What Are the Financial Statements for a Nonprofit?

Financial statements provide transparency and accountability for nonprofit organizations. These documents offer an overview of an organization’s financial health and performance. For donors, grantors, and the general public, they demonstrate how resources are managed and utilized to achieve the nonprofit’s mission. They also enable internal management to make informed decisions regarding resource allocation and operational efficiency.

Primary Financial Statements

Nonprofit organizations prepare financial statements that share a common structure with for-profit entities, though with distinct terminology and presentation nuances. These primary statements include the Statement of Financial Position, the Statement of Activities, and the Statement of Cash Flows.

Statement of Financial Position

The Statement of Financial Position, similar to a for-profit balance sheet, presents a snapshot of an organization’s assets, liabilities, and net assets at a specific point in time. Assets include cash, investments, and property, while liabilities encompass accounts payable and deferred revenue. A key distinction for nonprofits is the “net assets” section, which replaces owner’s equity and is categorized by the presence or absence of donor restrictions.

Statement of Activities

The Statement of Activities, equivalent to a for-profit income statement, reports an organization’s revenues, expenses, gains, and losses over a period, usually a fiscal year. Revenues for nonprofits come from contributions, program service fees, and government grants. Expenses are categorized by function, such as program services and supporting activities, to illustrate how funds are expended. This statement highlights the change in net assets, indicating whether the organization’s financial position has strengthened or weakened.

Statement of Cash Flows

The Statement of Cash Flows details cash inflows and outflows from an organization’s operating, investing, and financing activities over a period. Operating activities include cash from contributions and program fees, and cash paid for salaries and supplies. Investing activities reflect the purchase or sale of long-term assets like equipment or investments. Financing activities for a nonprofit can involve borrowing funds or repaying debt, and receiving donor-restricted contributions for long-term purposes such as endowment funds.

Statement of Functional Expenses

The Statement of Functional Expenses is a unique financial statement required for most nonprofit organizations. It provides a detailed breakdown of expenses by both their functional and natural classification, showing how an organization allocates its resources across different activities.

Functional Classifications

Functional classifications categorize expenses based on their purpose, divided into program services, management and general, and fundraising. Program service expenses are directly related to the organization’s mission. Management and general expenses include costs associated with overall administration, such as executive salaries, accounting, and general office expenses. Fundraising expenses are those incurred to solicit contributions, including direct mail campaigns or special events.

Natural Classifications

Natural classifications categorize expenses by their economic nature, such as salaries and wages, occupancy costs, supplies, and professional fees. By presenting expenses in both ways, the statement allows stakeholders to see what was spent (natural classification) and why it was spent (functional classification). This dual perspective helps demonstrate the efficiency and effectiveness of the organization’s use of donor funds. For example, a donor can see the proportion of total expenses dedicated to delivering direct services versus administrative overhead or fundraising efforts.

Unique Reporting Elements

Nonprofit financial reporting incorporates several unique elements that differentiate it from for-profit accounting, reflecting the distinct nature of their operations and funding. A primary concept is net assets, which represents the residual value of assets after liabilities are satisfied. These net assets are classified into two main categories: without donor restrictions and with donor restrictions.

Net Assets

Net assets without donor restrictions are funds the organization can use for any purpose consistent with its mission, as determined by its governing board. Net assets with donor restrictions are subject to specific donor-imposed stipulations that limit their use, either temporarily or permanently. Temporary restrictions dictate that funds be used for a specific program or after a certain date, while permanent restrictions, often associated with endowments, require that the principal be maintained in perpetuity, with only the income available for spending.

Liquidity Presentation

Liquidity presentation is another important aspect, as nonprofits must demonstrate their ability to meet short-term obligations and cover operational needs. While not a separate statement, information about liquidity is conveyed through specific classifications on the Statement of Financial Position, such as current assets readily convertible to cash, and through disclosures in the notes to the financial statements. This provides insight into the availability of cash and other liquid resources to meet immediate demands.

Contribution Revenue Recognition

Contribution revenue recognition involves conditional and unconditional promises to give. An unconditional promise to give is recognized as revenue when the promise is made, even if cash has not yet been received, as long as no donor-imposed conditions remain unmet. Conversely, a conditional promise to give is not recognized as revenue until the conditions specified by the donor are substantially met. These rules underscore the importance of understanding donor commitments, which directly impacts the timing of revenue reported on the Statement of Activities.