Mary Joyce, CPA
Shareholder
The Myers Associates, P.C.
February 10, 2011
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Historical cost
Revenue recognition
Matching principles
Conservatism
Materiality
Accrual accounting
FASB (GAAP) and AICPA (professional standards)
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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.
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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:
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Unrestricted – may
include boarddesignated reserves
Temporarily
Restricted – time or
purpose restrictions
Permanently
Restricted – corpus
maintained in
perpetuity
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Liquidity - the
availability of cash to
pay immediate and
routine obligations
Current Ratio - a
measure of liquidity
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
(
)
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
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Financial Reserve
Targets - establish,
report and monitor
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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
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. 𝟒𝟗 .56
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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?
 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
82% CY; 84% PY
seem reasonable
compared to total
support recognized?
 Does the organization
have a strong program
percent?
 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?
 Days Operating Cash - a
measure of how long
cash would last if all
sources of funding
stopped but expenses
continued
 Should be greater than
60 days:
365 × 𝑐𝑎𝑠ℎ 𝑏𝑎𝑙𝑎𝑛𝑐𝑒𝑠
(
)
𝑐𝑎𝑠ℎ 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
 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
 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 unusual trends?
 Is the current ratio greater than 1.0?
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𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
≥1
 Is capital readily accessible in an emergency?
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?