Chapter Ten
Lecture Notes
Reporting The Results of
Operations: The Activity and
Cash Flow Statements
1
The Activity and
Cash-Flow Statements



The Activity Statement
– Compares an entity's cumulative revenue and support to its
expenses for any period of time - like a fiscal year.
– Shows whether the organization was able to cover its costs.
Names for an Activity Statement: Income Statement, Operating
Statement, Statement of Revenues and Expenses, or Profit and
Loss (P&L) Statement.
The Cash Flow Statement looks at where an entity obtained its
cash and where it spent cash during some time period.
2
Revenues and Support
2011
2010
$ 10,000
$ 8,000
20,000
16,000
1,000
1,000
10,000
10,000
Foundation Grants
70,000
50,000
Annual Ball
12,000
11,000
Telephone Solicitation
25,000
28,000
Mail Solicitation
48,000
45,000
$196,000
$169,000
$ 17,000
$ 16,000
Kitchen Staff
35,000
33,000
Counseling Staff
35,000
34,000
Rent on Kitchen Locations
15,000
14,000
Administration and General
75,000
65,000
4,000
4,000
10,000
10,000
Total Expenses
$191,000
$176,000
Change in Net Assets:
Increase/(Decrease)
$
$ (7,000)
Meals
Client Revenue
City Revenue
Shelter Counseling
Meals for
the
Homeless
Activity
Statement
Client Revenue
County Revenue
Fundraising
Total Revenue and Support
Expenses:
Food
Bad Debts
Depreciation
5,000
3
The Activity or Operating Statement
Revenues and Support



Revenues and Support:
- represent inflows that the organization has received or is
entitled to receive.
- result in an inflow of Assets to the organization and an
increase in Net Assets.
Revenues are generally the result of an exchange for goods and
services that the organization has provided.
Support is the result of gifts, grants, and other contributions to the
organization.
4
Expenses and Net Income


Expenses:
- represent the recognition of the use of an asset to generate
revenue and support or otherwise carry on the operations of
the entity.
- result in an outflow of assets and a decrease in Net Assets.
Net Income is the difference between revenues/support and expenses.
- Profits are an excess of revenues over expenses. Also called
a surplus or increase in net assets.
- Losses are an excess of expenses over revenues. Also called
a deficit or decrease in net assets.
5
Recognizing Revenue and Support


Revenue is recognized if:
- the goods or services have been provided to the customer,
- the amount to be collected can be objectively measured, and
- there is a reasonable likelihood of collection.
Support is recognized if:
- all of the conditions of the gift have been met,
- the value of the pledge can be objectively measured, and
- there is a reasonable likelihood of collection.
6
Recognizing Expenses

Expense Recognition depends on the type of expense:
-
Product costs are those directly connected to providing
goods and services. They are recognized:
–
-
The Matching principle says that expenses should
be recorded in the same period as the revenue they
were used to generate.
Period Costs, like rent, are those related to the passage of
time. They are recognized:
–
in the time period in which they are incurred.
7
Expired and Unexpired Costs



Suppose Meals bought 100 large cans of green beans at a cost of
$1,000 in March.
- At acquisition, Meals would recognize the beans as an
asset (Inventory). They are also an unexpired cost.
- If they paid for the beans in cash, Cash would go down by
$1,000. Otherwise Accounts Payable increases $1,000.
In May, Meals used 50 of the cans of beans to produce meals.
- At use, the beans become an expense (expired cost) of $500
(50 cans * $10 per can = $500), and the value of the asset
(Inventory) is reduced by $500.
This is a Product Cost. The inventory becomes an expense when used
to provide service.
8
Uncollectible Accounts
Assume that Meals begins the year with $125,000 in
Pledges Receivable, and $15,000 in the Allowance
for Uncollectible Pledges contra account.
During the year $50,000 of new contributions are
received in cash and also $50,000 of new pledges
are made, but cash is not received.
Experience shows that 10% of pledges are never
collected. During the following year it is decided that
specific pledges totaling $3,000 will never be
collected.
9
Uncollectible Accounts, continued
$
Cash
Beg. Bal. Yr 1
Contribution
Pledges
Rec.
Allow. For
Uncoll.
Pledges
125,000
(15,000)
50,000
Pledges
50,000
Estimated
Uncoll.
(5,000)
=
Liab.
Net
Assets
0 110,000
50,000
Support
50,000
Support
(5,000) Bad Debt
Expense
End. Bal. Yr 1
50,000
175,000
(20,000)
0 205,000
Beg. Bal. Yr 2
50,000
175,000
(20,000)
0 205,000
(3,000)
3,000
172,000
(17,000)
Write Off
End Bal. Yr 2
10
50,000
0 205,000
Inventory Expense

