Appendix A: Approach to Club Industry
Statements of Activities
A p p e n d i c e s
In many industries, the basic statement of activities format consists of the following:
Less:
Equals:
Less:
Equals:
Revenues
Cost of goods sold
Gross profit
Overhead expenses
Net income
For retail firms, the cost of goods sold is the cost of goods purchased for resale,
including any freight costs. The expenses subtracted from gross profit to equal
net income consist of all other expenses such as administration and selling
expenses, depreciation and income taxes.
By contrast, the statement of activities format in the Uniform System of Financial
Reporting for Clubs (USFRC) approach consists of the following:
Less:
Equals:
Less:
Less:
Plus:
Equals:
Revenues
Direct operating expenses
Departmental operating income
Operating overhead expenses
Fixed charges
Other activities
Net income (a.k.a. increase in net assets)
Direct operating expenses include not only the cost of goods sold but also the
direct labor expense (including payroll and related expenses) and other direct
expenses. Direct labor expense is the expense of personnel working in the
profit centers, such as the food department and the beverage department.
Other direct expenses include supplies used by these revenue-producing
departments. Therefore, everything else being the same, gross profit would
exceed departmental operating income, since direct operating expenses
include direct labor and other direct expenses in addition to cost of goods sold.
The statements of activities based on the USFRC provide separate reporting by
profit center – that is, sales and direct expenses are shown separately for the
food department, the beverage department and so forth. In addition, the overhead expenses are divided among undistributed operating expenses and fixed
Appendices
7.1
Understanding Club Finances
A p p e n d i c e s
Appendix A: Approach to Club Industry
Statements of Activities
charges. The undistributed operating expenses are further detailed on the
statement of activities by major service centers such as administrative and
general and energy costs. The detail provided by both profit centers and service centers reflects reporting by areas of responsibility. Thus, the USFRC statement of activities is useful to managers in the club industry because it is
designed to provide the information necessary to evaluate the performance of
managers of the club facility by area of responsibility.
Statements for City and Country Clubs
The USFRC contains statement of activities formats for both city and country
clubs. Further, the USFRC also contains income statements formatted for providing financial information both to members and outsiders and to management.
The statements formatted for management reflect departmental operations, and
they are accompanied by several supporting schedules. Those formatted for
members do not reflect departmental operations, nor are departmental schedules provided. According to the USFRC, the format of these statements is simple and more readily understood by members. Several exhibits on the following
pages illustrate these statements. Exhibit 2 is the recommended statement for
members of country clubs. Exhibit 3 is the statement of activities in departmental form for a city club. There are five sections, as follows:
• Membership revenue
• Clubhouse operating income
• Undistributed operating expenses
• Fixed charges and provision for income taxes
• Other activities
The bottom line reflects the increase <decrease> in unrestricted net assets.
Exhibit 4 is the statement of activities in departmental form for a country club.
The detailed discussion of a club’s statement of activities that follows will focus
on this formatted statement of activities. The statement of activities per the
USFRC (see Exhibit 4) is divided into six major sections: Membership revenue,
cost of sports activities, clubhouse operating income, undistributed operating
expenses, fixed charges and income tax and other activities.
Membership revenue includes membership dues and initiation fees. Initiation
fees are included in membership income when used for normal operations. If
Understanding Club Finances
7.2
Appendices
Appendix A: Approach to Club Industry
Statements of Activities
A p p e n d i c e s
initiation fees are designated for capital improvements or the other non-operating
purposes, they should be included under the other activities section of the statement of activities that would follow the results of operations, shown on Exhibit 4.
In all cases, the initiation fees must be shown on the statement of activities.
The second section reflects the cost of sports activities. For each sports activity, there is a detailed schedule. The detailed schedule for the golf operations
of a country club is shown in Exhibit 5. This schedule reflects income from all
activities related to golf as well as the related expenses.
Exhibit 2 Statement of Activities for Country Clubs
Country Club
Statement of Activities
(External)
Period Ended
Revenue
Membership dues
Initiation fees
Unused food minimums
Food
Beverage
Entertainment
Golf operations
Golf shop
Racquet sports
Aquatic sports
Other sports activities
Overnight rooms
Locker rooms
Telecommunications
Other operating departments
Rentals and other revenue
Total revenue
Appendices
$
7.3
Understanding Club Finances
A p p e n d i c e s
Appendix A: Approach to Club Industry
Statements of Activities
Operating Expenses
Food
Beverage
Entertainment
Golf operations
Golf shop
Golf course maintenance
Racquet sports
Racquet shop
Aquatic sports
Other sports activities
Overnight rooms
Locker rooms
Telecommunications
Other operating departments
Clubhouse
Administrative and general
Facility maintenance
Energy costs
Total operating expenses
Income Before Fixed Charges
Fixed Charges
Rent
Property taxes and other municipal charges
Insurance
Interest
Depreciation and amortization
Total fixed charges
Income (Loss) Before Taxes
Provision For Income Taxes
Results of operations
Understanding Club Finances
7.4
Appendices
Appendix A: Approach to Club Industry
Statements of Activities
A p p e n d i c e s
Other Activities
Initiation fees
Special assessments
Investment income
Other
Increase (Decrease) in Unrestricted Net Assets (Members’ Equity)
Unrestricted net assets, beginning of period
Unrestricted net assets, end of period
The amount on the bottom line of this schedule, departmental income (loss), is
shown on the statement of activities. The reader of the statement of activities
would turn to schedule E for the detailed amounts.
A special schedule for golf course maintenance is shown in Exhibit 6. This
schedule includes the detailed expenses to maintain the golf course. The two
major categories are payroll and related expenses and other expenses.
Exhibit 3 Statement of Activities (in Departmental Form) for a City Club
City Club
Statement of Activities
(In Departmental Form)
(Internal)
Schedule
Membership Revenue
Membership dues
Initiation fees
Total membership revenue
Appendices
7.5
Period Ended
$
$
Understanding Club Finances
Appendix A: Approach to Club Industry
Statements of Activities
A p p e n d i c e s
Schedule
Clubhouse Operating Income (Loss)
Food
Beverage
Entertainment
Overnight rooms
Health and fitness
Telecommunications
Other operating departments
Rentals and other revenue
Total clubhouse operating income
(loss)
Undistributed Operating Expenses
Administrative and general
Clubhouse
Facility maintenance
Energy costs
Total operating expenses
Clubhouse net (loss)
Period Ended
A
B
C
D
K
M
N
O
P
Q
R
R
Income Before Fixed Charges
Fixed Charges
Rent
Property taxes and other municipal charges
Insurance
Interest
Depreciation and amortization
Total fixed charges
S
Income (Loss) Before Taxes
Provision For Income Taxes
Results of operations
S
Other Activities
Initiation fees
Understanding Club Finances
7.6
Appendices
Appendix A: Approach to Club Industry
Statements of Activities
Schedule
Period Ended
A p p e n d i c e s
Special assessments
Investment income
Other
Increase (Decrease) in Unrestricted Net
Assets (Members’ Equity)
Unrestricted net assets, beginning of period
Unrestricted net assets, end of period
$
$
The total golf course maintenance expense is subtracted from golf operations
income and golf shop (income) is added to equal net golf profit (expense) on
the statement of activities.
Other items listed in the sports activities section of the statement of activities
are racquet sports, racquet shop, and aquatic sports. In addition, a separate
line should be used to report any other significant sports activity. Total membership income less the net cost of sports activities equals membership revenue
available for clubhouse operation and fixed charges available per the statement of activities.
The section titled clubhouse operating income (loss) includes food, beverage,
entertainment, overnight rooms, locker rooms, telecommunications, other operating departments, and rentals and other revenue. The detailed schedule for
the food department is shown in Exhibit 7.
Appendices
7.7
Understanding Club Finances
Appendix A: Approach to Club Industry
Statements of Activities
Exhibit 4 Statement of Activities (in Departmental Form) for a Country Club
A p p e n d i c e s
Country Club
Statement of Activities
(In Departmental Form)
(Internal)
Schedule
Membership Revenue
Membership dues
Initiation fees
Total membership revenue
Period Ended
$
$
Cost of Sports Activities
Golf operations income (loss)
E
Less golf course maintenance
G
Golf shop
F
Net golf profit (expense)
Racquet sports
H
Racquet shop
I
Aquatic sports
J
Other sports
Net cost of sports activities
Membership revenue available for
clubhouse operations and fixed
charges
Clubhouse Operating Income (Loss)
Food
A
Beverage
B
Entertainment
C
Overnight rooms
D
Locker rooms
L
Telecommunications
M
Other operating departments
N
Rentals and other revenue
O
Total clubhouse operating income
(loss)
Understanding Club Finances
7.8
Appendices
Appendix A: Approach to Club Industry
Statements of Activities
A p p e n d i c e s
Schedule
Period Ended
Undistributed Operating Expenses
Administrative and general
P
Clubhouse
Q
Facility maintenance
R
Energy costs
R
Total operating expenses
Clubhouse net operations and
undistributed operating expenses
Income Before Fixed Charges
Fixed Charges
S
Rent
Property taxes and other municipal charges
Insurance
Interest
Depreciation and amortization
Total fixed charges
Income (Loss) Before Taxes
Provision For Income Taxes
Results of operations
S
Other Activities
Initiation fees
Special assessments
Investment income
Other
Increase (Decrease) in Unrestricted Net
Assets (Members’ Equity)
Unrestricted net assets, beginning of period
Unrestricted net assets, end of period
Appendices
7.9
$
$
Understanding Club Finances
Appendix A: Approach to Club Industry
Statements of Activities
Exhibit 5
Detailed Schedule for Golf Operations of a Country Club
A p p e n d i c e s
Country Club
Golf Operations – Schedule E
Revenue
Greens fees
Guest fees
Trail fees
Club storage
Club rentals
Club repair
Range fees
Tournament fees
Cart rentals
Service of member-owned carts
Lessons
Other
Total revenue
$
Departmental Expenses
Payroll and related expenses
Salaries and wages
Payroll taxes and employee benefits
Employees’ meals
Total payroll and related expenses
Other expenses
Cart rentals
Computer expense
Contract professionals
Driving range
Dues and subscriptions
Electricity
Equipment rental
Equipment repair and maintenance
Gasoline and lubricants
Understanding Club Finances
7.10
Appendices
A p p e n d i c e s
Appendix A: Approach to Club Industry
Statements of Activities
Golf cart batteries
Golf cart repairs and maintenance
Gratis food
Laundry and linen
Operating supplies
Printing and stationery
Prizes
Professional development
Telephone
Tournament expenses
Uniforms
Vehicle expense
Other operating expenses
Total other expenses
Total Departmental Expenses
Departmental income (Loss)
$
The bottom line of this schedule departmental income (loss), is shown on the
statement of activities for the food department. The reader of the statement of
activities must look to the departmental schedule to see the details of the food
sales, cost of sales, other revenue, payroll and related expenses and other
expenses. The details of this supporting schedule will be discussed in greater
detail in a later section of this chapter. Similar schedules are provided for other
clubhouse profit centers – that is, departments generating sales and incurring
expenses, including the beverage, entertainment, overnight rooms, locker
rooms and telecommunications.
