financial reporting 2008 National Leadership Conference
Association Finances <ul><li>Essential Financial Concepts & Terminology </li></ul><ul><li>Association Financial Statements...
Essential Financial Concepts & Terminology <ul><li>What is Finance? </li></ul><ul><ul><li>Finance is the economic activity...
Generally Accepted Accounting Principles <ul><li>Materiality </li></ul><ul><li>Business Entity </li></ul><ul><li>Objectivi...
What Accounting Looks At <ul><li>Assets </li></ul><ul><li>Liabilities </li></ul><ul><li>Equity </li></ul><ul><li>Income </...
Equity <ul><li>Equity = Net worth of an organization. </li></ul><ul><li>Formula </li></ul><ul><ul><li>What you own LESS wh...
Net Asset Categories <ul><li>Unrestricted Net Assets </li></ul><ul><ul><li>Including board designated funds </li></ul></ul...
Accounting Equation <ul><li>Assets – Liabilities = Equity </li></ul><ul><li>Most always shown as: </li></ul><ul><ul><li>As...
Categories <ul><li>Income = Revenue </li></ul><ul><ul><li>Dues income </li></ul></ul><ul><ul><li>Contribution income </li>...
Accounting & Chart of Accounts <ul><li>Each individual item in each category (assets, liabilities, equity, revenue and exp...
System of Accounting <ul><li>Method or system used is generally depends on size and complexity or organization. </li></ul>...
Accrual Method of Accounting <ul><li>Accounts Receivable </li></ul><ul><li>Prepaid Expense </li></ul><ul><li>Accounts Paya...
Grouping of Accounts <ul><li>Current Assets </li></ul><ul><li>Fixed Assets </li></ul><ul><li>Current Liabilities </li></ul...
Association Financial Statements <ul><li>Statement of Financial Position (or Balance Sheet)  </li></ul><ul><li>–  Shows wh...
Association Financial Reports <ul><li>Statement of Activities (Statement of Revenue and Expenses)   </li></ul><ul><li>– Sh...
Association Financial Reports <ul><li>Statement of Cash Flows   </li></ul><ul><ul><li>–  Tells where the organization got ...
How to Read a Statement <ul><li>Always check the heading first.  They will tell you. </li></ul><ul><ul><li>What unit, orga...
How to Read a Statement <ul><li>d. What comparable information  is being provided: </li></ul><ul><ul><li>For a Statement o...
How to Read a Statement <ul><li>2. Scan the page as a whole – most statements are shown complete on one page.  Once you un...
Statement of Financial Position <ul><li>Almost always broken into two major categories – assets on top and liabilities and...
Statement of Financial Position <ul><li>What kinds of things to look for: </li></ul><ul><ul><li>Have the current assets in...
Statement of Activities <ul><li>Almost always broken into two major categories – income (on top) and expenses underneath. ...
Statement of Activities <ul><li>What kinds of things to look for: </li></ul><ul><ul><li>Has the gross income gone up or do...
Statement of Cash Flows <ul><li>Divided into Three Parts: </li></ul><ul><ul><li>Cash Flows from Operating Activities </li>...
Notes to Financial Statements <ul><li>Notes are important in helping a reader understand an organization’s financial situa...
Financial Analysis & Benchmarking <ul><li>Financial Analysis </li></ul><ul><ul><li>What is state of org’s key indicators? ...
Financial Analysis <ul><li>Comparative Analysis </li></ul><ul><ul><li>Figures be provided for two different time periods f...
Internal Controls <ul><li>Help safeguard assets from fraud, misuse and waste. </li></ul><ul><li>Promote operational effici...
Important Things Nonprofits Should Consider in Era of SOX <ul><li>Org must have and enforce both whistle-blower and docume...
Important Things Nonprofits Should Consider in Era of SOX <ul><li>Prohibit loans to officers, employees and trustees if no...