Inventory expenses represent the cost of using supplies to create
goods or services. Inventory expense and the ending inventory value
are calculated using the following relationship:
Beginning Inventory + Purchases - Consumption = Ending
5
+ 10
???
=
2




Tracking inventory use
– Perpetual inventory
– Periodic inventory
LIFO and FIFO inventory flow assumptions
Does the choice of FIFO or LIFO impact inventory expenses and
ending inventory value? Why?
Why would a not-for-profit organization want to use LIFO?
11
FIFO and LIFO Examples
Suppose that the Big City public health clinic started the year with
2,000 vials of methadone for its drug rehab clinic. They cost $10
each. During the year the clinic bought 3,000 more vials for $15
each. If they had 1,000 left at the end of the year, what was their
inventory expense and how much was the remaining inventory worth?
2,000 vials + 3,000 vials -
Inventory
Method
Beginning
Balance
Purchases
??? vials
= 1,000 vials
Consumption
(Inventory
Expense)
Ending
Balance
LIFO
$20,000
$45,000
3,000 x $15 +1,000 x $10
=$55,000
$10,000
FIFO
$20,000
$45,000
2,000 x $10 +2,000 x $15 =
$50,000
$15,000
12
Deferred Revenue


Deferred or unearned revenues arise when an organization is
paid in advance for goods or services.
 Deferred usually is long term, and unearned usually is short
term.
 Why is deferred revenue a liability?
A museum sells a five-year membership for $250.
- How much of the $250 should be recorded as deferred
revenue?
- How much of the $250 would the museum recognize as
revenue during the first year of the membership?
13
Where the Income Statement
and Balance Sheet Meet
Event
Statement Impact
Revenue
Recognized
You provide a
good or service
and earn revenue
AR or Cash up B/S
Revenue up
A/S
No impact
on revenue
Someone pays
a bill you sent
AR down
Cash up
No impact
on expenses
When you buy
something
AP up or
Cash down
Inventory up
Expense
Recognized
When you use
something
Asset down or
Liability up
B/S
Expense up
A/S
Note
AR is a “holding area”
for unpaid bills that
you have sent out
B/S
B/S
B/S
B/S
AP is where you keep
track of what you owe
to others
B/S stands for the Balance Sheet, and A/S stands for Activity Statement.
14
Reflecting the Change in Net Assets
on the Balance Sheet

Net income is reported as a change in net assets on the
balance sheet.
Total Revenue and Support
$81,000
Total Expenses
- 80,050
Increase in Net Assets
$
Beginning Balances
Increase in Net Assets
Ending Balances
15
Activity Statement
Balance Sheet
950
Unrestricted
Temp. Rest.
Perm. Rest.
$113,000
$15,000
$10,000
$15,000
$10,000
950
$113,950
The Cash Flow Statement



