Case Study #3 - Financial Statement Review (Instructions) For Assignment #3, we will be using the financial statement for year ending March 31, 2021, that is located on the Internet for the not for profit organization named Youth Without Shelter (YWS). The not for profit charity is located in the greater Toronto area. The financial statement is located on their public website (yws.on.ca) under the heading "who we are" and then "Financials". I have also attached the financial statements to the assignment that are public knowledge and accessible to the general public. Note, in addition, I also contacted YWs to advise that the financial statements that are on their public website will be used as our assignment and they consented. Answer the 10 questions that I have listed. Note, the questions that are listed are totally hypothetical and do not represent the organization in any actual manner. Please ensure to show all calculations if the question requires them for the answer. Before you answer the questions, review the financial statement in its entirety to ensure you have an understanding of the financial information. (Answer all parts of the following questions) 1. Who are the auditors of this financial statement and provide the date of the audit. What are the auditor's responsibilities when completing the audit of the organization's financial statement? a 2. The organization is developing a new fundraising campaign. For a $50 donation that will go towards the purchase of a multi-residence apartment to be used to house youth, the donor will receive a volunteer t-shirt and a sponge brick with their name engraved on it. The variable costs for the donor gift is $10, and the total fixed cost of the campaign is $200,000. Determine the contribution margin for each $50 donation that is sold. In addition, calculate the break-even point in donations, and the required amount of $50 donations that are need to achieve a profit after fixed costs of $100,000. 3. With the two expenses of residents' needs and amortization that are in the financial statement, identify the cost as either variable or fixed. Explain why you identified the cost as variable or fixed. 4. Identify the total debt the organization has and explain if the debt has been properly managed and serviced. Explain if the organization has the ability to take on additional long-term debt. 5. Explain the difference between cash and short-term investments in the asset section of the financial statement. Where does an organization typically hold their cash? 6. YWS is considering the purchase of equipment for $200,000 to fund a program that will provide $75,000 yearly cash inflows for 5 years. Calculate the payback period? Explain if the payback you calculated is reasonable. 7. Answer the following short answer questions for the 2021 year end: a) The most recent financial year-end date (month and year) and the number of months it covers. b) Calculate the working capital and explain if the level is sufficient for this charity organization. c) Original cost of Building Improvements. d) The NBV of furniture & fixtures. e) The largest source of revenue and largest expense item in 2021. f) Why are prepaid expenses listed as an asset item in the financial statement? d) The NBV of furniture & fixtures. e) The largest source of revenue and largest expense item in 2021. f) Why are prepaid expenses listed as an asset item in the financial statement? 8. Identify the cash flows from operating activities and explain why accounts receivable reduced the amount of cash flows in 2021. 9. The organization is setting up a new program that will operate for 4 months. The total cash funds of $200,000 from the government to operate the program are to be provided evenly to YWS in $50,000 payments on Day 1 of each month. The monthly cash expenses for the program from start to finish will be $75,000, $50,000, $50,000 and $25,000. For any months the program has a cash shortfall, the shortfall will be covered by YWS until the funds have arrived from the program funder. Prepare a 4-month cash budget for this new program. 