Chapter Ten

1

• Chapter Ten
• Lecture Notes

Reporting The Results of Operations The
Activity and Cash Flow Statements
2

• The Activity and
• Cash-Flow Statements

• The Activity Statement
• Compares an entity's cumulative revenue and
  support to its expenses for any period of time -
  like a fiscal year.
• Shows whether the organization was able to cover
  its costs.
• Names for an Activity Statement Income
  Statement, Operating
• Statement, Statement of Revenues and Expenses,
  or Profit and
• Loss (PL) Statement.
• The Cash Flow Statement looks at where an entity
  obtained its
• cash and where it spent cash during some time
  period.

3
Revenues and Support 2011 2010
Meals
Client Revenue 10,000 8,000
City Revenue 20,000 16,000
Shelter Counseling
Client Revenue 1,000 1,000
County Revenue 10,000 10,000
Fundraising
Foundation Grants 70,000 50,000
Annual Ball 12,000 11,000
Telephone Solicitation 25,000 28,000
Mail Solicitation 48,000 45,000
Total Revenue and Support 196,000 169,000
Expenses
Food 17,000 16,000
Kitchen Staff 35,000 33,000
Counseling Staff 35,000 34,000
Rent on Kitchen Locations 15,000 14,000
Administration and General 75,000 65,000
Bad Debts 4,000 4,000
Depreciation 10,000 10,000
Total Expenses 191,000 176,000
Change in Net Assets Increase/(Decrease) 5,000 (7,000)

• Meals for the Homeless
• Activity Statement

4

• The Activity or Operating Statement
• Revenues and Support

• Revenues and Support
• - represent inflows that the organization has
  received or is
• entitled to receive.
• - result in an inflow of Assets to the
  organization and an
• increase in Net Assets.
• Revenues are generally the result of an exchange
  for goods and services that the organization has
  provided.
• Support is the result of gifts, grants, and other
  contributions to the organization.

5

• Expenses and Net Income

• Expenses
• - represent the recognition of the use of an
  asset to generate
• revenue and support or otherwise carry on the
  operations of
• the entity.
• - result in an outflow of assets and a decrease
  in Net Assets.
• Net Income is the difference between
  revenues/support and expenses.
• - Profits are an excess of revenues over
  expenses. Also called
• a surplus or increase in net assets.
• - Losses are an excess of expenses over revenues.
  Also called
• a deficit or decrease in net assets.

6

• Recognizing Revenue and Support

• Revenue is recognized if
• - the goods or services have been provided to the
  customer,
• - the amount to be collected can be objectively
  measured, and
• - there is a reasonable likelihood of
  collection.
• Support is recognized if
• - all of the conditions of the gift have been
  met,
• - the value of the pledge can be objectively
  measured, and
• - there is a reasonable likelihood of collection.

7

• Recognizing Expenses

• Expense Recognition depends on the type of
  expense
• - Product costs are those directly connected to
  providing
• goods and services. They are recognized
• The Matching principle says that expenses should
• be recorded in the same period as the revenue
  they
• were used to generate.
• - Period Costs, like rent, are those related to
  the passage of
• time. They are recognized
• in the time period in which they are incurred.

8

• Expired and Unexpired Costs

• Suppose Meals bought 100 large cans of green
  beans at a cost of
• 1,000 in March.
• - At acquisition, Meals would recognize
  the beans as an
• asset (Inventory). They are also an unexpired
  cost. - If they paid for the beans in
  cash, Cash would go down by
• 1,000. Otherwise Accounts Payable increases
  1,000.
• In May, Meals used 50 of the cans of beans to
  produce meals.
• - At use, the beans become an expense (expired
  cost) of 500
• (50 cans 10 per can 500), and the value
  of the asset
• (Inventory) is reduced by 500.
• This is a Product Cost. The inventory becomes an
  expense when used
• to provide service.

