UNDERSTANDING FINANCIAL REPORTS SUMMER 2012 HOD Just what you always wanted to know… © Copyright...
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Transcript of UNDERSTANDING FINANCIAL REPORTS SUMMER 2012 HOD Just what you always wanted to know… © Copyright...
UNDERSTANDING UNDERSTANDING FINANCIAL REPORTSFINANCIAL REPORTS
SUMMER 2012 HOD SUMMER 2012 HOD
Just what you always wanted to know…Just what you always wanted to know…
© Copyright 2012 American Association for Respiratory CareAll rights reserved
UNDERSTANDING FINANCIAL REPORTSUNDERSTANDING FINANCIAL REPORTS
General Topic OutlineGeneral Topic Outline
Accounting SystemsAccounting Systems Accounting RulesAccounting Rules General DefinitionsGeneral Definitions Reports to AARC managementReports to AARC management AARC Tax ReportingAARC Tax Reporting AARC Annual auditAARC Annual audit AARC Annual Budget processAARC Annual Budget process Financial Report to HOD-Summer ‘12Financial Report to HOD-Summer ‘12 Q & AQ & A
Accounting SystemsAccounting Systems
Is Accounting an art or a science—both, Is Accounting an art or a science—both, neither, some of each—neither, some of each—• As a science, it is a discipline with many rules As a science, it is a discipline with many rules
& principles& principles• As an art, it often relies on human subtleties of As an art, it often relies on human subtleties of
interpretation, understanding and estimationinterpretation, understanding and estimation
Why are Accounting systems needed?Why are Accounting systems needed?• Help Manage the businessHelp Manage the business• Provide Accountability to parties of interest Provide Accountability to parties of interest
(e.g. Directors / Owners / Members)(e.g. Directors / Owners / Members)• Tax reportingTax reporting
KEY ACCOUNTING CONCEPTSKEY ACCOUNTING CONCEPTS
MATCHING CONCEPTMATCHING CONCEPT• Record revenue and related expense in Record revenue and related expense in
the the samesame period that relate to each period that relate to each other (e.g. Product sales and COGS).other (e.g. Product sales and COGS).
Accrual (vs. cash) basis accountingAccrual (vs. cash) basis accounting• Record revenue in the period Record revenue in the period earnedearned• Record expense in the period to which Record expense in the period to which
the the benefitbenefit of that expenditure relates of that expenditure relates• When revenue is When revenue is receivedreceived or expense is or expense is
paidpaid does not usually matter. does not usually matter.• Cash basis often used for personal taxes Cash basis often used for personal taxes
or small organizationsor small organizations
ACCOUNTING RULESACCOUNTING RULES
Transactional activity is recorded in Transactional activity is recorded in AARC books based on Generally AARC books based on Generally Accepted Accounting Principles Accepted Accounting Principles (GAAP).(GAAP).
GAAP is determined by independent GAAP is determined by independent Accounting bodies (e.g. Financial Accounting bodies (e.g. Financial Standards Accounting Board [FASB]) Standards Accounting Board [FASB]) which issues standards and guides which issues standards and guides on proper accountingon proper accounting
GENERAL DEFINITIONSGENERAL DEFINITIONS ASSETASSET
• An owned item of some ongoing value or worth (e.g. An owned item of some ongoing value or worth (e.g. cash, receivables, property, investments)cash, receivables, property, investments)
LIABILITYLIABILITY• An amount owed to an outside party for goods / services An amount owed to an outside party for goods / services
/ property they have provided to you (e.g. telephone / property they have provided to you (e.g. telephone bill, loan payment)bill, loan payment)
NET ASSETSNET ASSETS• The difference between what is owned (asset) and what The difference between what is owned (asset) and what
is owed (liability). Often synonymous with Net Worth or is owed (liability). Often synonymous with Net Worth or Retained EarningsRetained Earnings
DEFINITIONS, cont’dDEFINITIONS, cont’d
REVENUES:REVENUES:• Monies received for goods / services Monies received for goods / services
sold or provided (e.g. dues, products).sold or provided (e.g. dues, products).