The Statement of Cash Flows focuses on the sources and uses
of cash for the organization. It divides those cash flows into:
- Cash flows from Operations,
- Cash flows from Investing, and
- Cash flows from Financing.
Why does an organization need both an operating statement
and a cash flow statement?
Why is it important to know the sources and uses of cash flow?
Isn't knowing if cash increased or decreased enough?
16
Example:
Meals for the
Homeless
Activity
Statement
For Year Ending
12/31/11
The first
estimate of
cash flow from
operations is
the change in
net assets.
Revenues and Support
Meals
Client revenue
City revenue
Shelter Counseling
Client revenue
County revenue
Fund-Raising
Foundation grants
Annual ball
Telephone solicitation
Mail solicitation
Total Revenues and Support
Expenses
Food
Kitchen staff
Counseling staff
Rent on kitchen locations
Administration and general
Bad debts
Depreciation
Total Expenses
Increase/(Decrease) in Net Assets
$ 10,000
20,000
1,000
10,000
70,000
12,000
25,000
48,000
$196,000
$ 17,000
35,000
35,000
15,000
75,000
4,000
10,000
$191,000
$ 5,000
17
Adjusting the Increase
in Net Assets to Cash Flow
The Increase in Net Assets is a first approximation of Cash
Flow from Operations.
Now, make adjustments for:
1. "Expenses not requiring cash“: Depreciation or
amortization.
2. Changes in balance sheet accounts related to
operations.
18
The Statement of Cash Flows
Cash Flows from Operating Activities
Increase in Net Assets
2011
2010
$ 5,000
$ (7,000)
10,000
10,000
2,000
2,000
0
1,000
Add Expenses Not Requiring Cash:
Depreciation
Other Adjustments:
Add Decrease in Inventory
Add Increase in Accounts Payable
Subtract Increase in Receivables
(17,000)
(12,000)
Subtract Decrease in Wages Payable
(1,000)
0
Subtract Increase in Prepaid Expenses
(1,000)
0
$ (2,000)
$ (6,000)
Net Cash Used for Operating Activities
19
The Statement of Cash Flows,
continued
2011
2010
Cash Flows from Investing Activities
Sale of Stock Investments
$ 4,000
$
Purchase of Delivery Van
Net Cash from Investing Activities
4,000
(32,000)
$ 4,000
$ (28,000)
Cash Flows from Financing Activities
Increase in Mortgages and Notes Payable
Repayments of Mortgages
Net Cash from Financing Activities
Net Increase/(Decrease) in Cash
Cash, Beginning of Year
Cash, End
20 of Year
$ 25,000
(5,000)
(4,000)
$ (5,000)
$ 21,000
$ (3,000)
$ (13,000)
4,000
$ 1,000
17,000
$
4,000
Meals for the Homeless
Statement of Financial Position
As of December 31, 2011 and December 31, 2010
Assets
Current Assets
Cash
Marketable securities
Accounts receivable,
net of estimated
uncollectibles of
$8,000and $7,000
Inventory (LIFO)
Prepaid expenses
Total Current Assets
Long-Term Assets
Fixed assets
Property
Equipment, net
Investments
Total Long-Term Assets
Total Assets
21
2011
$ 1,000
3,000
55,000
2,000
1,000
$ 62,000
$ 40,000
35,000
8,000
$ 83,000
$145,000
2010
Liabilities & Net Assets
$ 4,000
3,000
Liabilities
Current Liabilities
Wages payable
Accounts payable
Notes payable
Current portion of
mortgage payable
Total Current Liabilities
38,000
4,000
0
$ 49,000
$ 40,000
45,000
12,000
$ 97,000
$146,000
2011
2010
$ 2,000
3,000
5,000
$
3,000
3,000
5,000
4,000
$ 14,000
5,000
$ 16,000
Long-Term Liabilities
Mortgage payable
Total Long-Term Liabilities
Total Liabilities
$ 12,000
$ 12,000
$ 26,000
$ 16,000
$ 16,000
$ 32,000
Net Assets
Liabilities and Net Assets
$119,000
$145,000
$114,000
$146,000
The Cash Flow Statement



Cash flows relating to investment and financing activities are listed
separately.
- Why?
- Are these adjustments shown in the Activity Statement too?
Indirect vs. Direct Method for Statement of Cash Flows
22
Depreciation Expense

Depreciation expense represents the current period’s share
of the cost of using a capital asset over its life.
- Depreciation expense illustrates the matching principal.
- Depreciation expenses may be calculated either on
a straight-line or an accelerated basis. Why would
you use accelerated depreciation?
Straight-Line Depreciation Example
Cost of a van
Less: Salvage (Residual) Value
Depreciable Amount
 Useful life
Depreciation Expense per year
23
$32,000
2,000
$30,000
5 years
$ 6,000
A Mixed Balance Sheet and
Operating Statement Transaction

HOS paid $48,000 in wages to its employees; $30,000
represented money owed to employees for work last year
and $18,000 is for work performed this year.
Assets
=
Liabilities
=
Wages
Payable
- $30,000
Cash
- $48,000
24
+
+
Revenues
No Change
- Expenses
-
Labor
Expense
$18,000
Operating Statement Transactions

HOS provided services and billed patients $81,000. It also consumed
$4,000 worth of inventory in delivering those services. There are two
transactions here.
Net Assets
Transaction 1
Assets
= Liabilities
+ Revenues
- Expenses
A/R
Revenue
+ $81,000 = no change
+ $81,000
- no change
Transaction 2
Assets
= Liabilities
Inventory
- $4,000 = no change
25
+ Revenues
-
+ no change
-
Expenses
Supply Expense
$4,000
A Noncash Example

HOS owed its staff $27,000 for wages for the last two weeks
of 2011 which were not due for payment until the first week
in 2012.
Assets
= Liabilities
Wages Payable
no change =
+ $27,000
26
+ Revenues
-
Expenses
+ no change
Labor Expense
$27,000