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Revised October 2020
Appendix B
Understanding and Interpreting Financial Statements
Contents
Page Introduction ...................................................................................................................... 2
Frequently Asked Questions ............................................................................................ 3
- Who uses community financial statements and why? .......................................... 3
- When must our community audited financial statements be completed? ............ 3
- How do I know if the audited financial statements accurately reflect the financial position of our community? .................................................................. 3
- What is the purpose of the management letter and why is it so important? ......... 4
- How do I know whether our community is well managed, based on the audited financial statements? ................................................................................ 5
- How do I know if our community is able to pay its bills? ................................... 5
- How do I know if our community has a deficit or surplus and where it is coming from?........................................................................................................ 5
- What if I want more detail? .................................................................................. 6
- How can I improve my understanding of financial statements? .......................... 6
- What do I look for when reviewing a statement of operations (income statement)? ............................................................................................................ 7
Sample Financial Statements ........................................................................................... 8 Statement of Financial Position (Balance Sheet) ................................................. 8 Statement of Operations (Income Statement) ...................................................... 10 Statement of Change in Financial Position (Statement of Cash Flows)............... 12 Notes to Financial Statements .............................................................................. 13
Auditor’s Report .............................................................................................................. 14
Introduction
Financial statements are the key to understanding the financial position of your community. They help you determine where your community money comes from, how it was spent and if funds are available to support your community management plan (CMP).
The objective of financial statements is to communicate information to users. They provide information about the allocation and use of funds, the source and type of revenues and to what extent revenues were sufficient to meet expenditures. They also provide a snapshot of how much money was spent and for what purposes, and how cash needs were met. Financial statements assist communities and governments in decision making.
Your community’s financial information is recorded on a regular basis using a computer based accounting program which is capable of providing reports on the community’s financial position at any point in time. Typically, financial statements are produced monthly for review by decision makers. Financial statements are prepared using the accrual basis of accounting. This is the most commonly used accounting method which reports income when earned and expenses when incurred.
Financial statements provide important information to a variety of stakeholders: community residents, community council and government. It is important for stakeholders to have adequate financial information on which to form opinions and base decisions. To be of value, the financial information must accurately represent the financial position of the community at any point in time.
Like all governments and businesses, your community must prepare annual financial statements and have them audited by an independent professional auditor. The auditing process ensures that standard methods are used in accounting for revenues, expenditures, assets and liabilities.
To meet the needs of the different stakeholders, community financial statements are prepared in accordance with a standard set of rules recommended by the Canadian Institute of Chartered Accountants (CICA). These rules are known as Generally Accepted Accounting Principles or GAAP.
In addition, governments, including communities, must comply with the recommendations of the Public Sector Accounting Board (PSAB) of the CICA, which details specific accounting policies and disclosure requirements for government entities.
Like all governments, your community must make their financial information publically available. This is part of a long history of government accountability. Further, as governments cannot meet all the needs of their residents with available funds, the open sharing and discussion of financial information is important in setting community priorities.
Community councils are responsible to have their administrative staff prepare interim or monthly financial statements and annual year-end financial statements. Communities must hire an independent and professional auditor to review the financial systems and records. To be qualified, an auditor must have completed special training and be a member in good standing of a professional accounting association recognized by the Manitoba government.
The auditor’s job is to determine the completeness and fairness of the financial statements, in all significant respects. The auditors cannot review each and every financial transaction. The auditors perform such tests of the financial records, as they deem necessary in order for them to be able to provide a written professional opinion on the financial statements.
The auditor will provide either an unmodified opinion (formally known as unqualified opinion) or a modified opinion (formally known as a reserved opinion). An unmodified opinion means the financial statements are fairly presented in all material respects.☺
A modified opinion is provided when the auditor: a) forms a positive opinion on the financial statements as a whole, but qualifies that opinion with respect to a departure from GAAP or a limitation in the scope of their examination (a qualified opinion). For example, information can not be verified, ex. fundraising activity. b) forms an opinion that the financial statements are not presented fairly in accordance with GAAP (an adverse opinion). For example, the statements are incomplete. c) is unable to form an opinion on the financial statements because of a limitation in the scope of their examination (a denial or disclaimer of opinion). For example, records are not provided for the audit.