9

• Uncollectible Accounts

Assume that Meals begins the year with 125,000
in Pledges Receivable, and 15,000 in the
Allowance for Uncollectible Pledges contra
account. During the year 50,000 of new
contributions are received in cash and also
50,000 of new pledges are made, but cash is not
received. Experience shows that 10 of pledges
are never collected. During the following year
it is decided that specific pledges totaling
3,000 will never be collected.
10
Uncollectible Accounts, continued
Cash Pledges Rec. Allow. For Uncoll. Pledges Liab. Net Assets
Beg. Bal. Yr 1 125,000 (15,000) 0 110,000
Contribution 50,000 50,000 Support
Pledges 50,000 50,000 Support
Estimated Uncoll. (5,000) (5,000) Bad Debt Expense
End. Bal. Yr 1 50,000 175,000 (20,000) 0 205,000
Beg. Bal. Yr 2 50,000 175,000 (20,000) 0 205,000
Write Off (3,000) 3,000
End Bal. Yr 2 50,000 172,000 (17,000) 0 205,000
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• Inventory Expense

• Inventory expenses represent the cost of using
  supplies to create
• goods or services. Inventory expense and the
  ending inventory value
• are calculated using the following
  relationship
• Beginning Inventory Purchases - Consumption
  Ending
• 5 10 - ???
  2
• Tracking inventory use
• Perpetual inventory
• Periodic inventory
• LIFO and FIFO inventory flow assumptions
• Does the choice of FIFO or LIFO impact inventory
  expenses and
• ending inventory value? Why?
• Why would a not-for-profit organization want to
  use LIFO?

12

• FIFO and LIFO Examples

Suppose that the Big City public health clinic
started the year with 2,000 vials of methadone
for its drug rehab clinic. They cost 10 each.
During the year the clinic bought 3,000 more
vials for 15 each. If they had 1,000 left at the
end of the year, what was their inventory expense
and how much was the remaining inventory
worth? 2,000 vials 3,000 vials -
??? vials 1,000 vials
Inventory Method Beginning Balance Purchases Consumption (Inventory Expense) Ending Balance
LIFO 20,000 45,000 3,000 x 15 1,000 x 10 55,000 10,000
FIFO 20,000 45,000 2,000 x 10 2,000 x 15 50,000 15,000
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• Deferred Revenue

• Deferred or unearned revenues arise when an
  organization is paid in advance for goods or
  services.
• Deferred usually is long term, and unearned
  usually is short term.
• Why is deferred revenue a liability?
• A museum sells a five-year membership for 250.
  
• How much of the 250 should be recorded as
  deferred revenue?
• How much of the 250 would the museum recognize
  as
• revenue during the first year of the membership?

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• Where the Income Statement
• and Balance Sheet Meet

Event Statement Impact Note
Revenue Recognized You provide a good or service and earn revenue AR or Cash up B/S Revenue up A/S AR is a holding area for unpaid bills that you have sent out
No impact on revenue Someone pays a bill you sent AR down B/S Cash up B/S
No impact on expenses When you buy something AP up or Cash down B/S Inventory up B/S AP is where you keep track of what you owe to others
Expense Recognized When you use something Asset down or Liability up B/S Expense up A/S
B/S stands for the Balance Sheet, and A/S stands
for Activity Statement.

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• Reflecting the Change in Net Assets
• on the Balance Sheet

• Net income is reported as a change in net assets
  on the
• balance sheet.

Activity Statement
Total Revenue and Support 81,000
Total Expenses - 80,050
Increase in Net Assets 950
Balance Sheet
Unrestricted Temp. Rest. Perm. Rest.
Beginning Balances 113,000 15,000 10,000
Increase in Net Assets 950
Ending Balances 113,950 15,000 10,000
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• The Cash Flow Statement

• The Statement of Cash Flows focuses on the
  sources and uses
• of cash for the organization. It divides those
  cash flows into
• - Cash flows from Operations,
• - Cash flows from Investing, and
• - Cash flows from Financing.
• Why does an organization need both an operating
  statement
• and a cash flow statement?
• Why is it important to know the sources and uses
  of cash flow?
• Isn't knowing if cash increased or decreased
  enough?

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• Revenues and Support
• Meals
•     Client revenue  10,000
•     City revenue 20,000
•   Shelter Counseling
•     Client revenue 1,000
•     County revenue 10,000
•   Fund-Raising
•     Foundation grants 70,000
•     Annual ball 12,000
•     Telephone solicitation 25,000
•     Mail solicitation 48,000
• Total Revenues and Support 196,000
• Expenses
•   Food 17,000
•   Kitchen staff 35,000
•   Counseling staff 35,000
•   Rent on kitchen locations 15,000
•   Administration and general 75,000

Example Meals for the Homeless Activity
Statement For Year Ending 12/31/11
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Adjusting the Increase in Net Assets to Cash Flow
The Increase in Net Assets is a first
approximation of Cash Flow from Operations.
Now, make adjustments for 1. "Expenses not
requiring cash Depreciation or
amortization. 2. Changes in balance sheet
accounts related to operations.
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• The Statement of Cash Flows

