Financial Statements: List of Types and How to Read Them

Understanding a nonprofit’s financial health helps leaders assess their current budget and plan for future investments in order to grow the organization. It also gives them insight into how their decisions may affect the organization’s long-term success and sustainability. By examining past performance and comparing it with industry standards, they can make better decisions regarding spending patterns and strategic initiatives. Reading and understanding nonprofit financial statements is essential for making sound decisions about your organization’s future. First, financial statements can be compared to prior periods to better understand changes over time.

Audited financial statements are similar to a family photo album since they detail a snapshot of the nonprofit organization’s history. A closer examination of the details—and the story they combine to tell—may help you better manage your organization. The following table compares the main financial statements of a nonprofit organization with those of a for-profit corporation. Using the information in a cash flow statement, users are able to see whether a business is generating sufficient cash to meet both its debt obligations and its operating expenses. Also known as a statement of financial position, or a statement of net worth, the balance sheet is one of the four important financial statements every business needs.

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Your financial statements also play a crucial role in maintaining your nonprofit status and passing an independent audit (which you may need to keep your funding). Donors want to see their donations used effectively and they appreciate stories that highlight the impact of their contributions. They also want to be thanked for their support, featured in annual reports, and have the opportunity to share why they support a given organization. Furthermore, donors want to know how their money is being used and what impact it has had on the organization’s achievements. Nonprofits should showcase the accomplishments of both small and major donors in order to demonstrate appreciation for all levels of support. This document shows changes in equity—including the sale or repurchase of shares, dividend payments, and changes caused by reported profits or losses—during a given reporting period.

• These rules require a nonprofit organization to be recognized as tax exempt under the Internal Revenue Code, and they provide guidelines on how a nonprofit should conduct its operations.
• The number of accounts in a nonprofit’s general ledger could range from 30 to 1,000 or more.
• Accrual basis accounting means that you record revenues and expenses when they are incurred or earned.
• Additionally, it can be used to identify any unusual increases or decreases in expenses and determine whether they are reasonable.
• The Statement of Activities summarizes the money you’ve received (revenues) and the money you’ve spent (expenses) during a given period.

But in your audited nonprofit financials, it will be called a Statement of Financial Position. This is the income earned from other activities, such as gains from the sale of long-term assets including vehicles, land, or a subsidiary. A similar model can be used https://kelleysbookkeeping.com/how-to-correct-and-avoid-transposition-errors/ to prepare a cash-flow projection, which is particularly helpful for nonprofits with cyclical cash needs. If it shows you have excess cash in September, for example, but will need to use it in February, invest it in such a way that it can be available later.

Step 2: Analyze the Statement of Activities (Income Statement)

This variance policy allows you to assess operations in a timely way while evaluating the performance of individual programs and departments. Like the balance sheet, the information contained in an income statement is used in financial statement analysis to calculate financial ratios that provide users with further insight into a business’s financial performance. The cash flow statement reconciles the income statement with the balance sheet in three major business activities.

Current assets are the most liquid, meaning they can easily be converted to cash in a relatively short period. Fixed assets are non-current since the assets are expected to be available for a term longer than 12 months form the Understanding The 4 Essential Nonprofit Financial Statements measurement date (year-end). Similar to assets, liabilities are also classified as current or long-term based on the closeness to maturity. Net assets (equity) is the total amount of residual assets remaining in the nonprofit.