Auditors may also provide important information to the community council in a separate management letter.
4. What is the purpose of the management letter and why is it so important?
A management letter is not required as part of an audit by the CICA standards, however auditors usually communicate important information in writing through a management letter. The letter allows auditors to provide advice on issues for council to review and make suggestions to council on how to improve their processes and operations to ensure good financial management.
This letter is reviewed by council with the participation of the municipal development consultant in an exit interview. At the meeting, the auditor will explain the suggestions noted in the letter in order for council to fully understand the required changes. Council signs the acceptance of the letter and responds in writing as to the actions that will be taken for greater transparency and accountability to stakeholders.
5. How do I know whether our community is well managed, based on the audited financial statements?
An unmodified or unqualified opinion means the financial statements are presented fairly, but is not, in itself, an indicator the community is well managed. This can only be determined by an analysis of the financial statements to determine what financial resources the community has and how well they are being utilized to meet community priorities.
As discussed in the questions that follow, financial statements will indicate or provide: a surplus or deficit that is being carried from year to year and how it changes whether programs are being operated within budgets and/or funding levels two years of information in order to compare changes from one year to the next
This is a good starting point. However, you will have to review and discuss your community’s audited financial statements in order to understand what the complete financial situation is and how well your community’s finances are being managed.
6. How do I know if our community is able to pay its bills?
Look at the balance sheet and compare current assets to current liabilities. Current assets are those assets on hand (ex: bank deposits, accounts receivable, etc.) which represent a source of funds to cover existing liabilities or finance future operations. Current liabilities are debts of the community that must be paid in the near future (ex: one year or less).
If the current assets are greater than liabilities, cash is likely to be available to pay bills assuming that outstanding accounts receivables are collected. If current liabilities are greater, there may be problems paying bills on time.
Important note: The balance sheet is a statement detailing what assets and debts the community has on a particular date – ex: at the end of the accounting period to which the financial statements refer. It is historical information. In the case of the annual financial statement, for example, other transactions will have occurred between the time of the completion of the audit, and when the audit findings were released – transactions which may significantly alter the financial situation of the community.
7. How do I know if our community has a deficit or surplus and where it is coming from?
Look at the income statement and compare total revenues to total expenditures. Where revenues are greater than expenditures there is a surplus. If revenue is less than expenditures, a deficit exists. The accumulated total of more than one year will be either an accumulated surplus or an accumulated deficit. This amount will appear in the equity section of the balance sheet.
- annual operating budget
- maintenance management plan
- capital five-year plan
- funding schedule and other revenue sources
- reporting requirements
- accounting cycles and timelines
- Establish a specific set of financial statements for your meetings:
- comparative statement of operations
- program/project reports
- general ledgers for bank accounts
- others as required
- Attend all council meetings:
- review your information packages prior to your meetings
- participate and encourage discussion about your financial statements
- share your ideas and information
- stay focused/follow your plans
- Hold public meetings to keep yourself and the community informed:
- present your audited financial statements
- develop annual reports which review your community plans and financial information using various reporting methods
- Hold an annual interview, usually referred to as an exit interview:
- discuss audit report with the municipal development consultant and auditor
- this is an opportunity for administrative staff and council to discuss and respond to issues or concerns raised in the audit report 10. What do I look for when reviewing a statement of operations (income statement)?
Normally, differences occur between budget figures and actual figures. Administrative staff can explain any differences between the amount of revenue expected (budgeted) and the actual amount received or between the expense budgeted for and the actual expense incurred.
Differences may exist because:
- a transaction occurs later than expected – this is referred to as a timing difference and will sort itself out when the transaction is eventually recorded
- an accounting error was made where a transaction has been allocated to the wrong account – this will require an entry to correct the error
- an unexpected event has taken place that was not included in the budget
- the budget underestimates or overestimates an expected amount
Small differences are not unusual – budgets are estimates after all, but it is a good idea to question large variances to understand if circumstances have changed or errors have occurred which should be corrected.
Another thing to look for is large changes in a revenue or expense category from one year to the next. Again, administrative staff can explain the variance which could be due to changes in operations or funding or again, could indicate an accounting error has occurred and should be corrected.
