That’s because the accrual method that most businesses use to record income when it’s earned and expenses when they’re incurred. Often, this timing doesn’t align with when the cash arrives or leaves the account. An income statement serves as the starting point for the indirect method of calculating cash flow.
Exploring The Statement of Activities: A Beginner’s Guide
It offers a comprehensive overview of revenue and expenses over a specific timeframe. In this article, we will explore the ins and outs of nonprofit statements of activities, answering common questions and shedding light on their significance. Like all nonprofit financial statements, the central role of the Statement of Activities is to provide transparency and accountability to your donors and board. But it’s also an excellent tool for understanding just how healthy your business is. However, as you know a nonprofit is not like any other business, so it is no surprise that nonprofit financial reports are different. For nonprofit organizations, the financial report that meets the requirements for an income statement is called the Statement of Activities.
Understanding Net Assets in the Nonprofit Sector
A cash flow statement doesn’t include credit-based sales or other income or expenses that haven’t yet flowed into or out of the business. But businesses with uneven cash flow over multiple reporting periods often appear unstable. A statement showing positive cash flow indicates the business is bringing in more cash than it’s paying out. On a surface level, more cash flowing in than out reflects a financially healthy business.
Statement of Activities: Reading a Nonprofit Income Statement
Before we illustrate a sample statement of activities, let’s take a closer look at its components. Code for Science & Society depicts their financial expenses on this page of their report rather concisely and transparently. Online websites like Charity Navigator and GuideStar also use these reports to rate your organization.
Nonprofit Cash Flow Statement
Let’s dive in to learn more about the specifics of your nonprofit statement of activities. The results of each successive fiscal year’s financial activities accumulate on the SOFP, changing the net asset balances. Repeated annual deficits in the SOA will result in an accumulated deficit on the SOFP. Net assets with donor restrictions are usually never below zero, although special reporting may apply to an “underwater ” endowment balance (topic not covered here). Financial activities result in either a surplus (increase) or shortfall/deficit (decrease) in the organization’s net assets shown on the Statement of Financial Position (SOFP).
If you were to simply subtract the total expenses from total revenue without taking restrictions into account, you might have a false sense of security. Sharing these 3 sections with donors provides transparency and helps them understand where their donation goes. Websites like GuideStar also look at these reports when choosing which nonprofit to award their platinum and gold seals of approval.
Cash flow statement example
- The first thing you’ll want to look at when reading a nonprofit statement of activities is the net income.
- The purpose of the change in net assets is to articulate the net assets or equity of the statement of financial position.
- However, if you’re facing financial challenges, such as overspending, you may need to take a look at your expenses and see where you can cut back or look for other opportunities to get funding.
- Yes, nonprofit organizations must follow the Generally Accepted Accounting Principles (GAAP).
- If using the indirect method, GAAP looks at the income statement for net income and non-cash expenses like depreciation and amortization.
- The relationship of the SOA to the SOFP is shown in the illustration below.
An effective Statement of Activities goes beyond numbers to tell a compelling story of your nonprofit’s financial health and mission impact. Relying solely on spreadsheets and figures may not fully capture the organization’s achievements and challenges. It serves as a vital tool for both internal and external stakeholders to assess the financial performance and stewardship of the nonprofit.
Ensure that the statement of activities provides a clear overview of how the organization is using its revenue and expenses to support its mission. Classify the revenues and expenses into appropriate categories, such as unrestricted and restricted revenues, and major program, fundraising, and administrative expenses. A nonprofit statement of activities example will have a heading, body, and bottom line.
- Donors will often give product gifts to help with programs or events.
- Investing expenses are the purchases of long-term investments and any payments on long-term investments like buildings, land, equipment, etc.
- The restricted section in your report will educate all who view it that these funds cannot be used to pay rent or cover maintenance fees.
- The income statement counts income and expenses when they’re accrued.
- Net assets with donor restrictions are usually never below zero, although special reporting may apply to an “underwater ” endowment balance (topic not covered here).
- However, organizations should generate it internally more often, such as monthly or quarterly, to monitor financial performance more closely.
Understanding a Nonprofit Statement of Activities
Investing revenue is the amount of interest you can make from investments. Investing expenses are the purchases of long-term investments and any payments on statement of activities example long-term investments like buildings, land, equipment, etc. Here’s an example from Code for Science & Society’s Statement of Financial Position from 2021.