Chapter 5
Types of Financial Statements

There are two major types of financial statements. The most common type is an internal financial statement. It is created by the organization's accounting staff and is intended for the use of management, volunteer leaders, and boards of directors. Internal financial statements are usually produced each month. These internal statements are not always prepared with all the information required by accounting principles generally accepted in the United States of America (U.S. GAAP), as internal financial statements serve a different purpose from external financial statements.

The other type of financial statements are audited financial statements. These financial statements are also prepared by the nonprofit's financial staff, almost always as of the end of an organization's fiscal year. Once the document is prepared, however, it is handed over to the organization's independent external auditors, who must carefully examine it to make sure that it is reasonably accurate and complies with an exhaustive set of accounting rules governing what a nonprofit reports and how it must be reported.

Both types of financial statements are discussed later in the materials. The text, however, focuses largely on audited financial statements prepared in conformity with U.S. GAAP that, by definition, must reflect current industry accounting standards. The external audited financial statements must include the following three basic financial statements:

  1. The Statement of Financial Position (or Balance Sheet) shows what the assets (things of value) and liabilities (debts) of the nonprofit were at a given point in time.
  2. The Statement of Activities (or Income Statement) shows what comprised the revenue and expenses of the operations for a given period of time (usually one year) and whether there was an increase or decrease in the net assets of the organization.
  3. The Statement of Cash Flows demonstrates where the organization's cash came from and how the cash was used.

Once an organization adopts ASU 2016-14, it may also have a Statement of Functional Expenses (although the title may vary) that presents an analysis of expenses by nature and function. Under ASU 2016-14, the presentation of this analysis of expenses is required. The audit committee (or those charged with governance), however, will have the option of presenting this detail as a separate basic financial statement, in the statement of activities, or in the footnotes to the financial statements.

The audited financial statements may also include the following financial statements, but they are not required.

  1. The Statement of Changes in Net Assets is used by nonprofits to provide information on the changes in each class of net assets. It generally shows the opening balance of net assets, adds or subtracts the net change in net assets for the year (the change in net assets is calculated by adding the revenue and gains and subtracting the expenses and losses), and then shows the ending balance of net assets.
  2. The Statement of Functional Expenses shows a detailed breakdown of expenses by expense type (for example, salaries, rent, and so forth) and by program and supporting services. This statement is currently required only for voluntary health and welfare organizations.

However, as already noted, upon adoption of the provisions of ASU 2016-14, all nonprofit organizations will be required to show an analysis of expenses by natural and functional classifications. Entities will have the option under ASU 2016-14 to show this analysis in the statement of activities, in the footnotes, or as a separate basic financial statement (i.e., statement of functional expenses). This presentation cannot be included as supplemental information to the financial statements to meet the requirement under ASU 2016-14.