Financial Statements

1. Financial Statements Chapter 2 MSCM8615

2. 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

3. 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)

4. 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

5. 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

6. 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

7. 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