Download Financial Reporting: Preparing Financial Statements for DoD and more Study notes Financial Management in PDF only on Docsity!
*** February 2011**
SUMMARY OF MAJOR CHANGES TO DoD 7000.14-R, VOLUME 13, CHAPTER 7 “FINANCIAL REPORTING”
All changes are denoted by blue font
Substantive revisions are denoted by a * preceding the section, paragraph, table, or figure that includes the revision
Hyperlinks are denoted by underlined, bold, italic, blue font
PARAGRAPH EXPLANATION OF CHANGE/REVISION PURPOSE
0707 Added line item instructions for preparing the Nonappropriated Fund (NAF) Balance Sheet.
Add
0708 Added line item instructions for preparing the Nonappropriated Fund (NAF) Statement of Income and Expense.
Add
0709 Added line item instructions for preparing Reconciliation of Net Worth.
Add
0710 Added line item instructions for preparing the Nonappropriated Fund (NAF) Schedule A – APF and NAF Expense Summary.
Add
0711 Added line item instructions for preparing the Statement of Cash Flow.
Add
Figures 7- through 7-
Added the formats for the Balance Sheet, Statement of Income and Expense, Reconciliation of Net Worth, Schedule A - APF and NAF Expense Summary, and Statement of Cash Flow.
Add
*** February 2011**
TABLE OF CONTENTS
FINANCIAL REPORTING
0701 Overview
0702 Responsibilities
0703 Financial Reporting
0704 Comparative Analysis of Financial Statements
0705 Reporting to the Internal Revenue Service (IRS)
0706 International Balance of Payments (IBOP) Program
***** 0707 Format for the Balance Sheet
***** 0708 Format for the Statement of Income and Expense
***** 0709 Format for the Reconciliation of Net Worth
***** 0710 Format for the Schedule A – APF and NAF Expense Summary
***** 0711 Format for the Statement of Cash Flow
***** Figure 7-1 Balance Sheet
***** Figure 7-2 Statement of Income and Expense
***** Figure 7-3 Reconciliation of Net Worth
***** Figure 7-4 Schedule A - APF and NAF Expense Summary
***** Figure 7-5 Statement of Cash Flow
*** February 2011**
For information on the format and instructions for preparing the Balance Sheet, refer to Section 0707 and Figure 7-1 of this chapter. Additionally, for further information on assets, liabilities, and equity (net worth) refer to Chapter 3 of this volume.
B. Income Statement. An income statement (also referred to as profit or loss statement or income and expense statement) provides information about NAFI’s financial performance during a specified period of time and a summary of NAFI’s profit or loss during the accounting period. The income statement is used to track revenues and expenses. For information on the format and instructions for preparing the Statement of Income and Expense, refer to Section 0708 and Figure 7-2 of this chapter. Additionally, refer to Chapter 5 of this volume for further information on revenue and expenses.
C. Reconciliation of Net Worth. The reconciliation of net worth (also known as statement of retained earnings) provides information of changes to net worth during a specified period of time. It shows the establishment, disestablishment, or consolidation of NAFIs, receipt or distribution of capital, net income or net loss, and prior year material adjustments. Refer to Chapter 3 of this volume for further information on net worth (equity). For information on the format and instructions for preparing the Statement of Cash Flow, refer to Section 0709 and Figure 7-3 of this chapter.
D. Schedule A -APF and NAF Expense Summary. Schedule A provides a detailed breakdown of APF and NAF operating costs and capital expenditures. APF received and expended through the DoD MWR USA practice, UFM practice, or other APF agreements shall be reported as APF contractual services support and shall not be reported as NAF expenditures. NAF costs shall equal the operating expenses, other expenses, and extraordinary expense lines on the Statement of Income and Expense, which are also reported net of APF support to avoid double counting. NAF cost of goods sold is excluded. NAF capital expenditures shall be reported in the year funds are expended and assets are recorded (including construction in progress and capital leases). For information on the format and instructions for preparing Schedule A- APF and NAF Expense Summary, refer to Section 0710 and Figure 7-4 of this chapter.
E. Statement of Cash Flow. A cash flow statement provides information about cash receipts and cash payments of a NAFI during the accounting period. The statement shows how changes in balance sheet and income accounts affect cash and cash equivalents and breaks the analysis down according to operating, investing, and financing activities. For information on the format and instructions for preparing the Statement of Cash Flow, refer to Section 0711 and Figure 7-5 of this chapter.
