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Understanding Co-op Financial Statements Brian Dahlk, CPA, Senior Manager The Fundamental Equation of Accounting:

àAssets = Liabilities +

àWhat you HAVE = What you OWE plus what you OWN

à HAVE = OWE + OWN () = (Liability) + (Equity) The

àThe ’s financial situation at a particular point in time

àShows total equal to total Liabilities plus Equity – hence the name “Balance Sheet” !"#$%&'()*+),(('-(. !!"#$ !%&&'()*#+,-&-./"01-+ !2,-3".4+-53-)#-#+ !6)/-)*',7 !6)/-#*8-)*#+ !9")4 !:(.14.);# !<(,).*(,-+=+>?(.38-)* Examples of Liabilities:

àAccounts payable àAccrued àDeferred àAccrued àMember deposits àLoans payable Equity:

àRetained earnings àMember shares, certificates, and/or capital contributions (This is equity if the return is not automatic when the member leaves the co-op. If the return IS automatic, minus any nonpayment of charges and/or damage assessments, this should be recorded as a liability.)

When some of the earnings are returned to the owners of a co-op, this is know as a patronage (uncommon for housing co-ops) The : àThe organization’s financial performance over a given period in time Examples of Revenue (Income): àMember charges/assessments àMember fines àAnnual Membership dues àInterest and investment income Examples of : àMaintenance and repairs àStaff /wages àDepreciation àUtilities àInterest àInsurance àTechnology àProfessional services àSupplies àEducation !"#"$%&'()&&*'+,"-.#&

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Retained earnings, beginning of the year Balance sheet

Plus (minus): net income (loss) for the year Income statement

Equals retained earnings, end of the year Balance sheet

Retained earnings is also decreased when on net income are paid to the owners – rarely happens with housing co-ops !"#$%&'(%)(*++%,-#.-/ !01%(23.4536(4"#$%&'(%)(5++%,-#.-/7

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! 7*58%!"#$%"&&'()*$+,"-'.'/-$01&234 GAAP Method àGAAP = Generally Accepted Accounting Principles – Also know as the “ method” – Used for most formal financial reports, such as reports – This best reflects the organization’s true economic situation – Revenue recognized when it’s actually earned – Expenses recognized when they’re actually incurred Method àSimple and straightforward àAligns with budgetary amounts àRevenue recognized when cash is received àExpenses recognized when cash is paid àMost co-op , and internal income statements, are done on the cash basis àSome assets – buildings, renovations, furniture, equipment – are not recorded as expenses when purchased àInstead, they’re recorded as assets (balance sheet) and then depreciated over several years (income statement) àDepreciation spreads out & expenses the of those assets over several future years Maintenance Projects àPer GAAP:

– Capitalize and then Depreciate major projects. These are recoded as assets on the balance sheet. Then they are depreciated, over several years, and depreciation is recorded on the income statement.

– Expense minor projects. Recorded on the income statement as maintenance expense.

àCash basis (often for internal reports): – All maintenance projects will usually be expensed. !"#$%&'()*+),-%'.%/0*&1 !"#$%&'()*(+,*($+)&-.*/..+&0112&3(+"+,("4& )*"*.5.+*)&"+'&,")6&(+,$5.&)*"*.5.+*) 7 8+,$5.9&,")6&:";5.+*)&<.%)=)&",,%=.'&"5$=+*) 7 >?:.+).)9&,")6&:";5.+*)&<.%)=)&",,%=.'&"5$=+*) 7 @$"+&2";5.+*) 7 !"#$%&5"(+*.+"+,.&"+'&.A=(:5.+* 7 B.:%.,("*($+ !"#$%&'()*&#+)(,-+&./&"0.123"4

5"('/6# 7((2").#68"&97((2").#68"& .& /"'&:"8"3(21"/# Initial Situation

àBy the end of the December, the had borrowed $1,000,000 to develop its first property.

àThe development exactly $1,000,000. Balance Sheet Prior to Opening Assets Land and building $ 1,000,000 Total assets $ 1,000,000

Liabilities payable 1,000,000 Total liabilities 1,000,000

Equity 0 Liabilities and equity $ 1,000,000 Assumption #1 àThe co-op has thirty units as was full to start the year. The members are assessed $1,000 each for the month of January, for a total of $30,000. But two members didn’t pay during the month, and one member paid their January and February charges. !"#$%&'()*)&%&")'+$,,$-."/'0112%3).$"'45

!""# $%&'(%)*+,-%)%.-)*+('/0(&+1.)23+4)2-25 67*)')7&'1)*)&%&")'!"#$%& 8& 67*)')7&'1)*)&%&")''()"* 8&

