Question

. Either using a previous selected NFP CAFR or another NFP CAFR you are interested in; identify what financial statements are required of that organization? How are they different or comparable to those provided by organizations that operate for profit? How does the retained earnings section of for-profit organizations differ from that of the net assets section of not-for-profits?

Answer 1

As the term suggests, for-profit companies are driven by the quest to maximize profits for their owners/shareholders. Nonprofits, on the other hand, are generally motivated by a charitable purpose. From a financial perspective, in contrast to for-profit companies, nonprofits are focused on maximizing mission related returns both now and in the future than net profit returns.Their respective financial statements reflect this difference. For-profits report mainly on profitability and increasing assets, which correlate with future dividends and return on investment to owners and shareholders.Nonprofits report on their financial position, stability and how their funds are used to funders, board members and the community.

Reporting assets and liabilities

For-profits and nonprofits use different financial statements for their reporting of assets and liabilities. For-profit companies prepare a balance sheet that lists the owner’s or shareholders’ equity, which is based on the company’s assets, liabilities and prior profits. The equity determines the value of a company’s common and preferred stock.Nonprofits, which have no owners, prepare a statement of financial position, which also looks at assets, liabilities and prior earnings. The resulting net assets are classified as: 1) unrestricted, 2) temporarily restricted and 3) permanently restricted, based on the presence of donor restrictions.

Reporting revenues and expenses

For-profits and nonprofits also take different reporting approaches to revenues and expenses. For-profits produce an income statement (also known as a profit and loss statement), listing their revenues, gains, expenses and losses to evaluate financial performance.Nonprofits often rely on grants and donations in addition to fees for service income. So they prepare a statement of activities, which lists all revenue less expenses, and classifies the impact on each net asset class.Many nonprofits currently produce a statement of functional expenses. But when the new accounting standard kicks in, organizations will be required to classify expenses by both nature(meaning categories such as salaries and wages, rent, employee benefits and utilities) and function (mainly program services and supporting activities). This information will need to be expressed in a grid format that shows the amount of each natural category spent on each function.

The term "net asset" is traditionally seen in nonprofit organizations' financial statements, rather than a for-profit's "retained earnings." Net assets can be classified as unrestricted, temporarily restricted and permanently restricted. There are no such classifications or concept in the for-profit sector.

Unrestricted net assets may be used for operations in any area. Temporarily restricted net assets are a holding place for revenues received that are for specific programs or to be used in the future. Permanently restricted net assets are used for endowments and assets to be held in perpetuity.