Show me the Money: The Statement of Financial Position

Financial Statement Series

The statement of financial position required for nonprofits by FASB Statement 117 is similar to the balance sheet which we discussed in a previous article in this series. The statement of financial position addresses the restriction in net assets that the balance sheet does not. The balance equation is still the same:

Assets=Liabilities + Net Assets

This statement, like the balance sheet, lists assets in the order of liquidity, liabilities in the order that they are due, and the difference between the assets and the liabilities is the net assets.

Because nonprofits are funded by donors and other organizations such as grantors, donors may place restrictions on the contributions to the organization. Assets need not be reported on the basis of donor-imposed restriction unless they are designated for long-term purposes or received with donor-imposed restrictions that limit their use for long-term purposes. In those cases, there are guidelines for breaking out and reporting the assets designated for long-term use.

Net Asset Restrictions

Information about the nature and amounts of the restrictions on net assets may be reported by using a separate line for each type of restriction. Information on restrictions may also be included in the notes for the financial statements.

Permanently Restricted Net Assets

These are assets that the donor has instructed the organization to maintain in perpetuity.

Endowments are examples of permanently restricted net assets. Commonly, a donor contributes funds for an endowment with instructions that the principal may not be spent but the income generated by the endowment fund may be used by the organization.

Temporarily Restricted Net Assets

Temporarily restricted Net Assets either have a donor-imposed time or purpose restriction. Perhaps money is donated to a school for use within a specific school year. A building fund is another example of temporarily restricted funds.

Unrestricted Net Assets

These are net assets which have neither a permanent nor a temporary restriction placed on them. In the absence of donor restrictions, net assets are unrestricted.

Final Note

The statement of financial position offers unique insights into the special circumstances of a nonprofit organization. Looking at the statement balances, a reader might ask the following questions:

• Is there enough cash to pay the bills?
• Are investments diversified per organization policy?
• Are receivables being collected in a timely manner?
• Are vendors being paid in a timely manner?
• How long have liabilities been on the books?
• Are tax liabilities being met in a timely manner?
• Are the restricted funds protected?

A properly prepared statement of financial position is part of the complete package of financial statements for nonprofits.

Next time we’ll look at the statement of cash flows.

Laura Reifschlager

Trainer

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5 Ways to Get a Life Doing Data Entry

Let’s face it, mass data entry, especially the same recurring entry month after month, is about as enthralling as those high school science films like “Your Friend Zinc Oxide”. Oh sure there are some people out there that can put on their headphones, get their Shaka-Kan tunes going, turn off their higher brain functions and get IN THE GROOVE! But I’m not one of them. I remember trading shifts over at the IRS from the Data Entry Department over to the Extraction Department for the exciting possibility of opening a letter bomb to put me out of my misery.  So when I start with a new accounting package one of the first things I want to learn is how to automate data entry.

100 Fund Accounting has several tools toward this end.

1. Play the Keys – There are two keys on the Keyboard to get your journey toward blissful entry going. The Function Key 5 (F5) and Function Key 6 (F6). F5 will copy the contents of the CELL directly above it. F6 will copy the ENTIRE LINE. That way you can change a few key codes and save enough strokes to change your golf score.

2. Let the computer remember- There is a function called the memorize document. This allows you to enter a document once and then save it for future use. After you have memorized a document, you can recall it in later data entry. There are even options to recall it with different dollar amounts and have it do the fancy math to figure out how much goes to each fund.

3. Total Recall – Memorize documents for power users. When you memorize a document you can tell the system, “This is so cool I want to automatically use it next month,” and it becomes part of your data entry social calendar. Every morning you log into the software you get a list transactions waiting for a hot date. 

4. Déjà vu – A good old standby is to simply copy documents or entire sessions. In most forms of data entry, there is a “copy posted document” button that lets you use a specific document over again more times than your three year old watches that Barney video.

You can also copy the ENTIRE SESSION, duplicating hundreds of documents at once without risking a chipped nail.
In both copy processes, you have the awesome ability to change the document and effective dates thus bringing your data more up to date than your smart phone.

