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Financial Statements. Chapter 2 MSCM8615. 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

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financial statements

Financial Statements

Chapter 2

MSCM8615

purpose of financial statements
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
statement of financial position
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 church’s 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
  • Let’s look at a few examples, since there are different acceptable formats for this statement (first show the accountant’s report)
statement of activities
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
  • Let’s look at a few examples, since there are different acceptable formats for this statement
statement of cash flows
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 PP&E and loan collections, cash paid for PP&E 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
  • Let’s look at a few examples, since there are different acceptable formats for this statement
statement of functional expenses
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
  • Let’s look at a few examples, since there are different acceptable formats for this statement
notes to the financial statements
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 (PP&E)
    • Investments
    • Pensions
    • Restricted net assets
    • Other relevant info (transparency, e.g., Boston’s disclosure of the costs of the sexual abuse scandal)
  • Let’s look at a few examples, but we will not spend much time right now on this part of the financial statements