Understanding Financial Statements –

Income Statement

Continuing from the April edition of Association Times, we now cover general information related to how the Board of Directors, Members, and Management Company use the financial statements to maintain close watch over the financial well being of the association.

The income statement shows how the association is performing over a certain period of time.  It presents the income and the expenses for that period of time.  Associations should have these statements prepared regularly – monthly or quarterly – and the income statement should be provided on a timely basis, typically no later than 15 to 20 days after the period ends.  The number of accounts or the detail in the income statement will vary depending on the size of the association and the type of purchases and requests made by the Board of Directors or Owners.

Another important part of the income statement is a budget comparison.  Generally, the association's software package will have an option to input the current year's budget.  Once this is added, the income statement will show how the current period is compared to budget for that same period.  In addition, the income statement will reflect a year-to-date actual compared to a year-to-date budget.  The income statement shows how effectively the association budgeted for the year.  Associations almost always budget for a net income of zero, after allowing for contingencies.  Consequently, if all of the income and expenses in the budget occur exactly as estimated, the association would have a net income of $0.  However, due to fluctuations in income or expense, the association will likely have either a net income or a net loss.  A net loss does not necessarily reflect negatively on the association.  An association may want to use excess funds from a prior year, while budgeting for a net loss in the current period.

What are some of the items to look for when reviewing the income statement?

	Know what the assessment revenue should be, which is usually the number of units in the association times the monthly per unit assessment times the number of months that are under review. This tests if all the association assessments are being recorded properly.
	Identify miscellaneous income items and ask where these amounts are coming from.
	Review the large expense line items in comparison to budget and/or last year to determine if expenses are out of line.
	Clarify any unusual revenue and/or expense items. This will be particularly relevant during the next budgeting cycle when using historical data to develop the association's budget.