Understanding Financial Statements

1. Understanding Financial Statements Review of basic financial statements Tips for reading financial statements Financial statement examples: Pilgrim Services Society SanJo University

2. Non-profit ModelPilgrim Services Society Educational Institution ModelSanJo University Non-profit Financial Statements with different presentations

3. ADDITIONAL FINANCIAL ANALYSIS TIPS FOR READING FINANCIAL STATEMENTS

4. Liquidity and Solvency • Liquidity indicates the ability to meet cash needs • Current assets and current liabilities • Cash Flow Statement (how cash needs were met) • Solvency indicates the ability to stay in business • Net assets and overall balance sheet position • Statement of Activities (“are they profitable”) • Both Liquidity and Solvency are required for “going concerns”

5. Financial Analysis 101 – Questions to Ask • Balance Sheet: • Did total assets, liabilities and net assets increase or decrease? • Did current assets and current liabilities increase or decrease – which accounts caused the biggest changes? (especially if current liabilities are greater than current assets) • Are there any major changes in cash, debt, receivables or payables? • What are the major components of net assets (unrestricted, temp restricted or permanent) – any accumulated deficits? • Statement of Activity • What are the net changes in net assets (also called excess of revenues over expenses etc) – this tells you the overall profitability • What were the major components of revenue and expense and where are the major changes (especially those in excess of 5%) from the prior year? • Are there major changes in restricted funds?

6. Financial Analysis 101 – Questions to Ask • Statement of Cash Flows: • Did cash increase or decrease significantly from the prior year? • What caused the increase/decrease – cash flows from operations, investing or financing activities (major categories)? • If cash flow from operations is negative – how did they meet their cash needs – by selling investments or incurring debt? • Did they make major fixed asset additions – how did they fund those acquisitions – from debt or from other sources? • Notes to Financial Statements: • Provides more detail on investments, fixed assets, debt, pledges and restricted funds • Look for potential cash flow issues based on schedule of when pledges are due and when debt payments are required • What other liabilities are disclosed in the footnotes – pension, operating leases? • Are there major contingencies disclosed in the footnotes?

7. Three basic financials: Statement of Financial Position Statement of Activities Statement of Cash Flows Three categories of Net Assets: Permanently Restricted Temporarily Restricted Unrestricted Remember the Three’s

11. Statement of Activities Explains Unrestricted Temporarily Restricted Permanently Restricted Remember the Three’sStatement of Activities (Income Statement)

14. Cash Flows from: Operating Activities Investing Activities Financing Activities Remember the Three’sCash Flow Statement

15. ACCRUAL BASIS CASH BASIS

16. Importance of Footnotes • Notes to Financial Statements add critical data and insight: • Detail on financial statement components – investments, fixed assets, debt • Highlight financial matters not included in the numbers – uncertainties, contingencies, estimates • Audited financial statements are required to contain such disclosures