Appendices
7.11
Understanding Club Finances
Appendix A: Approach to Club Industry
Statements of Activities
Exhibit 6
Special Schedule for Golf Course Maintenance
A p p e n d i c e s
Country Club
Golf Course Maintenance – Schedule G
Departmental Expenses
Payroll and related expenses
Salaries and wages
Payroll taxes and employee benefits
Employees’ meals
Total payroll and related expenses
$
Other expenses
Applicants
Computer expense
Dues and subscriptions
Equipment rental
Energy costs
Fertilizer
Gasoline and lubricants
Laundry and linen
Licenses and permits
Operating supplies
Printing and stationery
Professional development
Refuse removal
Repairs and maintenance
Course buildings
Drainage systems
Fences and bridges
Irrigation systems
Mowers, tractors and trucks
Roads and paths
Sand and top dressing
Seeds, flowers and shrubs
Small tools
Telephone
Understanding Club Finances
7.12
Appendices
A p p e n d i c e s
Appendix A: Approach to Club Industry
Statements of Activities
Topsoil
Tree care
Uniforms
Vehicle expense
Water
Other operating expenses
Total other expenses
Total Golf Course Maintenance Expenses
$
The rentals and other revenues include various other revenues as shown in
Exhibit 8. Additional lines should be added for any other significant sources of
other revenue.
The fourth section of the statement of activities is undistributed operating
expenses. In general, this group of expenses represents operating overhead
expenses. These expenses are incurred for the overall operation of the club but
are not distributed to profit centers in the clubhouse since they do not generate revenue. The four undistributed operating expenses are administrative and
general, clubhouse, facility maintenance and energy costs. The clubhouse
expenses include expenses for club rooms in general and various other services to members that are not shown in any other department. Examples include
expenses related to the club’s lobby area and library. The various facility maintenance and energy costs are listed on a schedule titled facility maintenance
and energy. The administrative and general schedule is shown in Exhibit 9. This
schedule includes payroll and related costs to administer the club.
Appendices
7.13
Understanding Club Finances
Appendix A: Approach to Club Industry
Statements of Activities
Exhibit 7
Detailed Schedule for Food Department
A p p e n d i c e s
City or Country Club
Food – Schedule A
Food Sales (List Revenue by Location)
$
Cost of Food Sold
Cost of food consumed
Less credit for employees’ meals
Less credit for gratis food
Cost of food sold
Gross profit on food sales
Other Revenue
Unused minimum
Dining room rental
Total other revenue
Total gross profit and other revenue
Departmental Expenses
Payroll and related expenses
Salaries and wages
Less service charges
Net salaries and wages
Payroll taxes and employee benefits
Employees’ meals
Total payroll and related expenses
Other expenses
China, glassware, and silver
Computer expense
Contract services
Dues and subscriptions
Equipment rental
Equipment repair and maintenance
Gratis food
Kitchen fuel
Understanding Club Finances
7.14
Appendices
A p p e n d i c e s
Appendix A: Approach to Club Industry
Statements of Activities
Laundry and linen
Licenses and permits
Music and entertainment
Operating supplies
Printing and stationery
Professional development
Telephone
Uniforms
Other operating expenses
Total other expenses
Total Departmental Expenses
Departmental Income (Loss)
Exhibit 8
$
Rentals and Miscellaneous Income Schedule
City or Country Club
Rentals and Other Revenue – Schedule O
Revenue
Space rentals and concessions
Commissions
Cash discounts earned
Interest income
Other
Total Rentals and Other Revenue
Appendices
7.15
$
Understanding Club Finances
Appendix A: Approach to Club Industry
Statements of Activities
A p p e n d i c e s
In addition, this schedule reflects the many operating overhead expenses of a
club as shown in the second section of this schedule titled “other expenses.”
The income before fixed charges on the statement of activities is determined
by adding “membership revenue available for clubhouse operations and fixed
charges” and “total clubhouse operating income (loss)” and then subtracting
“total undistributed operating expenses.”
The next major section of the statement of activities is fixed charges. These
expenses are also referred to as capacity costs, as they relate to the physical
plant or the capacity to provide goods and services to members. Fixed
charges include rent, taxes, insurance, interest, and depreciation and amortization. Property taxes include real estate taxes, personal property taxes, business and occupation taxes and other taxes (but not income and payroll taxes).
Understanding Club Finances
7.16
Appendices
Appendix A: Approach to Club Industry
Statements of Activities
Exhibit 9
Administrative and General Schedule
A p p e n d i c e s
City or Country Club
Administrative and General – Schedule P
Departmental Expenses
Payroll and related expenses
Salaries and wages
Payroll taxes and employee benefits
Employees’ meals
Total payroll and related expenses
Other expenses
Bank charges
Club publications
Computer expense
Credit and collection expenses
Credit card fees
Directors and committees
Donations
Dues and subscriptions
Equipment rental
Equipment repair and maintenance
Licenses and permits
Loss and damage
Operating supplies and equipment
Postage
Printing and stationery
Professional development
Professional fees
Provision for doubtful accounts
Telephone
Trade associations and conferences
Uniforms
Vehicle expense
Website development and maintenance
Other operating expenses
Total other expenses
Total Administrative and General Expenses
Appendices
7.17
$
$
Understanding Club Finances
Appendix A: Approach to Club Industry
Statements of Activities
A p p e n d i c e s
Insurance
Insurance expense is the cost of insuring the facilities, including contents, for
damage caused by fire or other catastrophes.
Interest expense is the cost of borrowing money and is based on the amounts borrowed, the interest rate, and the length of time for which the funds are borrowed.
Generally, loans are approved by the club’s Board of Directors, as most relate to
the physical plant. Thus, interest expense is considered to be a fixed charge.
Depreciation of property and equipment and amortization of other assets are
shown as a fixed charge. The depreciation methods and useful lives of fixed
assets are normally disclosed in footnotes. If the club’s property is leased, the
rent expense should be shown as a fixed charge. Other rentals that should be
shown in this section of the statement of activities include the cost of other
major items, which – if not rented – would be capitalized as fixed assets.
For clubs that must pay income taxes, the income taxes are subtracted from
income before income taxes to determine results of operations. The final section on the statement of activities is other activities. This section includes initiation fees not used for operating purposes, special assessments for funding
replacement of property and equipment, investment income and any other
activities not related to normal operating activities.
Departmental Statements
Departmental statements, supplementary to the statement of activities and
referred to as schedules, provide management with detailed information. The
classifications listed in the statement of activities (Exhibits 3 and 4) suggest
several schedules and the USFRC provides additional schedules for greater
detail. Several of these schedules have already been mentioned and illustrated (Exhibits 5-9).
Exhibit 7 illustrates a profit center schedule using the food department. The
food department schedule reflects both revenues (sales) and direct expenses.
The sales and other revenue shown on this schedule includes food sales,
which should be reported by location according to the USFRC, such as dining
room, banquets, etc., and other revenues that includes unused food minimums
and dining room rental.
Understanding Club Finances
7.18
Appendices
A p p e n d i c e s
Appendix A: Approach to Club Industry
Statements of Activities
The expenses are subdivided on the food department schedule between “payroll and related expenses” and “other expenses.” Under payroll and related
expenses, salaries and wages, less service charges, payroll taxes and employee benefits and employees’ meals, are shown. Employee benefits include both
payroll taxes and benefits, such as the cost of health insurance and pensions
paid by the club operation and similar benefits. The cost of employee meals is
the actual or – in many clubs – the estimated cost of food consumed by
employees. The cost of employee meals is recorded in the appropriate account
by department. Failure to account for employee meals properly results in a misstatement of cost of food sold.
Other expenses include direct expenses of the food department. According to
the USFRC, 17 expense categories are shown under other expenses of the
food department. All other food department expenses should be classified in
these 17 categories if the USFRC is to be followed. When a classification is not
used, it should simply be left off of the food department schedule.
In contrast to the profit center schedules prepared for the revenue-producing
departments of a club, a service center schedule reports only expenses by
area of responsibility. Although these activity areas do not generate revenues,
they do provide service to the profit centers and — in some cases— to other
service centers. Exhibit 9 illustrates a service center departmental schedule for
administrative and general. This schedule contains two major sections – payroll and related expenses and other expenses. The three categories under payroll and related expenses are the same as for the food department. Twenty-four
items are listed under other expenses on this schedule.
The number and nature of the supporting schedules reported in a club facility
depend on the size and organization of the establishment. A smaller club generally provides fewer services to its members; thus, fewer schedules would be
used. Other types of clubs, such as yacht clubs, would tailor schedules to their
operations. The key is to use the schedules that communicate relevant financial information to the various management levels of the club.
Appendices
7.19
Understanding Club Finances
Appendix A: Approach to Club Industry
Statements of Activities
A p p e n d i c e s
Club Industry Operating Statistics
Several accounting and consulting firms provide statistical reports covering
operating results for the club industry. These reports generally provide median
figures for the clubs. The figures provided in these reports should not be
viewed as standards but as industry averages.
Statistics are produced for the club industry for the United States by accounting firm PKF Witt Mares. Other firms produce similar statistics for geographical
areas of the United States. For example, Condon O’Meara McGinty & Donnelly
LLP produces an annual statistical report for clubs in the northeastern part of
the U.S. In its Operations and Financial Data Report, CMAA presents findings
on the largest collection of club operations and financial data in the club industry. PDF files of the 2008 survey report’s executive summary can be found on
the CMAA Web site: www.cmaa.org.
The PKF statistical report for 2007 contains operating details for many areas of
clubs including, but not limited to, the following:
• Trends in club membership
• 20-year trend of income and expense
• Results of operations by geographic divisions and size classification
• Restaurant operations by geographic divisions and size classification
• Annual operating costs by geographic divisions and size classifications
• Golf course expenses by geographic divisions and size classifications
Several of these reports are presented separately for both country and city clubs.
Exhibits 10 and 11 illustrate these reports. Exhibit 10 contains the results of
operations of country clubs by geographic divisions and by size classifications.
The results of operations are shown for all clubs and then by three geographic
divisions and three size classifications. Also, a blank column is provided for the
user to place figures for comparative purposes. A quick review of this exhibit
reveals major differences based on geographical location and size of the country club.
A second report from this PKF publication reveals the 20-year trend of income
and expense of country clubs as shown in Exhibit 11. It is interesting to note
the continuous increase year after year in total revenue per member and the
Understanding Club Finances
7.20
Appendices
Appendix A: Approach to Club Industry
Statements of Activities
A p p e n d i c e s
increases and decreases in “available for debt service, capital improvements,
etc.” year by year.
Statistical reports are interesting to study for year-to-year comparisons; however, the reader must remember these reports reflect averages of respondents to
their surveys. The figures provided in the reports must be considered as averages and not as benchmarks or standards. Though comparisons will often be
made by members of a club’s management team and/or the board of directors,
the statistical averages are simply that: averages.
Appendices
7.21
Understanding Club Finances
Understanding Club Finances
7.22
-4.8%
Balance of Dues Available For Debt
Service, Capital Improvements, Etc.
