Statement of Functional Expenses
The statement of functional expenses is described as a matrix since it reports expenses by their function (programs, management and general, fundraising) and by the nature or type of expense (salaries, rent). For instructional purposes we highlighted the column headings to indicate the expenses by function. We also highlighted the words in the first column as they indicate the nature or type of expenses.
The FASB now requires every nonprofit to present expenses by function and nature in one place (statement or notes).
Statement of Cash Flows
The statement of cash flows for a nonprofit organization is similar to that of a for-profit business. It reports the organization's change in its cash and cash equivalents during the accounting period.
The statement of cash flows consists of three sections:
- net cash from operating activities
- net cash from investing activities
- net cash from financing activities
The operating section reports the changes in cash other than those reported in the investing and financing sections.
The investing section of the statement of cash flows reports the amounts spent to purchase long-term assets such as equipment, vehicles and long-term investments. The investing section also reports the amount received from the sale of long-term assets.
The financing section of the statement of cash flows reports the amounts received from borrowings and also any repayments.
While the statement of cash flows, or cash flow statement, may be a bit difficult to prepare, it is an important financial statement to be read.
You can learn more about this financial statement by reading our Explanation of the Cash Flow Statement.
Notes to the Financial Statements
The notes to the financial statements are an integral part of the statement of financial position, the statement of activities, and the statement of cash flows. The Accounting Standards Update No. 2016-14 requires important additional disclosures regarding liquidity, restrictions, etc. for creditors, donors, and others.
Additional Reporting by Nonprofits
The U.S. Internal Revenue Service (IRS) requires some tax-exempt nonprofit organizations to file Form 990 (some can file Form 990-EZ) each year. (However, churches and some other nonprofit organizations are not required to file.) The title of Form 990 is Return of Organization Exempt From Income Tax.
Since the Form 990 filed by the nonprofit becomes public information, you can learn much about a nonprofit by reading the information it provided on its Form 990. The website guidestar.org is a resource one can use to obtain financial (and other) information reported on nonprofits' Form 990.
Budgeting for Nonprofits
Budgeting for nonprofits can become complex when it involves several overlapping categories, such as grants, programs, function, and nature.
Budgeting is also complicated when sources of support are not secured at the time the budget is prepared for the upcoming year. This could lead to the use of an account entitled Resource Development in order to balance the budget.
Since resource development is often ongoing, budgets may require frequent modification. Good accounting software will also allow directors to compare budgeted amounts to actual amounts and make the necessary adjustments.
Sources for More Information on Nonprofit Accounting
Because we consider the material covered here to be only an introduction to the topic of nonprofit accounting, many complexities on the topic have been omitted. You should always consult with an accounting professional for assistance with your own specific circumstances.
In addition to books and other information on nonprofit organizations that can be found online, you may find the following sites helpful:
The U.S. generally accepted accounting principles (US GAAP) are established by the Financial Accounting Standards Board or FASB. Its website FASB.org contains its original and revised statements of accounting standards as well as a recent codification of accounting standards.
In June 1993 the FASB issued Statement of Financial Accounting Standards No. 116, Accounting for Contributions Received and Contributions Made.
In June 1993 the FASB also issued Statement of Financial Accounting Standards No. 117, Financial Statements of Not-for-Profit Organizations.
In August 2016 the FASB issued Accounting Standards Update No. 2016-14 to Topic 958 Not-for-Profit Entities.
The American Institute of Certified Public Accountants or AICPA offers for sale an Audit & Accounting Guide entitled Not-for-Profit Entities. It also offers continuing professional education materials such as Not-for-Profit Accounting and Reporting: From Start to Finish. You can learn more about these and other publications at the website cpa2biz.com.
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You should consider our materials to be an introduction to selected accounting and bookkeeping topics, and realize that some complexities (including differences between financial statement reporting and income tax reporting) are not presented. Therefore, always consult with accounting and tax professionals for assistance with your specific circumstances.