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.).


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.


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).


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)


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


• 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


• 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


• 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


• 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


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


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


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.


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.).


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 ???

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