- Footnotes to Financial Statements. Footnotes are an integral part of the financial statements and are used when more information is needed. When the actual dollar amounts on the financial statements do not provide sufficient information for decision makers, accountants supplement the financial statements with more detailed data in the form of footnotes. Footnotes help management compare the operating results of the current business period with the operating results of previous periods. Fund equity adjustments and significant business closures
*** February 2011**
are examples of occurrences which require footnotes. Refer to DoDI 1015.15 for specific
footnotes required.
0704 COMPARATIVE ANALYSIS OF FINANCIAL STATEMENTS. Comparative analysis is the study of relationships and trends to determine whether the financial position, results of operations, and the financial progress of the business are satisfactory or unsatisfactory. The objective of any method used to analyze a financial statement is to simplify or reduce the data under review to more understandable terms.
- Accountant Responsibilities. Accountants will compute, organize, and analyze data on a monthly basis. Analytical data is then assimilated to aid in management decision making. It is not enough to know at the end of a year, or even a quarter, that costs are increasing more rapidly than revenues. The accountant must use interim cost standards, ratios, or other devices in presenting income statement data to help determine the reasoning behind financial data changes.
- Analytical Methods and Techniques. Analytical methods and techniques used in analyzing financial statements include the following:
A. Comparative balance sheets, income statements, and statements of retained earnings or net worth. These statements detail the following information:
- Absolute data (dollar amounts)
- Comparisons expressed in ratios
- Increases and decreases in absolute data in terms of dollar amounts
- Increases and decreases in absolute data in terms of percentages
- Percentages of total
B. Statement of sources and uses of working capital
C. Trend ratios of selected and/or related financial and operating data. A trend analysis is performed for each NAFI financial statement. The analysis of the balance sheet compares actual to actual, and the percentage of increase or decrease is calculated. The analysis of the income statement for each activity compares actual to actual as well as actual to the budgeted amounts. The financial statement analysis is made by each activity for items such as sales, cost of goods sold, labor expenses, net income, and all other revenue and expense items with a material financial effect on the activity.
D. Common size percentages from balance sheets, income statements, and individual sections of these statements.
*** February 2011**
basis is generally considered acceptable and shows about a 3-month inventory supply. A low turnover rate may indicate overstocking, obsolescence, or deterioration. A high turnover rate may indicate inadequate inventory levels, which may lead to a loss in business. Appropriate inventory levels depend on quantity pricing of purchases, shelf life, and restocking lead time that should be as low as possible, consistent with these conditions.
E. Net Income Ratio. Net income ratio measures the net income as a percentage of total revenue. It measures the rate of return on revenue. The formula to compute the net income ratio is net income divided by total revenue (Net Income Ratio = Net Income/Total Revenue). Net income is calculated as total revenue minus total expenses. Refer to DoDI 1015.15 for further information on net income requirements.
F. Ratio of Net Sales to Assets. The ratio of net sales to assets measures the efficiency with which NAFI is using their assets to generate sales. In computing the ratio, any long-term investments are excluded from total assets, as they make no contribution to sales. If sales can be stated in a common unit, then units of products sold also can be used in place of the dollar amount of sales. Assets used in determining the ratio may be the total at the end of the year, the average at the beginning and end of the year, or the average of monthly totals. The formula to compute the ratio of net sales to assets is to divide net sales by total assets, minus long- term investments (Ratio of Net Sales to Assets = Net Sales/ (Total Assets - Long-Term Investments).
G. Return on Assets Ratio. This measures NAFI’s ability to generate revenue with its existing assets. The formula to compute the return on assets ratio is to divide net income by the average total assets. Average total assets are beginning total assets plus ending total assets divided by two (Return on Assets Ratio = Net Income/Average Total Assets).
H. Return on Fund Equity. The return on fund equity measures NAFI's ability to use leverage by earning a higher rate of return than is paid for the funds used to operate. The formula to compute the return on fund equity is to divide net income by the average fund equity (Return on Fund Equity = Net Income/Average Fund Equity). Average fund equity is the opening equity plus the closing equity divided by two.
I. Turnover of Working Capital. Working capital is a valuation metric that is calculated as current assets minus current liabilities. Current assets include accounts receivable and inventory. Current liabilities include accounts payable. These various components are analyzed individually to account for changes from period to period. The turnover of working capital reflects the extent to which NAFI is operating on a small or large amount of working capital in relation to sales. The formula to compute the working capital turnover is to divide the net sales by the average working capital (Turnover of Working Capital = Net Sales/Average Working Capital). Average working capital is ending current assets minus ending current liabilities plus beginning current assets minus beginning current liabilities, divided by two.
