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 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 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 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 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 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 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