But beware with the copy process as it duplicates the exact copy of the document numbers involved. If you’re doing this with AP or AR transactions, it can get you into more trouble than getting drunk at the company Holiday party and faxing an embarrassing photocopy to Chicago. Use the recurring entries instead.

5. Import Duties – Importing, the ultimate expression of data entry efficiency. If you can squeeze enough blood out of the budget rock to get a properly configured import file, then you can suck data in with such speed and efficiency it would bring tears to a Bavarian Engineers eyes.

The options are out there, so go forth and make your data entry life not suck.

Tom Tweedel

Sr. Customer Support Analyst

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Show me the Money: Understanding the Balance Sheet

Financial Statement Series

Throughout this series, we’ve established that FASB Statement 117 sets the minimum reporting standards for nonprofit organizations. The balance sheet is not part of those requirements, but is still a useful statement. The nonprofit version is the statement of financial position which is a balance sheet with net assets reported by restriction. We will look at the specifics of the statement of financial position next time. Looking at the balance sheet first will be a good primer.

Smile for the Camera

A balance sheet is a snapshot of an organizations assets, liabilities, and net assets. Because the statement is looking at different accounts than the revenue statement or the statement of activities, a different format is required. The key principle is that the statement represents totals as of the date issued, not a range of time. A balance sheet for December 31 reports on the financial position that date.

In its simplest form, the balance sheet lists assets and liabilities and subtracts the two to calculate total net assets. The balance derives its name from a basic accounting equation:

Assets=Liabilities + Equity

The equation always balances.

The Layout

Like the other statements, the balance sheet will have a heading and a body. Some balance sheets are laid out in a side-by-side manner with assets on one side and liabilities and equity on the other. This makes it easy to see that both sides equal, or, yes, balance.

A vertical layout is another choice with assets listed first, then liabilities, then net assets or equity.

The Contents

Assets are the things you own or what is owed to you. Assets are listed in order of liquidity. Liquidity is how close the asset is to cash, with cash, of course, being the most liquid. Securities that can be converted to cash very quickly are more liquid than a building and slightly less liquid than cash. Current assets are those assets which can be converted to cash within one full reporting cycle, most likely one year.

Next down the list would be less liquid assets such as accounts receivables or inventory. Long term assets are property, plant, and equipment as well as goodwill and long-term investments.

Liabilities are listed next. Liabilities are what you owe. They are listed in the order in which they come due. Just as for assets, liabilities are short-term and long-term.

Finally, the equity is listed. In the for-profit world, shareholder equity is the term used. Since there are no shareholders in the not-for-profit world, we use the term net assets. The simplest calculation is assets less liabilities equal net assets. It has to work out that way. It is a balance sheet, after all. Refer to the basic equation above. You get the math.

The Final Note

The balance sheet reports the financial position of the whole organization at a point in time. Readers can see what the organization owns and what it owes. These amounts may be used in financial ratios for further analysis. No one financial statement tells the entire story. The balance sheet is just part of the package. Next time we’ll look at the statement of financial position and its importance to a nonprofit organization.

Click here to read the previous article in this series.

Laura Reifschlager

Trainer

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Show me the Money: The Statement of Activities with Functional Expenses

A Financial Statements Series

A Statement of Activities is similar to a Statement of Revenue and Expenses. Because nonprofits have an operating purpose other than making a profit, the terms “statement of activities” and “change in net assets” are used instead of income statement and net income. Like the revenue statement, the statement of activities reports the changes in net assets over a period of time.

Because a major source of funding for nonprofits may come from donors, donors may also impose restrictions on the use of those funds. The funds may be unrestricted, permanently restricted (such as an endowment fund), or temporarily restricted (such as a building fund). FASB Statement 117 requires that an organization report the change in net assets based on the restriction categories of permanently, temporarily, or unrestricted.

The Format

Like the statement presented in Understanding the Statement of Revenue and Expenses , the statement of activities will have a heading, a body, and a bottom line. There will be a revenue section and an expense section in the body. A multi-columnar format is used to present the increases and decreases in net assets according to the intent of the donor with column headings for unrestricted, temporarily restricted, and permanently restricted.

