Chapter 10 Transcript

.docx

School

Northern Arizona University *

*We aren’t endorsed by this school

Course

569

Subject

Accounting

Date

Apr 3, 2024

Type

docx

Pages

Uploaded by ari.dillon

Chapter 10 Reporting the Results of Operations: The Activity and Cash Flow Statements Transcript Slide 1 Welcome to Chapter 10 of the Fundamentals of Budgeting and Financial Management. This lecture will summarize the information in Chapter 10 but should not be considered a replacement for reading Chapter 10. Slide 2 In this session we will cover the activity statement and cash flow statement. Together with the balance sheet, they provide the complete financial picture of an organization. There is also a relationship between the three statements. Slide 3 The activity and cash flow statements look at information over time rather than as a particular point in time. The activity statement looks at revenue and support and expenses and helps an organization determine whether they have enough resources to cover costs. There are many names for the activity statement as shown here: Income Statement, Operating Statement, Statement of Revenues and Expenses, Profit and loss (P&L) Statement, Consolidated Statements of Earnings. The cash flow statement provides information on where an organization receives and spends cash. It also shows the amount of cash available. The cash flow statement provides information on sources and uses of cash, but not whether the organization generated a surplus or deficit (aka profitability. Slide 4 We will start with a discussion on the Activity Statement Slide 5 Most non-profit organizations call the activity statement ….drum roll…the activity statement, PHPM 569: Fundamentals of Health Budgeting and Financial Management

whereas healthcare systems call it the operating or income statement. Fortunately, regardless of the name, the format is pretty much the same, so you will recognize the statement regardless of what it is called. The activity statement many times is broken down in columns that show resources that are restricted (by donors) or unrestricted. In addition to helping an organization determine if it has adequate resources to cover costs, the activity statement helps provides clear guidance about whether an organization is meeting its mission. The format is easy to read as it looks somewhat like a budget. Slide 6 As we know revenues and support represent money an organization has earned or is entitled to receive based on supplying goods and services or through other support activities such as fundraising, grants or non-mission specific activities such as gift shop or cafeteria income. We went over this in our budget discussions. Slide 7 Expenses on the other hand represent resources used to deliver goods or services or support activities. Net income is the difference between revenue and support and the related expenses. Expenses, similar to the terms we used in a line item budget, demonstrates the use of resources needed for organizational operations. Net Income is the same as surplus or deficit, and yes, you can have a negative net income (deficit) on your activity statement if revenues are less than expenses. The difference between a budget and an activity statement, is the budget is an estimate or plan of what you think will happen. An activity statement is a report of what actually did happen. Slide 8 Here is a sample of an Activity Statement. In this example it is called the Income Statement because this is for a health care organization. Again, the activity statement demonstrates the organization’s revenue less expenses and whether there is a surplus or deficit. Please notice the line item detail and format of the Activity Statement. Slide 9 To fully analyze all financial statements it is instructive to look at multiple years to detect trends and/or anomalies as well as pinpoint problems. This is why you were asked to obtain financial information for at least two years for the non-profit organization you chose to assess for the class. PHPM 569: Fundamentals of Health Budgeting and Financial Management

Slide 10 Activity statements are prepared as shown on the slide. Look at the recognition of revenue and support. Hmmm, do these terms sound familiar from our budget discussions? What type of accounting system is this? Answer: Accrual Slide 11 Let us now look at an example in the accrual method where revenue and support can be reported on an activity statement. Un-named Donor donates $30M to MEZCOPH if they change the name of Drachman Hall (the main public health teaching building on the UA campus in Tucson): - Specific amount of $ (measurable) - Donor is quite wealthy, so good evidence of collection - All conditions are met so - The name is changed and we can we count the support in the current period. Slide 12 There are also conditions that must be met when recognizing expenses. Expense Recognition depends on the type of expense:  Based on the matching principle, expenses should be recorded in the same period as the revenue they generate.  Period Costs, like rent, are those related to the passage of time. They are recognized: o In the time period they are incurred o When the items expire or are used up (for example a rent or a food bank) Slide 13 Administrative costs are necessary in all organizations. Non-profits want to keep these as low as possible. Nevertheless, they are very important for organizational operations. Here are some examples of administrative functions. That being said, donors are still very aware of how much of their money goes to actual program services vs. administration. The exception to this is healthcare. Due to the regulatory and patient safety environment, administrative costs will be much higher. As we learned in our budget discussions the functional format breaks out administrative costs from program services. PHPM 569: Fundamentals of Health Budgeting and Financial Management

Slide 14 Here is an example of a statement of functional expenses. Non profit organizations are required to report their expenses by the functions of program services and support services in their financial statements. This can be done through a separate report like this or in the activity statement. So, when you look for this reporting in your NPO financial statements, if there is no separate statement of functional expenses, the breakdown will be in activity statement. In our example here, the support services of $47,000 and $23,000 represent 37% of the total expenses and program services are 63%. The expense total on the statement of functional expenses should = the expense total on the activity statement. Slide 15 You might have noticed the category reported as bad debt in the statement of functional expense report we just reviewed. I would like to spend just a moment on bad debt. Non-profit organizations are required to provide some level of charity services. However, bad debt should not be confused with charity services. Charity services are provided by NPOs with no expectation of payment. Bad debt is a designation for money organizations expect to collect but do not. Bad debt is generally reported as an expense on the activity statement, however some healthcare organizations report bad debt as a deduction from revenue. Slide 16 Revenues and expenses can be classified by type to help with more specific reporting. Here are some examples. Why is this important? Because it helps organizations determine activity by subcategory to pinpoint successes and challenges at a more granular level. Slide 17 Let’s take a moment to talk about deferred revenue. We covered prepaid expense in our balance sheet discussion. Deferred revenue, when included, it is the first category reported as a long term liability on balance sheet. Deferred or unearned revenue is money that has been paid in advance for goods or services. Deferred or unearned revenue is a liability until goods or services have been delivered. The term deferred refers to long term, unearned refers to short term. The slide gives an example of how deferred revenue works – as activities occur, membership is used and revenue is increased. Deferred (or unearned – the term for short term) represents the entity that must deliver the services, as they have received the money. PHPM 569: Fundamentals of Health Budgeting and Financial Management

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version