Functional Expenses Expenses are categorized by type (e.g. salaries and employee benefits, rent, supplies, and depreciation) Program Services –Organizations major programs or activities –Select functions that are significant to the entire organization Supporting Services –Oversight, finance and business management –Fundraising

16. March 2006 Statement of Functional Expenses

17. March 2006

18. Notes to the Financial Statements Provide information about the nature of an organizations 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

19. 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 to Equity Ratio

20. 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 Services to Expense G&A to Total Expense Total Expense to Total Revenues & Support

21. March 2006 Sample

22. 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