Types of Expenses

An important distinction on the statement of activities is how expenses are classified. Nonprofits use two important classifications of expenses: natural and functional. Natural classifications are used by the for-profit world also and indicate the type of expense incurred. Examples of the natural classification of expenses are utilities, rent, office supplies, and salary expenses. Functional classification indicates on what activity (the function) the expense was incurred. There are three principal functional classifications: program expenses, management and administrative expenses, and fund-raising expenses.

A statement of activities with functional expense classification would list the programs under the expense section. The expenses for each program would include salaries, office supplies, utilities, and other expenses for that specific program.

A statement of activities with natural classification would simply list all the expense types: Salaries, utilities, office supplies, and other expenses.

FASB Statement 117 allows most nonprofits to present the functional information in the notes of the financial statements but functional expenses may also be presented on the face of the statement.

Statement of Functional Expenses

Voluntary health and welfare organization have the additional requirement of presenting the expenses in a matrix which includes both the natural and the functional expense by program. (See FASB Statement 117 C  for the specific definitions.)

Direct or Indirect

Some expenses are easily matched to the program activity. Other expenses support more than one program. Expenses related to more than one program must be allocated to the appropriate functions. A building may be shared by several programs. The building rent must be allocated to the programs utilizing the building using an objective method of allocation if possible. Note there is special guidance on allocating costs related to an activity that combines fund-raising with elements of another function. These types of costs are referred to as joint activities.

Flexibility

Statements produced by nonprofits must be useful to donors and contributors so that decisions about the allocation of resources can be made. Statements are useful in assessing the services provided by the organization and its ability to continue those services and statements may also offer insight when assessing how managers have performed their stewardship responsibilities.

While FASB Statement 117 establishes minimum standards for financial reporting, organizations have flexibility in how items are sequenced on a report allowing the reporting standards to meet the needs of different organizations.

Next time: A look at the Balance Sheet

Laura Reifschlager
Trainer

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Show me the Money: Understanding the Statement of Revenue and Expenses

A Financial Statement Series

Although FASB Statement 117 requires a non-profit organization to produce a Statement of Activities, Revenue and Expense statement still serve a purpose. These two are similar and in the next article, we will look at the specifics for the Statement of Activities. Both statements depict how the organization derives revenue and how those funds are being spent.

A Rose by Any Other Name

In the for profit world, this statement is also known as the Income Statement, The Statement of Profitability and Loss (this is where the term P&L comes from), and sometimes the Statement of Operations. We will just keep it simple and refer to it as the Statement of R&E (for revenue and expenses), especially since nonprofits don’t have profit.

In its simplest form, the Statement of R&E begins with a revenue section, followed by an expense section. The total revenue minus the total expenses produces The Bottom Line. If the revenue is greater than expenses, you have revenue over expenses. If the expenses exceed the revenue, you have revenue under expenses, sometime displayed as a red number, hence the term in the red. No one wants to be in the red.

The Beginning, A Very Good Place to Start

The Statement of Revenue and Expenses has a defined format. First up is the heading. The heading is important because that tells you three things:

The name of the organization,

the statement type,

and the time period for the statement.

Statements of R&E report results over a defined period of time. That means there is a starting date and an ending date for the statement. For example, the statement might report revenue and expenses for a month, or a quarter, or annually, or since your last birthday. Just be sure the dates are stated in the heading.

The body of the statement is next. The body contains the revenue section, and the expenses associated with earning that revenue for a specific time period. Revenue is the money coming in. The expenses section is the money going out. Even though this section reflects money going out, the amounts are reported with positive signs.

For a simple statement, the next section is The Bottom Line. Expenses are deducted from the revenue received and a total is reported. Nonprofits often use the term Revenue Over (Under) Expenses rather than the term profit.

More than One Way to Count Money

An important question to ask is, “What method does the organization use to report revenue?” You mean there is more than one way to count the cash? Well, you count the cash the same, but you report it differently. A cash basis organization reports the revenue when the cash is received. Many organizations use the accrual method rather than the cash method.

Under the accrual method, revenue is reported according to accounting rules. For example, revenue might be reported when the item is shipped rather than when the cash is received for the order. For service organizations, revenue is recognized when the service is provided. Suppose fees are collected for child care classes. Under the accrual method, the revenue is recognized (and reported) when the participant takes the class rather than when the fees were received. No matter which method is chosen, it applies to both revenue and expenses.

