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Nonprofit organizations play an important role in society by providing essential services and addressing social issues, and their financial stability is crucial to their success. To this end, nonprofits must prepare financial statements to provide transparency about their financial health; understanding nonprofit financial statements is essential to effectively managing their finances. 

What Types of Financial Statements Does a Nonprofit Organization Need?

Nonprofits typically require three financial statements – the statement of financial position, the statement of activities, and the statement of cash flows:

  • The statement of financial position or balance sheet provides information about the organization’s assets, liabilities, and net assets. Notably, the balance sheet shows the organization’s financial position at a specific point in time
  • The statement of activities or income statement provides information about the organization’s revenue, expenses, gains, and losses over a specific period of time. 
  • The statement of cash flows provides information about the organization’s cash inflows and outflows during a specific period of time.

In short, these financial statements provide stakeholders – donors, board members, and regulators – with an understanding of the organization’s financial performance and ability to achieve its mission. 

How Does a Nonprofit Use Financial Statements?

Nonprofit organizations use financial statements to make informed decisions about their finances. For example, the balance sheet can help an organization determine if it has enough cash on hand to cover its expenses. The income statement can help a nonprofit determine if it generates enough revenue to cover its costs. The cash flow statement can help an organization identify and address cash-flow problems.

Nonprofit organizations also use financial statements to communicate with stakeholders. Donors need to know that the organization uses their donations effectively and efficiently. Board members want to ensure that the organization is financially stable and has a plan for long-term sustainability. Regulators review financial statements to determine whether the organization complies with laws and regulations.

How Can a CPA Help?

A CPA or accountant can help nonprofit organizations with their financial statements in several ways. First, they can assist with bookkeeping and accounting tasks, such as recording financial transactions, reconciling accounts, and preparing financial statements. This can be particularly helpful for organizations without an in-house accountant.

A CPA can also advise on financial reporting requirements and best practices. Nonprofit organizations must comply with various reporting requirements, such as: 

  • Generally Accepted Accounting Principles (GAAP)
  • Financial Accounting Standards Board (FASB)
  • Internal Revenue Service (IRS)

A professional accountant can help a nonprofit prepare financial statements according to these requirements and provide guidance on improving financial reporting practices. Finally, a CPA can provide financial analysis to help nonprofit organizations identify trends, strengths, and weaknesses and develop strategies to improve performance and sustainability.

The Takeaway

Understanding financial statements is critical to managing the finances of nonprofit organizations effectively. By working with an experienced CPA, nonprofits can stay on top of bookkeeping and accounting tasks, make informed decisions about their finances, provide assurance to stakeholders, and achieve their mission.