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Reading and Understanding Financial Statements (PPT)


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Reading and Understanding Financial Statements (PPT)

  2. 3. 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
  3. 4. Financial Statements (Nonprofit) <ul><li>Statement of Financial Position </li></ul><ul><li>Statement of Activities </li></ul><ul><li>Statement of Cash Flows </li></ul><ul><li>Schedule of Functional Expenses </li></ul><ul><li>Notes to the Financial Statements </li></ul><ul><li>These basic financial statements </li></ul><ul><ul><li>Provide information on the organization as a whole </li></ul></ul><ul><ul><li>Provide comparative figures for analysis </li></ul></ul>
  4. 5. Statement of Financial Position <ul><li>Previously known as the Balance Sheet </li></ul><ul><li>Shows financial position of an organization at a particular point in time </li></ul><ul><li>Presents information about the organization’s resources, debts and net worth </li></ul><ul><li>Assets = Liabilities + Net Assets </li></ul>
  5. 6. Statement of Financial Position <ul><li>Present in order of liquidity or length of time it takes to </li></ul><ul><li>convert them to cash </li></ul><ul><li>Current assets: typical useful life < 1 year </li></ul><ul><li>Fixed Assets: typical useful life > 1 year </li></ul><ul><li>Depreciation: non-cash asset that reflects the decline </li></ul><ul><li>in an asset’s useful life </li></ul>Assets
  6. 7. Statement of Financial Position <ul><li>List in order of nearness to maturity </li></ul><ul><li>Accounts Payable: amount owed to business creditors </li></ul><ul><li>on open accounts (e.g.: utilities, supplies, rent, etc.) </li></ul><ul><li>Notes Payable: more formal, longer term debt owed </li></ul><ul><li>to banks or other lenders </li></ul><ul><li>Accrued Expenses: estimates of liabilities not paid as </li></ul><ul><li>of the statement date </li></ul><ul><li>Deferred Revenues: liabilities that have not been “used” for the purpose intended at that point in time </li></ul>Liabilities
  7. 8. Statement of Financial Position <ul><li>Difference between assets and liabilities equals net assets or net worth of the organization </li></ul><ul><li>Net assets increase or decrease based on the operating results from the fiscal year </li></ul>Net Assets
  8. 9. Sample Statement of Financial Position
  9. 10. Statement of Activities <ul><li>Previously known as the Income statement </li></ul><ul><li>Presents changes in each class of net assets – unrestricted, temporarily restricted, and permanently restricted </li></ul><ul><li>Shows types of support and revenue received by the organization </li></ul><ul><li>Shows amounts incurred for various program activities and supporting services </li></ul>
  10. 11. Statement of Activities <ul><li>States operational activities from beginning to end of the fiscal year </li></ul><ul><li>Provides information about cost of services </li></ul><ul><li>Shows how an organization utilizes its revenues and public support </li></ul><ul><li>Reflects whether an organization is operating within the constraints of its financial resources </li></ul>
  11. 12. Sample Statement of Activities
  12. 13. Statement of Cash Flows <ul><li>Shows funding activities and how cash is spent </li></ul><ul><li>Grants, fees & contributions </li></ul><ul><li>Program expenses, supplies, payroll </li></ul><ul><li>Sale of property, maturity of investments </li></ul><ul><li>Purchase of property </li></ul><ul><li>Short or long term loans </li></ul><ul><li>Payment on debt, mortgage payments </li></ul>Operating Investing Financing
  13. 14. Example Statement of Cash Flows
  14. 15. Schedule of Functional Expenses <ul><li>Expenses are categorized by type (e.g. salaries and employee benefits, rent, supplies, and depreciation) </li></ul><ul><li>Program Services </li></ul><ul><ul><ul><li>Organization’s major programs or activities </li></ul></ul></ul><ul><ul><ul><li>Select functions that are significant to the entire organization </li></ul></ul></ul><ul><li>Supporting Services </li></ul><ul><ul><ul><li>Oversight, finance and business management </li></ul></ul></ul><ul><ul><ul><li>Fundraising </li></ul></ul></ul>
  15. 16. Statement of Functional Expenses
  16. 18. Notes to the Financial Statements Provide information about the nature of an 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
  17. 19. Ratios – What They Indicate <ul><li>Ability to pay current liabilities as they mature (higher number is better) </li></ul><ul><li>Ability to pay current debt with only cash and cash equivalents (higher number is better) </li></ul><ul><li>Indicates the balance between equity and debt </li></ul><ul><li>The greater the number the “more leveraged” is the organization </li></ul>Quick Ratio Current Ratio Debt to Equity Ratio
  18. 20. Ratios – What They Indicate <ul><li>Balance spent on mission in relation to total expenses (higher number is better) </li></ul><ul><li>Relationship between overhead expenses to total expenses (varies depending on activities among similar entities lower is better) </li></ul><ul><li>Ratios less than 1 but closer to 1.0 indicate a fairly healthy financial picture </li></ul>Program Services to Expense G&A to Total Expense Total Expense to Total Revenues & Support
  19. 21. Sample
  20. 22. “ 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