Matchmaker, Matchmaker

Accounting has a term called matching. Accounting rules say that the expenses listed should be for the period matching the revenue reported. Expenses will also be reported either with the cash method or the accrual method

It is Not Cash

Statements of Revenue and Expense also include non-cash items. Depreciation is a noncash item. Depreciation is a way of reporting the wear and tear of some assets such as equipment, vehicles, computers, or machinery. Depreciation spreads the cost of those assets over time. So while depreciation isn’t using up cash at the time of the report, it is a reminder that assets are wearing out and will need to be replaced someday. Non-cash items are one reason the income (or loss) reported on the bottom line will not match the cash in the bank. Amortization is another non-cash item. Similar to depreciation, amortization spread the cost of intangible assets over time.

The Bottom Line

And finally, the bottom line plus a few other terms. Sometimes, there are levels of The Bottom Line. Some organizations report Net Operating Income. This is income before interest and taxes. Operating revenue and expenses will be monies earned or spent directly related to the mission or the business. Non-operating items will be reported next. If the organization has taxable income, the taxes will be reported in this section. Interest income and expenses may be reported here. After the non-operating items comes the final bottom line. This is known as Excess Revenue Over (Under) Expenditures. You know how to do the math now.

The Final Note

Generally, if the revenue is more than the expenses that is a good thing. However, no one financial statement tells the entire story. There are several financial statement types and each one is needed to answer the question, “Is this organization well managed?” Next up, The Statement of Activities, a statement specific for nonprofits.

Click here to read the previous article in this series.

Laura Reifschlager
Trainer

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Show me the Money: An Overview of Financial Statements for Fund Accounting

A Financial Statements Series

Accounting systems capture accounting transactions. Financial statements are constructed from these transactions and depict the economic activity and financial position of the organization. Knowing how to read financial statements may help you determine the health of a non-profit. Is it well-funded? Is it properly managed? How is the organization spending its resources? How have the assets or liabilities changed over time? Several key statements provide clues to these answers.

In a for-profit organization, net income can be a measure of success. Non-profit organizations use any surplus revenue to achieve its goals rather than distribute the surplus as profit. Changes in net assets are referred to as surplus or deficit and are carried forward. Thus FASB (that’s the Financial Accounting Standards Board) requires a different set of statements for non-profits.

This is the first in a series of articles where I’ll unravel the mysteries of those reports in easy-to- understand terms.

To begin, let’s look at some of the most popular reports produced. Then, in subsequent articles, we will look at the most common ones in a little more detail.

FASB Statement 117 requires that a complete set of financial statements for a nonprofit organization include:

• A Statement of Financial Position
• A Statement of Activities
• A Statement of Functional Expenses for Voluntary and Welfare Organizations and encourages it for other not-for-profit organizations
• A Statement of Cash Flows
• Financial Statement Disclosures

A Statement of Financial Position is similar to a balance sheet in that it shows the ending balance of the assets, liabilities and net assets (also called net equity) at a specific point in time. Further, net assets must be classified based on the donor-imposed restrictions of permanently restricted, temporarily restricted, or unrestricted.

A Statement of Activities is similar to an Income Statement, also known as a Statement of Revenue and Expenses, in that it reports the changes in net assets over a period of time. The change in net assets is also reported based on the restriction categories of permanently, temporarily, or unrestricted.

A Statement of Functional Expenses is the Statement of Activities with expenses reported by functional classification such as programs and services, management and general expenses rather than the natural classification of salaries, office and supplies expenses, and maintenance, to mention a few examples.

A Statement of Cash Flows summaries the inflow and outflow of cash by an organization over a defined period of time. Because many organizations use accrual accounting, the recognition of revenue and expenses is often different from the actual timing of cash receipts and disbursements. The  cash flow statement is intended to address the actual flow of cash and validate the ending cash account balance reported.

And finally, A Statement of Financial Disclosure simply stated is a list of explanations and comments that explain certain aspects of an organization’s procedures. FASB Statement 116 as well as FASB Statement 117 require specific disclosures for nonprofit organizations.