10. The organization is looking to purchase furniture and fixtures for $140,000. Assume the organization made the purchase on Day 1 of the fiscal year; calculate the annual depreciation given it will be amortized over the estimated useful life on a straight- line basis. The expected terminal/ending value is zero. Explain how depreciation impacts the organization's cash flow and net income (excess or deficiency of revenues over expenses). YOUTH WITHOUT SHELTER Index to Financial Statements Year Ended March 31, 2021 Page INDEPENDENT AUDITOR'S REPORT 1 - 2 FINANCIAL STATEMENTS Statement of Financial Position 3 Statement of Changes in Net Assets Statement of Operations 5 Statement of Cash Flows Notes to Financial Statements 7-12 INDEPENDENT AUDITOR'S REPORT To the Members of Youth Without Shelter Qualified Opinion We have audited the financial statements of Youth Without Shelter (the "Organization"), which comprise the statement of financial position as at March 31, 2021, and the statements of changes in net assets, operations and cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion section of our report, the accompanying financial statements present fairly, in all material respects, the financial position of the Organization as at March 31, 2021, and the results of its operations and its cash flows for the year then ended in accordance with Canadian accounting standards for not-for-profit organizations. Basis for Qualified Opinion In common with many charitable organizations, the Organization derives revenue from donations and fundraising activities, the completeness of which is not susceptible to satisfactory audit verification. Accordingly, our verification of these revenues was limited to the amounts recorded in the records of the Organization. Therefore, we were not able to determine whether any adjustments might be necessary to revenues, excess (deficiency) of revenues over expenses, and cash flows from operations for the years ended March 31, 2021 and 2020, and current assets and net assets as at March 31, 2021 and 2020 and April 1, 2020 and 2019. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with Canadian accounting standards for not-for-profit organizations, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Organization's ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless management either intends to liquidate the Organization or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Organization's financial reporting process. Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. (continues) Independent Auditor's Report to the Members of Youth Without Shelter (continued) . Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery. intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. . Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the entity to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation, We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Hogg. Shain & Scheck PC Toronto, Ontario August 25, 2021 Authorized to practise public accounting by the Chartered Professional Accountants of Ontario YOUTH WITHOUT SHELTER Statement of Financial Position As at March 31, 2021 2021 2020 ASSETS Current assets Cash Short-term investments (Note 3) Accounts receivable Prepaid expenses and deposits s $ 815,689 172,267 89,294 48,886 596,414 657,970 56,253 30,318 1,126,136 1,340,955 Investments held for internally restricted reserves (Notes 3 and 9) Property and equipment (Note 4) Assets held in trust (Note 5) 970,844 1,869,533 9,076 469,735 1,838,527 9,076 $ 3.975,589 $ 3,658,293 LIABILITIES Current liabilities Accounts payable and accrued liabilities Deferred revenues (Note 6) $ $ 202,502 428,441 58,477 485.415 630,943 543,892 Deferred property and equipment grants (Note 7) Long-term forgivable capital loan (Note 8) Funds held in trust (Note 5) 1,209,420 153,669 9,076 1,095,431 307,002 9,076 2,003,108 1.955,401 NET ASSETS Unrestricted Internally restricted (Note 9) Invested in property and equipment 495,193 970,844 506,444 797,063 469,735 436,094 1,972,481 1.702,892 $ 3,975,589 $ 3,658,293 CONTINGENCIES (Note 10) APPROVED ON BEHALF OF THE BOARD YOUTH WITHOUT SHELTER Statement of Changes in Net Assets Year Ended March 31, 2021 Internally restricted Invested in property and equipment Unrestricted 2021 2020 NET ASSETS - BEGINNING OF YEAR $ 797,063 $ 469,735 $ 436,094 $ 1,702,892 $ 1,742,006 269,589 (39,114) Excess (deficiency) of revenues over expenses Net amortization for the year Property and equipment purchases Property and equipment grants received Transfer to internally restricted net assets (Note 9) 269,589 28,872 (231,808) 132.586 (501,109) (28,872) 231,808 (132,586) 501,109 495,193 $ 970,844 $ 506,444 $ 1,972,481 $ 1,702,892 NET ASSETS - END OF YEAR YOUTH WITHOUT SHELTER Statement of Operations Year Ended March 31, 2021 2021 2020 s 1,560,837 $ 1,239,298 REVENUES Donations and fundraising (Note II) City of Toronto Per diem fees Community Housing Support Grants Amortization of property and equipment grants (Note 7) Interest and other 1,147,493 100,000 1,139,617 171,930 26,008 1,136,132 107,000 579,529 148,001 40,739 