Reading financial statements

Know what you're holding before you read a single number

Every board financial package was produced under one of three levels of CPA involvement, and they are not interchangeable.

"a CPA does not provide any assurance. The CPA does not have to be independent, but the CPA must indicate a lack of independence, if applicable, in the report."

Source: What is the difference among a compilation, review, and audit?, AICPA & CIMA

That is a compilation: the CPA arranges management's own numbers into a standard format and offers no opinion on whether they are correct. A review goes further, the CPA must be independent and performs inquiry and analytical procedures to reach limited assurance. An audit goes furthest, the CPA tests internal controls and assesses fraud risk before issuing an opinion. A package labeled "compiled" has had zero independent checking, no matter how professional it looks.

Whether your association is required to have its statements reviewed or audited at all, or just compiled, depends on your governing documents and your state's statute. Ask your treasurer or management company which one your association currently gets, and check your bylaws for whether a higher level is required.

The balance sheet is a snapshot, read it first

"A balance sheet lays out the ending balances in a company's asset, liability, and equity accounts as of the date stated on the report."

Source: The balance sheet, AccountingTools

Everything on it is true as of one date, not for a period. Look for three things: what the association owns (cash, and accounts receivable, chiefly unpaid assessments), what it owes (accounts payable to vendors), and what is left over as fund balance. An asset earns its place on this statement because it is expected to provide the association some future benefit, which is why an unpaid assessment counts as an asset even though no cash has arrived yet.

The income statement covers a period, compare it to budget

"presents revenues earned and expenses incurred to determine net income or loss"

Source: Income statement definition, AccountingTools

Read this statement next to the budget, not by itself. That comparison is the budget-vs-actual report, and it tells you whether the community is tracking, ahead of, or behind its plan for the year.

One trap catches almost every new director. Most associations recognize assessment revenue in the period it is billed, not the period it is collected. A month can show healthy net income while a large share of that "income" is sitting uncollected in accounts receivable. If net income looks strong but the bank balance does not match that story, check the receivables total before you celebrate.