Substantive Audit Testing Revenue Cycle

The Income Statement and
Statement of Functional
Expense
Barbara Clemenson, CPA, CFRE

Outline
Review of the Income Statement

The 990
Income Statement Numberless Analysis
Statement of Functional Expenses
Using the 990 as a development tool
Income Statement Financial Analysis
Clemenson - Income Statement Analysis © 2

Review of the Income
Statement
Statement of Activities - Looks at the
activities of an organization throughout its
fiscal year.
This balances based on this accounting
formula:
Income - Expenses = Profit
For a nonprofit, “Profit” = Increases Net
Assets.
Statement
Because nonprofits have three different
types of funds, their Statement of Activities
might include three mini-income statements
-- one for each Fund:
Unrestricted - Typically the normal operations of the
organization
Temporarily Restricted - Those fund given for a
particular purposes. They are released and reclassified
as Unrestricted when they are used for that purpose
Permanently Restricted - Endowment
Statement
B alance S heet S tatm ent of
Financial P osition at B efore
Liabilities S napshot
A ssets E nd of P revious
N et A ssets Fiscal Y ear
Incom e S tatem ent S um m ary of

Activities that
H appen D uring the M ovie
E xpenses Incom e Y ear
If Incom e > E xpenses, P rofit increases N et Assets
If Incom e < E xpense, Loss D ecreases N et Assets
B alance S heet S tatm ent of

Financial P osition at After
Liabilities E nd of This Fiscal S napshot
A ssets
N et A ssets Y ear

The 990
Part I = Income Statement
Part II = Statement of Functional Expenses
Part III = Statement of Program Service
Accomplishments [Not a “Financial
Statement” but a great development tool]
Part IV = Balance Sheet
Schedule A Part IV-A = Support Schedule
[partial cash flow statement]
Income Statement Analysis
The Income Statement and the Statement

of Functional Expenses, more than any
other financial statements, give us a
picture of an organization.
Expenses = What they do = Their
MISSION
Income = How they fund what they do

Basic Nonprofit Structure: Three-
legged stool
Finance/Administration
Programs = Development =
Expenses Income
Income Statement
Numberless Analysis
What is the greatest source of revenue?
In much the same way as the largest asset
controls the Balance Sheet, the source of
the greatest amount of revenue holds the
organization’s purse strings.
How much of dependence is there on that
source?
How diversified is the organization’s income
stream? Why might the organization have
made those funding choices?
Denver Rescue Mission

Rescue Mission of Mahoning Valley

Union Rescue Mission

Income Statement
Numberless Analysis
What are the Program = 75.20%

approximate
Administration = 5.75%
percentages of the
expense Other = Fundraising
categories? =19.05%

Income Statement
Numberless Analysis
What are the approximate percentages of the

expense categories?

Income
Statement
Numberless
Analysis

Income Statement
Numberless Analysis
Did net assets increase or decrease this
year?
If they decreased less than 5%, why?
Investigate the organization, its programs
and services, its funders and its stability.
If they decreased more than 5%, seriously
investigate the stability of the organization.
Even nonprofits have to make a profit!
Expenses - THE MISSION
The needs will ALWAYS be greater than

the resources to meet those needs.
Each organization needs to determine
which needs it will try to meet.
Defining Parameters
Major Social Service Provider of All Services
in the Community
Major Social Service Provider of Some
Services in the Community
Niche Social Service Provider---One of Several
Providers of Similar Services in the Community
The Organization’s
Parameter Decisions
will be influenced by
and will influence
their development
decisions.
The more comprehensive
they want to become in
offering Social Services,
the more likely they will
need to work with and
accept funding from
government agencies.
Organizations not only need to define
what they will they WILL be, but also
what they will NOT be in the future.
Their Mission Statement and Goals will
positively define what they will do.
Their parameters will positively define the extent
to which they will exercise their Mission.
Their prohibitions will negatively prevent them
from acting outside of their mission and
parameters.
Expenses - The MISSION
What is the Mission?