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  1. 1. financial reporting 2008 National Leadership Conference
  2. 2. Association Finances <ul><li>Essential Financial Concepts & Terminology </li></ul><ul><li>Association Financial Statements </li></ul><ul><li>Financial Analysis & Benchmarking </li></ul><ul><li>The Importance of Internal Controls </li></ul><ul><li>Operating Policies in Sarbox World </li></ul>
  3. 3. Essential Financial Concepts & Terminology <ul><li>What is Finance? </li></ul><ul><ul><li>Finance is the economic activity of an organization. </li></ul></ul><ul><li>What is Accounting? </li></ul><ul><ul><li>Recording of financial activity </li></ul></ul><ul><ul><li>Classifying the financial activity </li></ul></ul><ul><ul><li>Reporting upon the financial activity </li></ul></ul>
  4. 4. Generally Accepted Accounting Principles <ul><li>Materiality </li></ul><ul><li>Business Entity </li></ul><ul><li>Objectivity </li></ul><ul><li>Money Management </li></ul><ul><li>Cost principle </li></ul><ul><li>Consistency </li></ul><ul><li>Going concern </li></ul><ul><li>Conservatism </li></ul><ul><li>Full disclosure </li></ul><ul><li>Matching principle </li></ul>
  5. 5. What Accounting Looks At <ul><li>Assets </li></ul><ul><li>Liabilities </li></ul><ul><li>Equity </li></ul><ul><li>Income </li></ul><ul><li>Expense </li></ul>
  6. 6. Equity <ul><li>Equity = Net worth of an organization. </li></ul><ul><li>Formula </li></ul><ul><ul><li>What you own LESS what you owe = what you’re worth </li></ul></ul><ul><li>What is the net asset figure? </li></ul><ul><ul><li>Total Assets $1,000,000 </li></ul></ul><ul><ul><li>Total, Liabilities 970,000 </li></ul></ul><ul><ul><li>Net Assets $ </li></ul></ul>
  7. 7. Net Asset Categories <ul><li>Unrestricted Net Assets </li></ul><ul><ul><li>Including board designated funds </li></ul></ul><ul><ul><li>Money can be used for any legal purpose </li></ul></ul><ul><li>Temporarily Restricted Net Assets </li></ul><ul><ul><li>Money whose use is limited by time or purpose </li></ul></ul><ul><li>Permanently Restricted Net Assets. </li></ul><ul><ul><li>Including endowment funds </li></ul></ul><ul><ul><li>The principal can never be spent </li></ul></ul>
  8. 8. Accounting Equation <ul><li>Assets – Liabilities = Equity </li></ul><ul><li>Most always shown as: </li></ul><ul><ul><li>Assets = Liabilities + Equity </li></ul></ul>
  9. 9. Categories <ul><li>Income = Revenue </li></ul><ul><ul><li>Dues income </li></ul></ul><ul><ul><li>Contribution income </li></ul></ul><ul><ul><li>Interest income </li></ul></ul><ul><ul><li>Exhibit income </li></ul></ul><ul><li>Expenses </li></ul><ul><ul><li>Employee salaries & benefits </li></ul></ul><ul><ul><li>Meeting space, meals and AV </li></ul></ul><ul><ul><li>Printing, postage, etc </li></ul></ul><ul><ul><li>Travel </li></ul></ul>
  10. 10. Accounting & Chart of Accounts <ul><li>Each individual item in each category (assets, liabilities, equity, revenue and expenses) is an “account”: </li></ul><ul><ul><li>An account is the smallest subcategory in which financial activity is tracked </li></ul></ul><ul><li>A “Chart of Accounts” is simply a listing of all accounts an organization uses. </li></ul>
  11. 11. System of Accounting <ul><li>Method or system used is generally depends on size and complexity or organization. </li></ul><ul><li>Orgs with budgets less than $1M can often create acceptable and accurate financial statements using simple system called “cash basis” accounting. </li></ul><ul><ul><li>Transactions only recorded when cash moves. Income is treated as earned when money received; expenses counted when money is spent. </li></ul></ul><ul><li>Larger, more complex organizations use the “accrual basis” to make sure that financial reports correctly reflect financial activity and position. </li></ul><ul><ul><li>System that tracks when income is earned and when expenses are incurred. </li></ul></ul>