-5.4%
8.7%
94.4%
3.3%
10.6%
38.7%
6.2%
8.4%
63.9%
-91.1%
54.4%
4.8%
53.6%
2.4%
12.0%
127.2%
-27.2%
37.2%
12.5%
23.2%
5.7%
21.3%
100.0%
East
0.1%
8.1%
77.2%
8.2%
9.3%
30.0%
7.6%
2.8%
49.7%
-69.0%
50.3%
10.9%
49.2%
1.3%
7.6%
119.3%
-19.3%
43.8%
13.2%
26.4%
3.1%
13.6%
100.0%
Central
-4.3%
7.5%
103.9%
3.2%
10.2%
33.9%
5.8%
5.3%
55.2%
-100.7%
53.8%
11.0%
72.9%
1.9%
5.9%
145.5%
-45.5%
41.6%
13.1%
32.9%
3.8%
8.6%
100.0%
West
Geographic Division
Source: Clubs in Town & Country, North American Edition 2007. (PFK, 2007)
Note: Payroll taxes and employee benefits are distributed to each department.
8.2%
97.6%
3.4%
10.4%
36.1%
6.1%
6.4%
59.0%
-94.2%
53.8%
8.2%
62.4%
2.1%
8.7%
135.2%
-35.2%
39.9%
12.9%
28.2%
4.5%
14.5%
100.0%
Rent, Real Estate Taxes and Insurance
Membership Dues
Dues Available for Fixed Charges
Clubrooms
Administrative and General
Heat Light and Power
Repair and Maintenance
Total Unapportioned Expenses
Net Cost of Operations
Less Unapportioned Expenses
Food
Beverage
Golf
Minor Operated Departments
Sports Activities
Total Departmental Income
Net Departmental Income
Departmental Expense
Food
Beverage
Golf
Sports Activities
Other Income
Total Sales and Income
Your
Figures
All
Country
Clubs
-7.2%
8.4%
99.7%
1.2%
9.2%
39.1%
6.0%
5.5%
59.8%
-98.5%
54.0%
8.9%
67.4%
2.0%
6.4%
138.7%
-38.7%
40.4%
13.2%
29.4%
3.6%
13.4%
100.0%
Under
500
-16.2%
7.3%
101.2%
-8.9%
12.7%
42.6%
5.8%
8.6%
69.7%
-110.1%
56.8%
7.0%
65.3%
2.4%
8.9%
140.4%
-40.4%
40.4%
11.4%
27.8%
3.7%
16.7%
100.0%
500 To
700
6.4%
8.6%
92.6%
15.0%
11.2%
27.4%
6.6%
6.1%
51.3%
-77.6%
51.9%
7.7%
52.5%
2.1%
12.1%
126.3%
-26.3%
38.8%
13.5%
25.7%
6.4%
15.6%
100.0%
Over
700
Size (Membership)
Results of Operations by Geographic Divisions and Size Classifications
Ratio To Total Income
Sales and Income – Except Dues
Exhibit 10
A p p e n d i c e s
Appendix A: Approach to Club Industry
Statements of Activities
Appendices
Appendices
7.23
1,443
1,465
1,569
1,718
1,735
1,847
1,963
2,230
2,312
2,360
2,299
2,704
3,445
3,063
3,787
4,429
5,116
5,830
6,239
6,394
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
3,043
2,970
3,366
3,567
3,459
1,769
1,823
1,959
2,444
2,784
1,497
1,485
1,526
1,713
1,737
1,100
1,161
1,211
1,269
1,348
1,895
2,255
2,559
3,051
3,090
1,087
1,373
1,503
2,964
2,104
785
800
1,095
1,135
1,164
479
520
561
600
647
All Other
Sales and
Income
9,368
10,341
11,755
12,857
12,943
5,155
5,900
6,907
8,471
8,675
4,129
4,248
4,851
5,160
5,261
3,022
3,146
3,341
3,587
3,730
Total
Revenue
5,373
5,740
6,566
7,042
6,943
2,554
3,048
3,198
3,833
3,937
1,942
2,031
2,496
2,513
2,430
1,300
1,378
1,475
1,580
1,728
Payroll and
Related
Costs
Source: Clubs in Town & Country, North American Edition 2007. (PFK, 2007)
Membership
Dues
Year
Food and
Beverage
Sales
4,621
5,043
5,672
5,976
6,310
2,481
2,852
3,118
4,166
4,523
2,095
2,156
2,289
2,441
2,725
1,407
1,504
1,602
1,732
1,853
All Other
Operating
Expenses
9,994
10,784
12,238
13,018
13,253
5,035
5,900
6,316
7,999
8,460
4,037
4,187
4,785
4,954
5,155
2,707
2,882
3,077
3,312
3,581
Total Costs
and Expenses
-626
-442
-483
-161
-310
120
0
591
472
215
92
61
66
206
106
315
264
264
275
149
Available For
Debt Service,
Capital
Improvements
Disposition of Income Per Member
20–Year Trends of Income and Expenses
20–Year Trends of Income and Expenses
Source of Income Per Member
Exhibit 11
Exhibit 11
Size (Membership)
A p p e n d i c e s
Geographic Division
Appendix A: Approach to Club Industry
Statements of Activities
Understanding Club Finances
Appendix A: Approach to Club Industry
Exhibit 10 Results
of Operations by Geographic Divisions and Size Classifications
Statements
of Activities
Exhibit 12
Comparative Food Department Schedules
A p p e n d i c e s
Spartan Club
Comparative Food Department Schedules
20x8
Food Sales
$1,100,000
20x9
Difference
$
%
9.09%
$1,200,000 $1,000,000
Cost of Food Sold
Cost of food consumed
Less: Employees’ meals
Cost of food sold
420,000
20,000
400,000
440,000
22,000
418,000
20,000
2,000
18,000
4.76%
10.00%
4.50%
Gross Profit on Food Sales
700,000
782,000
82,000
11.71%
100,000
50,000
150,000
850,000
105,000
45,000
150,000
932,000
5,000
(5,000)
0
82,000
5.00%
10.00%
0.00%
9.65%
610,000
<110,000>
80,000
15,000
595,000
670,000
<120,000>
90,000
18,000
658,000
60,000
<10,000>
10,000
10,000
63,000
9.84%
<9.09%>
12.50%
20.00%
10.59%
22,000
20,000
15,000
10,000
8,000
4,000
5,000
2,000
86,000
681,000
24,000
22,000
16,000
11,000
9,000
4,500
5,500
2,200
94,200
752,200
2,000
2,000
1,000
1,000
1,000
500
500
200
8,200
71,200
9.09%
10.00%
6.67%
10.00%
12.50%
12.50%
10.00%
10.00%
9.53%
10.46%
$169,000
$179,800
$10,800
6.39%
Other Revenue
Unused minimum
Dining room rental
Total Other Revenue
Total gross profit and other revenue
Departmental Expenses
Payroll and Related Expenses
Salares and wages
Less services charges
Payroll taxes and emplyee benefits
Employees’ meals
Total payroll and related expenses
Other Expenses
China, glassware, silver
Laundry and dry cleaning
Linens
Operating supplies
Other operating expenses
Refuse removal
Repairs and maintenance
Uniforms
Total other expenses
Total departmental expenses
Departmental Net Income
Understanding Club Finances
7.24
Appendices
Appendix A: Approach to Club Industry
Statements of Activities
A p p e n d i c e s
Analysis of Statements of Activities
The analysis of statements of activities enhances the user’s knowledge of a
club’s operations. This can be accomplished by horizontal analysis, vertical
analysis, base-year comparisons and ratio analysis. Since much less financial
information is available to members and creditors than is available to management, their analytical approaches will generally differ.
Horizontal analysis compares statements of activities for two accounting periods in terms of both absolute and relative variances for each line item. The user
should investigate any significant differences. Another common comparative
analysis approach is to compare the most recent period’s operating results with
the budget by determining absolute and relative variances.
Exhibit 12 illustrates the horizontal analysis of food department results of the
Spartan Club for years 20X8 and 20X9. In this comparative analysis, 20X8 is
considered the base. Because the revenues for 20X9 exceed revenues for
20X8, the dollar difference is shown as positive. If 20X9 revenues had been
less than 20X8 revenues, the difference would have been shown as negative.
Actual 20X9 expenses increased compared to 20X8, resulting in a positive difference. This should be expected, since, as revenues increase expenses
should also increase. If actual 20X9 expenses had decreased compared to
20X8, the differences would have been shown as negative. The percentage differences in this statement are determined by dividing the dollar difference by
the base (that is, the 20X8 numbers).
Another approach in analyzing statements of activities is vertical analysis. The
product of this analysis is also referred to as common-size statements. These
statements result from reducing all amounts to percentages using total sales as
a common denominator. Exhibit 13 illustrates two common-size statements of
activities for the Spartan Club.
Vertical analysis allows for more reasonable comparisons of two or more periods when the activity for the two periods was at different levels. For example,
assume the following:
Food sales
Cost of food sales
Appendices
20X8
$500,000
150,000
7.25
20X9
$750,000
225,000
Understanding Club Finances
Appendix A: Approach to Club Industry
Statements of Activities
A $75,000 increase in cost of sales may at first appear to be excessive.
However, vertical analysis reveals the following:
A p p e n d i c e s
Food sales
Cost of food sales
20X8
100%
30%
20X9
100%
30%
In this example, vertical analysis suggests that, despite the absolute increase
in cost of sales from 20X8 to 20X9, the cost of food sales has remained constant at 30 percent of sales for both years. The relatively large dollar increase
from 20X8 to 20X9 can be attributed to the higher level of activity during the
20X9 period rather than to unreasonable increases in the cost of sales.
Vertical analysis allows more meaningful comparisons among clubs that differ
substantially in size. This common-size analysis also allows comparisons to
industry averages, as discussed previously. However, a note of caution is
offered at this point. Industry averages include clubs of all sizes from vastly different locations operating in entirely different markets. The industry averages
reflect neither any particular operation nor an average operation, and they certainly do not depict an ideal operation.
A third approach to analyzing statements of activities is base-year comparisons. This approach allows a meaningful comparison of statements of activities for several periods. A base period is selected as a starting point and its figures are assigned a value of 100 percent. All subsequent periods are compared with the base on a percentage basis. Exhibit 14 illustrates the base-year
comparison of the Bulldog Club for 20X7-20X9 (with 20X7 as the base). Note
that some percentages increase quite dramatically.
A fourth approach to analyzing statements of activities is ratio analysis (which
is beyond our scope in this chapter). (See the chapter titled “Using Financial
Ratio Analysis to Guide the Decision Making Process” for a more in-depth
examination of this area.) Ratio analysis gives mathematical expression to a
relationship between two figures and is computed by dividing one figure by the
other figure. Financial ratios are compared with standards in order to evaluate
the financial condition of a club operation. Since vertical analysis is a subset of
ratio analysis, there is considerable overlap between these two approaches
when the focus is on operations.