EXPENSESEXPENSES• Monies paid for goods / services Monies paid for goods / services
received (e.g. rent, utilities, payroll, received (e.g. rent, utilities, payroll, printing, supplies)printing, supplies)
DEFINITIONS, cont’dDEFINITIONS, cont’d NET EARNINGSNET EARNINGS
• What remains after subtracting expenses from revenues What remains after subtracting expenses from revenues in a given period.in a given period.
• While not exactly the same, often synonymous withWhile not exactly the same, often synonymous with Net IncomeNet Income Net MarginNet Margin CHANGES IN NET ASSETS (the most common term in CHANGES IN NET ASSETS (the most common term in
non-profit reports)non-profit reports)
• NOTE: Net earnings at any given point in time do NOT NOTE: Net earnings at any given point in time do NOT necessarily mean there is this amount just sitting and necessarily mean there is this amount just sitting and available to be used or spent in the future. These available to be used or spent in the future. These earnings could have already been utilized to invest earnings could have already been utilized to invest further in the business (e.g. equipment), may include further in the business (e.g. equipment), may include non-cash income (e.g. unrealized stock market non-cash income (e.g. unrealized stock market investment gains) or may be reserved for other investment gains) or may be reserved for other significant commitments (e.g. Daedalus Enterprises, CPG significant commitments (e.g. Daedalus Enterprises, CPG reviews, web site upgrade, etc.).reviews, web site upgrade, etc.).
DEFINITIONS, cont’dDEFINITIONS, cont’d
PREPAYMENTSPREPAYMENTS• Monies paid for goods or services that Monies paid for goods or services that
we will receive the benefit of in the we will receive the benefit of in the future. future. Example:Example: Paying for rent six Paying for rent six months in advance. Prepayments are an months in advance. Prepayments are an ASSET and shown as an expense as we ASSET and shown as an expense as we receive the benefit in the coming receive the benefit in the coming months.months.
DEFINITIONS, cont’dDEFINITIONS, cont’d
DEFERRED REVENUEDEFERRED REVENUE• Monies received for services that will be Monies received for services that will be
provided in the future. provided in the future. ExampleExample: Member dues : Member dues are paid for the forthcoming year. These paid are paid for the forthcoming year. These paid amounts are amounts are notnot considered income considered income immediately but deferred until they are taken immediately but deferred until they are taken into income on a pro rata basis over the term into income on a pro rata basis over the term paid for. paid for.
• Example: Example: $90 dues is pd. $12 revenue sharing $90 dues is pd. $12 revenue sharing is sent to the state and 1/12 of the is sent to the state and 1/12 of the remainingremaining balance ($78 [$90-$12]) is recorded as income balance ($78 [$90-$12]) is recorded as income each month ($78 /12 or $6.50/mo).each month ($78 /12 or $6.50/mo).
DEFINITIONS, cont’dDEFINITIONS, cont’d
REALIZEDREALIZED gains and losses gains and losses• Money made (gain) or lost (loss) from the Money made (gain) or lost (loss) from the
actual sale of an asset. Typically used relating actual sale of an asset. Typically used relating to investments.to investments.
UNREALIZEDUNREALIZED change in market value change in market value• The increase or decrease in the market value The increase or decrease in the market value
of an asset that has NOT been sold and is still of an asset that has NOT been sold and is still held—most typical of investments.held—most typical of investments.
• Relates to a Relates to a given accounting periodgiven accounting period and does and does NOT reflect whether the investment is in an NOT reflect whether the investment is in an overall gain or loss position. overall gain or loss position.