J. Other Ratios. The ratios referenced in the previous paragraphs are not the only ones that can be computed. Following are additional ratios that can be used:
*** February 2011**
- Fixed Asset Turnover
- Working Capital to Total Assets
- Return on Tangible Assets
- Comparative Statements
A. General. Any fact by itself has limited significance. Other related facts are necessary to give the first fact increased meaning. The validity of this observation is demonstrated as follows: Learning that last year’s net income of a certain activity was $68,514 offers little insight. Does that amount of net income indicate a successful or unsuccessful year? Does the amount present an improvement or decline from the year before? Is the amount large or small in relation to sales, assets, or equity? How does it compare with similar activities? If the information about last year’s income is to have any real meaning, then other facts must be known.
B. Comparison. If the financial statements are analyzed on a comparative basis, then they can be much more informative and meaningful. Four comparison types are possible:
- Comparison of the latest financial statements and relationships between various elements with the statements and relationships of one or more previous periods
- Comparison of the statements and financial relationships of the fund with data for other similar activities
- Comparison of statements and financial relationships of two or more divisions or branches of the same activity
- Comparison of information in the statements with preset plans or goals (normally in the form of budgets)
C. Horizontal Analysis. A comparison of the amounts for the same item in the financial statements of two or more periods is called horizontal analysis. The term is applied because the analysis, which suggests probabilities, weaknesses, or strengths, includes data from year to year rather than as of one date or period of time as a whole. If the amount of any change and its relative size are shown, then a comparison is facilitated. In computing the percent of change, the amount for the earlier year serves as the base. In general, the percentage of change is of greater interest than the actual amounts.
D. Vertical Analysis. The amount of each item in a statement can be expressed as a percentage of the total. Percentages resulting from vertical analysis may be compared across two or more periods to discover trends over time.
*** February 2011**
***** 0707 FORMAT FOR THE BALANCE SHEET
Format for the Balance Sheet. The format presented in Figure 7-1 shall be used for the consolidated Balance Sheet. The working versions of all statements and notes shall include line numbers as shown.
Instructions for the Preparation of the Balance Sheet. The Balance Sheet presents, as of a specific time, amounts of economic benefits owned or managed by the reporting entity (assets), amounts owed by the entity (liabilities), and amounts which comprise the difference (net worth). Individual statement crosswalks are prepared from information utilizing the Nonappropriated Fund Standard General Ledger guidance and crosswalks found in Chapter 2 of this volume. Complete the heading on the form to indicate: (a) Military Service, (b) Program Group, and (c) the reporting period (month and calendar year).
Line Item Instructions for Preparing the Balance Sheet
A. Current Assets
- Cash/Investments, Line 1. This is a summary line for cash and investments. General ledger account 1110 (Cash) is a summary account that includes general ledger accounts 1111, 1112, 1113, and 1114. Report the balances of the following accounts:
GL Acct # Title
1110 Cash
1120 Savings Account
1130 Marketable Securities
1140 Other Short-Term Investments
- Receivables, Line 2. This is a summary line for all receivables. Report the balances of the following accounts:
GL Acct # Title
1210 Accounts Receivable - This is a summary account that includes general ledger accounts 1211, 1212, 1213, 1214, and 1215.
1220 Deposits Receivable
1230 NAFI Receivables
*** February 2011**
Current Assets (continued)
GL Acct # Title
1240 Returned Check Receivable
1250 Employee Receivable
1260 Accrued Interest Receivable
1270 Loans Receivable
1280 Morale, Welfare, and Recreation (MWR) Utilization Support and Accountability (USA) Receivable
1290 Other Current Receivables (Specify)
1299 Allowance for Doubtful Accounts
- Other Current Assets, Line 3. This is a summary line for all prepaid assets. Report the balances of the following accounts:
GL Acct # Title
1310 Travel Advances
1320 Prepaid Contracts
1330 Prepaid Insurance
1340 Prepaid Rent
1350 Prepaid Supplies
1360 Prepaid Tax and License
1370 Other Prepaid Expenses (Specify).
- Inventory, Line 4. This is a summary line for all inventory accounts. Report the balances of the following accounts:
GL Acct # Title
1410 Inventory Warehouse/Storeroom
1420 Inventory Sales Outlet Resale
*** February 2011**
- Net NAFI Owned Fixed Assets, Line 8. Report the net total of lines 6 and 7.
- Government Titled Fixed Assets, Line 9. This line is for reporting fixed assets for which title has been transferred to the Government. Footnotes are required. Report the balance of the following account:
GL Acct # Title
1580 Buildings and Improvements-Government Titled
- Less: Accumulated Depreciation on Government Titled Fixed Assets, Line 10. This line is for depreciation of government titled fixed assets. Report the balance of the following account:
GL Acct # Title
1581 Accumulated Depreciation on Buildings and Improvements
- Government Titled
- Net Government Titled Fixed Assets, Line 11. Report the net total of lines 9 and 10.