Understanding Club Finances
7.26
Appendices
Appendix A: Approach to Club Industry
Statements of Activities
Exhibit 10
Results of Operations by Geographic Divisions and Size Classifications
Exhibit 13
Common-Size Food Department Schedules
A p p e n d i c e s
Spartan Club
Common-Size Food Department Schedules
20x8
20x9
Percentages
20x8
20x9
Total Sales and Income
$1,250,000
$1,350,000
100.00%
100.00%
Food Sales
$1,100,000
$1,200,000
88.00%
88.89%
Cost of food consumed
Less: Employees’ meals
Cost of food sold
420,000
20,000
400,000
440,000
22,000
418,000
33.60%
1.60%
32.00%
32.59%
1.63%
30.96%
Gross Profit on Food Sales
700,000
782,000
56.00%
52.93%
100,000
50,000
150,000
105,000
45,000
150,000
8.00%
4.00%
12.00%
7.78%
3.33%
11.11%
850,000
932,000
68.00%
69.04%
610,000
<110,000>
80,000
15,000
595,000
670,000
<120,000>
90,000
18,000
658,000
48.80%
<8.80%>
6.40%
1.20%
47.60%
49.63%
<8.89%>
6.67%
1.33%
48.74%
China, glassware, silver
Laundry and dry cleaning
Linens
Operating supplies
Other operating expenses
Refuse removal
Repairs and maintenance
Uniforms
Total other expenses
22,000
20,000
15,000
10,000
8,000
4,000
5,000
2,000
86,000
24,000
22,000
16,000
11,000
9,000
4,500
5,500
2,200
94,200
1.76%
1.60%
1.20%
0.80%
0.64%
0.32%
0.40%
0.16%
6.88%
1.78%
1.63%
1.19%
0.81%
0.67%
0.33%
0.41%
0.16%
6.98%
Total Departmental Expenses
681,000
752,200
54.48%
55.72%
$169,000
$179,800
13.52%
13.32%
Cost of Food Sold
Other Revenue
Unused minimum
Dining room rental
Total Other Revenue
Total Gross Profit and Other Revenue
Departmental Expenses
Payroll and Related Expenses
Salares and wages
Less services charges
Payroll taxes and emplyee benefits
Employees’ meals
Total payroll and related expenses
Other Expenses
Departmental Net Income
Appendices
7.27
Understanding Club Finances
Appendix A: Approach to Club Industry
Statements of Activities
Exhibit 10
Results of Operations by Geographic Divisions and Size Classifications
Exhibit 14
Base-Year Comparison – Food Department
A p p e n d i c e s
Spartan Club
Base – Year Comparisons
Food Department
20x7
20x8
20x9
100.00%
110.00%
120.00%
Cost of food consumed
Less: Employees’ meals
Cost of food sold
100.00%
100.00%
100.00%
107.7%
111.1%
107.5%
112.8%
122.2%
112.4%
Gross Profit on Food Sales
100.00%
111.5%
124.5%
100.00%
100.00%
100.00%
105.3%
111.1%
107.1%
110.5%
100.0%
107.1%
100.00%
110.7%
121.4%
106.4%
<110.0%>
106.7%
115.4%
106.6%
117.0%
<120.0%>
120.0%
138.5%
117.9%
Food Sales
Cost of Food Sold
Other Revenue
Unused minimum
Dining room rental
Total other revenue
Total Gross Profit and Other Revenue
Departmental Expenses
Payroll and Related Expenses
Salaries and wages
Less service charges
Payroll taxes and emplyee benefits
Employees’ meals
Total payroll and related expenses
100.00%
<100.0%>
100.00%
100.00%
100.00%
Other Expenses
China, glassware, silver
Laundry and dry cleaning
Linens
Operating supplies
Other operating expenses
Refuse removal
Repairs and maintenance
Uniforms
Total other expenses
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
115.8%
105.3%
107.1%
111.1%
106.7%
105.3%
111.1%
111.1%
109.4%
126.3%
115.8%
114.3%
122.2%
120.0%
118.4%
122.2%
122.2%
119.8%
Total Departmental Expenses
100.00%
107.0%
118.2%
Departmental Net Income
100.00%
128.6%
136.8%
Understanding Club Finances
7.28
Appendices
A p p e n d i c e s
Appendix B: Understanding the Statement of
Financial Position
The statement of financial position consists of assets, liabilities and net assets
(sometimes called members’ equity on internal statements). Simply stated,
assets are things owned by the club, liabilities are claims of outsiders to club
assets, and net assets are claims of club members (or the club’s owner) to
assets. Thus, assets must equal (balance) liabilities and net assets. Assets
include various accounts such as cash, inventory for resale, buildings and
accounts receivable.
Exhibit 1
Major Elements of the Statement of Financial Position
Assets
Current Assets
Noncurrent Assets:
Noncurrent Receivables
Designated Assets
Investments – Long-Term
Property and Equipment
Other Assets
Liabilities and Net Assets
Current Liabilities
Long-Term Debt
Other Long-Term Liabilities
Unrestricted Net Assets (Members’ Equity)
Liabilities include accounts such as accounts payable, wages payable and
mortgage payable. Net assets include membership certificates (capital stock),
designated equity and undesignated equity. These major elements are generally divided into various classes, as shown in Exhibit 1. While statements of
financial position may be organized differently, most clubs follow the order
shown in Exhibit 1.
Current Accounts
Under both assets and liabilities is a “current” classification. Current assets normally refers to items to be converted to cash or used in club operations within
one year. Current liabilities are obligations that are expected to be satisfied
either by using current assets or by creating other current liabilities within one
year.
Current Assets
Current assets, listed in the order of liquidity, generally consist of cash and
cash equivalents, short-term investments, receivables, inventories, prepaid
expenses and other current assets.
Appendices
7.29
Understanding Club Finances
Appendix B: Understanding the Statement of
Financial Position
A p p e n d i c e s
Cash and cash equivalents consist of cash in house banks, cash in checking and
savings accounts, and certificates of deposit. The exception is cash restricted for
the retiring of long-term debt, which should be shown under designated assets.
Cash is shown in the statement of financial position at its face value.
Short-term investments are shown as current assets when they are available for
conversion to cash. These investments should be carried on the statement of
financial position at fair market value (FMV) if FMV is readily determinable. If FMV
is not readily determinable, then such investments should be carried at cost.
The current asset category of receivables consists of accounts receivable,
notes and deferred initiation fees receivable, the current portion of non-current
receivables and other receivables. Accounts receivable consist of the total
amount due on the members’ open accounts for dues, assessments and member charges. Notes and deferred initiation fees expected to be collected within one year are reflected in this account. Notes and deferred initiation fees that
are not due within one year should be included under noncurrent receivables.
The current portion of noncurrent receivables are shown as current assets.
Receivables other than those mentioned above are reported as “other.”
Receivables should be stated at the amount estimated to be collectible. An
allowance for “doubtful” accounts – the amount of receivables estimated to be
uncollectible – should be subtracted from receivables to provide a net receivables amount.
Inventories of a club consist primarily of merchandise held for resale. If the
amount of inventory is significant and the difference between cost and market
value is significant, then the inventory should be stated on the balance sheet at
the lower of cost or market.
In the 2008 study of club balance sheets by Raymond Schmidgall and Agnes
DeFranco, the average amount of various inventories were:
food
beer:
wine
other alcoholic
golf proshop
Understanding Club Finances
$29,100
$2,000
$23,400
$13,600
$91,900
7.30
Appendices
A p p e n d i c e s
Appendix B: Understanding the Statement of
Financial Position
Prepaid expenses represent purchased goods and services to be used by the
club within one year. For example, assume that a fire insurance premium of
$30,000 affords insurance protection for one year after the transaction. At the
date of the expenditure, the $30,000 is classified as prepaid insurance and,
thereafter, is amortized by a monthly reduction of $2,500 (1/12 of $30,000),
which is shown on the statement of activities as insurance expense. At the end
of the year (assume six months later) the prepaid insurance would be shown
as $15,000 (6 x $2,500). Other prepaid expenses include prepaid rent, prepaid
property taxes, prepaid interest and prepaid maintenance and service contracts.
Prepaid expenses that will benefit the club beyond one year from the statement
of financial position date should be classified as “other assets.” For example,
assume that a three-year fire insurance policy costs $90,000. The entry to
record the cash disbursement of $90,000 would be to debit prepaid insurance
for $30,000 (the cost of coverage for the next 12 months) and to debit “deferred
charges – insurance” for $60,000 (the cost of insurance coverage paid that
benefits the club for periods beyond 12 months from the statement of financial
position date).
Finally, items that are to be realized in cash or consumed within one year of the
statement of financial position that are not classified in the current assets categories just discussed are shown as “other current assets.”An example would
be a security deposit for future services.
Current Liabilities
Current liabilities are obligations at the statement of financial position date that
are expected to be paid by converting current assets or by creating other current liabilities within one year. They generally consist of one of the four following types:
1. Payables resulting from the purchase of goods, services and labor and from
the applicable payroll taxes.
2. Amounts received in advance for dues and rentals.
3. Obligations to be paid in the next accounting period relating to property
and equipment purchases or to the reclassification of long-term debt as
current.
4. Income taxes payable.
Appendices
7.31
Understanding Club Finances
A p p e n d i c e s
Appendix B: Understanding the Statement of
Financial Position
According to the USFRC, the major classifications of current liabilities are notes
payable, accounts payable, taxes payable and accrued, accrued expenses,
the current portion of long-term debt, deferred revenue, deferred income taxescurrent, special purpose funds and other current liabilities. Notes payable
include short-term notes that are due within 12 months from the statement of
financial position date. Accounts payable include amounts due to creditors for
merchandise, services, equipment or other purchases. Accrued expenses are
expenses incurred before the statement of financial position date that are not
due until after the statement of financial position date. Current portion of longterm debt includes the principal payments of long-term debt, such as notes
and similar liabilities, sinking fund obligations and the principal portion of capitalized leases due within 12 months.
Deferred revenue includes revenues received in advance that benefit future
periods within the next 12 months, such as advance deposits and initiation
fees. Deferred income taxes-current reveals any tax effects resulting from temporary differences between financial and tax reporting for current items.
Special purpose funds may be funds such as prize funds or gift certificates.
These funds are supported by members for special events. Other current liabilities is used to reflect minor current liabilities not shown separately on the
Statement of Financial Position.
Obligations to be paid with restricted cash (that is, cash that has been deposited in separate accounts, often for the purpose of retiring long-term debt or as
a reserve for capital improvements), should be classified as long-term, not current, obligations.
Current liabilities are often compared with current assets. The difference
between the two is commonly called working capital. The current ratio results
from dividing current assets by current liabilities. Many clubs operate successfully with a current ratio approximating 1.5 to 1, compared with a reasonable
current ratio for other segments of the hospitality industry of 1 to 1. The major
reason for this difference lies with the relatively low turnover of receivables by
clubs as compared with restaurants and lodging operations.
The Statement of Financial Position from the Uniform System of Financial
Reporting for Clubs, 6th Revised Edition, is shown in Exhibit 2.