Expenses - The MISSION
Using the 990 as a Development Tool
Part III: Statement of Program Service
Accomplishment, can be very effectively used as a
development tool to highlight and showcase your
organization’s mission accomplishments.
You do NOT have to limit yourself to the small
spaces they provide. Insert your own schedule and
really show off your organization!
OK use as
Denver Rescue Mission Development
Tool

Rescue Mission of Mahoning Valley

Union Rescue Mission

Much better use of 990 as a development tool!

Use of 990 as a Development Tool
Another way to increase the value of your

990 as a development tool is to file with
the 990 a copy of your audited financial
statements.
990s are not audited. Filing a copy of
your audit with the 990 assures viewers
that the 990s’ numbers are accurate and
verifiable.
Use of 990 as a Development Tool
Even if your organization is totally
government funded, use the 990
as if public support depended on
your emotionally and effectively
portraying your organization.
Because if the government
makes cuts, it will only continue
supporting you if you have
perceived community value!
Income
Various sources of income carry with

them unique challenges.

Streams of Funding
Private Funding from
Individuals:
Many donors/Small gifts
Need personnel and database to
process, record and receipt gifts
Donors acquired and cultivated
primarily through Direct Mail
Can rely heavily on technology
and, if desired, consultants for
assistance to limit in-house staffing
costs
Streams of Funding
Private Funding from Major
Donors, Businesses and
Foundations:
Fewer donors/Large gifts
Donors acquired and cultivated
primarily through personal
relationships
Needs intensive time commitment
by staff to develop and follow-up
on relationships; write grants and
comply with reporting
requirements.
Streams of Funding
Special Events Funding
Successfully planning and
executing special events takes
considerable staff time and
Board commitment.
Planning and execution might
be outsourced, and funding can
be helped through corporate
sponsorships.
There is the risk that the event
will fail for unforeseen reasons.
Streams of Funding
Entrepreneurial Income [Thrift Store Income
for Rescue Missions]
Adequate staff, facilities and equipment to
receive, sort, display and sell merchandise
Labor-Intensive with Retail Hours
⌧Paid Staff
⌧Clients
⌧Volunteers
Must contend with

competition from
Discount Stores and
other Thrift Stores
Streams of Funding
United Way
United Way Oversight of Sponsored Program(s)
and Budget
Auditing and Reporting Requirements
Site Visits and Budget Meetings
Black-out times for Organizational Fundraising during
United Way campaign
Movement towards Outcome Based Measurement
for Program Evaluation
Movement towards more Program and Agency
directives based upon Community Needs
Streams of Funding
Government Funding
Reporting requirements of the
granting agencies
Federal: OMB Circular A-133
for nonprofits receiving
$500,000 or more
Cash Flow issues with Fee-for-
Services
Possible certification
requirements
Compliance with government
regulations

What interests me here is how much of

their contributions are in cash and how
much are noncash contributions.
56.72% Cash
43.28% Noncash

When I seen noncash contributions, I

always ask myself:
What do they consists of?
How are they valued?
How are they expensed?

This large percentage of noncash

contributions can mean several things:
An excellent procurement program in
development for organizational needs
A large retail operation
A car donation program

Summary
The Income Statement reveals the heart of
the organization:
Expenses = Programs = MISSION
Income = Development = Funding
Basic Income Statement analysis gives us an
idea of how effectively an organization is
using its resources to fulfill its mission
The 990 may also be used as an effective
fundraising tool

Substantive Audit Testing Revenue Cycle

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The Income Statement and

Barbara Clemenson, CPA, CFRE

Review of the Income Statement

Clemenson - Income Statement Analysis © 2

Incom e S tatem ent S um m ary of

If Incom e > E xpenses, P rofit increases N et Assets

If Incom e < E xpense, Loss D ecreases N et Assets

B alance S heet S tatm ent of

Clemenson - Income Statement Analysis © 5

The Income Statement and the Statement

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What are the Program = 75.20%

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What are the approximate percentages of the

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The needs will ALWAYS be greater than

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Another way to increase the value of your

Various sources of income carry with

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Must contend with

Clemenson - Income Statement Analysis © 43

What interests me here is how much of

Clemenson - Income Statement Analysis © 44

When I seen noncash contributions, I

Clemenson - Income Statement Analysis © 45

This large percentage of noncash

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