There. I’ve now defined the basic statements. A good fund accounting software program should provide these statements both “out of the box” and with customizable features. Sage 100 Fund Accounting provides standard statements that can be run without any changes as well as the ability to customize each report for the needs of specific organizations.

Stay tuned for more details on the most frequently used financial reports.

Update: Follow the links below to view the next articles in this series.

Show me the Money: Understanding the Statement of Revenue and Expenses

Show me the Money: The Statement of Activities with Functional Expenses

Show me the Money: Understanding the Balance Sheet

Show me the Money: The Statement of Financial Position

Laura Reifschlager
Trainer

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Innovation And The Social Balance Sheet

Innovation can mean many things to many people. Innovation and accounting are usually not words that go well together. Innovative accounting usually = new ways to justify questionable practices. Enron had a very innovative accounting department. When applying innovation to accounting, we shouldn’t be focused on creating new recipes with which to cook the books. Instead, we should be innovative about how we measure things and look beyond just OUR books to the social balance sheet.

A non-profit organization “success” should be measured beyond simple financial results, overhead ratios, number of clients served and other traditional methods of tracking efficiency. The effect of their services on their customers, and thus society at large, should also be given weight in that evaluation.

Let’s say you’re a human services agency and have a choice of two programs for improving health outcomes. Both help, but the more expensive one has a difference in the number of days a client is sick or hospitalized. When you look at both programs strictly from a budget/efficiency perspective one serves fewer people and is more expensive, looks like “inefficiency” at work. From the organizations’ standpoint that might be true if we only look at how much money it costs US.

But what about the savings to our clients and society as a whole? If that person stays out of the hospital, the local community sees large cost savings. If the person doesn’t miss work because they are ill or taking care of something (like waiting in line for discounted services), then that’s productivity that isn’t lost to their employer as well as direct wages the client doesn’t lose. When you consider that many non-profit clients are in tenuous circumstances to begin with, these savings in time and money on their part may make the difference between staying afloat or going under in a reinforcing spiral of work issues, health issues, medical access, food and nutrition and ultimately housing issues. Keeping more of them afloat reduces the strain on many other services besides the one our organization provides. In accounting terms, it keeps them in the asset vs. the liability section of the social balance sheet.

Finding ways to measure this success and tell this story, rather than beating tired ratios of efficiency to death, is real innovation. Statements like “saved average customer 4 sick days” don’t sound terribly impressive, but “saved average customer $15,345 in lost time, wages, hospitalization and social welfare costs” makes a stronger case that even bean counters can appreciate. Then you can make a better case when you ask “Is it worth $100 of our money to save the customer and society at large $10,000?”.

Tom Tweedel

Sr. Customer Support Analyst

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Protect Your Fixed Assets

Assets are important to your organization and help you accomplish your mission. Tracking those assets is just good management practice and provides for internal controls. Form 990 requires reporting on signification disposal of assets, but tracking asset information also helps you budget for replacement of those assets. Disposing of assets may have tax consequences, so it is important to record disposals correctly.

When events like Hurricane Sandy or other disasters occur, having a good fixed asset system in place provides you with solid data to report what was lost, file insurance claims, and get back to business quickly.

Assets can be current or long-term. Long-term assets are usually called fixed assets in the accounting world. Fixed does not mean immovable. Fixed means it is an item or intellectual property that will last or be used for more than a year.

My super-duper purple power stapler is a huge asset (to me!) and necessary for my everyday tasks but is not an item tracked as an organization asset. Should a natural disaster strike, everything lost will need to be replaced. Even though all the staplers may have whirled away in a tornado, staplers are not the type of items classified as assets for accounting purposes.

Fixed assets are items intended for continuing use and are used up over time. Each item will have a recognized life. A building will have a life of 20 years or more. A vehicle may have a life of only three years. Depreciation expense is recorded to recognize the wearing out or “using up” of the asset.

While my purple stapler may be heavy duty and last 20 years, the cost of the item plays a role in determining asset status. Organization policy usually dictates the cost threshold for determining asset status. Accounting rules are also considered. So while my stapler might outlast some vehicles, the cost for stapler will eliminate it from the asset list.

A good fixed asset system will provide for quick and efficient asset entry at the time of purchase, accurate tracking, customized depreciation calculations, and user-friendly reports for quick analysis.  Here are 5 features of a good fixed asset system.