- Pension Benefit Asset, Line 12. This new general ledger account is used for reporting the difference when the Plan Assets are greater than the Plan Benefit Obligation. Report the balance of the following account:
GL Acct # Title
1610 Pension Benefit Asset
- Other, Line 13. This is the summary line for all other noncurrent assets that include receivables and investments. Report the balances of the following accounts:
GL Acct # Title
1620 Long-Term Receivables
1630 Sinking Fund
1640 Long-Term Investments
Total Noncurrent Assets, Line 14. Report the net total of line 6 through line 13.
Total Assets, Line 15. Report the net total of line 5 and 14.
*** February 2011**
C. Current Liabilities
- Accounts Payable, Line 16. This is the summary for all accounts payable. Report the balance for the following account:
GL Acct # Title
2100 Accounts Payable
- Post-Retirement Benefit Obligation, Line 17. This new general ledger account is used for reporting the difference when the Plan Assets are less than the Plan Benefit Obligation. The difference is classified as a current liability as determined and provided by the pension provider when the amount is due within the year. This also includes any other post-retirement benefit plan, such as retiree health care. Report the balance of the following account:
GL Acct # Title
2200 Post-Retirement Benefit Obligation - Current
- Other Current Liabilities, Line 18. This is a summary line for all other current liabilities. General ledger account 2300 (Other Current Liabilities) is a summary account that includes general ledger accounts 2310 , 2320 , 2330 , 2340 , 2350, 2360, 2370, 2380, 2390, 2410, 2420, and 2430. Additionally, general ledger account 2370 (Salaries Payable) is a summary account and includes general ledger accounts 2371, 2372, 2373, 2374, 2375, 2376, and
- Total Current Liabilities, Line 19. Report the total of lines 16 through line 18.
D. Long Term Liabilities
- Loans Payable, Line 20. Report the amount of loans and notes that will not be paid within 12 months. Report the balance of the following account:
GL Acct # Title
2510 Long Term Loans Payable
- Post-Retirement Benefit Obligation, Line 21. This new general ledger account is used when the difference of the Plan Assets are less than the Plan Benefit Obligation. The difference is classified as a long-term liability as determined and provided by the pension provider and exceeds 12 months. This also includes any other post-retirement benefit plan, such as retiree health care. Report the balance of the following account:
*** February 2011**
overhead is not reported below the category level. Individual statement crosswalks are prepared from information utilizing the Nonappropriated Fund Standard General Ledger guidance and crosswalks found in Chapter 2 of this volume. Complete the heading on the form to indicate (a) Military Service, (b) Program Group, (c) Category, and (d) the reporting period (month and calendar year).
- Line Item Instructions for Preparing the Statement of Income and Expense
A.. Sales, Line 1. This is a summary line for income from sale of goods or services less returns and allowances and discounts. Report the balances for the following accounts:
GL Acct # Title
4010 Sales
4011 Sales Returns and Allowances
4012 Sales Discounts
B. Cost of Goods Sold, Line 2. This is a summary line for the Cost of Goods Sold calculation. Report the balances for the following accounts:
GL Acct # Title
6010 Purchases – Resale
6011 Purchases Returns and Allowances – Resale
6012 Freight – Resale
6013 Vendor Rebates – Resale
C. Gross Margin, Line 3. Gross Margin is a calculation. The calculation is the total sales revenue minus the cost of goods sold, divided by the total sales revenue, expressed as a percentage.
D. Other Operating Income, Line 4. This is the heading for reporting Other Operating Income, as follows.
- Participation Fees and Charges, Line 4a. Report the balances for the following accounts:
GL Acct # Title
4020 Participation Fees and Charges
*** February 2011**
GL Acct # Title
4040 Other Fee Income (Specify)
4060 Amusement Machine Income
4090 Gaming Machine Income
- Dues and Assessments, Line 4b. Report the balance for the following account:
GL Acct # Title
4050 Dues and Assessment Income
- Concessionaire Income, Line 4c. Report the balance for the following account:
GL Acct # Title
4080 Concessionaire Income
- Other, Line 4d. Report the balances for the following accounts:
GL Acct # Title
4030 Other Service/Recreation Activity Income (Specify)
4070 Commission Income
E. Total Other Operating Income, Line 5. Report the total of lines 4a, 4b, 4c and 4d.
F. Gross Operating Income, Line 6. Report the total of line 1 less line 2 plus line 5.
G. Operating Expenses, Line 7. Report the operating expenses from Schedule A, Lines 1- 13. Refer to Figure 7-4 of this chapter. This section does not crosswalk to general ledger accounts.
