leasing rights

When Transfers are Fraud?

An expenditure

fund

few

Improvement

the

A government’s Statement of Activities presents much of the same information we see on the income statement for a for-profit or non-profit.

going concern

2015

Assets + Deferred Outflows = Liabilities + Deferred Inflows + Net Position

cover

has

deferred inflow of resources

finances.

That increase

qualitative

80% a

They’re just not sexy

We see a reconciliation that added back $750,000 to net assets. Practically speaking, this means Treehouse collected on a large receivable in FY14 that did not appear in FY15. This raises a natural question: Was FY14 an outlier year with respect to receivables and cash flow? If it was, then an important second conclusion is that Treehouse’s basic operations consistently use more cash than they produce, so it depends on positive cash flow from investing and financing activities. That’s not a weakness, per se, but it does change how we think about Treehouse’s operational and financial strategy.

Returning to Treehouse

Here

Of course, this can’t go on forever. At some point Treehouse will need to pay off those payables. When they do that liability will decrease, but so will cash. That’s why when liabilities decrease, we see a reconciliation that also decreases net assets.

Strange as it sounds, by committing to a future cash outflow, Treehouse has produced cash it can use today. That’s why increasing a liability leads to a reconciliation that adds back to net assets.

acycess

related to that store’s operations.

flow

Most assets will increase if cash decreases. If we purchase inventory with cash, for instance, inventory will increase and cash will decrease. It follows that decreasing an asset will almost always bring about an increase in cash. For example, if we sell marketable securities or collect on accounts receivable, those assets will decrease but cash will increase.

unrealized losses on investments

Activity that would otherwise decrease net assets is shown here as an increase because we’re “adding back” those decreases to arrive at net cash flows from operations. Activity that would otherwise increase net assets is shown as a reduction (in parentheses) because we’re “backing out” those increases to arrive at net cash flows from operations.

$199,299

It might see negative cash flow from investing activities if it moves a lot of its idle cash into short-term investments. In the future we expect those investments to produce positive cash flow, but in the first year or two they might look like only a cash outflow. You need to look at all these year-to-year cash flows when looking at cash flows from investing activities.

spent

are

Total expenses grew by 14.5% from FY2014 to FY2015, a growth rate slightly slower than the growth rate for revenues. Also note that all of the expenses are reported as unrestricted, hence why we reclassify revenues as “Net assets released from restrictions”.

In reviewing financial statements

These releases do not indicate new revenues, but rather a re-classification across the different types of net asset restrictions.

It

reports

in-kind contributions

Earned revenue

That’s why profitability is one of many criteria we need to apply when thinking about the finances of a public organization.

are the

Fair Value vs. Historical Cost

see below

Book Value vs. Market Value

less liquid

Cash equivalents

reducing

look

How much does the organization report in buildings and equipment?

receivables

this sort

accrual basis

looks and feels a bit different

We also have to think about the restrictions on net assets. Net assets are reported as either unrestricted net assets, temporarily restricted net assets or permanently restricted net assets. Unrestricted net assets have no donor-imposed stipulations but may include internal or board-designated restrictions. Temporarily restricted net assets represent assets with time and/or purpose restrictions stipulated by a donor. Permanently restricted net asset represent assets with donor restrictions that do not expire. We are therefore interested in whether the growth in an organization’s capacity is limited to donor-funded programs (i.e., temporarily or permanently net assets) or whether the growth is in its unrestricted position.

Public organizations don’t have “owners.” Instead, they have stakeholders, or anyone who has an interest, financial or otherwise, in how well the organization achieves its mission. For governments, taxpayers are a rough analog to owners. But unlike investors in a for-profit company, taxpayers don’t have a legal claim to the government’s assets. Taxpayers’ main interest is that the government delivers the services they expect it to deliver. Donors and funders who give money to a non-profit organization care about its financial health, but they also don’t expect to get their money back if the organization fails. Mostly, they care that the organization will continue to serve its clients and the community at large. For these reasons, net assets are an important part of a government and non-profit finances, but they don’t have quite the same meaning as owners’ equity for a for-profit entity.

Assets = Liabilities + Net Assets

How are Budgeting and Accounting Different?

That’s why budget-makers and accountants often don’t see eye-to-eye. In fact, in many large public organizations, they work side-by-side but don’t talk.

These are known as principles of accounting recognition.

But sometimes we want an “apples-to-apples” comparison. Sometimes we want to know if an organization’s mission-money nexus is the same, or different, from similar organizations. Sometimes we want to know how efficiently an organization accomplishes its mission compared to its peers. Sometimes we want to know if an organization is in comparatively good or bad financial health. To answer these types of question you need information found only in financial statements. In this chapter, we walk through the basic financial statements that most public organizations prepare, and the essential concepts from accounting you’ll need understand the numbers that appear in those statements. Moreover, we may need to compare an organization’s finances to the finances of other organizations. If our organization’s expenses exceeded its revenues we might consider that to be a failure. Unless, of course, we see that all organizations like it also struggled. If it failed to invest in its capital equipment, we might think it was neglecting its own service delivery capacity, unless we saw other organizations make that same trade-off. These types of comparisons demand financial information that’s based on standardized financial information from a broadly-shared set of assumptions. Budgets are rarely standardized that way. Fortunately, we can get that information from an organization’s financial statements.

On

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