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*+',+(+$+#" G&0&AA&E'A&B&$6& <'''' :?@@@ D3"C3#3*3&5 :?@@@?@@@ H1*"#'#3"C3#3*3&5 <':?@@:?@@@

IJ63*K L&*'3$%17&'M K&"A'*1'E"*& F@?@@@ %&$'()(+',+(+$+#")'-.)#/0+$1 <':?@F:?@@@ Assumption #2 àAlso in January, the co-op purchased $5,000 of supplies, for which it paid $4,000 by the end of the month. And its staff incurred $8,000 in wages, for which it paid $7,000 by the end of the month. !"#$%&'()*)&%&")'+$,,$-."/'0112%3).$"'45

!""# $%&'(%)*+,-%)%.-)*+('/0(&+1.)23+4)2-25 67*)')7&'1)*)&%&")'!"#$%& 8& 67*)')7&'1)*)&%&")''()"* 8&

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*+',+(+$+#" -%%16$*5'8"F"C#& <''''''''':?@@@ G&0&AA&E'A&B&$6& =?@@@ D1"$5'8"F"C#& =?@@@?@@@ H1*"#'#3"C3#3*3&5 =?@@I?@@@

-./+$0 J&*'3$%17&'K F&"A'*1'E"*& =L?@@@ %&$'()(+',+(+$+#")'12)#./+$0 <''=?@:@?@@@ Assumption #3 àAlso in January, the co-op made a payment of $3,000. $2,000 of this is comprised of interest, and $1,000 paid down the principal balance. !"#$%&'()*)&%&")'+$,,$-."/'0112%3).$"'45

!""# $%&'(%)*+,-%)%.-)*+('/0(&+1.)23+4)2-25 67*)')7&'1)*)&%&")'!"#$%& 8& 67*)')7&'1)*)&%&")''()"* 8&

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*+',+(+$+#" -%%16$*5'8"H"C#& <''''''D?@@@ I&0&AA&F'J&B&$6& =?@@@ E1"$5'8"H"C#& KKK?@@@ L1*"#'#3"C3#3*3&5 =?@@D?@@@

-./+$0 M&*'3$%17&'N H&"A'*1'F"*& =>?@@@ %&$'()(+',+(+$+#")'12)#./+$0 <=?@=G?@@@ Assumption #4 àAlso in January, the co-op acquired a $7,000 pool table for its common room. It paid for the pool table by the end of the month. !"#$%&'()*)&%&")'+$,,$-."/'0112%3).$"'45

!""# $%&'(%)*+,-%)%.-)*+('/0(&+1.)23+4)2-25 67*)')7&'1)*)&%&")'!"#$%& 8& 67*)')7&'1)*)&%&")''()"* 8&

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;0&)*+':/'%2'2 F?<;;; ;0&)*+':/'%2'2 =F<;;;

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!""#$" ;"5) <'''' =>??? -%%16$*5'@&%&3A"B#& C>??? D"$E'"$E'B63#E3$4 F>???>??? GH6387&$* I>??? %&$'()'""#$" <'F>?FI>???

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-./+$0 N&*'3$%17&'O J&"@'*1'E"*& FP>??? %&$'()(+',+(+$+#")'12)#./+$0 <'F>?FI>??? Assumption #5 àThe co-op depreciates is property and equipment at a rate of $12,000 per year. !"#$%&'()*)&%&")'+$,,$-."/'0112%3).$"'45

!""# $%&'(%)*+,-%)%.-)*+('/0(&+1.)23+4)2-25 67*)')7&'1)*)&%&")'!"#$%& 8& 67*)')7&'1)*)&%&")''()"* 8&

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9:/'%2'2 9:/'%2'2 (233,.&1 5<;;; (233,.&1 ?<;;; 6*/&1 @<;;; 6*/&1 A<;;; !")&B&1) =<;;; C$B)/*/&'3*D%&")1 :<;;; E&3B&#.*).$" F<;;;' !%3B$G&%&")1 A<;;;

;0&)*+':/'%2'2 FH<;;; ;0&)*+':/'%2'2 =F<;;;

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!""#$" ;"5) <''''''''=>??? -%%16$*5'@&%&3A"B#& C>??? D"$E'"$E'B63#E3$4 F>???>??? GH6387&$* I>??? -%%676#"*&E'E&8@&%3"*31$ !"#$$$% %&$'()'""#$" <''F>?FJ>???

*+',+(+$+#" -%%16$*5'8"K"B#& <'''''''C>??? L&0&@@&E'@&A&$6& F>??? D1"$5'8"K"B#& MMM>??? N1*"#'#3"B3#3*3&5 F>??C>???

