Nonprofit financial statements must show all incoming and outgoing funding to demonstrate accountability and compliance.
For-Profit and Nonprofit Financial Statements
In previous blog posts, we discussed the for-profit vs nonprofit accounting. A for-profit’s goal is to make a profit. A nonprofit’s goal is to fulfill its mission. In order to be compliant to funding sources, the presentation of nonprofit financial statements must demonstrate proper accountability and transparency. This is the framework of understanding the answers to key nonprofit profit organization accounting questions.
All nonprofits have at least three or four — depending on the type of organization — financial statements that they must submit to ensure compliance. These statements form a complete picture of the organization.
Four Types of Nonprofit Financial Statements
- Statement of Activities – Profit or Loss/Income Statement
- Statement of Changes in Net Assets – Profit or Loss by Functional Area combined with changes in Net Asset
- Statement of Financial Position – Balance Sheet
- Statement of Cash Flow
1. Statement of Activities – Income Statement
This statement of retained earnings details the revenue your organization has earned and subtracts the amount you have spent (your expenses) during an accounting period.
- Revenue minus Expenses = Excess or Deficiency
The resulting amount is recognized as either an excess (revenue exceeds expenses) cash inflow or a deficit (expenses exceed revenue) cash outflow. The resulting change either increases (excess) or decreases (deficit) your net asset balance. The Statement of Activities gives you a sense for how well the nonprofit is operating.
- Must be broken down by Fund – According to proper nonprofit reporting standards, the Statement of Activities must separate your revenue and expenses by Net Asset Class:
- Net Assets Without Donor Restrictions
- Net Assets With Donor Restrictions
- Must be broken down by functional area within each Fund: Management & General, Programs, Fundraising
Technically, there is no such thing as a Temporarily Restricted Expense; therefore there is a line item called: Revenue Released from Restrictions.
- Excess or deficiency increases or decreases the Net Asset balance
Usually restrictions on revenue are based on timing — you must spend the money for the designated purpose before you can recognize the revenue that is designated.
2. Statement of Activities and Changes to Net Assets
The primary purpose of the Statement of Activities and Changes in Net Assets is to provide relevant information about the sources of and uses of income and the effect of those transactions on specific net asset classes.
Revenue is grouped by Net Asset Class (Net Assets Without Donor Restrictions and Net Assets With Donor Restrictions) and is listed by the type of revenue received — grants, program revenue, donations, earned revenue.
This statement helps donors, creditors, and others to evaluate the organization’s performance during a period, assess an organization’s service efforts and its ability to continue to provide services. It also assesses how an organization’s managers have discharged their stewardship responsibilities and other aspects of their performance.
This statement focuses on the organization as a whole and reports the amount of the change in net assets for the period.
- Lists revenue by line item. Similar to Statement of Activities
- Revenue is summarized by Functional Area or Program
- Includes the Changes in Net Assets by Fund
- Provides relevant information to evaluate the performance of an organization and the ability to continue in these efforts
3. Statement of Financial Position – Balance Sheet
- Summarizes all assets and liabilities
- Net Assets listed by net asset class
Reflects the overall financial position of your organization at a fixed point in time. It totals all your assets and subtracts all your liabilities to compute your overall net worth (or net loss). This statement is referenced when applying for funding.
Assets are your cash accounts, receivables, prepaid expenses, security deposits, fixed assets and other long-term assets, such as mortgages or notes receivable.
Liabilities are your accounts payable, accrued expenses, payroll tax liabilities and loans payable.
Net Assets are your organization’s net worth at a specific period of time. The calculation of net assets is your Assets minus your Liabilities.
Similar to the Statement of Activities, your Net Asset Balance must be broken down by Net Asset class.
4. Statement of Cash Flow
As a nonprofit, your biggest challenge is likely to be managing your cash flow. The overall purpose of managing your cash flow is to make sure that you have enough cash to pay current bills. The Cash Flow Statement includes total cash received minus total cash spent. The accounting method you choose, cash versus accrual accounting for nonprofits, determines when cash and expenses are recognized.
Reports the change in its cash and cash equivalents in three sections:
- Net cash from operating activities
- Net cash from investing activities
- Net cash from financing activities
Nonprofit Financial Statements Best Practices
Once you have become proficient at producing the basic financial statements each month, it is critical that the statements are reviewed and used in planning and decision making. The Board, Treasurer and the Executive Director have a fiduciary responsibility for the integrity of the organization.
The benefit of preparing and understanding nonprofit financial statements is to help your organization to stay on budget, measure outcomes, plan for the future, address and correct inefficiencies and maintain sustainabilty. It is your responsibility to understand the preparation, production and analysis of the financial statements of your organization.
Nonprofit leadership needs to take an active role in their organization’s financial health, to benefit all areas of the organization, including programs, administration and fundraising.
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