• See Example on next slideSee Example on next slide
DEFINITIONS, cont’dDEFINITIONS, cont’d Stock purchased FEB 2011 for $100Stock purchased FEB 2011 for $100 Stock tanks at 2011 year-end:Stock tanks at 2011 year-end:
• Value at 12/31/2011--$60Value at 12/31/2011--$60• Unrealized loss at 12/31/11--$40Unrealized loss at 12/31/11--$40
A New Year>>A New Year>>• Stock rebounds: Value increases in 2012 to $75 at Stock rebounds: Value increases in 2012 to $75 at
June 30, 2012June 30, 2012• Unrealized positive change at 6/30/12 -- $15 Unrealized positive change at 6/30/12 -- $15
Calculation– (Current Value $75 less 12/31/11 Calculation– (Current Value $75 less 12/31/11 year end value of $60)year end value of $60)
Note that even though there is a $15 gain in 2012, the Note that even though there is a $15 gain in 2012, the stock is still in an overall LOSS position (Down $25 stock is still in an overall LOSS position (Down $25 ($100 cost; $75 current value)($100 cost; $75 current value)
Monthly Financial Reports are sent to:Monthly Financial Reports are sent to:• AARC Board AARC Board • House OfficersHouse Officers• Finance Committee Finance Committee • Audit CommitteeAudit Committee
Reports include:Reports include:• Balance SheetBalance Sheet—shows all assets, liabilities and —shows all assets, liabilities and
net assets at a point in time (e.g. 12/31/11)net assets at a point in time (e.g. 12/31/11)• Statement of ActivityStatement of Activity—shows all revenue and —shows all revenue and
expense activity for a period (e.g. January 1-expense activity for a period (e.g. January 1-March 31, 2012March 31, 2012
• Detail departmental revenue & expense Detail departmental revenue & expense activityactivity
Reporting to AARC MgmtReporting to AARC Mgmt
Tax ReportingTax Reporting
Being non-profit does Being non-profit does notnot mean no mean no government / tax reporting >>>government / tax reporting >>>
AARC files:AARC files:• Annual Federal informational returns Annual Federal informational returns
with IRSwith IRS• Annual Federal Return and pays taxes Annual Federal Return and pays taxes
on any net Unrelated Business Incomeon any net Unrelated Business Income• City / County Property tax returnsCity / County Property tax returns• State Sales tax returnsState Sales tax returns• Federal and state payroll tax returnsFederal and state payroll tax returns
AARC’s Annual AuditAARC’s Annual Audit
Performed by independent CPA firmPerformed by independent CPA firm• CPA firm reports to the audit committeeCPA firm reports to the audit committee
CPA firm:CPA firm:• Expresses an opinion on AARC’s financial Expresses an opinion on AARC’s financial
statements. An “unqualified” opinion means statements. An “unqualified” opinion means the financial statements comply in all material the financial statements comply in all material respects to GAAP. AARC continues to receive respects to GAAP. AARC continues to receive an unqualified opinion.an unqualified opinion.
• Provides suggestions on any internal Provides suggestions on any internal accounting system control weaknessesaccounting system control weaknesses
• Presents Audit Report to AARC BODPresents Audit Report to AARC BOD
AARC Annual Budget Process-AARC Annual Budget Process-High Level OverviewHigh Level Overview
Process starts in early August for next yearProcess starts in early August for next year AARC President (or Pres-Elect) consulted AARC President (or Pres-Elect) consulted
to determine any new goals and objectives to determine any new goals and objectives for coming yearfor coming year
Rates and Volumes (R & V) estimated and Rates and Volumes (R & V) estimated and reviewed by all AARC dept managers for reviewed by all AARC dept managers for adequacy and reasonablenessadequacy and reasonableness
Revenues & expense dollars calculated to Revenues & expense dollars calculated to match / support the above R & V.match / support the above R & V.
AARC Annual Budget Process-AARC Annual Budget Process-High Level Overview, Cont’dHigh Level Overview, Cont’d
We always ask:We always ask:• Are these revenue levels the best we can do?Are these revenue levels the best we can do?• Where can unnecessary expense be cut?Where can unnecessary expense be cut?
With above in mind, revenue and expense With above in mind, revenue and expense are reviewed until the budget is balanced are reviewed until the budget is balanced to Zero (i.e. Revenues = Expenses).to Zero (i.e. Revenues = Expenses).