  12. 12. Accrual Method of Accounting <ul><li>Accounts Receivable </li></ul><ul><li>Prepaid Expense </li></ul><ul><li>Accounts Payable </li></ul><ul><li>Unearned Revenue </li></ul><ul><li>Depreciation </li></ul><ul><li>Amortization </li></ul><ul><li>Accumulated Depreciation </li></ul>
  13. 13. Grouping of Accounts <ul><li>Current Assets </li></ul><ul><li>Fixed Assets </li></ul><ul><li>Current Liabilities </li></ul><ul><li>Long Term Liabilities </li></ul>
  14. 14. Association Financial Statements <ul><li>Statement of Financial Position (or Balance Sheet) </li></ul><ul><li>– Shows what the assets, liabilities and net assets of association were at a given point in time. </li></ul>
  15. 15. Association Financial Reports <ul><li>Statement of Activities (Statement of Revenue and Expenses) </li></ul><ul><li>– Shows what comprised the income and expenses of the operation for a given period of time, and whether there was a gain or loss in net assets. </li></ul>
  16. 16. Association Financial Reports <ul><li>Statement of Cash Flows </li></ul><ul><ul><li>– Tells where the organization got the funds it used and what it spent them on. Old format had its analysis based on the chapters in assets and liabilities; the new format focuses mainly on where cash came from and how it was used. </li></ul></ul>
  17. 17. How to Read a Statement <ul><li>Always check the heading first. They will tell you. </li></ul><ul><ul><li>What unit, organization or group or organizations is reported on. </li></ul></ul><ul><ul><li>What type of statement is being provided. </li></ul></ul><ul><ul><li>What is the relevant period of time (Statement of Activities, Statement of Cash Flows) or date (Statement of Financial Position). </li></ul></ul>
  18. 18. How to Read a Statement <ul><li>d. What comparable information is being provided: </li></ul><ul><ul><li>For a Statement of Financial Position, usually the org’s position at the same time in the prior year. </li></ul></ul><ul><ul><li>For a Statement of Activities or Cash Flows, usually the same period in the prior years </li></ul></ul><ul><ul><li>Budgeted figures or percentages may be provided on Statements of Activities </li></ul></ul>
  19. 19. How to Read a Statement <ul><li>2. Scan the page as a whole – most statements are shown complete on one page. Once you understand major Divisions of the statement, you can work more confidently on the detail in each section. </li></ul>
  20. 20. Statement of Financial Position <ul><li>Almost always broken into two major categories – assets on top and liabilities and net assets on bottom. </li></ul><ul><ul><li>Assets are broken down into subcategories: </li></ul></ul><ul><ul><ul><li>Current assets </li></ul></ul></ul><ul><ul><ul><li>Fixed assets </li></ul></ul></ul><ul><ul><ul><li>Other assets </li></ul></ul></ul><ul><ul><li>It is called a balance sheet because assets must equal (balance with) liabilities plus net assets. </li></ul></ul>
  21. 21. Statement of Financial Position <ul><li>What kinds of things to look for: </li></ul><ul><ul><li>Have the current assets increased or decreased? </li></ul></ul><ul><ul><li>Any major fixed assets purchased or sold? </li></ul></ul><ul><ul><li>Any new debt taken on or old debt paid off? </li></ul></ul><ul><ul><li>Any new unusual liabilities show up? </li></ul></ul><ul><ul><li>If statement has more than one time period, how has the org changed during that time? </li></ul></ul>
  22. 22. Statement of Activities <ul><li>Almost always broken into two major categories – income (on top) and expenses underneath. </li></ul><ul><ul><li>Income will be shown by type, and then totaled. </li></ul></ul><ul><ul><li>Expenses will be shown by type, and then totaled. </li></ul></ul><ul><ul><li>Sometimes the Change in New Assets will be shown as the “bottom line”. </li></ul></ul>
