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Key Principles

Understanding Financial Statements (in English, not Finance Speak) Thomas A. McLaughlin tamclaughlin@comcast.net 617.549.9611. Key Principles. Entity Money measurement Conservatism Dual aspect Going concern. Key Principles. Cost concept Materiality Realization Matching.

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Key Principles

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  1. Understanding Financial Statements (in English, not Finance Speak)Thomas A. McLaughlintamclaughlin@comcast.net617.549.9611

  2. Key Principles • Entity • Money measurement • Conservatism • Dual aspect • Going concern

  3. Key Principles • Cost concept • Materiality • Realization • Matching

  4. Other Important Concepts • Accrual vs. cash basis of accounting • Fund accounting • GAAP • FASB

  5. STOP! CAUTION Yellow and Red Flags

  6. The Three Levels of Reporting Compilation Audit Review High Low Complexity Time Required Assurance Complexity Time Required Assurance

  7. The Audit Equation Auditing Auditor Management Bookkeeping

  8. The Truth is in the Footnotes • Accrual basis of accounting • Related party transaction • Borrowing practices -- key areas: • purpose of borrowing • status of lines of credit • interest rate charged

  9. The Truth is in the Footnotes (cont.) • Lawsuits pending, if any • Extraordinary transactions • Pending adjustments • Comments about uncertainty of government funding, etc. • Subsequent events

  10. Current Ratio: Current assets Current liabilities How capable is this organization of meeting its obligations in the short term? To what degree does the organization have enough short term assets to meet its immediate obligations?

  11. Days’ Cash: Cash & equivalents * 365 Operating Expenses - Depreciation If a nonprofit suddenly has to live off its cash accounts only -- no more cash is coming in -- how long will it survive if it continued spending at its usual rate?

  12. Days’ Receivables Accounts receivable * 365Operating Revenue For organizations that provide services for a fee or hold government contracts, how long does it take, on average for you to be paid?

  13. Debt to Net Assets Long-term Debt Net Assets Compares the total amount of long term debt to the total net assets (“net worth”) of the organization to see how much of the latter could potentially be claimed by outside lenders.

  14. Accounting Age (of Property and Equipment) Accumulated Depreciation Depreciation Expense On average, how well does this organization keep up its investment in tangible assets like computers, buildings, vehicles, etc.

  15. Profitability Revenue - ExpensesRevenue The “bottom line.”

  16. Sunset, Plum Cove Cape Ann

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