Chapter 8: Financial Tools for Decision Making

Question 1

3 Basic Financial Statements

Answer 1

1. Statement of Financial Position
2. Statement of Activities
3. Statement of Cash Flows

Question 2

What are major problem areas for nonprofit executives reading financial statements?

Answer 2

1. Separating net asset classes
2. Making fiscal year comparisons with the statement of activities
3. Transferring funds
4. Confusion with the budget
5. Campaign Funds

Question 3

Why is separating Net Asset Classes a problem for nonprofit decision makers?

Answer 3

The Statement of Financial Position presents the classes (unrestricted, temporarily restricted, restricted) as a single total

Question 4

Why is Fiscal Year Comparisons a problem for nonprofit decision makers?

Answer 4

Statement of Activities typically has 3 columns in the CY data for restricted/unrestricted/temp restricted net assets, but only 1 (total) column for the PY. This leads to faulty comparisons between years.

Question 5

Why is Transferring Funds a problem for nonprofit decision makers?

Answer 5

Transferred funds for net assets released from restriction can be misunderstood by nonprofit leaders. Should indicate actual sources of revenue that they represent

Question 6

Why is Confusion with the Budget a problem for nonprofit decision makers?

Answer 6

When revenue and expenses do not match the budget, good decisions cannot be made.

Question 7

Why is Campaign Funds a problem for nonprofit decision makers?

Answer 7

Statement of Activities may include onetime capital campaign funds that are not part of annual ongoing revenues. These funds must be isolated to decision makers do not depend on them in future years.

Question 8

Capital Campaign

Answer 8

A targeted fundraising effort that takes place over a defined period of time

Question 9

What can financial professionals to do help decision makers understand the data? (4)

Answer 9

1. Break down net assets into their 3 classes
2. Sort revenue/expense categories in unrestricted net assets to correspond with categories in annual budget
3. Create comparison summary between Statement of Financial Position and Statement of Activities
4. Prepare list of major financial issues and recommendations

Question 10

Endowment Draw

Answer 10

Annual amount taken from an endowment that is to be used for general operating purposes