Understanding Club Finances
7.32
Appendices
Appendix B: Understanding the Statement of
Financial Position
Exhibit 2
Statement of Financial Position Assets
A p p e n d i c e s
Statement of Financial Position
[Insert period ended]
Assets
Current Year
Current Assets
Cash and cash equivalents
$
Short-term investments
Receivables:
Accounts receivable – members
Notes and deferred initiation fees receivable
Current portion of noncurrent receivables
Other receivables
Total receivables
Less allowance for doubtful accounts
Net receivables
Inventories
Prepaid expenses
Other current assets
Total current assets
Prior Year
$
Noncurrent Receivables, Net of Current Portion
Designated Assets
Investments – Long-Term
Property and Equipment
Land
Golf course and golf course improvements
Construction in progress
Leasehold and leasehold improvements
Buildings and building improvements
Furniture, fixtures, and equipment
China, glassware, silver, linen, and uniforms
Total property and equipment
Less accumulated depreciation and amortization
Net property and equipment
Appendices
7.33
Understanding Club Finances
Appendix B: Understanding the Statement of
Financial Position
Current Year
Prior Year
$
$
$
$
$
$
A p p e n d i c e s
Other Assets
Security deposits
Deferred charges
Other
Total other assets
Total Assets
Current Liabilities
Notes payable
Accounts payable
Taxes payable and accrued
Accrued expenses
Current portion of long-term debt
Deferred revenue
Deferred income taxes – current
Special purpose funds
Other current liabilities
Total current liabilities
Long-Term Debt
Notes payable, net of current maturity
Obligations under capital lease, net of
current maturity
Mortgage payable, net of current maturity
Total long-term debt
Other Long-Term Liabilities
Deferred compensation
Deferred income taxes – noncurrent
Interest rate swaps
Other
Total other long-term liabilities
Total liabilities
Unrestricted Net Assets (Members’ Equity)
Capital stock
Designated
Undesignated
Total unrestricted net assets
Total Liabilities and Net Unrestricted Assets
Understanding Club Finances
7.34
Appendices
A p p e n d i c e s
Appendix B: Understanding the Statement of
Financial Position
Noncurrent Receivables
Noncurrent receivables include both accounts and notes receivable that are
not expected to be collected within one year from the statement of financial
position date. If any collectability is uncertain regarding noncurrent receivables, an allowance for doubtful noncurrent receivables should be used (similar to the allowance account for current receivables) and subtracted from total
noncurrent receivables to provide net noncurrent receivables.
Designated Assets
Designated assets include both cash and investments that have been designated by the club’s Board for special purposes. For example, cash may be set
aside to pay off long-term debt or for a reserve for capital improvement. Since
this cash is not available to pay current bills as they become due, it should be
reported on the statement of financial position in the “designated assets” classification. Two particular designated asset groups often used by clubs are capital improvements and endowment. If both of these designated assets are
used, they should be shown separately on the statement of financial position.
See Exhibit 3 for an example of this presentation.
Investments – Long-Term
Long-term investments includes debt and equity instruments that are expected
to be held for a period of more than one year. Investments should be shown at
market value and all unrealized gains and losses should be shown on the statement of activities.
Property and Equipment
Property and equipment consists of land; buildings; leasehold and leasehold
improvements; construction in progress; and furniture, fixtures and equipment.
Property and equipment under capital leases should also be shown in this section of the statement of financial position. With the exception of land, the cost
of all property and equipment is written off to expense (depreciation expense)
over time due to the matching principle. The depreciation methods used
should be disclosed in a footnote to the statement of financial position. On the
statement of financial position, property and equipment are shown at cost and
are reduced by the related accumulated depreciation.
Appendices
7.35
Understanding Club Finances
A p p e n d i c e s
Appendix B: Understanding the Statement of
Financial Position
Other Assets
Other assets consist of all noncurrent assets not included in the aforementioned
categories. Other assets include deferred charges and security deposits.
Deferred charges typically are related to financing activities and represent the
direct costs of obtaining financing, such as loan fees and bond issuance costs.
Such costs are usually amortized over the life of the related financing. The method
and period of amortization should be disclosed in notes to the financial statements. Security and similar types of deposits are funds deposited to secure occupancy or utility services (such as telephone, water, electricity and gas).
Long-Term Debt
Long-term debt is obligations at the statement of financial position date that are
expected to be paid beyond the next 12 months or, if paid in the current year, will
be paid using designated assets. Common long-term liabilities consist of notes
payable, mortgages payable and capitalized lease obligations. Any long-term
debt to be paid with current assets within the next year is reclassified as current
liabilities. Still, long-term debt is often reported on the balance sheet in total with
the amount due within 12 months subtracted as “Less Current Maturities.”
Exhibit 3
Sample Statement of Financial Position, Showing Capital
Improvement and Endowment Assets
XYZ Club
Statement of Financial Position
October 31, 20X8
Assets
Liabilities and Net Assets
Operating Fund
Operating Fund
$ 102,000
Cash and cash equivalents
Investments
50,000
Accounts receivable
200,000
Inventories, at cost
20,000
Prepaid expenses
50,000
Property & equipment, at cost – net
of accumulated depreciation
2,000,000
Total operating fund assets
2,422,000
Assets Restricted For Capital
Improvements
Cash and cash equivalents
Investments
Total capital improvement fund
assets
50,000
100,000
150,000
Assets Restricted for Endowments
Cash and cash equivalents
Investments
Total endowment fund assets
Total assets
101,000
500,000
601,000
3,173,000
Accounts payable
Taxes payable
Accrued expenses
Unearned income
Total operating fund
liabilities
$ 50,000
20,000
30,000
50,000
150,000
Capital Improvement Fund
Notes payable
Accounts Payable
Total capital improvement
fund liabilities
Total liabilities
50,000
25,000
75,000
225,000
Net Assets
Operating fund
Capital improvement fund
Endowment fund
Total net assets
2,272,000
75,000
601,000
2,948,000
Total liabilities and net assets
3,173,000
Adapted from Condon O’Meara McGinty and Donnelly, LLP, Financial Accounting Standards Board
Procurement: What They Mean to Your Club
Understanding Club Finances
7.36
Appendices
Appendix B: Understanding the Statement of
Financial Position
A p p e n d i c e s
Lease obligations reported as long-term liabilities generally cover several
years, while short-term leases are usually expensed when paid. Accounting for
leases is beyond the scope of this chapter.
Other Long-Term Liabilities
Other long-term liabilities include deferred compensation, deferred income
taxes and other long-term obligations not included under long-term debt.
Deferred compensation arrangements are common employee remuneration
vehicle at many clubs. These include, but are not limited to, the following:
• Section 457 plans in which a club will typically record an asset and liability
of equal amount. Investments in such plans should be recorded at fair market value.
• One-time grants to specific employees for retirement benefits. Often, the
Board will decide to pay a long-time employee, upon retirement, a fixed
sum for the remainder of his or her life or for a specified period. The present value of the payments should be recorded as a liability at the date the
benefits are granted.
• Liabilities that will accrue to specific employees over a period of service.
This type of deferred compensation arrangement is often buried in employment contracts of key personnel. Typically, the retirement benefit will vest
over time, and a liability should be accrued each period to record the vested amount.
Where a club has a plan to provide post-retirement benefits (typically healthcare) to covered employees – and actuarial valuation of the plan may be
required – then a liability may need to be recorded. All of the above situations
should be discussed with professional advisors prior to their enactment.
Deferred income taxes pertain to clubs that are subject to income taxes. They
result from timing differences in reporting for financial and income tax purposes – that is, the accounting treatment of an item for financial reporting purposes results in a different amount of expense (or revenue) that used for tax purposes. Generally, the most significant timing difference for clubs relates to
depreciation. Clubs that are subject to income taxes generally use the straightline method for financial reporting purposes and an accelerated method for
income tax purposes. For example, suppose a club subject to income taxes
decides to depreciate equipment on a straight-line basis at $15,000 a year for
Appendices
7.37
Understanding Club Finances
Appendix B: Understanding the Statement of
Financial Position
A p p e n d i c e s
reporting purposes and depreciate the same asset $25,000 for the year using
an accelerated depreciation method for tax purposes. If the club’s marginal tax
rate is 30 percent, then the difference in depreciation expense of $10,000
($25,000 – $15,000) times 30 percent results in $3,000 cash saved and must
be reported as a noncurrent liability. The book entry to record this savings is as
follows:
Income Tax Expense
Deferred Income Taxes
$3,000
$3,000
Other long-term liabilities include interest rate swaps, advance deposits that
will benefit the club more than 12 months from the Statement of Financial
Position date, refundable deposits from members refundable upon terminating
their membership and accrued pension obligations.
Net Assets
According to the USFRC, the unrestricted net assets section of the statement
of financial position reflects the members’ interests in the club’s assets. Exhibit
2 shows this section as “Unrestricted Net Assets (Members’ Equity)” (See page
7.34). Although either term is appropriate for internal documents, FASB
Statement No. 117 (“Financial Statements of Not-for-Profit Organizations”),
which U.S. clubs must follow, specifies that “net assets” be used in the external financial documents of nonprofit clubs. The detail of this section in Exhibit
3 on page 7.36 includes capital stock (membership certificates), designated
net assets and undesignated net assets. Membership certificates include
refundable deposits by members for which they receive a certificate entitling
them to vote for the governing Board of the club. Designated net assets
includes amounts designated by the club’s Board for restricted purposes;
examples include capital improvement assessments and other nonoperating
assessments to augment the capital of the club. Undesignated net assets
includes equity that has not been restricted and has been generated from normal operations of the club.
Footnotes
The statement of financial position, although packed with financial information,
is not complete without the other financial statements (statement of activities
and statement of cash flows) and footnotes. The full disclosure principle
Understanding Club Finances
7.38
Appendices
A p p e n d i c e s
Appendix B: Understanding the Statement of
Financial Position
requires that financial information be sufficient to inform the financial information’s users – creditors, club members and others. This can only be accomplished by providing footnote disclosure in addition to the financial statements.
Thus, footnotes are an integral part of a club’s financial statements. They
should contain additional information not presented in the body of the financial
statements. They should not contradict or soften the disclosure of the financial
statements but rather provide needed explanations. The financial statements of
clubs generally include – but are not limited to – the following footnotes:
• Brief description of the club (to include services to members and type of
ownership)
• Retirement and/or deferred compensation plans
• Lease agreements
• Long-term debt agreements
• Contingent liabilities
• Pending lawsuits
• Income tax status
• Changes in accounting methods
• Extraordinary items of income or expense
• Long-term contracts
• Definition of cash and cash equivalents
• Description of designated assets
• Concentration of credit risk
• Description of operating funds
• Use of significant estimates in preparing financial statements
• Long-term investments
Any such relevant information may affect how a financial statement’s users
interpret that statement. The statement would be incomplete and potentially
misleading without all relevant footnotes.
Statement of Financial Position Analysis
The information shown on the statement of financial position is most useful
when it is properly analyzed. The analysis of a statement of financial position
may include the following:
1. Horizontal analysis (comparative statements)
2. Vertical analysis (common-size statements)
3. Base-year comparisons
4. Ratio analysis
Appendices
7.39
Understanding Club Finances
Appendix B: Understanding the Statement of
Financial Position
A p p e n d i c e s
In the remainder of this chapter, the first three techniques will be discussed.
The fourth technique, ratio analysis, is a complex subject requiring a chapterlength treatment is covered elsewhere in this manual.
Horizontal Analysis
Horizontal analysis compares two statements of financial position: the current
statement of financial position and the statement of financial position for the
end of the previous period. In this analysis, the two statements of financial position are often referred to as comparative statements of financial position. This
represents the simplest approach to analysis and is essential to the fair reporting of financial information. Often included for management’s analysis are the
two sets of figures with the changes from one period to the next expressed both
in absolute and relative terms.
Absolute changes show the change in dollars between two periods. For example, assume that cash was $50,000 at the end of year 20X8 and $70,000 at the
end of year 20X9. The absolute change is the difference of $20,000.