4.145.885 3.250,699 2,236,629 1,953,417 EXPENSES Salaries and benefits Administration and operational Materials and services (Note 11) Residents' needs (Note 11) Food services (Note II) Transportation, insurance, and other Property management and building Building maintenance services (Note 11) Amortization Utilities and property tax 319,221 313,259 187,024 54,522 386,310 267,021 208,778 51,770 500,342 200,802 64,497 200,388 176,328 45.801 3.876.296 3.289,813 EXCESS (DEFICIENCY) OF REVENUES OVER EXPENSES S 269.589 $ (39,114) YOUTH WITHOUT SHELTER Statement of Cash Flows Year Ended March 31, 2021 2021 2020 s 269,589 $ (39,114) OPERATING ACTIVITIES Excess (deficiency) of revenues over expenses Items not affecting cash: Amortization of property and equipment Amortization of property and equipment grants In-kind contributions In-kind expenses - food and residents' needs 200.802 (171,930) (341,010) 341,010 176.328 (148,001) (379,533) 379,533 298,461 (10,787) Changes in non-cash working capital: Accounts receivable Prepaid expenses and deposits Accounts payable and accrued liabilities Deferred revenues (33,041) (18,568) 144,025 (56,974) (1,745) 16,688 21.665 326,880 35,442 363.488 333.903 352.701 (15,406) (231.808) (19,427) (52.619) Cash flows from operating activities INVESTING ACTIVITIES Change in investments (net) Purchase of property and equipment Cash flows used by investing activities FINANCING ACTIVITY Property and equipment grants received NET INCREASE IN CASH CASH - BEGINNING OF YEAR (247,214) (72.046 132,586 52.622 219,275 333,277 596,414 263,137 CASH - END OF YEAR s 815,689 $ 596,414 YOUTH WITHOUT SHELTER Notes to Financial Statements Year Ended March 31, 2021 1. NATURE AND PURPOSE OF ORGANIZATION Youth Without Shelter (the "Organization") is a registered charity incorporated in the Province of Ontario without share capital. It is incorporated under the name Youth Without Shelter Terra House North Toronto Emergency and Referral Agency. The shelter is exempt from income tax in Canada as a registered charitable organization under the Income Tax Act (Canada). The shelter operates two facilities with a link between the two buildings. The original shelter operates a 33- bed residence in Toronto for temporary shelter and provides a supportive environment for youth in times of personal and family crisis. The second building offers a stay-in-school program for an additional 20 youth by providing long-term transitional housing and support. Impact of COVID-19 On March 11, 2020, the World Health Organization characterized the outbreak of a strain of the novel coronavirus ("COVID-19") as a pandemic, which resulted in a series of public health and emergency measures that were put in place to combat the spread of the virus. The duration and impact of COVID-19 are unknown at this time. It is not possible to reliably estimate the impact that the length and severity of these developments will have on the financial results of the Organization in future periods. The Organization projects that will be able to contin its programming with no significant disruptions and has secured funding contracts for the next fiscal year. Management continues to closely monitor and assess the impact on operations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These financial statements are the representation of management and have been prepared in accordance with Canadian accounting standards for not-for-profit organizations ("ASNPO") in Part III of the CPA Canada Handbook Revenue recognition The Organization follows the deferral method of accounting for restricted contributions. Restricted contributions, including government funding, donations and fundraising, and other contributions, are recognized as revenue in the year in which the related expenses are incurred. Unrestricted contributions are recognized as revenue when received or receivable if the amount to be received can be reasonably estimated and collection is reasonably assured. Grants related to the purchase of property and equipment are recorded as revenue in the same year the related property and equipment are charged to operations. Grants related to the purchase of land is recorded as a direct increase in net assets in the year of receipt. Government funding for providing youth accommodation is recognized based on the services delivered in the year. Any grant funds unspent at year end are recorded in deferred revenues. Fundraising revenue is recognized when the event occurs. Interest and other revenue is recorded when earned. Contributed goods and services Contributed goods and services are recognized