1. Quick Asset Entry – Wouldn’t it be nice if assets could be entered into the fixed asset ledger when the invoices for the asset purchase are entered into the system?
2.  Track Asset History – Be sure you can track warranty information, manufacturer information, serial numbers, and repair history into the asset record. You may scan and attach important source documents directly to the asset record.
3. Depreciation – Use one of four standard depreciation methods or even better find a system so that you can set up customized depreciation methods to generate accurate journal entries to record depreciation monthly, quarterly, or annually.
4. Accounting Entries – the system is capable of complex journal entries to distribute expenses across programs, departments, and more using percentages or units such as square feet.
5. Reporting – You can easily analyze depreciation calculations and accounting entries with detailed reports before you accept the figures.

And, yes Sage 100 Fund Accounting’s Fixed Asset Module does all of the above.  Want to learn more?  We have two webcasts coming up:

The How and Wow of Tracking Fixed Assets With Sage

Thursday, January 31, 2013 at 2 p.m. ET and Wednesday, February 13, 2013 3 p.m. ET  Register Now

Laura Reifschlager
Trainer
Sage Nonprofit

 

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Fiscal Cliff May Spur Charitable Giving

Many nonprofits voiced their concerns that the Fiscal Cliff deal would have negative impact on charitable deductions. They worried that capping the tax deductions for charitable contributions from the wealthiest families and individuals would hamper their fundraising efforts. However, the Fiscal Cliff deal did not limit tax breaks on charitable deductions and may in fact have a positive effect on donations this year, according to a brief on The American Taxpayer Relief Act of 2012 from the Urban-Brookings Tax Policy Center’s Urban Institute on Nonprofits and Philanthropy.

The documents answers the question that has since been abuzz in the nonprofit community, “What Does The Fiscal Cliff Deal Mean for Nonprofits?” It explains that a number of provisions in the Act could potentially have an impact on charitable organizations, such as an increase of the top tax rate from 25 to 39.6 percent on taxable income, while itemized charitable deductions can still be subtracted at their full rate. Individuals who donate appreciated property may also find there are additional tax benefits, thanks to capital gains increases for corporate stock, real estate and investments.

In all, these changes could pump approximately $3.3 billion more into nonprofits’ accounts, representing a 1.3 percent jump over giving totals in 2012.

– Sage Nonprofit

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Make A Record Retention Resolution This Year

When I began my career with Sage on the Customer Support team, I really loved “saving the day”. Whether the call was a plea for help with a payroll issue (and payroll is always an urgent issue!), or a request to add a new user, I enjoyed providing answers to resolve the questions so work could continue.

Unfortunately, some requests required magic on my part, and a magician I’m not. Take this call for example: the caller needed to provide data to the IRS for periods prior to the current year. He searched the entire office for the file copies for those years. Alas, no paper copies were to be found – anywhere! We did come up a solution to retrieve data from the his Sage 100 Fund Accounting system, however having paper copies for comparison would surely have been helpful!

Although the move toward the paperless office is progressing, sometimes it seems as if the computer age has brought with it more paper rather than less! Granted, sorting files, finding space for archives, and shredding paper are not the most glamorous tasks, but having your paper files in order along with proper system backups might just “save the day” for you!

My advice, start the new year with a record retention resolution.  Try and say that out loud, quickly. Resolve to clean up old files, properly dispose of papers containing sensitive information, and develop policies to handle all current paperwork in the most efficient manner.

For nonprofit organizations, especially those that file a 990 tax return, the IRS explains why the 990 asks about record retention (section B, line 14):

A document retention and destruction policy identifies the record retention responsibilities of staff, volunteers, board members, and outsiders for maintaining and documenting the storage and destruction of the organization’s documents and records.”

Source: Instructions to the Form 990 page 21.

There is no one guideline or regulation governing record retention. I gleaned the best from that all-knowing source, the Internet, to provide a beginning point for your record retention resolution and complied it into this document > Sage Nonprofit Record Retention Guidelines.

Happy New Year! May your new year be well organized and efficient.

Laura Reifschlager
Trainer
Sage Nonprofit

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