Sample Financial Statements
Financial Statements include the following:
- Statement of Financial Position (Balance Sheet)
- Statement of Operations (Income Statement)
- Statement of Change in Financial Position (Statement of Cash Flows)
- Notes to Financial Statement
Statement of Financial Position (Balance Sheet): The balance sheet provides a snapshot of community council’s financial position at any point in time, but particularly at a month-end or year-end. It is called the balance sheet because the assets must equal (balance) the liabilities and owner’s equity (A = L + OE).
Assets are items owned by a council.
Current assets are assets that can be converted to cash or consumed in the ordinary course of operations: cash: bills, coins and cheques on hand or on deposit in a bank account accounts receivable (A/R): money owed to council that is reported as revenue on the income statement and a receivable on the balance sheet. All outstanding A/R is money not yet collected and thus not available for council to use until collected or paid. This may include money from government funding agencies. An allowance for bad debt may be deducted from the A/R balance to arrive at the net receivable. short-term investments other current assets, ex. prepaid expenses
Other assets are non-current assets that will not ordinarily be converted to cash in the ordinary course of operations: reserve investments
Liabilities are monies owed by a council.
Current liabilities are debts which must be paid in the ordinary course of operations: accounts payable: monies owed by the council for the purchase of supplies and services all due amounts in MEBP, CPP, EI and federal taxes in year-end
MEBP Medical 8. MEBP Pension 417. MEBP LTD 12. MEBP Life 1.74 0 MEBP Payable 440.28 0 CPP Payable 165. EI Payable 91. Federal Income Tax Payable 769.97 0 Receiver General Payable 1,026.51 0 Total Current Liabilities $4,617.00 $2,999.
Deferred Revenue (Reserves) Waste Disposal Cell Replacement 23,586.00 21,085. Water truck 1,113.00 61,244. Tractor 40,580.00 35,437. Water Breaks 29,695.00 33,464. Pump 7,304.00 17,266. Contribution to Capital 50,593.00 22,638. Roads and Ditching 164,714.00 153,311. Total Deferred Revenue (Reserves) $317,585.00 $344,445.
TOTAL LIABILITIES $322,202.00 $347,444.
EQUITY Equity Current Earnings (158,639.00) (232,285.00) Retained Earnings 128,264.00 186,427. Transfers to Equity in TCA 180,692.00 174,122. Equity in TCA 2,055,190.00 2,235,882. TOTAL EQUITY $2,205,507.00 $2,364,146.
LIABLITIES AND EQUITY $2,527,709.00 $2,711,590.
Statement of Operations (Income Statement): The income statement presents information that allows readers to compare actual revenues and expenses to budgeted revenues and expenses. This statement shows the surplus or deficit for the current fiscal year. Budgets must be set at the beginning of the reporting year, as part of the annual community management planning process. Communities must submit a balanced budget (expenditures must equal revenues).
Revenues Department O&M funding represents all the monies received or receivable by the community during the year from the department, ex. core funding, Northern Association of Community Councils (NACC) grant.
User fees and other revenues are all locally generated revenues billed by the community to users, ex. water/wastewater fees, licences, sale of assets. It is very important to keep an organized account of these revenues to ensure all revenues are reported and a proper audit trail exists. Although the amounts are shown as income, they are not available for use until collected.
Community operations are revenues generated by the community and not funded by the department, ex. a trailer court operation.
Expenses Payroll represents total wages paid or payable by the community to both part-time and full-time employees for the period in question. Payroll also includes expenses for the community’s portion of EI, CPP and council honorariums.
Operation expenses represent all the monies spent by the community for that year, other than payroll expenses, ex. phone/fax/internet, travel, road maintenance, legal/audit fees, hydro, testing, building maintenance.
Net Income Net income is the difference between the revenues and expenses for a given period. If revenue is greater than expense, there is a surplus. If revenue is less than expense, there is a net loss or deficit. The surplus or deficit amount is shown on the balance sheet as current earnings and at year-end is added to or subtracted from the retained earnings.
Income Statement Green Meadows Community Council For the year ending March 31, 2020 REVENUE Department O&M Funding Budget 2020 2019 Core Funding 219,766.00 228,736.00 219,776. Operating Reserve 15,000.00 13,731.00 26,202. NACC 800.00 800.00 800. Total Department O&M Funding $235,566.00 $243,627.00 $246,778.
