Ian Shuman, CPA Shareholder/Director, Gelman, Rosenberg & Freedman, CPAs

2. Ian Shuman, CPAShareholder/Director, Gelman, Rosenberg & Freedman, CPAs • Director of Client Services • 15+ years of experience in auditing, consulting and accounting • Specializes in nonprofit outsourced accounting services • Controllership assignments, recruiting and training of client accounting personnel and set up of accounting systems. • Nonprofit Involvement: • Treasurer of the Sitar Arts Center • Treasurer of the Bach Sinfonia • Former Treasurer for the Maryland chapter of the Race for the Cure

3. Jacqueline A. Oneto, CPAShareholder/Director, Gelman, Rosenberg & Freedman, CPAs • 17 years of experience with auditing and accounting • Specializes in audits of nonprofit organizations including associations • Focuses on employee benefit plan audits, including 401(k), 401(a), 403(b), profit-sharing, pension and health and welfare plans • Nonprofit Involvement: • Membership Committee Member of the Nonprofit Roundtable of Greater Washington • Community Council Member of the Tree House Child Assessment Center of Montgomery County

4. Financial Statements Overview • Snapshot • Reading financial statements • Financial statement components • For-Profit income statement example • Nonprofit example • Functional expenses example

5. Snapshot Take a photo and capture the image (Statement of Financial Position) Measure the activity showing how we got from one image to another (Statement of Activities) Take a photo and capture the image (Statement of Financial Position)

6. Reading Financial Statements • Who is reading your financial statements? • The purpose of financial statements • The story financial statements tell aboutyour organization

7. Financial Statement Components • Statement of financial position (balance sheet) • Snapshot in time • Statement of activities and change in net assets(handout) • Statement of functional expenses(handout)

8. Financial Statement Components (cont) • Statement of cash flows • Footnotes • Supplementary schedules (handouts – sample financial statements)

9. Who are the users of this report? • Maybe bankers, owners, potential owners or management • What do they want to know? • Profitability, ability to repay a loan, etc.

10. … maybe they want to break out between business lines • Now let’s make this a nonprofit organization

11. For a nonprofit entity, who are the users of the reports? • Management, potential donors, funders, board members • Does this format still work? • NO, it’s no longer all about net income • Conclusion: In the 1990’s, nonprofits got a completely different format

12. Functional Classification(see glossary) • Natural expense classification (see glossary) • Shows expenses by functional instead of natural classification

13. Show restricted categories in separate columns • Most of this information is required • There’s nowhere to show the natural expense categories except on a separate page

14. Administration and fundraising are called "supporting services” • Page is optional for most orgs (but encouraged) • Note these Interchangeable words: "administrative,” “management and general,” “general and administrative,” and "overhead"

15. Audited vs. Unaudited • Audit • Review • Compilation

16. GAAP vs. Non GAAP • Generally Accepted Accounting Principles (GAAP) • Tax Basis • Cash Basis

17. Cash vs. Accrual Accounting • A - On Jan 12, a donor pledges to donate $1,000 per month for three months starting next month (and does). • B - On Feb 8 you collect a donation of $5,000 from a donor who had promised it last year. • C - On Feb 28 a customer uses your classroom for an agreed rent of $800. You send them an invoice on March 2 and collect it on April 7.

18. Cash vs. Accrual Accounting (cont) • D - On March 20 a foundation offers a donation of $15,000. You receive the check in May. • E - On January 18 you spend $5,000 on a project funded by a temporarily restricted donation. The money was collected last year.

19. Cash vs. Accrual Accounting (cont)

20. Red Flags • Unrestricted net asset deficit • Net loss in unrestricted net assets (operations) • Current liabilities exceed current assets

21. Red Flags (cont) • Insufficient current assets to cover temporarily restricted net assets • Supporting service expenses ≥ 25% of total expenses

22. Red Flag Example (refer to handout) • Unrestricted net assets are less than net fixed assets (and deposits) • Deferred revenue is greater than cash • Temporarily restricted net assets are greater than cash plus grants receivable • Accounts payable is greater than liquid assets

23. Overhead • The cycle that starves nonprofits • Cost of running programs (handout)

24. Reserves • Unrestricted net assets • Often 3 to 6 months budgeted expenses • Cash – What is cash?

25. Restricted Net Assets • Temporarily restricted • Permanently restricted

26. Budgets • About budgets • Constructing a budget • Common differences between budget and accounting • An example

27. Internal Financial Reporting • What’s in your report? • Here comprehension is more important than completeness or proper form • Reporting against budget • Cash projections