Management, donors, lenders and regulators all rely on not-for-profit entities’ financial statements to tell the organizations’ stories. While many individuals come face-to-face with financial information daily, much of it, when presented in financial statement format, is not intuitive or self-explanatory.
This article is the second in a series intended to help non-profit stakeholders better understand financial statements in order to make intelligent use of the information. The first article, Financial Statement Basics, reviewed the three primary financial statements: the Statement of Financial Position, the Statement of Activities and the Statement of Cash Flows.
Next, we will look more closely at this “accounting trinity,” examining the relationships between statements and the process of capturing financial data and producing statements.
The Accounting Trinity
The three primary financial statements constitute the organization’s center of gravity. They are a three-ring circus. The Statement of Activity draws the most attention, but you need to watch in all three places!
How do the statements interact? The Statement of Financial Position is the sum total of all Statements of Activities over the life of the organization. The Statement of Activities and the Statement of Cash Flows report very similar information. The Statement of Activities reflects current-period activity on an accrual basis (income recorded when earned and expenses recorded when committed). The Statement of Cash Flows reflects how cash was created or used during the current period. The Statements of Activities and Cash Flows are formatted very differently, however.
Items to look for and consider on every financial statement include:
- Is there enough cash?
- Are receivables/payables growing?
- What’s the bottom line?
- What are administrative expenses?
- What are functional expenses?
- Which numbers are estimated?
Read the rest of the article, which covers Internal Controls and Governance here.