The relative change – also called the percentage change – is found by dividing the absolute change by the amount for the previous period. The relative
change, using the cash example just discussed, is 40 percent ($20,000 ÷
$50,000). The $20,000 absolute change may not seem significant by itself, but
viewed as a relative change, it is a 40 percent increase over the previous year.
Examine the comparative statement of financial position for the fictional
Mercury Country Club found in Exhibit 4 (See page 7.42). Comparative analysis shows that cash increased by $5,000 in absolute terms and 25 percent in
relative terms, while accounts receivable increased by $30,000 and 5.8 percent. Are these increases substantial? A club manager might desire answers to
several questions, including: (1) Are the amounts of the increases justified? and
(2) What measures are being taken to ensure the collection of the accounts
receivable? Significant changes in all accounts should be investigated.
Understanding Club Finances
7.40
Appendices
A p p e n d i c e s
Appendix B: Understanding the Statement of
Financial Position
Vertical Analysis
Another approach to analyzing a statement of financial position is to reduce
category entries to percentages. This vertical analysis, often referred to as
common-size statement analysis, is accomplished by having total assets equal
100 percent and individual asset categories equal percentages of the total.
Likewise, total liabilities and net assets equal 100 percent and individual categories equal percentages of the total.
Common-size statements of financial position permit a comparison of amounts
relative to a base within each period. For example, assume that cash at the end
of year 20X8 is $50,000 and total assets are $5 million. At the end of year 20X9,
assume that cash is $70,000 and total assets are $7 million. Horizontal analysis shows a $20,000/40 percent increase. But cash at the end of each year is
one percent of the total assets ($50,000 ÷ $5,000,000 = $70,000 ÷
$7,000,000). What may first appear to be excessive cash at the end of year
20X9 ($20,000) may not be excessive since cash is one percent of total assets
in both cases. However, only a detailed investigation would resolve whether
cash equal to one percent of total assets is required in each case.
Examine the Mercury Country Club’s common-size statement of financial position (Exhibit 5 on page 7.43). Notice that cash of $20,000 at the end of 20X8 is
0.5 percent of total assets, while cash of $25,000 at the end of 20X9 is 0.6 percent of total assets. Management should investigate significant changes to
determine if they are reasonable. If the changes are found to be unreasonable,
management should attempt to remedy the situation.
Common-size statement comparisons are not limited strictly to internal use.
Comparisons may also be made against the financial statements of other
clubs, when available, and against industry averages. Common-size figures
are helpful in comparing club operations that differ materially in size. For example, assume that a large club operation has current assets of $500,000, while
a much smaller club’s current assets are $50,000 and that both figures are for
the same period. If total assets equal $5 million for the large club and $500,000
for the small club, then both operations have current assets equaling 10 percent of total assets. These percentages provide a more meaningful comparison
than the dollar amount of the current assets when comparing the financial
statements of these two clubs.
Appendices
7.41
Understanding Club Finances
Appendix B: Understanding the Statement of
Financial Position
Exhibit 4
Horizontal Analysis: Comparative Statement of Financial
Position, Mercury Country Club
A p p e n d i c e s
Assets
December 31
20X9
20X8
Change from 20X8
to 20X9
Amount
%
Current Assets
5,000
30,000
5,000
1,000
41,000
25.0%
5.8%
16.7%
9.1%
7.1%
800,000
3,000,000
1,150,000
4,950,000
1,100,000
3,850,000
0
0
50,000
50,000
100,000
(50,000)
0.0%
0.0%
4.3%
1.0%
9,1%
(1.3%)
3,000
3,000
0
0.0%
$4,425,000
$4,434,000
($9,000)
-0.2%
Cash
Accounts receivable
Inventories
Prepaid expenses
Total current assets
$ 25,000
550,000
35,000
12,000
622,000
$ 20,000
520,000
30,000
11,000
581,000
800,000
3,000,000
1,200,000
5,000,000
1,200,000
3,800,000
$
Property and Equipment
Land
Buildings
Furniture, fixtures, and equipment
Total
Less accumulated depreciation
Net property and equipment
Other Assets
Total Assets
Liabilities and Net Assets
Current Liabilities
Accounts payable
Taxes payable
Current portion of long-term debt
Total current liabilities
$ 325,000
75,000
100,000
500,000
$ 300,000
70,000
100,000
470,000
$ 25,000
5,000
0
30,000
8.3%
7.1%
0.0%
6.4%
300,000
2,000,000
2,300,000
350,000
2,200,000
2,550,000
(50,000)
(200,000)
(250,000)
(14.3%)
(9.1%)
(9.8%)
1,000,000
200,000
425,000
1,625,000
1,000,000
200,000
214,000
1,414,000
0
0
211,000
211,000
0.0%
0.0%
98.6%
14.9%
$4,425,000
$4,424,000
($9,000)
-0.2%
Long-Term Debt
Notes payable
Mortgage payable
Total long-term debt
Net Assets
Capital stock
Designated
Undesignated
Total net assets
Total Liabilities and Net Assets
Understanding Club Finances
7.42
Appendices
Appendix B: Understanding the Statement of
Financial Position
Exhibit 5
Vertical Analysis: Common-Size Statement of Financial
Position, Mercury Country Club
A p p e n d i c e s
Assets
December 31
20X9
20X8
Common-Size
20X9
20X8
Current Assets
$ 25,000
550,000
35,000
12,000
622,000
$ 20,000
520,000
30,000
11,000
581,000
0.6%
12.4%
0.8%
0.3%
14.1%
0.5%
11.7%
0.7%
0.2%
13.1%
800,000
3,000,000
1,200,000
5,000,000
1,200,000
3,800,000
800,000
3,000,000
1,150,000
4,950,000
1,100,000
3,850,000
18.1%
67.8%
27.1%
113.0%
27.1%
85.9%
18.0%
67.7%
25.9%
111.6%
24.8%
86.8%
3,000
3,000
0.1%
0.1%
$4,425,000
$4,434,000
100.0%
100.0%
Cash
Accounts receivable
Inventories
Prepaid expenses
Total current assets
Property and Equipment
Land
Buildings
Furniture, fixtures, and equipment
Total
Less accumulated depreciation
Net property and equipment
Other Assets
Total Assets
Liabilities and Net Assets
Current Liabilities
Accounts payable
Taxes payable
Current portion of long-term debt
Total current liabilities
$ 325,000
75,000
100,000
500,000
$ 300,000
70,000
100,000
470,000
7.3%
1.7%
2.3%
11.3%
6.8%
1.6%
2.3%
10.6%
300,000
2,000,000
2,300,000
350,000
2,200,000
2,550,000
6.8%
45.2%
52.0%
7.9%
49.6%
57.5%
1,000,000
200,000
425,000
1,625,000
1,000,000
200,000
214,000
1,414,000
22.6%
4.5%
9.6%
36.7%
22.6%
4.5%
4.8%
31.9%
$4,425,000
$4,434,000
100.0%
100.0%
Long-Term Debt
Notes payable
Mortgage payable
Total long-term debt
Net Assets
Capital stock
Designated
Undesignated
Total net assets
Total Liabilities and Net Assets
Appendices
7.43
Understanding Club Finances
Appendix B: Understanding the Statement of
Financial Position
Exhibit 6
Example of Base-year Comparisons
A p p e n d i c e s
Current Assets
Mercury Country Club
20X9
20X8
20X7
138.9%
110.0%
109.4%
120.0%
111.1%
104.0%
93.8%
110.0%
100.0%
100.0%
100.0%
100.0%
111.1%
103.8%
100.0%
Current Assets
Cash
Accounts receivable
Inventories
Prepaid expenses
Total current assets
Base-Year Comparisons
A third approach to analyzing statements of financial position is base-year
comparisons. This approach allows a meaningful comparison of the statements
of financial position for several periods. A base period is selected as a starting
point, and all subsequent periods are compared with the base. Exhibit 6 illustrates the base-year comparisons of the fictional Mercury Country Club’s current assets for the years 20X7-20X9.
The base-year comparisons of the Mercury Country Club use 20X7 as the
base. Total current assets for 20X9 are 111.1 percent of the total current assets
for 20X7. The user of this analysis is quickly able to determine the changes of
current assets over a period of time. For example, cash increased by 38.9 percent from the end of 20X7 to the end of 20X9, while accounts receivable
increased by only 10 percent.
Understanding Club Finances
7.44
Appendices
Appendix C: Statement of Cash Flows
A p p e n d i c e s
The Statement of Cash Flows per the Uniform System of Financial
Reporting for Clubs
The USFRC includes only the Statement of Cash Flows (SCF) format following
the indirect approach as shown in Exhibit 5 (page 7.46). The USFRC does indicate either the direct or indirect approaches may be used. Very few, if any
clubs, will use all the line items shown on Exhibit 5. Most lines on this exhibit
are discussed in this chapter. However, revenue designated for capital replacements and improvements should be noted. An example would be initiation fees
designated for capital improvements. Since initiation fees must be shown on
the Statement of Activities, it will impact the bottom line of that statement, resulting in an increase in unrestricted net assets. When initiation fees are designated for capital improvements, the amount must be subtracted in the operating
activities section of the SCF and added in the financing activities section of the
SCF.
Appendices
7.45
Understanding Club Finances
Appendix C: Statement of Cash Flows
Exhibit 5
Statement of Cash Flows
Statement of Cash Flows
(Indirect Approach)
Period Ended
A p p e n d i c e s
Cash Flows From Operating Activities
Increase (decrease in unrestricted net assets
Adjustments to reconcile increase (decrease) in net assets to net cash
provided (used) by operating activities
Depreciation and amortization
Deferred income taxes
Revenue designated for capital replacements and improvements
(Gains) losses on sales of investments
(Increase) decrease in assets
Accounts receivable
Inventories
Prepaid expenses
Other current assets
Security deposits
Increase (decrease) in liabilities
Accounts payable
Taxes payable and accrued
Accrued expenses
Deferred revenue
Special purpose funds
Other current liabilities
Net cash provided (used) by operating activities
$
Cash Flows From Investing Activities
Deposits to designated assets
Expenditures for property and equipment
Purchases of investments
Redemption of investments
Net cash provided (used) by investing activities
Cash Flows From Financing Activities
Revenue designated for capital replacement and improvements
Proceeds of debt
Repayment of debt
Capital stock (membership certificates) sold
Capital stock (membership certificates) redeemed
Net cash provided (used) by financing activities
Increase (Decrease) In Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Period
Cash and Cash Equivalents, End of Period
$
Supplemental Disclosure of Cash Flow Information
Interest paid during the year
Income taxes paid during the year
$
$
See notes to financial statements.
Understanding Club Finances
7.46
Appendices
A p p e n d i c e s
Appendix C: Statement of Cash Flows
Preparing the SCF
The principal sources of information needed for preparing the SCF are the
statement of activities, the statement of members’ equity and two successive
statements of financial position from the beginning and end of the accounting
period. In addition, details of transactions affecting any change in noncurrent
statement of financial position accounts must be reviewed. For example, if a
comparison of two successive statements of financial position shows the building account has increased by $5 million, the account must be analyzed to
determine the reason(s) for the change. Simply reflecting the net change of $5
million on the SCF is generally not acceptable.