Balanced Budget initially reviewed by Balanced Budget initially reviewed by AARC staff with President and TreasurerAARC staff with President and Treasurer
Budget presented to AARC Finance Budget presented to AARC Finance Committee, BOD & HOD at AARC CongressCommittee, BOD & HOD at AARC Congress
FINANCIAL REPORT TO HODFINANCIAL REPORT TO HODSummer 2012Summer 2012
A Main Report: “Statement of Activity” A Main Report: “Statement of Activity” also known as Profit & Loss (P & L)also known as Profit & Loss (P & L)
Shows financial activity for a period of up Shows financial activity for a period of up to a year (e.g. five months)to a year (e.g. five months)
Main components:Main components:• RevenuesRevenues• ExpenseExpense• Change in Net Assets (AKA Net Margin or Net Change in Net Assets (AKA Net Margin or Net
Income)Income)
FINANCIAL REPORT TO HOD FINANCIAL REPORT TO HOD EXAMINING THE REPORTEXAMINING THE REPORT
Report will be distributed in Joint Report will be distributed in Joint Session in afternoonSession in afternoon
Shows several columns:Shows several columns:• Current year actual activity thru MayCurrent year actual activity thru May• Current budget thru MayCurrent budget thru May• Variance between the actual & budget Variance between the actual & budget
aboveabove• Actual last Actual last fullfull year of activity (2011) year of activity (2011)• Current Current fullfull year’s budget (2012) year’s budget (2012)
FINANCIAL REPORT TO HODFINANCIAL REPORT TO HODSummer 2012Summer 2012
Defining line-by line components:Defining line-by line components:• REVENUESREVENUES
Membership duesMembership dues —Includes all member —Includes all member dues amounts received relating to period dues amounts received relating to period being reported.being reported.
Product SalesProduct Sales – includes revenues for – includes revenues for• Store productsStore products• Professor roundsProfessor rounds• Books & videosBooks & videos
FINANCIAL REPORT TO HODFINANCIAL REPORT TO HODSummer 2012Summer 2012
• REVENUES, cont’dREVENUES, cont’d EducationEducation —includes: —includes:
• On line courses (Asthma, COPD, Ethics)On line courses (Asthma, COPD, Ethics)• CRCE accreditation CRCE accreditation
ConventionConvention —includes: —includes:• Congress and Summer Forum Attendee Congress and Summer Forum Attendee
registrationregistration• Congress Booth feesCongress Booth fees• Congress sponsorshipsCongress sponsorships
FINANCIAL REPORT TO HODFINANCIAL REPORT TO HODSummer 2012Summer 2012
• REVENUES, cont’dREVENUES, cont’d Investment incomeInvestment income — includes: — includes:
• Dividends & InterestDividends & Interest• Realized investment gains / losses (from Realized investment gains / losses (from
investments sold)investments sold)• Unrealized investment gains / losses (changes in Unrealized investment gains / losses (changes in
market price on market price on unsoldunsold investments) investments)
Other IncomeOther Income – includes: – includes:• Grant incomeGrant income• Other miscellaneousOther miscellaneous
FINANCIAL REPORT TO HODFINANCIAL REPORT TO HODSummer 2012Summer 2012
• EXPENSESEXPENSES Executive & AdministrativeExecutive & Administrative –includes: –includes:
• Travel & Meeting (BOD, President, etc.)Travel & Meeting (BOD, President, etc.)• Support departments like Administrative, Support departments like Administrative,
Accounting and MISAccounting and MIS• Utility, insurance and tax expenseUtility, insurance and tax expense• Building and Equipment depreciationBuilding and Equipment depreciation
MembershipMembership – includes: – includes:• Customer ServiceCustomer Service• Programs to enhance and increase membershipPrograms to enhance and increase membership
FINANCIAL REPORT TO HODFINANCIAL REPORT TO HODSummer 2012Summer 2012
• EXPENSES,EXPENSES, cont’d cont’d State Society SupportState Society Support -- includes: -- includes:
