Understanding Audited Financial Statements and Form 990

By now you’ve probably heard how important it is for nonprofit leaders to understand basic accounting concepts, regardless of the nature of their work. But that knowledge should cover more than balancing the organization’s checkbook. You should also be familiar with the paperwork that comes with the territory. This includes your financial statements and your IRS Form 990.

Corinne LaRoche and Tiffany Edwards break down the components of these important documents and what they mean for your nonprofit. Both are key members of James Moore’s Nonprofit Services team.

Decoding audited financials

Many nonprofit boards and management teams struggle with utilizing audited financial statements. “I present audited financials and 990s to nonprofit boards and management teams,” said Corinne. “And I find that a lot of them don’t really understand what they should be looking for.”

Having this knowledge is crucial when monitoring the fiscal health of your nonprofit. Financial statements might seem like documents done in a foreign language. But when you break down the components and look at what they convey, the task becomes easier.

Let’s take a walk through each particular statement, what to look for and what this information means.

Statement of Financial Position: This is the equivalent of a balance sheet in a for-profit business. It shows assets and liabilities, as well as net assets. Pay close attention to these components:

  • Liquidity: Do you have enough assets such as cash, accounts receivable and liquid investments to cover your short-term liabilities? These can include accounts payable, debts, mortgages and so forth. Make sure you’re not cash poor, so that you’re able to continue to run your organization.
  • Net assets: Differentiate unrestricted net assets from those that are earmarked for specific purposes. “I think that’s the biggest misunderstanding I see when it comes to reading financial statements – really understanding what the composition of your net assets is and what you can actually do with that,” Corinne said. “You want to look at how much is outside of restrictions and not tied up in property, equipment and/or other non-liquid assets.”

Statement of Activities: This is the equivalent of an income statement in a for-profit business. It shows all of your revenues and supports, as well as expenses and outflows. Check whether your expenses are tracking with your expectations and, if not, why. At the end of the year, examine whether you increased or decreased your net assets for the year and whether you have an overall net income or loss.

Statement of Functional Expenses: This statement, unique to the nonprofit setting, breaks out your expenses by the type. It can also show whether you are spending enough on programs — an important percentage to monitor for your 990.

Statement of Cash Flows: This indicates where your cash came from throughout the year, how you spent it and whether your cash increased or decreased. Nonprofits have many non-cash expenses and revenues, such as unrealized gains on securities and depreciation expenses. This statement can highlight inefficiencies in your financial process.

Notes to the Financial Statements: Notes can provide helpful context for information on financial statements.

Nonprofits with more than $750,000 in federal or state funding are required to have a single audit. In this case, there are additional schedules at the back of your audited financial statement packet:

  • Schedule of Expenditures of Federal Awards/State Financial Assistance: This details all of your funding by source. It lists your programs with their CFDA or CSFA numbers and shows how much funding you spent under each, as well as how much (if any) was passed through program subrecipients.
  • Schedule of Findings and Questioned Costs: This indicates whether an auditor uncovered any compliance findings or internal control findings during the audit of your programs. If so, respond with how you’re going to remediate those findings.

IRS Form 990: What to keep in mind

Some nonprofits might choose to disclose their financial statements. Your IRS Form 990, however, is always available to the public. That’s why it is important to thoroughly review this document for accuracy and awareness of the portrait it presents of your organization.

“You really want to make sure that your house is in order and that what people are seeing accurately represents your financial position,” Corinne said.

Form 990 includes these components:

  • Type of organization: Most nonprofits are 501(c)(3) organizations, but some are (c)(4), (c)(5) or (c)(6). The type of organization you are determines how you operate.
  • Mission and major programs: You can choose how much detail to present in this section. Using this space to tell the story of your organization allows you to use Form 990 as a fundraising tool. Many nonprofits, for example, share key statistics about their top three programs.
  • Statement of Functional Expenses: This shows your program expenses, administrative expenses and fundraising expenses. Many grantors will check the percentage of your expenses that actually go toward programs. “It’s important to make sure that you’re putting thought into how your expenses are being allocated and grouped, and not just lumping them haphazardly,” Corinne said. “That can have consequences when it comes to how your organization is going to be funded.”
  • Board and governance required disclosures: On page 7, the IRS requires you to disclose the compensation of high-level individuals in your organization or related organizations for transparency.
  • Schedule B: This lists your substantial contributors. The copy available to the public redacts the names and addresses of key donors but leaves the amounts.

Remember that you sign the Form 990 under penalty of perjury, so ensuring accuracy is paramount. Also make sure you don’t wait until the last minute to complete your 990.

“990s can be (put off for) so long that a lot of times they just fall off the radar—and then you’re down to the wire trying to get it completed,” Tiffany said. “When your audit is done, go ahead and get your CPA the information, so they can get the 990 prepared, and it’s not a last-minute rush to finish things up.”

Granted, you can leave the deep dive financial expertise to your CPA. Just make sure to have basic knowledge of your financial statements and Form 990. It’s a big key to securing the future for your nonprofit—and those it serves.

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