1. www.tamclaughlin.nettamclaughlin@comcast.net Understanding Financial Statements (in English, not Finance Speak) Thomas A. McLaughlin tamclaughlin@comcast.net 617.549.9611 www.tamclaughlin.nettamclaughlin@comcast.net

2. www.tamclaughlin.nettamclaughlin@comcast.net Key Principles Entity Money measurement Conservatism Dual aspect Going concern

3. www.tamclaughlin.nettamclaughlin@comcast.net Key Principles Cost concept Materiality Realization Matching

4. www.tamclaughlin.nettamclaughlin@comcast.net Other Important Concepts Accrual vs. cash basis of accounting Fund accounting GAAP FASB

5. www.tamclaughlin.nettamclaughlin@comcast.net Yellow and Red Flags CAUTION STOP!

6. www.tamclaughlin.nettamclaughlin@comcast.net

7. www.tamclaughlin.nettamclaughlin@comcast.net The Three Levels of Reporting Low High Complexity Time Required Assurance Audit Review Compilation Complexity Time Required Assurance

8. www.tamclaughlin.nettamclaughlin@comcast.net Auditing Auditor Management Bookkeeping The Audit Equation

9. www.tamclaughlin.nettamclaughlin@comcast.net The Truth is in the Footnotes Accrual basis of accounting Related party transaction Borrowing practices -- key areas: purpose of borrowing status of lines of credit interest rate charged

10. www.tamclaughlin.nettamclaughlin@comcast.net The Truth is in the Footnotes (cont.) Lawsuits pending, if any Extraordinary transactions Pending adjustments Comments about uncertainty of government funding, etc. Subsequent events

11. www.tamclaughlin.nettamclaughlin@comcast.net Current Ratio: Current assets Current liabilities How capable is this organization of meeting its obligations in the short term? To what degree does the organization have enough short term assets to meet its immediate obligations?

12. www.tamclaughlin.nettamclaughlin@comcast.net Days’ Cash: Cash & equivalents * 365 Operating Expenses - Depreciation If a nonprofit suddenly has to live off its cash accounts only -- no more cash is coming in -- how long will it survive if it continued spending at its usual rate?

13. www.tamclaughlin.nettamclaughlin@comcast.net Days’ Receivables Accounts receivable * 365 Operating Revenue For organizations that provide services for a fee or hold government contracts, how long does it take, on average for you to be paid?

14. www.tamclaughlin.nettamclaughlin@comcast.net Debt to Net Assets Long-term Debt Net Assets Compares the total amount of long term debt to the total net assets (“net worth”) of the organization to see how much of the latter could potentially be claimed by outside lenders.

15. www.tamclaughlin.nettamclaughlin@comcast.net Accounting Age (of Property and Equipment) Accumulated Depreciation Depreciation Expense On average, how well does this organization keep up its investment in tangible assets like computers, buildings, vehicles, etc.

16. www.tamclaughlin.nettamclaughlin@comcast.net Profitability Revenue - Expenses Revenue The “bottom line.”

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