How to Read the Annual Financial Statement

The financial statement consists of the opinion letter, or auditor's report; the statements (yes, "statements" within the "financial statement" – no wonder it's confusing) and footnotes.

The statements within the financial statement generally include a balance sheet; statements of income, expenses, and deficits; and a statement of cash flow.

Examine the statements of income, expenses, and deficit, which collectively comprise the income statement. Here you will see things like income from maintenance charges, laundry rooms, etc., and expenses like operating costs.

The next item to look at is the mortgage information, found in the liabilities section of the balance sheet. This tells you when the mortgage is due, the interest it carries, and the monthly payments. It also tells you about any a second mortgage, such as a revolving line of credit.

The next thing to look at is the building's cash position, found in the balance sheet under the heading "Cash and Equivalents." These include investments such as U.S. government securities and money-market accounts.

Next, review all the footnotes. They may describe such things as the co-op or condo's history, operations and number of units; its accounting policies, including the "methods and useful lives" used to depreciate the building and improvements; a definition of cash and equivalents; the use of estimates in financial statements; policies concerning future major repairs, including any requirements or policies to establish and/or accumulate funds to finance such work; and other relevant data specific to one's building, such as the number of outstanding shares a co-op may have.

Where applicable, it will also disclose the existence of leases for retail spaces, garages and the like, along with their expiration dates, a brief description of the rental terms, and the minimum rents for the next five years, as well as the costs and kinds of improvements made during the year.

As the final step, look at all remaining items, noting those which seem out of line or which you don't understand. The building's treasurer should be able to explain what the items are and what they mean.

Adapted from Habitat December 2007. For the complete article and more, join our Archive >>