Government agencies, including the Internal Revenue Service, attempt to set rules to monitor the way nonprofit organizations record and report their operating data. Even though charities and other nonprofits, such as universities, don't operate with a profit motive, philanthropic institutions cannot withhold performance data or hide the truth about its finances.
Statement of Financial Position
A statement of financial position reflects the solvency of a nonprofit, telling readers how top management is administering the organization's resources. The report indicates assets, liabilities and net assets, which equal assets minus liabilities. Assets include everything the charity owns, from cash and inventories to land, buildings and equipment. Liabilities refer to its debts, which range from accounts payable to salaries due and mortgages payable. When presenting a nonprofit's net assets, accountants must distinguish unrestricted net assets from temporarily restricted net assets and permanently restricted net assets. The nonprofit can use unrestricted net assets as it wishes. For net assets that donors have temporarily or permanently restricted, the institution must meet the donor imposed conditions before using the funds.
Statement of Activities
A statement of activities presents how much money a nonprofit recieved from contributions and other sources over a given period. This may cover a month, quarter or fiscal year. The report indicates such income sources as contributions, fundraising inflows, legacies and bequests, donated services, gifts and interest revenues. Expenses range from fundraising charges to general and administrative costs, which include rent, insurance and office supplies. At the bottom of a statement of activities, accountants indicate the increase or decrease in net assets, depending on whether revenues exceed expenses.
Statement of Cash Flows
The statement of cash flows of a philanthropic institution tells readers how the organization spends its money and whether management is effectively administering donor funds. The statement displays three specific sections: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. This trifecta also tells donors and the public how much money the institution started a period with, how much it spent for investments and operating activities, and how much cash it has left at the end of the period.
Business Financial Reporting
There are similarities and differences between nonprofit financial statements and the accounting reports that businesses prepare. A business prepares four, not three, financial statements. The report missing from the nonprofit reporting catalog is the statement of shareholders' equity, also known as a statement of owners' capital. This makes sense since a nonprofit cannot, by definition, have shareholders with a profit motive. There are similarities among both types of accounting reports. A statement of financial position is also known as a balance sheet. In the business arena, a statement of activities is referred to as an income statement. The statement of cash flow doesn't change its title in both accounting schemes.
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