The purpose of a nongovernmental not-for-profit (NFP) entity's statement of cash flows is to report cash receipts and payments for the period, classified as operating, investing, and financing activities under U.S. generally accepted accounting principles (GAAP).
The objectives of the statement of cash flows include assessing sources and uses of cash and the NFP's ability to meet obligations and fund programs. Contributions restricted for long-lived assets or endowments enter financing; ordinary program contributions, including donor-restricted gifts, enter operating activities.
A not-for-profit entity's indirect statement of cash flows reconciles the statement of activities' change in total net assets to operating cash by removing noncash effects and investing or financing items, then adjusting operating accruals. Adding investing and financing cash flows explains the change in combined cash balances.
The statement helps donors, creditors, and others assess an entity's ability to sustain services, meet obligations, and obtain additional financing.
- The statement of activities supplies the change in total net assets, including contribution revenue recognized before collection and expenses recognized before payment.
- The statement of financial position supplies beginning and ending cash balances, plus receivable, payable, and other balances supporting accrual adjustments.
Common mistakes
- Financing the unpaid pledge. Capital contribution revenue of $100,000 supports only $80,000 of financing receipts in the illustrated rollforward.
- Adjusting only current receivables. Ignoring Alder's $5,000 increase in noncurrent operating pledges would overstate operating cash by $5,000.
- Counting an internal transfer. Moving $15,000 between included cash accounts contributes $0 to the statement's combined cash change.
Bottom line
- The statement explains cash generation, resource use, and financing separately from accrual changes in net assets.
- The indirect method starts with the change in total net assets across both donor-restriction classes.
- General and ordinary program support produce operating receipts; donor-restricted capital and endowment contributions produce financing receipts.
- Financing reports actual contribution collections, with pledge movements handled consistently to prevent duplicated operating adjustments.
Exam shortcut
Circle the requested method, then locate both net-asset changes and every cash component before computing adjustments. Mark each contribution with two facts: the donor's purpose and the amount collected. Put unpaid promises on a separate rollforward. For receivables, check the underlying activity before the current or noncurrent label. Match capital-pledge treatment to the contribution reversal selected. When correcting a draft, use separate columns for operating, investing, and financing changes.
The full lesson (about 5,936 words, 40 min read) adds 3 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- I.B3
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