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TABLE OF CONTENTS

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CHAPTER 1. INTRODUCTION

1-1 Purpose 1-1

1-2 Scope 1-2

1-3 Legislative Authority 1-3

1-4 Goals of Financial Analysis 1-5

1-5 Accounting Knowledge Quiz 1-7

Introduction 1-7

Directions 1-7

Questions 1-9

Answers 1-12

CHAPTER 2. THE ACCOUNTING PROCESS

2-1 Orientation 2-1

2-2 Introduction 2-2

2-3 Types of Financial Statements 2-2

2-4 Statement of Financial Position (Balance Sheet) 2-4

Assets 2-4

Liabilities 2-8

Owner\'s Equity 2-10

2-5 Statement of Income 2-14

Revenue 2-15

Expenses 2-18

Net Income or Loss 2-23

2-6 Statement of Cash Flows 2-26

Operating Activities Section 2-29

Investing Activities Section 2-30

Financing Activities Section 2-30

2-7 Statement of Retained Earnings 2-31

2-8 How the Four Statements Work Together 2-33

2-9 Cash Basis Accounting 2-33

2-10 Tax Basis Accounting 2-34

2-11 Accrual Basis Accounting 2-36

2-12 Summary 2-37

Chapter 2 Accounting Knowledge Quiz 2-40

Answers 2-44

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CHAPTER 3. STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

IN DETAIL

3-1 Introduction 3-1

3-2 Assets 3-1

Cash 3-2

Accounts Receivable 3-4

Allowance for Doubtful Accounts 3-5

Notes Receivable 3-6

Short Term Investments 3-6

Deposits Held in Trust 3-7

Tenant Security Deposits 3-7

Other Deposits 3-8

Prepaid Expenses 3-8

Restricted Deposits and Funded Reserves 3-9

Mortgage Escrow Deposits 3-9

Reserve for Replacements 3-10

Miscellaneous Current Assets 3-11

Fixed Assets 3-11

3-3 Liabilities 3-12

Current Liabilities 3-12

Accounts Payable 3-13

Accrued Liabilities 3-13

Notes Payable 3-14

Mortgage Payable 3-14

Deferred Income 3-15

Distributions or Dividends Payable 3-15

Security Deposit Liability 3-16

Long Term Liabilities 3-16

Notes Payable 3-16

Mortgage Payable 3-17

Other Liabilities 3-17

Amounts Due to Owners 3-17

3-4 Owner\'s Equity 3-18

Capital Account 3-18

Withdrawals Account 3-19

Retained Earnings Account 3-19

3-5 Financial Ratios 3-19

Liquidity Ratios 3-20

Other Financial Ratios 3-22

3-6 Chapter Summary 3-24

Chapter 3 Accounting Knowledge Quiz 3-25

Answers 3-28

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CHAPTER 4. STATEMENT OF INCOME IN DETAIL

4-1 Introduction 4-1

4-2 Revenue 4-1

Rental Revenue 4-1

Service Revenue 4-2

Financial Revenue 4-3

4-3 Expenses 4-3

Administrative Expenses 4-5

Operating and Maintenance Expenses 4-6

Depreciation 4-7

Amortization 4-10

Taxes and Insurance 4-13

Financial Expenses 4-13

Service Expenses 4-14

Corporate Expenses 4-14

4-4 Net Income or Loss 4-15

4-5 Chapter Summary 4-17

Chapter 4 Accounting Knowledge Quiz 4-19

Answers 4-20

CHAPTER 5. STATEMENT OF CASH FLOWS IN DETAIL

5-1 Introduction 5-1

Objective 5-2

5-2 Operating Activities Section 5-2

Cash Received from Operations 5-2

Cash Disbursements for Project Operations 5-3

5-3 Financing Activities Section 5-4

5-4 Investing Activities Section 5-4

Reconciling Net Income to Net Cash 5-5

Changes in Non-cash Current Assets and Current

Liabilities 5-5

Changes in Operating Items that do not Create

Cash Flows 5-7

5-6 Gains and Losses from Non-Operating Activities 5-7

5-7 Summary 5-8

Chapter 5 Accounting Knowledge Quiz 5-9

Answers 5-11

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CHAPTER 6. STATEMENT OF RETAINED EARNINGS IN DETAIL, OTHER

REPORTS, AND NOTES TO THE FINANCIAL STATEMENTS

6-1 Introduction 6-1

6-2 The Statement of Retained Earnings 6-2

Net Income (Loss) 6-2

Cash Dividends Declared 6-2

Retained Earnings Year End 6-3

6-3 Other Statements (Schedules) 6-4

6-4 Notes to the Financial Statements 6-7

6-5 Chapter Summary 6-8

Chapters 6 Accounting Knowledge Quiz 6-9

Answers 6-10

CHAPTER 7. AUDITING CONCEPTS

7-1 Introduction 7-1

7-2 Auditor/Owner Responsibilities 7-1

7-3 Accounting Principles and Standards 7-6

GAAP 7-6

GAAS 7-6

GAS 7-6

General Standards 7-6

Fieldwork Standards 7-7

Reporting Standards 7-7

Government Standards 7-8

7-4 Review and Evaluation of Internal Control Systems 7-8

Tests of Transactions 7-8

Tests of Account Balances 7-9

7-5 Materiality 7-9

7-6 Reports 7-10

Chapter 7 Accounting Knowledge Quiz 7-13

Answers 7-15

EXHIBITS

2-1 Asset Section of Statement of Financial Position

(Balance Sheet) 2-6

2-2 Liabilities Section of Statement of Financial Position

(Balance Sheet) 2-9

2-3 Statement of Financial Position (Balance Sheet) 2-13

2-4 Revenue Section of a Statement of Income 2-17

2-5 Expense Section of a Statement of Income 2-20

2-6 Statement of Income, Form HUD-92410 2-24

2-7 Statement of Cash Flows 2-28

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2-8 Sample Statement of Retained Earnings 2-32

EXHIBIT Page

4-1 Types of Depreciation - GAAP 4-11

4-2 Types of Depreciation - Income Tax Basis 4-12

APPENDICES

1 Financial Statements Package A-1

2 Glossary G-1

3 Acronyms AC-1

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FOREWORD

Under the provisions of the regulatory agreement, project owners are

required to submit certain financial accounting reports to the
Department

for review. The financial statements are a critical tool through which

Loan Management staff can evaluate the performance of a project. In

addition, the timely review of financial statements can identify actions

needed to avoid defaults and minimize insurance claims against the

Department.

This Handbook provides the information needed to understand concepts and

terms necessary to accomplish the Loan Management staffs review of
audited

financial statements and monthly accounting reports. This Handbook
should

be used in conjunction with:

o IG 2000.4 Consolidated Audit Guide for Audits of HUD Programs

o HUD 4080.1 Compliance Handbook for Housing

o HUD 4350.1 Insured Project Servicing

o HUD 4350.3 Occupancy Requirements of Subsidized Multifamily

Housing

o HUD 4355.1 Flexible Subsidy

o HUD 4370.1 Reviewing Annual and Monthly Financial Reports

o HUD 4370.2 Financial Operations and Accounting Procedures for

Insured Multifamily Projects

o HUD 4370.3 Uniform System of Accounts for Cooperatives Using

Computer and Manual Systems

o HUD 4381.5 Management Documents, Agents & Fees

o HUD 4470.1 Mortgage Credit Analysis for Project Mortgage

Insurance, Section 207

o HUD User Manuals on Multifamily Information

Processing System (MIPS) Loan Management Module

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