Cash Flows from Operating Activities 2011 2010
Increase in Net Assets 5,000 (7,000)
Add Expenses Not Requiring Cash
Depreciation 10,000 10,000
Other Adjustments
Add Decrease in Inventory 2,000 2,000
Add Increase in Accounts Payable 0 1,000
Subtract Increase in Receivables (17,000) (12,000)
Subtract Decrease in Wages Payable (1,000) 0
Subtract Increase in Prepaid Expenses (1,000) 0
Net Cash Used for Operating Activities (2,000) (6,000)
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• The Statement of Cash Flows,
• continued

2011 2010
Cash Flows from Investing Activities
Sale of Stock Investments 4,000 4,000
Purchase of Delivery Van (32,000)
Net Cash from Investing Activities 4,000 (28,000)
Cash Flows from Financing Activities
Increase in Mortgages and Notes Payable 25,000
Repayments of Mortgages (5,000) (4,000)
Net Cash from Financing Activities (5,000) 21,000
Net Increase/(Decrease) in Cash (3,000) (13,000)
Cash, Beginning of Year 4,000 17,000
Cash, End of Year 1,000 4,000

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Meals for the HomelessStatement of Financial
PositionAs of December 31, 2011 and December 31,
2010

• Assets 2011 2010 Liabilities Net Assets
  2011 2010
• Current Assets
•   Cash   1,000   4,000 Liabilities
•   Marketable securities 3,000
  3,000 Current Liabilities
•   Accounts receivable,    Wages payable  
   2,000     3,000
•     net of estimated     Accounts payable
  3,000 3,000
•     uncollectibles of Notes payable
  5,000 5,000
•     8,000and 7,000 55,000 38,000  
  Current portion of
•   Inventory (LIFO) 2,000 4,000
   mortgage payable 4,000 5,000
•   Prepaid expenses 1,000 0 
  Total Current Liabilities  14,000   16,000
•   Total Current Assets  62,000  49,000
• Long-Term Assets   Long-Term Liabilities
•   Fixed assets    Mortgage payable   12,000
  16,000
•     Property  40,000  40,000 Total Long-Term
  Liabilities  12,000 16,000
•     Equipment, net 35,000 45,000   Total
  Liabilities  26,000 32,000 
• Investments 8,000 12,000   
• Total Long-Term Assets  83,000  97,000   Net
  Assets 119,000 114,000
• Total Assets 145,000
  146,000   Liabilities and Net Assets
  145,000 146,000

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The Cash Flow Statement

• Cash flows relating to investment and financing
  activities are listed separately.
• - Why?
• Are these adjustments shown in the Activity
  Statement too?
• Indirect vs. Direct Method for Statement of Cash
  Flows

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• Depreciation Expense

• Depreciation expense represents the current
  periods share of the cost of using a capital
  asset over its life.
• - Depreciation expense illustrates the matching
  principal.
• Depreciation expenses may be calculated either on
  
• a straight-line or an accelerated basis. Why
  would you use accelerated depreciation?

Straight-Line Depreciation Example Cost of a
van 32,000 Less Salvage (Residual)
Value 2,000 Depreciable
Amount 30,000 ? Useful life
5 years Depreciation Expense per year
6,000
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• A Mixed Balance Sheet and
• Operating Statement Transaction

• HOS paid 48,000 in wages to its employees
  30,000
• represented money owed to employees for work
  last year
• and 18,000 is for work performed this
  year.Assets Liabilities Revenues
  - Expenses Cash Wages
  Labor
• Payable Expense- 48,000
  - 30,000 No Change - 18,000

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• Operating Statement Transactions

• HOS provided services and billed patients
  81,000. It also consumed 4,000 worth of
  inventory in delivering those services. There are
  two transactions here. Net
  AssetsTransaction 1 Assets Liabilities
  Revenues - Expenses A/R
  Revenue
• 81,000 no change 81,000 -
  no changeTransaction 2 Assets
  Liabilities Revenues -
  Expenses Inventory
  Supply Expense - 4,000 no change
  no change - 4,000

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• A Noncash Example

• HOS owed its staff 27,000 for wages for the last
  two weeks
• of 2011 which were not due for payment until
  the first week
• in 2012.Assets Liabilities
  Revenues - Expenses Wages Payable
  Labor Expenseno change
  27,000 no change - 27,000