To prepare the SCF:
1. Determine net cash flows from operating activities.
2. Determine net cash flows from investing activities.
3. Determine net cash flows from financing activities.
4. Present cash flows by activity on the SCF.
Exhibits 6 and 7 show a statement of financial position, a condensed statement
of activities and a statement of members’ equity for the Sample Club, respectively. These will be used to illustrate this four-step approach. The preparation
of the SCF is illustrated using the indirect method for showing net cash flows
from operating activities.
Step 1: Determine Net Cash Flows from Operating Activities
To determine the net cash flow from operating activities using the indirect
method, focus first on the statement of activities by starting with the increase in
net assets of $500,000. Next, adjust the increase in net assets for items on the
statement of activities that did not provide or use cash. In particular, consider
depreciation expense and the gain on the sale of the investment. Since depreciation was subtracted on the statement of activities to determine the increase
in net assets, it must be added to increase in net assets on the SCF to determine net cash flow from operating activities. Since the gain on the sale of
investments is not a cash flow (the proceeds from the sale of investments of
$150,000 are an investing activity on the SCF and will be discussed later), the
gain of $100,000 must be subtracted from the increase in net assets on the
SCF. Thus, the net cash flows from operating activities are determined as follows:
Appendices
7.47
Understanding Club Finances
Appendix C: Statement of Cash Flows
Exhibit 6
Statement of Financial Position
Sample Club
Statement of Financial Position
December 31, 20X8 and 20X9
Assets
20X8
20X9
A p p e n d i c e s
Current Assets
$
Cash
Accounts Receivable
Inventory
Total
Investments
505,000
430,000
110,000
1,045,000
$
510,000
426,000
112,000
1,048,000
50,000
300,000
200,000
9,000,000
1,000,000
(5,000,000)
5,200,000
200,000
9,000,000
1,252,000
(5,500,000)
4,952,000
$ 6,295,000
$ 6,300,000
$ 316,000
104,000
57,000
477,000
$ 316,500
104,500
61,000
482,000
4,050,000
3,300,000
1,000,000
768,000
1,768,000
1,250,000
1,268,000
2,518,000
$6,295,000
$6,300,000
Property and Equipment
Land
Building
Equipment
Less: Accum. Depreciation
Total
Total Assets
Liabilities and Net Assets (Members’ Equity)
Current Liabilities
Accounts Payable
Accrued Payroll
Payroll Taxes Payable
Total
Long-Term Debt
Net Assets (Members’ Equity)
Capital Stock
Undesignated Equity
Total
Total Liabilities and Net Assets (Members’ Equity)
Net Cash Flows from Operating Activities:
Increase in Net Assets
Adjustments to Reconcile Increase in
Net Assets to Net Cash Flows from Operating Activities:
Operating Activities:
Depreciation expense
Gain on sale of investments
Partial Net Cash Flows from Operating Activities
Understanding Club Finances
7.48
$500,000
$500,000
(100,000)
400,000
$900,000
Appendices
Appendix C: Statement of Cash Flows
Exhibit 7 Statement of Activities and Statement of Undesignated Equity
A p p e n d i c e s
Sample Club
Condensed Statement of Activities and Statement of
Undesignated Equity
For the Year Ended December 31, 20X9
Revenues
Cost of Goods Sold
Labor Expenses
Payroll Taxes
Other Expenses
Depreciation Expense
Gain on the Sale of Investments
$7,000,000
1,000,000
3,000,000
700,000
1,400,000
500,000
100,000
Increase in Net Assets
Undesignated Equity – 12/31/X8
Undesignated Equity – 12/31/X8
500,000
768,000
$1,268,000
Other Information:
1. No property and equipment were disposed of during 20X9.
2. Investments and equipment purchases during 20X9 were made with
cash. No funds were borrowed.
3. Investments costing $50,000 were sold for $150,000, resulting in a
$100,000 gain on the sale of investments during 20X9.
4. Interest expense paid during the year totaled $400,000.
The second type of adjustment includes changes in current accounts from the
statement of financial position. The cash account is not considered, since we
are essentially looking at all other statement of financial position accounts to
determine what caused the change in cash for purposes of the SCF. The
change in the remaining five current accounts is as follows:
Balances – December 31
Account
Current Assets:
Accounts Receivable
Inventory
Currentl Liabilities
Accounts Payable
Accrued Payroll
Payroll Taxes Payable
Appendices
Change in
Account Balance
20X8
20X9
$30,000
$10,000
$26,000
$12,000
$4,000
$2,000
(dec.)
(inc.)
$16,000
$ 4,000
$ 7,000
$16,500
$ 4,500
$11,000
$ 500
$ 500
$4,000
(inc.)
(inc.)
(inc.)
7.49
Understanding Club Finances
Appendix C: Statement of Cash Flows
A p p e n d i c e s
A brief explanation follows for each of the above current accounts, including
how the change affects net cash flow from operating activities.
Accounts receivable relate directly to revenues, which were $7 million for the
Sample Club for 20X9. Revenues result in cash inflows when the members pay
their bills. However, under accrual accounting, the revenues are recorded
when services are provided. Most of the revenues during 20X9 resulted in cash
as the members paid their accounts, but at year end the accounts receivable
account balance was $26,000. Analysis of the account will reveal how much
cash resulted from sales:
Accounts Receivable
12/31/X8 Balance
Revenues
12/31/X9 Balance
430,000
7,000,000
426,000
Cash received
7,004,000
Alternatively, the cash receipts from club members could be determined as follows:
Cash Receipts
from Members
=
AR Beginning
Balance
=
=
$430,000
$7,004,000
+
Revenues
–
AR Ending
Balance
+
$7,000,000
–
$426,000
In preparing the SCF, we need to show a decrease in accounts receivable of
$4,000, which is added to the increase in net assets as an increase in cash to
determine net cash flows from operating activities.
Understanding Club Finances
7.50
Appendices
Appendix C: Statement of Cash Flows
A p p e n d i c e s
The change in the balances of the inventory account is an increase of $2,000.
Inventory relates to the purchases and cost of goods sold (food and beverages) accounts. Remember, the cost of goods sold is the cost of food and beverage inventory sold, not the cash disbursed for purchases. Therefore, we
need to determine the purchases for the year as follows:
+
=
–
Ending inventory
Cost of goods sold
Goods available for sale
Beginning inventory
Purchases
$ 112,000
1,000,000
1,112,000
110,000
$1,002,000
The $2,000 increase in inventory causes the accrual-basis cost of goods sold
to be $2,000 less than purchases. By assuming that the balance in the purchases account represents the cash amount paid for purchases, we must show
a decrease in cash flows from operating activities of $2,000.
However, not all purchases were made for cash. The $500 increase in accounts
payable represents the difference between purchases on account and cash
paid to suppliers during 20X9. An increase in accounts payable means the
amount of cash paid was less than the amount of purchases. Thus, the $500
increase in accounts payable must be added back to the accrual-basis
change in net assets to determine net cash flows from operating activities. An
analysis of the accounts payable account shows:
Accounts Payable
Payments to suppliers
1,001,500
1/1/X8 Balance
Purchases
12/31/X9 Balance
316,000
1,002,000
316,500
The increase in the accrued payroll account of $500 represents the difference
between the accrual basis labor costs of $3 million and the cash payments to
personnel of $2,999,500. This determination is apparent in the analysis of the
accrued payroll account:
Accounts Payroll
Payments to suppliers
Appendices
1,999,500
7.51
12/31/X8 Balance
Labor Expense
12/31/X9 Balance
104,000
2,000,000
104,500
Understanding Club Finances
Appendix C: Statement of Cash Flows
A p p e n d i c e s
Since the payroll payments were $500 less than the payroll expense, the $500
increase in accrued payroll is added back to the accrual-basis increase in net
assets to determine net cash flows from operations.
Finally, the increase of $4,000 in payroll taxes payable represents the difference
between the accrual-basis payroll taxes expense of $700,000, shown on the
condensed statement of activities of the Sample Club (Exhibit 7, page 7.49),
and the $696,000 paid, as determined by the analysis of the payroll taxes
payable account as follows:
Payroll Taxes Payable
Payroll taxes paid
696,000
12/311/X8 Balance
Payroll taxes
12/31/X9 Balance
57,000
700,000
61,000
In reality, the $7,000 of payroll taxes due at the end of 20X8 was paid along with
$689,000 of payroll taxes due for 20X9. The remaining $11,000 of taxes for
20X9 will be paid in the next year. However, since payroll taxes expenses for
20X9 exceed payroll taxes paid during 20X9 by $4,000, the $4,000 must be
added to the accrual-basis increase in net assets to determine the net cash
flows from operations.
The Sample Club’s net cash flows from operating activities would appear on the
SCF as:
Net Cash Flows from Operating Activities:
Increase Net Assets
Adjustments to Reconcile Increase in Net Assets
Income to Net Cash Flows from
Operating Activities:
Depreciation expense
Gain on sale of investments
Decrease in accounts receivable
Increase in inventory
Increase in accounts payable
Increase in accrued payroll
Increase in payroll taxes payable
Net Cash Flows from Operating Activities
Understanding Club Finances
7.52
$ 500,000
$
500,000
(100,000)
4,000
(2,000)
500
500
4,000
407,000
907,000
Appendices
Appendix C: Statement of Cash Flows
A p p e n d i c e s
When determining net cash flows provided by operating activities, follow these
general rules for noting changes in current accounts:
• A decrease in a current asset is added to the increase in net assets.
• An increase in a current asset is deducted from the increase in net assets.
• A decrease in a current liability is deducted from the increase in net assets.
• An increase in a current liability is added to the increase in net assets.
Step 2: Determine Net Cash Flows from Investing Activities
The next step focuses on investing activities – specifically, noncurrent assets of
the Sample Club. The investment account increased by $250,000. Further
analysis indicates:
Investments
12/311/X8 Balance
Purchase of investments
12/31/X9 Balance
50,000
300,000
300,000
Sale of Investments
50,000
The analysis reveals both a sale of $50,000 of investments and a purchase of
investments of $300,000. Thus, cash of $300,000 was used to purchase investments, which is a use of cash in the investing activities section of the SCF.
However, further analysis of the sale of investments shows the journal entry to
record this transaction as follows:
Cash
$150,000
Investments
Gains on sale of investments
$ 50,000
100,000
The entry clearly shows a cash inflow of $150,000. Thus, this source of cash
should be shown as an investing activity. Notice that the cost of investments
sold ($50,000) and the gain on the sale of investments ($100,000) has no
impact on net cash flow from investing activities.
There were no changes in the land and building accounts, as no purchases or
sales were made during 20X9. Therefore, cash was not affected.
According to note #1 under “Other Information” (Exhibit 7), no equipment was
disposed of during 20X9. Thus, the $252,000 difference noted in Exhibit 6 must
be due to purchases of equipment. The $252,000 equipment is shown as a use
of cash in determining net cash flows from investing activities.
Appendices
7.53
Understanding Club Finances
Appendix C: Statement of Cash Flows
A p p e n d i c e s
The Sample Club’s final noncurrent account is accumulated depreciation,
which increased by $500,000, the exact amount of depreciation expense for
the year. Because depreciation does not affect cash, under the indirect
method, the $500,000 is added back to the accrual-basis change in net assets
as discussed under Step One. The change in no way affects investing activities of the Sample Club.
