Financial Statement

Analysis
CHARLES H. GIBSON

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 Chapter
13

Personal Financial
Statements and
Accounting for Governments
and Not-For-Profit
Organizations

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use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.
Personal Financial Statements
• Prepared for
– Individuals
– Husband and wife
– Larger family groups
• For the purpose of
– Obtaining credit
– Income tax planning
– Retirement planning
– Estate planning

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Personal Financial Statements—
Continued
• Statement of Financial Condition
– Similar to a business entity balance sheet
– Prepared on the accrual basis
– Assets and liabilities are reported in order of liquidity
and maturity
• They are not classified as current and noncurrent

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Personal Financial Statements—
Continued
• Statement of Financial Condition
– Tax liability for the difference between the stated
amounts and tax basis amounts of the reported
assets and liabilities
– Excess of assets over liabilities is described as net
worth which is equivalent to equity section in a
commercial balance sheet

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Personal Financial Statements—
Continued
• Statement of Changes in Net Worth
– Realized increases (decreases) in net worth
• Salaries, dividends, income taxes, and personal expenditures
– Unrealized increases (decreases) in net worth
• Change in current value of securities
• Change in current value of personal residence and other real
estate
• Change in estimated tax liability for the difference between
the stated amounts and tax basis amounts of the reported
assets and liabilities

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Personal Financial Statements—
Continued
• Reviewing the Statement of Financial Condition
– Net worth indicates the level of wealth
– Identify highly liquid (readily available) assets like
cash, savings, marketable securities, and so on
– Note the due dates of liabilities
– Compare specific assets with related liabilities
• Indicates the net investment in the asset

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Personal Financial Statements—
Continued
• Reviewing the Statement of Changes in Net
Worth
– Review realized and unrealized changes in net worth
– Observe whether the net realized and unrealized
amount increased or decreased and by how much
– Observe whether the net change increased or
decreased and the amount
– Observe the net worth at the end of the year
• Indicates the level of wealth

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Governments
• Terminology
– Appropriations
• Provision for necessary resources
• The authority of disbursements
– Debt service
• Cash receipts and disbursement relating to the payment of
interest and principal on long-term debt
– Capital projects
• Cash receipts and disbursement relating to acquisition of
long-lived assets

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Governments—Continued
• Terminology
– Special assessments
• Cash receipts and disbursement relating to improvements or
services for which a special property assessment has been
levied
– Enterprises
• Similar to private businesses where service users are
charged fees
– Internal service
• Service centres that supply goods or services to other
governmental units on a cost reimbursement basis

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Governments—Continued
• Terminology
– General fund
• All cash receipts and disbursements not required to be
accounted in another fund
– Proprietary funds
• Maintain assets through cost reimbursement by users
– Fiduciary funds
• Principal must remain intact
– Encumbrances
• Future commitments for expenditures

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Governments—Continued
• Accounting authority
– Governmental Accounting Standards Board
Organizing Committee
– Governmental Accounting Standards Board
• Branch of the Financial Accounting Foundation
• Seven-member board
• Majority of four votes is needed to issue a pronouncement

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Governments—Continued
• Fund accounting
– Fund
• Independent fiscal and accounting entity with a self-balancing
set of accounts
– Basis used for accounting—cash, modified accrual, or
accrual
• Trend is towards modified accrual or accrual basis

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Governments—Continued
• Financial statements (GASB 34)
– Issued in 1999
– Redefines what constitutes basic financial statements
– Provides minimum requirements for general-purpose
external financial statements

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Exhibit 13-1: Minimum
Requirements
• Minimum requirements for general-purpose
external financial statements—state and local
governments is illustrated in this exhibit

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Governmental General-Purpose
Financial Statements
• MD&A
– Provides an objective analysis of the financial
activities of the government based on known facts,
decisions, or conditions
– Provides financial managers with the opportunity to
present both a short-term and a long-term analysis of
the government’s activities
• Government-wide financial statements
– Prepared on the accrual basis