-./+$0 O&*'3$%17&'P K&"@'*1'E"*& FQ>??? %&$'()(+',+(+$+#")'12)#./+$0 <'F>?FJ>??? !"#"$%&'()*+%,-./-01*%2*$".+3

!!"#$%&'(&)*+,-&.$(-)&$)'-/0 1 !-)&2,).(3$%"'&.$()#%,-,(&,4)$()&2,)5'-2)6'-.-7) 899%+':)6'-.-7)$%)-$",)9$";.('&.$(< 1 6+4=,&)>'%.'(9,-0)'%,)&2,?)%,'-$(';:,< 1 8%,)%,>,(+,)'(4),@#,(-,-),@#,9&,4)&$);,)9$(-.-&,(&) '::)&2%$+=2$+&)&2,)?,'%< Balance Sheet for Review

Assets Cash $ 12,000 5,000 Land 20,000 Building 75,000

Total assets $ 112,000

Liabilities $ 11,000 90,000 Total liabilities 101,000

Equity Retained Earnings 21,000

Total liabilities and equity $ 122,000 Income Statement for Review #1

Actual Difference

Revenue Rent income $ 80,000 $ 81,000 $ (1,000) Services income 96,000 97,000 (1,000) Interest income 2,000 4,000 (2,000) Total revenue 178,000 182,000 (4,000)

Expenses Loan payments 11,000 11,000 0 Utilities 23,000 22,000 1,000 To capital 8,000 8,000 0 Maintenance 82,000 134,000 (52,000) Education 4,000 7,000 (3,000) Total expenses 128,000 182,000 (54,000)

Net income (loss) $ 50,000 $ 0 $ (50,000) Income Statement for Review #2 Actual Budget Difference

Revenue Rent income $ 100,000 $ 81,000 $ 19,000 Services income 96,000 97,000 (1,000) Interest income 4,000 4,000 0 Total revenue 200,000 182,000 18,000

Expenses Loan payments 11,000 11,000 0 Utilities 21,000 22,000 (1,000) To capital reserve 8,000 8,000 0 Maintenance 183,000 134,000 49,000 Education 4,000 7,000 (3,000) Total expenses 227,000 182,000 45,000

Net income (loss) $ (27,000) $ 0 $ 27,000 Income Statement for Review #3

Actual Budget Difference

Revenue Rent income $ 100,000 $ 101,000 $ (1,000) Services income 96,000 89,000 7,000 Interest income 4,000 4,000 0 Total revenue 200,000 194,000 6,000

Expenses Loan payments 11,000 11,000 0 Utilities 21,000 22,000 (1,000) Maintenance 163,000 154,000 9,000 Education 4,000 7,000 (3,000) Total expenses 189,000 194,000 5,000

Net income (loss) $ 1,000 $ 0 $ 1,000 !"#$$%&'()*%+,#-.'.$%/,01,2$2-(3 !!"#$%#&'()*'('$%+ !,$-+"+.-)"'-+) !/01"-#2'-#1$))3(+$4-5)16)"+&'70+$-8 !"#$%&%'( !!"#$%&"'$(")*+,*"(-%#"-./%/-".-(0-."%.",$##%/-(%# Principal Balance

àThis is the amount owed on the loan – When the loan is first taken out, the principal balance equals the amount borrowed. – As the monthly payments are made, the principal balance is gradually reduced. àThe charge assessed for the temporary use of another entity’s Period

àThe length of time over which the loan is to be repaid. – Most loans for housing co-ops, and other “commercial” ventures, are amortized over periods between 15 and 25 years. – Individual home owners can usually receive loans amortized over 30 years. Mortgage Payment àThree variables combine to determine the monthly mortgage payment: – Principal balance – Interest rate – Amortization à This payment is constant from month to month. – What changes is the amount of the payment which is applied to interest (income statement) versus the amount of the payment which is applied to principal (balance sheet). !"#$%&%'()"&*+(,-'#(./0' !!"#$%&'()*'+$#,('+*-'.*/#,'0+'()*'10/%2'()*'$%(*#*,(' 3)/#&*,'(/4*'"5'/'#*1/($6*1.')$&)'/70"%('0+'()*' 70#(&/&*'5/.7*%(,8' 9 :#/;"/11.2'/,'()*'5#$%3$5/1'

Loan amount: 300,000 Interest rate: 7% Repayment period: 20 years

Calculated monthly payment: 2,326

Payment interest principal loan balance 300,000 2,326 1,750 576 299,424 2,326 1,747 579 298,845 !"#$%&'"()*+#)*"$%,-#'./0%1 ,$2%"3%)40%!"#$!"#$

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ompilation àProvides no assurance

àResults in a formal report per GAAP (although the co-op could request it to be done on a different basis) !"#$%&'()*

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