  23. 23. Statement of Activities <ul><li>What kinds of things to look for: </li></ul><ul><ul><li>Has the gross income gone up or down? </li></ul></ul><ul><ul><li>How have the key sources of income changed? </li></ul></ul><ul><ul><li>Are total expenses up or down? Which individual expenses have changed significantly? </li></ul></ul><ul><ul><li>How does the change in expenses relate to the change in income? </li></ul></ul><ul><ul><li>How does this period’s Change in Net Assets compare to that of prior periods? </li></ul></ul>
  24. 24. Statement of Cash Flows <ul><li>Divided into Three Parts: </li></ul><ul><ul><li>Cash Flows from Operating Activities </li></ul></ul><ul><ul><li>Cash Flows from Investing Activities </li></ul></ul><ul><ul><li>Cash Flows from Financing Activities </li></ul></ul>
  25. 25. Notes to Financial Statements <ul><li>Notes are important in helping a reader understand an organization’s financial situation. </li></ul><ul><li>Notes will highlight significant accounting policies to start with and then go to detailed reports on matters of significance. </li></ul><ul><li>Major acquisitions or changes in operations are highlighted as are pension funding requirements, pending law suits and other significant information. </li></ul>
  26. 26. Financial Analysis & Benchmarking <ul><li>Financial Analysis </li></ul><ul><ul><li>What is state of org’s key indicators? (critical revenue streams, number of members, registrants for key meetings, etc.) </li></ul></ul><ul><ul><li>What are the most important financial changes you should be made aware of? Which are positive and which negative? </li></ul></ul><ul><ul><li>Are there related items whose trends should be considered? </li></ul></ul>
  27. 27. Financial Analysis <ul><li>Comparative Analysis </li></ul><ul><ul><li>Figures be provided for two different time periods for the same financial statements </li></ul></ul><ul><ul><li>All line items be calculated exactly the same. </li></ul></ul><ul><ul><li>Best offered for similar time periods – This month this year to this month last year. </li></ul></ul><ul><li>Common Size Statements </li></ul><ul><ul><li>Figures presented are calculated as a percentage of some common figure. </li></ul></ul><ul><ul><li>Presented in combination with regular financial statements. </li></ul></ul><ul><ul><li>Using this information, it is easy to identify trends. </li></ul></ul>
  28. 28. Internal Controls <ul><li>Help safeguard assets from fraud, misuse and waste. </li></ul><ul><li>Promote operational efficiency and effective implementation of management’s intentions. </li></ul><ul><li>Identify and correct errors or irregularities on a timely basis, as a part of normal operations. </li></ul>
  29. 29. Important Things Nonprofits Should Consider in Era of SOX <ul><li>Org must have and enforce both whistle-blower and document retention policies. </li></ul><ul><li>Create an audit committee. </li></ul><ul><li>Have CEO or CFO publicly attest to accuracy, completeness and fairness of financial statements. </li></ul><ul><li>Publicly disclose you have adopted and follow a code of ethics for Board. </li></ul><ul><li>Consider very carefully all transactions between org and any “insider”. </li></ul>
  30. 30. Important Things Nonprofits Should Consider in Era of SOX <ul><li>Prohibit loans to officers, employees and trustees if not already in Bylaws. </li></ul><ul><li>Instruct attorney to report all wrongdoing anywhere in the org to senior management of Board. </li></ul><ul><li>Have auditor issue report on your internal controls and make public. </li></ul><ul><li>Inquire of your outside auditor whether they have adopted the requirements of SOX. </li></ul>
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