H. Operating Margin, Line 8. Operating Margin is a calculation only. Report the difference in Gross Operating Income (Line 6) and Operating Expenses (Line 7).
I. Other Income, Line 9. Non-operating income (loss) consists of income/expenses that are not related to the NAFI’s primary operation.
*** February 2011**
M. Extraordinary Income, Line 1 3. Extraordinary income is income that is unusual and infrequent and is to be accorded special treatment in the accounts or separate disclosure in financial statements. Report the balance of the following account:
GL Acct # Title
7100 Extraordinary Income (Specify)
N. Extraordinary Expense, Line 1 4. Extraordinary expenses are expenses that are unusual and infrequent and are to be accorded special treatment in the accounts or separate disclosure in financial statements. Report the balances of the following accounts:
GL Acct # Title
7200 Extraordinary Expense (Specify)
7300 Base Realignment & Closure (BRAC) and Installation Closure Expense.
O. Net Income, Line 15. Report the net of lines 12 through 14.
***** 0709 FORMAT FOR THE RECONCILIATION OF NET WORTH
- Format for the Reconciliation of Net Worth. The format presented in Figure 7-3 shall be used for the Reconciliation of Net Worth.
- Instructions for the Preparation of the Reconciliation of Net Worth. The Reconciliation of Net Worth presents, as of a specific time, the reconciliation of the additions and reductions of net worth. Individual statement crosswalks are prepared for information utilizing the Nonappropriated Fund Standard General Ledger guidance and crosswalks found in Chapter 2 of this volume. Complete the heading on the form to indicate: (a) Military Service, (b) Program group and (c) the reporting period (month and calendar year).
- Line Items Instructions for Preparing the Reconciliation of Net Worth
A. Line 1, Net Worth, Beginning. Report the amount of Line 25 on the Balance Sheet from the preceding year.
B. Line 2, Net Income. Report the amount of Line 15 from the Statement of Income and Expense.
C. Line 3, Grants Received. Report the balance of general ledger account 4240, Grant Income (new account) on Line 9b from the Statement of Income and Expense.
D. Line 4, Other Increases. Report the balances of general ledger accounts (as appropriate) for 3020 - Contributed Capital, 3030 – Minimum Pension Liability Adjustment, and
*** February 2011**
3040 – Other Equity Transactions. Examples of increases include donated assets, recycling contributions, prior year material corrections, change in funded status of pension and other postretirement liabilities, and funds for BRAC property.
E. Line 5, Total Additions. Report the sum of Lines 2, 3, and 4.
F. Line 6, Net Loss. Report the amount on Line 15 of the Statement of Income and Expense (if appropriate).
G. Line 7, Grants Disbursed. Report the balance of general ledger account 5430, Grants Expense from Schedule A - APF and NAF Expense Summary.
H. Line 8, Other Decreases (specify). Report the balances of general ledger accounts (as appropriate) for 3020 - Contributed Capital, 3030 – Minimum Pension Liability Adjustment, and 3040 -Other Equity Transactions. Examples of decreases include transfer of headquarters funded projects after books closed, change in funded status of pension and other postretirement benefit liabilities, net decreases in fair value of derivative instruments, annual leave transfers, asset write offs, data conversion write offs, prior period adjustments, interest distribution, dividends paid, audit adjustments, and closing facilities.
I. Line 9, Total Reductions. Report the sum of Lines 6, 7, and 8.
J. Line 10, Net Additions/Reduction to Net Worth. Report the net of Line 5 and Line 9.
K. Line 11, Net Worth, Ending. Report the sum of Line 1 and Line 10.
***** 0710 FORMAT FOR THE SCHEDULE A - APF AND NAF EXPENSE SUMMARY
Format for Schedule A – APF and NAF Expense Summary. The format presented in Figure 7-4 shall be used for Schedule A.
Instructions for the Preparation of Schedule A. NAF expenses for common support functions are allocated to and reported by the benefiting categories (Category A, B, and C). Allocated or prorated management overhead is not reported below the category level. Individual statement crosswalks are prepared from information utilizing the Nonappropriated Fund Standard General Ledger guidance and crosswalks found in Chapter 2 of this volume. Complete the heading on the form to indicate (a) Military Service, (b) the Program Group, and (c) Year Ending.
Line Item Instructions for Preparing Schedule A
A. Cost Expense Captions