Now that the noncurrent asset accounts of the Sample Club have been analyzed, the investing activities section of the SCF reflects the following:
Net Cash Flows from Investing Activities:
Proceeds from sale of investments
Purchase of investments
Purchase of equipment
Net cash flows from investing activities
$150,000
(300,000)
(252,000)
$(402,000)
Step 3: Determine Net Cash Flows from Financing Activities
To determine the net cash flows from financing activities, we must consider
noncurrent liabilities and net assets (members’ equity) accounts. First, the
change in the long-term debt account is a decrease of $750,000. The analysis
of the long-term debt is as follows:
Long-Term Debt (LTD)
Payment of LTD
12/31/X8 Balance
4,050,000
12/31/X9 Balance
3,300,000
750,000
The above analysis is based on note #2 (Exhibit 7, pg. 7.49), which indicates
no funds were borrowed; therefore, the $750,000 reduction in LTD had to be
due to payment of LTD. The $750,000 payment is a cash outflow from financing activities.
Understanding Club Finances
7.54
Appendices
Appendix C: Statement of Cash Flows
The sale of capital stock has resulted in an increase for 20X9 of $250,000. This
is shown as a source of cash from financing activities. The statement of undesignated equity at the bottom of the condensed statement of activities reflects
the detailed changes in this account:
A p p e n d i c e s
Undesignated Equity
12/31/X8 Balance
768,000
Results of Operations
500,000
12/31/X9 Balance
1,268,000
The Sample Club’s SCF financing activity section would show the following:
Net Cash Flows from Financing Activities:
Payment of long-term debt
Sale of membership certificates
$(750,000)
250,000
Net cash flows from financing activities
$(500,000)
Step 4: Present Cash Flows by Activity
We now are ready to prepare the SCF based on the analysis of the preceding
steps. The SCF for the Sample Club is shown in Exhibit 8 (pg. 7.56). The three
activities show cash flows as follows:
The result is a bottom line of $5,000 cash inflow. The Sample Club’s operating
activities provided cash inflows large enough to cover the outflows for investing and financing.
Appendices
7.55
Understanding Club Finances
Appendix C: Statement of Cash Flows
Exhibit 8
SCF for the Sample Club
Sample Club
Statement of Cash Flows
For the Year Ended December 31, 20X9
A p p e n d i c e s
Net Cash Flow from Operating Activities
$ 500,000
Increase in net assets
Adjustments to reconcile increase in net assets to net
cash flows from operating activities:
Depreciation
Gain on sale of investments
Decrease in accounts receivable
Increase in inventory
Increase in accounts payable
Increase in accrued payroll
Increase in payroll taxes payable
Net cash flows from operating activities
$
500,000
(100,000)
4,000
(2,000)
500
500
4,000
407,000
907,000
Net Cash Flow from Investing Activities
Sale of investments
Purchase of investments
Purchase of equipment
Net cash flows from investing activities
$
150,000
(300,000)
(252,000)
(402,000)
Net Cash Flow from Financing Activities
Payment of long-term debt
Sale of membership certificates
Net cash flows from financing activities
$
(750,000)
250,000
(500,000)
Net Increase in Cash During 20X2
5,000
505,000
$510,000
Cash at the beginning of 20X2
Cash at the end of 20X2
Supplementary Disclosure of Cash Flow Information
Cash paid during the year for:
Interest
Understanding Club Finances
$
7.56
400,000
Appendices
A p p e n d i c e s
Appendix C: Statement of Cash Flows
In the preparation of the SCF, the net increase in cash of the Sample Club per
the SCF is added to the Sample Club’s cash at the beginning of 20X9 to equal
the cash at the end of 20X9. The $5,000 net increase in cash per the SCF
equals the $5,000 increase in cash per the Sample Club’s successive statement of financial position (Exhibit 6, pg. 7.48). This does not prove that the SCF
is prepared correctly; however, if the $5,000 increase per the SCF had not been
equal to the change per the successive statements of financial position, we
would know that we had improperly prepared the SCF. We would then need to
locate our mistake and make the correction. Thus, this is at least a partial check
of the SCF’s accuracy.
Appendices
7.57
Understanding Club Finances
Appendix D: Financing Capital Projects –
Net Present and Future Values
A p p e n d i c e s
The future value factors are based on present amounts at the end of each period. For example, the future amount of $100 two years from now at 15 percent
interest is $132.25. This is determined by finding the number in the 15 percent
column and the period 2 row (1.3225) and multiplying it by $100.
The present value of a future amount is the present amount that must be invested at x percent interest to yield the future amount. For example, what is the
present value of $100 one year hence when the interest rate is 12 percent? The
formula to determine the present value of the future amount is as follows:
where
1
n
(1 + i)
P
=
F
P
=
Present Amount
F
=
Future Amount
i
=
Interest Rate
n
=
Number of Years
Therefore, the present value of $100 one year hence (assuming an interest rate
of 12 percent) is $89.29, determined as follows:
P
1
1
(1 + .12)
=
100
=
100(.8929)
=
$89.29
The present value of $100 two years hence (assuming an interest rate of 12
percent) is $79.72 determined as follows:
P
1
2
(1 + .12)
=
100
=
100(.7972)
=
$79.72
Understanding Club Finances
7.58
Appendices
A p p e n d i c e s
Appendix D: Financing Capital Projects –
Net Present and Future Values
Appendices
7.59
Understanding Club Finances
A p p e n d i c e s
Appendix D: Financing Capital Projects –
Net Present and Future Values
An alternative to using this formula to calculate the present value of a future
amount is to use a table of present value factors, such as that found in Exhibit
2 (pg. 7.61). The present value factors in Exhibit 2 are based on future amounts
at the end of a period. For example, the present value of $100 a year from now
at 15 percent interest is $86.96. This is determined by finding the number in the
15 percent column and the period 1 row (0.8696) and multiplying it by $100.
The present value of $100 today is $100.
Most capital investments provide a stream of receipts for several years. When
the amounts are equal at equal intervals, such as the end of each year, the
stream is referred to as an annuity. Exhibit 3 (pg. 7.62) shows the calculation of
the present value of an annuity of $10,000 due at the end of each year for five
years. The present value factors used in the calculation are from the present
value table in Exhibit 2.
The present value of an annuity will vary significantly based on the interest rate
(also called the discount rate) and the timing of the future receipts. Everything
else being the same, the higher the discount rate, the lower the present value.
Likewise, everything else being the same, the more distant the receipt, the
smaller the present value.
An alternative to multiplying each future amount by the present value factor
from the present value table in Exhibit 2 is to add the present value factors and
make one multiplication. This is illustrated in Exhibit 4 (pg. 7.62). Thus, the
$33,522 calculated in Exhibit 4 equals the calculation performed in Exhibit 3.
Rather than using the present value tables from Exhibit 2, present value tables
of an annuity are provided in Exhibit 5 (pg. 7.63). As a check on your understanding of the present value of an annuity table, locate the present value factor for five years and 15 percent. As you would expect, it is 3.3522. Thus, the
present value of an annuity table is nothing more than a summation of present
value factors from Exhibit 2. However, this table of present values of an annuity
will save much time, especially when streams of receipts for several years must
be calculated.
Understanding Club Finances
7.60
Appendices
A p p e n d i c e s
Appendix D: Financing Capital Projects –
Net Present and Future Values
Appendices
7.61
Understanding Club Finances
Appendix D: Financing Capital Projects –
Net Present and Future Values
Exhibit 3
Present Value of a $10,000 Five-Year Annuity at 15 Percent
A p p e n d i c e s
Present
Value
Amount
$8,696
Years in Future
1
2
3
4
5
$10,000
$10,000
$10,000
$10,000
$10,000
.8696
.7561
7,561
.6575
6,575
.5718
5,718
.4972
4,972
Total
Exhibit 4
$33,522
Shortcut Calculations of the Present Value of a $10,000
Five-Year Annuity at 15 Percent
Present Value
Factors at 15%
Years Hence
1
2
3
4
5
3.3522 x $10,000 =
.8696
.7561
.6575
.5718
+ .4972
3.3522
$33,522
A problem that calls for the use of both present value factors (Exhibit 2) and
present value of an annuity factor (Exhibit 5) is presented in Exhibit 6 (pg.
6.125). This problem is solved by treating the stream of receipts as a $10,000
annuity and two separate payments of $5,000 and $10,000 due at the end of
years two and four, respectively.
Understanding Club Finances
7.62
Appendices
A p p e n d i c e s
Appendix D: Financing Capital Projects –
Net Present and Future Values
Appendices
7.63
Understanding Club Finances
Appendix D: Financing Capital Projects –
Net Present and Future Values
Exhibit 6
Present Value of Stream of Unequal Future Receipts
Problem
A p p e n d i c e s
Determine the present value of receipts from an investment using a 15 percent discount factor
that provides the following stream of income.
Years Hence
Amount
0
1
2
3
4
5
$10,000
10,000
15,000
10,000
20,000
10,000
Solution:
Years Hence
Amount
Annuity
0
1
2
3
4
5
$10,000
10,000
15,000
10,000
20,000
10,000
$10,000
10,000
10,000
10,000
10,000
10,000
Calculation
Present Value of amount due today
Present Value of the $10,000 annuity for 5 years
$10,000 x 3.3522
Present Value of $5,000 due 2 years hence
$5,000 x .7561
Present Value of $10,000 due 4 years hence
$10,000 x .5718
Total
=
$10,000
=
33,522
=
3,781
=
5,718
$53,021
Amount in
Excess of Annuity
$
0
0
5,000
0
10,000
0
Present and future values can alternatively be determined using both financial
calculators and spreadsheet programs. Microsoft Excel® will be used to illustrate the use of a spreadsheet program.
The formula for PV is as follows: PV (k, n, PMT, FV)
Understanding Club Finances
7.64
Appendices
Appendix D: Financing Capital Projects –
Net Present and Future Values
A p p e n d i c e s
To solve for present value (PV), one must consider the periodic interest rate (k),
the number of time periods (n) and the cash flow amounts (PMT). The formula
also includes FV for future value, which will always be zero when determining PV.
When determining PV using Excel®, enter k as a decimal, thus 8 percent is
entered as .08. Secondly, there will be three dollar variables, PV, FV and PMT.
FV will be entered as 0, leaving two dollar variables. Since we will want to show
PV as a positive number, the PMT must be entered as a negative number.
Consider the following illustration. What amount of money must be invested
today in order for the club to be able to withdraw $10,000 a year at the end of
each year for 10 years? Use an annual interest rate of 8 percent.
PV
=
=
=
PV
(k, n, PMT, FV)
PV
(.08, 10, -10,000, 0)
$67,100.81
Therefore, if over 10 years $10,000 is withdrawn each year ($100,000 total),
$67,100.81 must be invested at the beginning of year one. The difference
between the $100,000 and the PV of $67,100.81 is $32,899.19, which is the
amount of interest earned over the 10 year period. The reader is encouraged
to go to Excel® if possible and determine PV for the following:
PV
k
n
PMT
=
=
=
=
?
.10
5 years
$5,000
The answer is $18,953.93!
Appendices
7.65
Understanding Club Finances