How to Understand a Non-profit Financial Statement

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Financial statements can provide key information about a non-profit's health and core values.
Financial statements can provide key information about a non-profit's health and core values. (Image: Medioimages/Photodisc/Photodisc/Getty Images)

Just like their for-profit counterparts, non-profit organizations maintain financial statements that they regularly distribute to board members as a way to assess the organizations' financial health. Audited statements are often required as part of a grant application. While financial reports are not as widely accessible as the annual tax forms non-profits are required by federal law to disclose to the public, called 990 forms, about 13 percent of non-profits posted their audited financial statements on their websites in 2008, according to Guidestar.org. Financial statements can be a valuable resource to anyone who wants to research a non-profit before donating money.

Compare assets and liabilities on the statement of financial condition. This form is also submitted to the IRS as Part IV of the 990 form and is required to be made available to the general public. Assets and liabilities are reported based on a basic accounting equation: Assets = Liabilities + Net Assets. This formula basically shows that the things of value that the organization holds are equal to its debt plus the assets funded by its own resources. The equation is the same as the one reported on a for-profit financial statement, except for-profit companies use the terms "equity" or "net worth" instead of "net assets."

Look at how net assets changed from one date to another on the statement of activity. This statement, available to the public as Part I of Form 990, will show how net assets increased or decreased every time revenues or expenses were reported based on the following calculation: Revenues - Expenses = Change in Assets. This formula, however, is not as important an indicator of the organization's success as it is for for-profit financial statements, where revenue less expenses, recorded as net profit or net income, indicate the firm's success. Non-profits, which focus on fulfilling their mission rather than making money, carry that balance forward as a surplus or deficit.

Analyze how the organization spends its resources on the statement of functional expenses, which is available to the public as Part II of Form 990. This equation is expressed as Total Expenses = Program Expenses + Fundraising Expenses + Administration Expenses. This formula shows how expenses are distributed and is one of the best reflections of the organization's values, mission, success and accounting practices in the report. Unfortunately, not every non-profit financial statement will include this item.

Examine cash inflows and outflows on the statement of cash flows. This statement shows the following formula: Change in Cash = Cash from Operations + Cash from Investing + Cash from Financing. While this part of the financial statement is not included anywhere on a 990 form, it can provide an important glimpse into how cash moves through the organization.

Read the footnotes. Footnotes are often overlooked as a routine part of the report, but they contain valuable information, including descriptions of the accounting principles used to draft the report, decisions regarding allocation of joint costs and a depiction of the agency's mission and key programs.

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