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financial reporting 2008 National Leadership Conference Association Finances Essential Financial Concepts & Terminology Association Financial Statements Financial Analysis & Benchmarking The Importance of Internal Controls Operating Policies in Sarbox World

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Financial reporting l.jpg

financial reporting

2008 National Leadership Conference


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Association Finances

  • Essential Financial Concepts & Terminology

  • Association Financial Statements

  • Financial Analysis & Benchmarking

  • The Importance of Internal Controls

  • Operating Policies in Sarbox World


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Essential Financial Concepts & Terminology

  • What is Finance?

    • Finance is the economic activity of an organization.

  • What is Accounting?

    • Recording of financial activity

    • Classifying the financial activity

    • Reporting upon the financial activity


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Generally Accepted Accounting Principles

  • Materiality

  • Business Entity

  • Objectivity

  • Money Management

  • Cost principle

  • Consistency

  • Going concern

  • Conservatism

  • Full disclosure

  • Matching principle


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What Accounting Looks At

  • Assets

  • Liabilities

  • Equity

  • Income

  • Expense


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Equity

  • Equity = Net worth of an organization.

  • Formula

    • What you own LESS what you owe = what you’re worth

  • What is the net asset figure?

    • Total Assets $1,000,000

    • Total, Liabilities 970,000

    • Net Assets $


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Net Asset Categories

  • Unrestricted Net Assets

    • Including board designated funds

    • Money can be used for any legal purpose

  • Temporarily Restricted Net Assets

    • Money whose use is limited by time or purpose

  • Permanently Restricted Net Assets.

    • Including endowment funds

    • The principal can never be spent


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Accounting Equation

  • Assets – Liabilities = Equity

  • Most always shown as:

    • Assets = Liabilities + Equity


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Categories

  • Income = Revenue

    • Dues income

    • Contribution income

    • Interest income

    • Exhibit income

  • Expenses

    • Employee salaries & benefits

    • Meeting space, meals and AV

    • Printing, postage, etc

    • Travel


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Accounting & Chart of Accounts

  • Each individual item in each category (assets, liabilities, equity, revenue and expenses) is an “account”:

    • An account is the smallest subcategory in which financial activity is tracked

  • A “Chart of Accounts” is simply a listing of all accounts an organization uses.


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System of Accounting

  • Method or system used is generally depends on size and complexity or organization.

  • Orgs with budgets less than $1M can often create acceptable and accurate financial statements using simple system called “cash basis” accounting.

    • Transactions only recorded when cash moves. Income is treated as earned when money received; expenses counted when money is spent.

  • Larger, more complex organizations use the “accrual basis” to make sure that financial reports correctly reflect financial activity and position.

    • System that tracks when income is earned and when expenses are incurred.


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Accrual Method of Accounting

  • Accounts Receivable

  • Prepaid Expense

  • Accounts Payable

  • Unearned Revenue

  • Depreciation

  • Amortization

  • Accumulated Depreciation


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Grouping of Accounts

  • Current Assets

  • Fixed Assets

  • Current Liabilities

  • Long Term Liabilities


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Association Financial Statements

  • Statement of Financial Position (or Balance Sheet)

    – Shows what the assets, liabilities and net assets of association were at a given point in time.


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Association Financial Reports

  • Statement of Activities (Statement of Revenue and Expenses)

    – Shows what comprised the income and expenses of the operation for a given period of time, and whether there was a gain or loss in net assets.


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Association Financial Reports

  • Statement of Cash Flows

    – Tells where the organization got the funds it used and what it spent them on. Old format had its analysis based on the chapters in assets and liabilities; the new format focuses mainly on where cash came from and how it was used.


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How to Read a Statement

  • Always check the heading first. They will tell you.

    • What unit, organization or group or organizations is reported on.

    • What type of statement is being provided.

    • What is the relevant period of time (Statement of Activities, Statement of Cash Flows) or date (Statement of Financial Position).


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How to Read a Statement

d. What comparable information is being provided:

  • For a Statement of Financial Position, usually the org’s position at the same time in the prior year.

  • For a Statement of Activities or Cash Flows, usually the same period in the prior years

  • Budgeted figures or percentages may be provided on Statements of Activities


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How to Read a Statement

2. Scan the page as a whole – most statements are shown complete on one page. Once you understand major Divisions of the statement, you can work more confidently on the detail in each section.


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Statement of Financial Position

  • Almost always broken into two major categories – assets on top and liabilities and net assets on bottom.

    • Assets are broken down into subcategories:

      • Current assets

      • Fixed assets

      • Other assets

    • It is called a balance sheet because assets must equal (balance with) liabilities plus net assets.


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Statement of Financial Position

  • What kinds of things to look for:

    • Have the current assets increased or decreased?

    • Any major fixed assets purchased or sold?

    • Any new debt taken on or old debt paid off?

    • Any new unusual liabilities show up?

    • If statement has more than one time period, how has the org changed during that time?


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Statement of Activities

  • Almost always broken into two major categories – income (on top) and expenses underneath.

    • Income will be shown by type, and then totaled.

    • Expenses will be shown by type, and then totaled.

    • Sometimes the Change in New Assets will be shown as the “bottom line”.


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Statement of Activities

  • What kinds of things to look for:

    • Has the gross income gone up or down?

    • How have the key sources of income changed?

    • Are total expenses up or down? Which individual expenses have changed significantly?

    • How does the change in expenses relate to the change in income?

    • How does this period’s Change in Net Assets compare to that of prior periods?


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Statement of Cash Flows

  • Divided into Three Parts:

    • Cash Flows from Operating Activities

    • Cash Flows from Investing Activities

    • Cash Flows from Financing Activities


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Notes to Financial Statements

  • Notes are important in helping a reader understand an organization’s financial situation.

  • Notes will highlight significant accounting policies to start with and then go to detailed reports on matters of significance.

  • Major acquisitions or changes in operations are highlighted as are pension funding requirements, pending law suits and other significant information.


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Financial Analysis & Benchmarking

  • Financial Analysis

    • What is state of org’s key indicators? (critical revenue streams, number of members, registrants for key meetings, etc.)

    • What are the most important financial changes you should be made aware of? Which are positive and which negative?

    • Are there related items whose trends should be considered?


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Financial Analysis

  • Comparative Analysis

    • Figures be provided for two different time periods for the same financial statements

    • All line items be calculated exactly the same.

    • Best offered for similar time periods – This month this year to this month last year.

  • Common Size Statements

    • Figures presented are calculated as a percentage of some common figure.

    • Presented in combination with regular financial statements.

    • Using this information, it is easy to identify trends.


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Internal Controls

  • Help safeguard assets from fraud, misuse and waste.

  • Promote operational efficiency and effective implementation of management’s intentions.

  • Identify and correct errors or irregularities on a timely basis, as a part of normal operations.


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Important Things Nonprofits Should Consider in Era of SOX

  • Org must have and enforce both whistle-blower and document retention policies.

  • Create an audit committee.

  • Have CEO or CFO publicly attest to accuracy, completeness and fairness of financial statements.

  • Publicly disclose you have adopted and follow a code of ethics for Board.

  • Consider very carefully all transactions between org and any “insider”.


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Important Things Nonprofits Should Consider in Era of SOX

  • Prohibit loans to officers, employees and trustees if not already in Bylaws.

  • Instruct attorney to report all wrongdoing anywhere in the org to senior management of Board.

  • Have auditor issue report on your internal controls and make public.

  • Inquire of your outside auditor whether they have adopted the requirements of SOX.


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