A Financial Statements Series
Accounting systems capture accounting transactions. Financial statements are constructed from these transactions and depict the economic activity and financial position of the organization. Knowing how to read financial statements may help you determine the health of a non-profit. Is it well-funded? Is it properly managed? How is the organization spending its resources? How have the assets or liabilities changed over time? Several key statements provide clues to these answers.
In a for-profit organization, net income can be a measure of success. Non-profit organizations use any surplus revenue to achieve its goals rather than distribute the surplus as profit. Changes in net assets are referred to as surplus or deficit and are carried forward. Thus FASB (that’s the Financial Accounting Standards Board) requires a different set of statements for non-profits.
This is the first in a series of articles where I’ll unravel the mysteries of those reports in easy-to- understand terms.
To begin, let’s look at some of the most popular reports produced. Then, in subsequent articles, we will look at the most common ones in a little more detail.
FASB Statement 117 requires that a complete set of financial statements for a nonprofit organization include:
- A Statement of Financial Position
- A Statement of Activities
- A Statement of Functional Expenses for Voluntary and Welfare Organizations and encourages it for other not-for-profit organizations
- A Statement of Cash Flows
- Financial Statement Disclosures
A Statement of Financial Position is similar to a balance sheet in that it shows the ending balance of the assets, liabilities and net assets (also called net equity) at a specific point in time. Further, net assets must be classified based on the donor-imposed restrictions of permanently restricted, temporarily restricted, or unrestricted.
A Statement of Activities is similar to an Income Statement, also known as a Statement of Revenue and Expenses, in that it reports the changes in net assets over a period of time. The change in net assets is also reported based on the restriction categories of permanently, temporarily, or unrestricted.
A Statement of Functional Expenses is the Statement of Activities with expenses reported by functional classification such as programs and services, management and general expenses rather than the natural classification of salaries, office and supplies expenses, and maintenance, to mention a few examples.
A Statement of Cash Flows summaries the inflow and outflow of cash by an organization over a defined period of time. Because many organizations use accrual accounting, the recognition of revenue and expenses is often different from the actual timing of cash receipts and disbursements. The cash flow statement is intended to address the actual flow of cash and validate the ending cash account balance reported.
And finally, A Statement of Financial Disclosure simply stated is a list of explanations and comments that explain certain aspects of an organization’s procedures. FASB Statement 116 as well as FASB Statement 117 require specific disclosures for nonprofit organizations.
There. I’ve now defined the basic statements. A good fund accounting software program should provide these statements both “out of the box” and with customizable features. Sage 100 Fund Accounting provides standard statements that can be run without any changes as well as the ability to customize each report for the needs of specific organizations.
Stay tuned for more details on the most frequently used financial reports.
Update: Follow the links below to view the next articles in this series.