Understanding Financial Statements

NOTE: This post was created by Joe Moore during his 2023 MCA Board member campaign.

Unless you have experience in financial accounting, it can be difficult to understand how to read financial statements. The best place to start is to learn some of the basics of such statements. To begin, it is helpful to establish the meaning of some common terms.

Revenue: The amount of money an organization takes in during a reporting period.

Expenses: The amount of money an organization spends during a reporting period.

Net Revenue: The total Revenue less the total Expenses.

Capital projects: Money spent on improvements that have more than one year of useful life.

Non-Operating Expenses: Expenses or capital projects that are not necessary for basic operation of the organization.

Depreciation: a cost associated with the decreasing value of an Asset. It is an expense but it has no impact upon cash flow.

Liability: Money owed to an entity outside the organization.

Financial statements are written records that convey the business activities and the financial performance of an organization. Financial statements include:

+ Balance Sheet

+ Statement of Revenue and Expenses (Income Statement)

+ Cash Flow Statement

The Balance Sheet provides an overview of an organization’s assets, liabilities, and fund balances (term used for MCA equity) at a specific point in time. It is called a Balance Sheet because in all cases:

Value of Assets = Value of Liabilities + Value of Fund Balances (equity)

Unlike the Balance Sheet, the Statement of Revenues and Expenses summarizes the financial activity during a specific period of time. Frequently, this annual statement is compared with previous annual statements in an effort to establish trends in Revenue or specific expenses. It can be very helpful to identify good and bad trends and will prove very helpful to recognize costs that might be out of control.

The purpose of a Cash Flow Statement is to provide a detailed picture of what happened to an organization’s cash during a specified period, known as the accounting period. It demonstrates an organization’s ability to operate in the short and long term, based on how much cash is flowing into and out of the organization. The cash flow statement is typically broken into three sections:

+ Operating activities – Cash from receivables, depreciation, accounts payable, interest payments, and net cash in/out from operating the organization.,

+ Investing activities – Cash from purchase/sale of an asset, or cash from short/long term investments.

+ Financing activities – Cash to/from lenders such as banks, investors, or other types of lenders.

To manage any business, it is important to review and understand all three financial statements but as homeowners, if we review and understand the Statement of Revenue and Expenses we should have a pretty good idea about what our board is doing and how our financial condition has changed over time.