Financial Statements

1
Financial Statements

• Chapter 2
• MSCM8615

2
Purpose of Financial Statements

• To better inform interested stakeholders about
  the financial health of the church/diocese and
  how its funds are being used
• These statements are audited/reviewed by
  independent public accounting firms
• There are three basic financial statements
  required for non-profits according to GAAP
• Statement of financial position
• Statement of activities
• Statement of cash flows
• The notes to the financial statements are a
  critical part of the statements as well
• In addition to the three basic statements, many
  churches/dioceses also prepare a statement of
  functional expenses

3
Statement of financial position

• This report shows the assets, liabilities, and
  net assets of the church, as of a certain date,
  such as the last day of the churchs fiscal year
• Assets are generally listed in their order of
  liquidity, meaning how quickly can the asset be
  converted to cash liabilities are listed by
  their due date (maturity)
• As noted in the first lecture, net assets are
  classified into unrestricted, temporarily
  restricted, and permanently restricted
• Unrestricted assets may be further classified as
  designated or undesignated such a designation is
  made by the board, and not by a donor as such,
  they are not true restrictions on how the funds
  may be used, i.e., if necessary, designated funds
  could be used for any purpose, not just for what
  they are designated the same cannot be said for
  restricted net assets, they must be used for
  their declared purpose
• Lets look at a few examples, since there are
  different acceptable formats for this statement
  (first show the accountants report)

4
Statement of Activities

• This report presents the changes in net assets
  over a period of time, such as a year
• The source of changes in net assets would come
  from revenues, expenses, gains and losses, and
  reclassification
• The report shows the changes in each of the three
  categories of net assets unrestricted,
  temporarily restricted and permanently restricted
• Revenues can increase any one of the three
  categories of net assets, while expenses always
  decrease just the unrestricted net assets
• Reclassification occurs when net assets are
  transferred from temporarily restricted to
  unrestricted because their time or purpose
  restrictions were met
• Must report revenues and expenses on a gross
  basis you cannot net the revenues and expenses
  for a particular program and just show the net
  amount you must report both the revenue and the
  expense
• Lets look at a few examples, since there are
  different acceptable formats for this statement

5
Statement of Cash Flows

• Since cash is so critical to the financial health
  of an organization, there is a need to have a
  separate statement which focuses on cash
• This report, also for a period of time like the
  statement of activities, shows the receipts and
  disbursements of cash, classified into three
  areas
• Operating activities cash received from revenue
  and support transactions (other than long term
  restricted contributions), cash paid for normal
  ongoing expenses
• Investing activities cash received from sales of
  PPE and loan collections, cash paid for PPE and
  loan disbursements
• Financing activities cash receipts from long
  term restricted contributions, interest and
  dividends on such long term contributions, short
  and long term borrowings cash paid for short and
  long term debt and repayments of capital leases
• The statement must also present certain noncash
  investing and financing activities, such as the
  contribution of marketable securities or the gift
  of equipment
• For the operating activities section, there is
  the choice of either the direct or indirect
  method we will show both, but use the direct
  method
• Lets look at a few examples, since there are
  different acceptable formats for this statement

6
Statement of Functional Expenses

• While this statement is not required (it is
  required of Voluntary Health and Welfare
  organizations), it does provide useful
  information about the expenses of various
  programs and activities
• This statement breaks down the natural
  classification of expenses (utilities, salaries,
  rent, etc.) into two broad functional areas
• Program expenses
• Supporting service expenses, further broken into
• Management and general expenses
• Fund-raising expenses
• You end up with a matrix
• Lets look at a few examples, since there are
  different acceptable formats for this statement

7
Notes to the Financial Statements

• This is where all the good stuff is!
• Definition of the entities covered by the
  financial statements
• Summary of significant accounting policies
• Further details on items such as
• Fixed assets (PPE)
• Investments
• Pensions
• Restricted net assets
• Other relevant info (transparency, e.g., Bostons
  disclosure of the costs of the sexual abuse
  scandal)
• Lets look at a few examples, but we will not
  spend much time right now on this part of the
  financial statements