Primary U.S. Financial Statements of Interest to Grantmakers

There are four primary financial statements used in grantmaking: audited financial statements, statements of financial position, statements of activities, and statements of cash flow.

I. Audited Financial Statements

Audits are conducted in accordance with generally accepted auditing standards (GAAS). Those standards require that the audit is planned and performed to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. An audit must provide a reasonable basis for the opinion rendered. The two most common opinions are the unqualified and the qualified opinion.

Unqualified opinion:

“In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of _____________as of June 30, 2013, and the changes in its net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.”

Qualified opinion:

States that “Except for the effects of the matter to which the qualification relates, the financial statements referred to above present fairly, in all material respects, the financial position of _____________as of June 30, 2013, and the changes in its net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.”

A qualified opinion is rendered when there is a lack of sufficient competent evidential matter or restrictions on the scope of the auditor’s examination due to one of the following:

1. The financial statements contain a departure from generally accepted accounting principles (GAAP), the effect of which is material.
2. There has been a material change between periods in accounting principles or in the method of their application.
3. There are significant uncertainties affecting the financial statements.

A review is a second level of attestation. It consists primarily of inquiries of the organization’s personnel and analytical procedures applied to the financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion on the financial statements taken as a whole. Accordingly, such an opinion is not rendered.

II. Statement of Financial Position

The primary purpose of the statement of financial position is to help donors, members, creditors, and others to identify the organization’s financial strengths and weaknesses, evaluate its performance during the period, and assess its ability to continue to render services. This statement focuses on the organization as a whole and reports the amounts of its total assets, liabilities, and net assets.

A statement of financial position provided by a nonprofit organization reports the amounts of each of three classes of net assets—permanently restricted net assets, temporarily restricted net assets, and unrestricted net assets—based on the existence or absence of donor-imposed restrictions. Information about the nature and amounts of different types of permanent or temporary restrictions shall be provided either by reporting their amounts on the face of the statement or by including relevant details in notes to the financial statements. Similarly, separate line items may be reported within temporarily restricted net assets or in notes to the financial statements to distinguish between temporary restrictions.

An organization reports gifts of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires—that is, when the stipulated time restriction ends or purpose restriction is accomplished—temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Donor-restricted contributions whose restrictions are met in the same reporting period may be reported as unrestricted support provided that an organization reports consistently from period to period and discloses its accounting policy. Contributions without donor-imposed restrictions are reported as unrestricted support that increases unrestricted net assets.

III. Statement of Activities (and Changes in Net Assets)

The primary purpose of the statement of activities is to provide relevant information about: (1) the effects of transactions and other events and circumstances that change the amount and nature of net assets, (2) the relationships of those transactions and other events and circumstances to each other, and (3) how the organization’s resources are used in providing various programs or services. This statement helps donors, creditors, and others to (1) evaluate the organization’s performance during a period, (2) assess an organization’s service efforts and its ability to continue to provide services, and (3) assess how an organization’s managers have discharged their stewardship responsibilities and other aspects of their performance. This statement focuses on the organization as a whole and reports the amount of the change in net assets for the period.

To help donors, creditors, and others in assessing an organization’s service efforts, including the costs of its services and how it uses resources, a statement of activities or notes to the financial statements provide information about expenses reported by their functional classification, such as major classes of program services and supporting activities. Nonprofit organizations (other than voluntary health and welfare organizations for which it is required) are encouraged, but not required, to provide information about expenses by their natural classification (for example, salaries, consultants, rent, electricity, interest expense) in a matrix format in a separate financial statement (the statement of functional expenses).

Program services are the activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the organization exists. Those services are the major purpose for and the major output of the organization and often relate to several major programs.

Supporting activities are all activities of a nonprofit organization other than program services. Generally, they include management and general, fundraising, and membership-development activities. Management and general activities include oversight, business management, general record keeping, budgeting, financing, and related administrative activities. They also include all management and administration except for direct conduct of program services or fundraising activities. Fundraising activities include publicizing and conducting fundraising campaigns; maintaining donor mailing lists; conducting special fundraising events; preparing and distributing fundraising manuals, instructions, and other materials; and conducting other activities involved with soliciting contributions from individuals, foundations, government agencies, and others. Membership-development activities include soliciting prospective members and membership dues, membership relations, and similar activities.

IV. Statement of Cash Flows

The primary purpose of the statement of cash flows is to provide relevant information about the cash receipts and cash payments of an organization during a period.