at fair value when received, when they would be used in the normal course of operations, and would otherwise have been purchased. (continues) YOUTH WITHOUT SHELTER Notes to Financial Statements Year Ended March 31, 2021 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Property and equipment Property and equipment are recorded at cost less accumulated amortization, and are amortized on a straight- line basis over their estimated useful lives as follows: Building Building improvements Major equipment Furniture and fixtures Computer equipment Vehicle 25 years 10 years 10 years 7 years 3 years 8 years The Organization regularly reviews its property and equipment to eliminate obsolete items. The amortization of property and equipment acquired during the year commences when they are placed into use. Impairment of long-lived assets The Organization tests for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability is assessed by comparing the carrying amount to the projected future net cash flows the long-lived assets are expected to generate through their direct use and eventual disposition. When a test for impairment indicates that the carrying amount of an asset is not recoverable, an impairment loss is recognized to the extent the carrying value exceeds its fair value. Financial instruments The Organization's financial instruments consist of cash, investments, accounts receivable, and accounts payable. All financial instruments are initially measured at fair value, and subsequently, at amortized cost, with the exception of investments, which are measured at cost plus accrued interest. Financial assets are assessed for impairment on an annual basis at the end of the fiscal year if there are indicators of impairment, and are adjusted accordingly. Use of estimates The preparation of these financial statements in accordance with ASNPO requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Estimates are periodically reviewed and any adjustments are reported in the year in which they become known. Significant estimates include the useful life of property and equipment, and the fair value of donated assets, materials, and services, Actual results could differ from these estimates. 3. INVESTMENTS Investments are comprised of Guaranteed Investment Certificates issued by a major Canadian chartered bank, which earn interest in the range of 0.20% to 1.15% (2020 -0.20% to 1.95%) and mature between April and July 2021 (2020 - April and June 2020). YOUTH WITHOUT SHELTER Notes to Financial Statements Year Ended March 31, 2021 4. PROPERTY AND EQUIPMENT 2021 Net book value 2020 Net book value $ $ $ Land Building Building improvements Major equipment Furniture and fixtures Computer equipment Vehicle Accumulated Cost amortization 371,162 $ 2,293,323 1,291,296 532,535 199,581 83,069 29,450 167,117 126,263 42,521 32,922 66,654 7,336 371,162 1,002,027 332,954 53,619 40,854 9,599 59,318 371,162 1,093,120 248,254 54.265 68,772 1,290 1,664 $ 3,556,381 $ 1,686,848 $ 1,869,533 $ 1,838,527 5. FUNDS ADMINISTERED FOR OTHERS The shelter is administering funds of $9,076 (2020 - $9,076) on behalf of the Youth Shelter Interagency Network. The funds are held in cash, and remain unchanged from the prior year.. 6. DEFERRED REVENUES Deferred revenues as at March 31 are comprised of the following: 2021 2020 s $ The Home Depot Canada Foundation Pinball Clemons Foundation Other program funding Prepaid fundraising event revenue 261,401 81,670 85,370 208,945 74,307 94,765 107,398 428,441 S 485,415 s s The continuity of deferred revenues is as follows: Balance, beginning of year Add: Restricted contributions received in year Less: Restricted contributions spent in year Less: Funds used to purchase property and equipment (Note 7) Balance, end of year 485,415 1,322,627 (1,247,015) (132,586) 158,535 580,321 (200.819) (52,622) $ 428,441 $ 485,415 YOUTH WITHOUT SHELTER Notes to Financial Statements Year Ended March 31, 2021 2020 7. DEFERRED PROPERTY AND EQUIPMENT GRANTS Deferred property and equipment grants as at March 31 are comprised of the following: 2021 Building and building improvements $ 1,103,396 Equipment 40,335 Furniture and fixtures 29,579 Vehicle 25,419 Computer equipment 10,691 $ 1,209,420 $ 1,011,851 34,726 45,649 1,663 1,542 $ 1,095,431 s The continuity of deferred property and equipment grants is as follows: Balance, beginning of year Add: Property and equipment grants received in year Add: Grants from deferred revenues (Note 6) Less: Grants amortized to revenues in year Balance, end of year $ 1,095,431 153,333 132,586 (171,930) 1,037,477 153,333 52,622 (148,001) $ 