• Revenue SharingRevenue Sharing• PACT meeting (Wash. DC)PACT meeting (Wash. DC)• State Society meeting grantsState Society meeting grants• HOD delegate travel assistanceHOD delegate travel assistance• HOD meeting expensesHOD meeting expenses
Publicity, Consumer & Public RelationsPublicity, Consumer & Public Relations• General P/R, press releases,Web site supportGeneral P/R, press releases,Web site support• International activityInternational activity• AHA & AACVPR representativesAHA & AACVPR representatives
FINANCIAL REPORT TO HODFINANCIAL REPORT TO HODSummer 2012Summer 2012
EXPENSESEXPENSES, cont’d, cont’d•Government AffairsGovernment Affairs –includes: –includes:
State Director’s travel and support costState Director’s travel and support cost Regulatory and legislative activitiesRegulatory and legislative activities Lobbying costs Lobbying costs
• Marketing and ProductsMarketing and Products – includes: – includes: Product sale fulfillment and related costsProduct sale fulfillment and related costs Product and overall promotional costProduct and overall promotional cost
FINANCIAL REPORT TO HODFINANCIAL REPORT TO HODSummer 2012Summer 2012
EXPENSESEXPENSES, cont’d, cont’d• ConventionConvention – includes: – includes:
All Expense to support Convention & Summer Forum All Expense to support Convention & Summer Forum eventsevents
Professional fees, Facility rental, speaker & staff Professional fees, Facility rental, speaker & staff costs, etc.costs, etc.
Program Committee costProgram Committee cost
• EducationEducation – includes: – includes: Education staff and costs to support CRCE and other Education staff and costs to support CRCE and other
educational programseducational programs
FINANCIAL REPORT TO HODFINANCIAL REPORT TO HODSummer 2012Summer 2012
EXPENSESEXPENSES, cont’d, cont’d• Accreditation & StandardsAccreditation & Standards– includes:– includes:
Representative cost for ASTM, CAMTS & Representative cost for ASTM, CAMTS & NCHPEGNCHPEG
• Special ProjectsSpecial Projects -- includes: -- includes: Expenses to support Grant revenueExpenses to support Grant revenue
• Intercompany ServicesIntercompany Services (both revenue (both revenue & expense) – include:& expense) – include:
Charges between AARC & Daedalus for work Charges between AARC & Daedalus for work done by one for the other.done by one for the other.
FINANCIAL REPORT TO HODFINANCIAL REPORT TO HODSummer 2012Summer 2012
NET CHANGES IN NET ASSETS-NET CHANGES IN NET ASSETS---To repeat from above>>To repeat from above>>• Close to / about Synonymous with: Close to / about Synonymous with:
Net IncomeNet Income Net MarginNet Margin Net EarningsNet Earnings
• NOTE: Net earnings at any given point in time do NOT NOTE: Net earnings at any given point in time do NOT necessarily mean there is this amount just sitting and necessarily mean there is this amount just sitting and available to be used or spent in the future. These available to be used or spent in the future. These earnings could have already been utilized to invest earnings could have already been utilized to invest further in the business (e.g. equipment), may include further in the business (e.g. equipment), may include non-cash income (e.g. unrealized stock market non-cash income (e.g. unrealized stock market investment gains) or may be reserved for other investment gains) or may be reserved for other significant commitments (e.g. Daedalus Enterprises, CPG significant commitments (e.g. Daedalus Enterprises, CPG reviews, web site upgrade, etc.).reviews, web site upgrade, etc.).
FINANCIAL REPORT TO HODFINANCIAL REPORT TO HODSummer 2012Summer 2012
Analytical thoughts---Analytical thoughts---• Variances are inevitable but one should Variances are inevitable but one should
understand any understand any significantsignificant (10-15%+) (10-15%+) Actual vs. Budget variances.Actual vs. Budget variances.
• The Stock Market is very volatile. Look The Stock Market is very volatile. Look at bottom line performance at bottom line performance withoutwithout investment activity.investment activity.
QUESTIONS ???QUESTIONS ???