In this video, we walk through 4 FAR practice questions teaching about the purpose and objectives of the statement of activities. These questions are from FAR content area 1 on the AICPA CPA exam blueprints: Financial Reporting.
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
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The Purpose and Objectives of the Statement of Activities
The statement of activities is a financial statement for nongovernmental, not-for-profit entities. It serves as a comprehensive report of how the organization’s net assets have changed over a specific reporting period. This statement is similar to the income statement used by for-profit businesses but is tailored to meet the unique needs of not-for-profit entities. Understanding the purpose and objectives of the statement of activities is essential for stakeholders, including donors, board members, and management, to assess the organization’s financial health and its ability to fulfill its mission.
Purpose of the Statement of Activities
The primary purpose of the statement of activities is to provide a detailed account of the changes in an organization’s net assets during a reporting period. It achieves this by systematically categorizing and reporting all revenues, gains, expenses, and losses. The statement is designed to distinguish between two key types of net assets: those without donor restrictions and those with donor restrictions. This distinction is critical because it ensures transparency and accountability in how the organization manages its financial resources according to donor intentions.
By clearly presenting the financial activities that affect net assets, the statement of activities helps stakeholders understand the organization’s financial performance. It shows how effectively the organization is utilizing its resources to support its mission and meet donor expectations. Additionally, it offers insights into the overall financial health of the organization for making informed decisions about future donations, grants, and investments.
How the Statement of Activities Accomplishes Its Purpose
The statement of activities includes several key components that help it accomplish its purpose:
- Revenues and Gains: This section details all incoming resources, such as contributions, grants, and program service fees. Revenues are categorized based on whether they are restricted or unrestricted according to donor-imposed restrictions. Gains, such as those from asset sales, are also included in this section.
- Expenses and Losses: Expenses are categorized by functional areas, such as program services, management and general, and fundraising. This functional classification helps stakeholders see how resources are allocated toward different activities within the organization. Losses, such as those from asset disposals or investments, are also reported here.
- Changes in Net Assets: After listing revenues, gains, expenses, and losses, the statement calculates the change in net assets for the period. This is presented separately for net assets without donor restrictions and net assets with donor restrictions, showing the impact of financial activities on the organization’s overall financial position.
- Reclassification of Net Assets: If donor restrictions are met during the reporting period (e.g., funds are spent according to donor specifications), these assets are reclassified from the “with donor restrictions” category to the “without donor restrictions” category.
Objectives of the Statement of Activities
The statement of activities has several key objectives:
- Transparency: By distinguishing between restricted and unrestricted net assets, the statement ensures that stakeholders can see how donor contributions are being managed and utilized in line with donor intentions.
- Accountability: The statement provides a clear record of how resources are being spent, enabling stakeholders to assess whether the organization is fulfilling its mission effectively.
- Financial Insight: By presenting a detailed view of revenues, expenses, gains, and losses, the statement offers insights into the organization’s financial performance and sustainability.
- Enhanced Disclosure: Typically, a note to the financial statements accompanies the statement of activities, providing a natural classification of expenses (e.g., salaries, rent, supplies) in addition to the functional classification. This note enhances transparency by offering a more detailed breakdown of how resources are used.
Conclusion
The statement of activities is a tool for ensuring that a nongovernmental, not-for-profit entity operates with transparency, accountability, and effectiveness. By understanding its purpose and objectives, stakeholders can gain a deeper insight into the financial health of the organization and make more informed decisions about supporting its mission. Whether you are a donor, a board member, or part of the organization’s management, the statement of activities provides essential information about how the organization is managing and utilizing its resources.