Other Federal/Provincial Grants Municipal Operating 14,040.00 9,240.80 11,976. Total Other Federal/Provincial Grants $14,040.00 $9,240.80 $11,976.
User Fees and Other Revenue Municipal Taxes 12,500.00 49,454.00 10,538. Water and Wastewater Services 31,000.00 11,305.00 11,408. Solid Waste Services 15,494.00 13,352.00 12,392. Rentals 7,300.00 10,727.00 6,300. Licenses/Permits/Fees 1,000.00 1,026.00 867. Interest 5,000.00 6,345.00 4,195. Total User Fees and Other Revenue $72,294.00 $92,209.00 $51,009.
Capital Water Truck Replacement 0 71,283.00 0 Total Capital $0 $71,283.00 $
TOTAL REVENUE $321,900.00 $416,000.00 $309,763.
EXPENSE Payroll Wages 172,500.00 158,896.00 131,686. Council Honorariums 9,840.00 10,210.00 11,070. Total Payroll $182,340.00 $169,106.00 $142,756.
Statement of Cash Flows Green Meadows Community Council For the year ending March 31, 2020
Cash Flows from (used in) Operating Activities 2020 2019 Net Income (Loss) (158,639.00) (232,285.00) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization, Depreciation and Depletion Amortization Expense 180,692.00 174,122. Decrease (Increase) in Operating Assets Accounts Receivable (1,230.00) 2,359. Increase (Decrease) in Operating Liabilities MEBP Medical 8.94 0 MEBP LTD 12.00 0 MEBP Life 1.74 0 MEBP Pension 417.60 0 Water Truck (60,283.00) 0 Accounts Payable 151.21 (1,072.00) CPP Payable 165.00 0 EI Payable 91.54 0 Federal Income Tax Payable 769.97 0 Net Cash provided by (used in) Operating Activities ($37,842.00) ($56,876.00)
Increase (Decrease) in Cash and Cash Equivalents ($37,842.00) ($56,876.00)
Cash and Cash Equivalents at Beginning of Period $121,026.00 $177,902.
Cash and Cash Equivalents at End of Period $83,184.00 $121,026.
Notes to Financial Statements: The notes to financial statements are very important in understanding the financial statements and provide more information beyond what is shown in the financial numbers of the statements. They explain significant accounting practices and provide additional information on other matters that will affect the financial position of your community.
At right are some examples of explanatory notes to financial statements. The type and amount of information will vary from community to community. At a minimum, the notes should include useful details on: the accounting policies used by the community accounts receivable
Green Meadows Community Council Notes to Financial Statements Year Ended March 31, 2020
- Significant Accounting Policies Revenue and expenditures are recorded on an accrual basis.
- Accounts Receivable 2010 2009 Interest 150 0 Reimbursement 1,560 100 Water services 3,000 1, GST Refund 3,200 1, $7,910 $2, Less: Allowance for Doubtful Acc. (500) (200) Net Accounts Receivable $7,410 $2,
Auditor’s Report
The covering report by the independent auditor that accompanies the audited financial statements includes important information. The report details the scope of the audit - what the auditor examined, for what period and in accordance with what standards. It also includes the auditor’s opinion on the accuracy of the financial statements. The auditor will provide an unqualified, qualified or adverse opinion, or a disclaimer of opinion (formerly denial of opinion).
An example of an unqualified opinion is shown below. The department requires the community maintain at least a qualified audit or better, preferably an unqualified audit.
When an auditor has reservations, they will detail them in a separate paragraph before the opinion paragraph.
ABC Professional Accountants
AUDITOR’S REPORT
To the Members of Green Meadows Community Council
We have audited the balance sheet of Green Meadows Community Council as at March 31, 2020 and the statement of operations and surplus for the year ended. These financial statements are the responsibility of the community council’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, * these financial statements present fairly* , in all material aspects, the financial position of the community council as at March 31, 2020 and the results of its operations and its cash flows for the year then ended, in accordance with Canadian generally accepted accounting principles.
Signed by
ABC Professional Accountants Winnipeg, Manitoba
Date ____________________