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Governmental General-Purpose
Financial Statements—Continued
• Fund financial statements
– Governmental funds
• Account for the general operations of government
• Uses modified accrual basis of accounting
– Proprietary funds
• Account for maintaining capital or producing income
• Uses accrual basis of accounting
– Fiduciary funds
• Account for assets held in a trustee or agency capacity
• Uses accrual basis of accounting
• Required reconciliation is to be presented
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Governmental General-Purpose
Financial Statements—Continued
• Notes to the financial statements
– Similar to corporate reporting
– Must also present the original and revised budgets for
the reporting period
• Statistical section provides information
– Historical
– Financial
– Analytical
– Economic
– Demographic
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Governmental General-Purpose
Financial Statements—Continued
• Report of Independent Auditor
– Contains information relating to both financial
statements and the internal controls of the entity
• Component units
– Legally separate organizations
– Significant relationship to the governmental entity
– Elected officials of the primary government are
financially accountable

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Not-for-Profit Organizations
• Examples of not-for-profit organizations
– Hospitals
– Religious institutions
– Professional organizations
– Universities
– Museums

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Not-for-Profit Organizations—
Continued
• The FASB issued four standards
– SFAS No. 93, “Recognition of Depreciation by Not-
for-Profit Organizations”
– SFAS No. 116, “Accounting for Contributions
Received and Contributions Made”
– SFAS No. 117, “Financial Statements of Not-for-Profit
Organizations”
– SFAS No. 124, “Accounting for Certain Investments
Held by Not-for-Profit Organizations”

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Not-for-Profit Organizations—
Continued
• SFAS No. 93, “Recognition of Depreciation by
Not-for-Profit Organizations”
– Requires depreciation of long-lived tangible assets
– Exempts assets that meet two requirements
• Asset must have value worth preserving perpetually
• Organization must be able to preserve the asset

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Not-for-Profit Organizations—
Continued
• SFAS No. 116, “Accounting for Contributions
Received and Contributions Made”
– Contributions Received
• Revenue in the period received
• Measured at fair value
• Reported as restricted or unrestricted support
– Exemptions
• Contributed items are held for public service
• Contributed items are protected and preserved
• Policy of using funds from the sales of collected items to
purchase additional collection pieces

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Not-for-Profit Organizations—
Continued
• SFAS No. 117, “Financial Statements of Not-for-
Profit Organizations”
– Statement of financial position
• Include aggregated information about assets, liabilities, and
net assets
• Assets and liabilities are reported in homogeneous groups
• New assets are classified as permanently restricted,
temporarily restricted, or unrestricted

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Not-for-Profit Organizations—
Continued
• SFAS No. 117 “Financial Statements of Not-for-
Profit Organizations”
– Statement of activity
• To provide information concerning the effects of transaction
• Revenues, expenses, gains, and losses are separated into
homogeneous groups
• Activities are classified as affecting permanently restricted,
temporarily restricted, and unrestricted net assets
• Discloses changes in the amounts of permanently restricted,
temporarily restricted, and unrestricted net assets

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Not-for-Profit Organizations—
Continued
• SFAS No. 117 “Financial Statements of Not-for-
Profit Organizations”
– Statement of cash flows
• Comply with SFAS No. 95, “Statement of Cash Flows”
• Financing activities include receipts of donations restricted
for acquiring, constructing, or improving long-lived assets or
increasing permanent or term endowments

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Not-for-Profit Organizations—
Continued
• SFAS No. 124, “Accounting for Certain
Investments Held by Not-for-Profit
Organizations”
– Investments in equity and debt securities with readily
determinable fair value are reported at fair value
• Does not apply to investments that are accounted for under
the equity method or to investments in consolidated
subsidiaries
– Realized and unrealized gains and losses are shown
on the statement of activities

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Not-for-Profit Organizations—
Continued
• Applicability of GAAP to Not-for-Profit
Organizations
– AICPA’s SOP 94-2
• GAAP applies to not-for-profit organizations unless
– Specifically exempted
– Subject matter precludes applicability

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Not-for-Profit Organizations—
Continued
• Budgeting by Objectives and Measures of
Productivity
– Accounting for not-for-profit organizations do not
• Include the entity concept or efficiency
• Have a bottom-line net income
– Budgeting by objectives and measures of productivity
• Incorporate measures of efficiency

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