1,209,420 s 1.095,431 8. LONG-TERM FORGIVABLE CAPITAL LOAN The Canada Mortgage and Housing Corporation ("CMHC") provided a forgivable capital loan to a maximum of $2,300,000 for a term of 15 years. Funds borrowed on this loan are recorded as part of capital grants. The unforgiven portion of the loan at March 31, 2021 is $153,669 (2020 - $307,002). Forgiveness of the loan is earned at a rate of one-fifteenth of the original principal amount for each year that the shelter continues to own and use the property for youth shelter services. As the loan is forgiven, the contribution to the shelter will be treated as follows: The portion of the contribution related to land, estimated at $371,162, was recorded as a direct increase in net assets in the first year of forgiveness. The portion of the contribution related to the cost of the building, leasehold improvements, and furniture and equipment has been deferred and is recognized as revenue over the life of the assets. The forgivable loan is secured by a first mortgage on the property for the full amount of the loan, a General Assignment of revenues, and a first security interest in chattels. YOUTH WITHOUT SHELTER Notes to Financial Statements Year Ended March 31, 2021 9. INTERNALLY RESTRICTED INVESTMENTS AND NET ASSETS The Board of Directors (the "Board") designated a portion of net assets to be set aside in reserves. The Organization maintains certain cash and Guaranteed Investment Certificates in segregated accounts which are designated for internally restricted purposes. Capital Reserve The Board established a Capital Reserve to set aside funds for capital purposes. The reserve funds will be used for capital replacement, acquisition, renovation, or for unforeseen working capital requirements, as approved by the Board. Effective March 31, 2021, the Board approved a transfer of $156,109 to the Capital Reserve from unrestricted net assets. Contingency Reserve The Contingency Reserve was established to preserve the provision of service in the event of a shortfall in contributions, or in the event of disaster or any such other emergency. The reserve is not to exceed 180 days of the shelter's operating expenditures from the previous year. Funds contributed are from the Organization's own fundraising efforts or from donations. It is the intention of the Board to add to the Contingency Reserve until the maximum of 180 days of operating expenditures is attained. Effective March 31, 2021, the Board approved a transfer of $175,000 to the Contingency Reserve from unrestricted net assets. Long-Term Development Fund In 2016, the Board established the Long-Term Development Fund to be used for a feasibility study and research into possible expansion and other strategic initiatives as outlined in the Organization's strategic plan. Effective March 31, 2021, the Board approved a transfer of $170,000 to the Long-Term Development Fund from unrestricted net assets. Internally restricted net assets are comprised of the following: 2021 2020 $ $ Capital Reserve Contingency Reserve Long-Term Development Fund 300,000 425,000 245,844 143,891 250,000 75,844 $ 970,844 s 469,735 10. CONTINGENCIES As at March 31, 2021, there are legal claims outstanding. The ultimate outcomes of these claims cannot be determined at this time and, as a result, no amounts have been recorded. Any losses related to these claims will be recorded in the year in which the liability can be estimated. YOUTH WITHOUT SHELTER Notes to Financial Statements Year Ended March 31, 2021 11. DONATIONS AND FUNDRAISING REVENUE Donation and fundraising were received from the following sources: 2021 2020 S S 961,399 258,428 585,721 274,044 Donations Fundraising Donations in-kind: Residents' food Residents' personal needs Advertisements Building supplies 147,004 193,808 159,814 157,442 56,700 5,577 198 $ 1,560,837 $ 1.239.298 Amounts equal to donated in-kind materials and services are recorded in the applicable expense categories on the statement of operations. 12. FINANCIAL RISKS It is management's opinion that the Organization is not exposed to significant credit, liquidity, currency, or other price risks arising from its financial instruments. The Organization is subject to interest rate risk on its investments, which is the risk that the value of the investments might be adversely affected by a change in the market interest rates. Fluctuations in market interest rates are not expected to significantly affect the Organization's cash flows. 13. COMPARATIVE FIGURES Some of the comparative figures have been reclassified to conform to the current year's presentation