Nonprofit Financial Statements: What Donors and Advisors Should Look For

For many donors, the moment they open a nonprofit’s financials is also the moment things stop feeling particularly charitable. Nonprofit financial statements can suddenly mean net assets, functional expenses, restrictions, liquidity disclosures, and a Form 990 that seems determined to make one simple question—Where did the money go?—much harder than it needs to be.

Here is the short answer. Nonprofit accounting uses the same bookkeeping as any business, but it answers a different question: not whether the organization made a profit for owners, but where its resources came from, what limits are attached to them, and how they were used. AICPA’s current nonprofit guidance highlights these same issues, including donor-imposed restrictions, liquidity, contributions, and expenses by function and nature. 

For donors, understanding even a little of that language can make financial reports far less intimidating. For financial advisors, it can make conversations about charitable giving more precise, especially when a client is considering scholarships, restricted gifts, endowments, or other structures with specific purposes.

And transparency is not just an accounting exercise; in fact, clear financial reporting is central to maintaining the trust donors and communities place in charitable organizations. 

This guide breaks down the statements, restrictions, expense categories, and financial signals worth paying attention to, then brings those concepts back to something much more concrete: making confident, informed giving decisions in Miami County. 

Accounting for Nonprofits: Why the Rules Look Different 

The easiest way to understand accounting for nonprofits is to stop expecting nonprofit financials to answer exactly the same questions as a business. Both need to know what they own, owe, earn, and spend. But the reason those numbers matter is different.

For a for-profit company, accounting ultimately helps show whether the business is creating value for its owners or shareholders. A charitable nonprofit has no shareholders waiting for a dividend. Its resources exist to advance a public or charitable mission, so nonprofit accounting puts much more emphasis on stewardship: What resources does the organization control? Are there limits on how they can be used? And is the organization using them in a way that supports its mission?

That does not mean nonprofits are supposed to finish every year at exactly zero. The National Council of Nonprofits calls that a common misconception: nonprofits can generate a surplus and may need positive revenue to build reserves and remain financially sustainable. The key difference is that those profits cannot simply be distributed to private individuals the way corporate profits can be distributed to owners. 

Another major difference is that charitable gifts can arrive with instructions attached. A donor might give money specifically for a scholarship, a particular program, or another defined purpose. AICPA identifies donor-imposed restrictions, net-asset classes, liquidity, contributions, and expenses by function and nature as central issues in nonprofit financial reporting. Its 2026 accounting guide also treats contributions and fund accounting as distinctive areas of nonprofit practice. 

For a community foundation like MICOCF, that distinction becomes very concrete. The Foundation acts as an umbrella for numerous funds with different charitable purposes, from scholarships to family, business, and community funds. 

A dollar intended for a particular scholarship cannot simply be treated as though it were interchangeable with gifts given for broader Miami County needs.

That is why nonprofit financial reports spend so much time talking about net assets, restrictions, liquidity, and expenses. Once those ideas are clear, the actual statements become much easier to read. 

Nonprofit Financial Statements: The Four Reports Worth Knowing

Nonprofit financial reports can look intimidating because they use different names for things that are actually pretty familiar. The easiest way in is to treat them as four documents answering four different questions.

Statement of Financial Position: What does the nonprofit have and owe right now?

This is the nonprofit version of a balance sheet. It shows assets, liabilities, and net assets at a specific moment in time. CLA’s 2025 nonprofit financial-reporting guide describes it as a snapshot of financial condition and identifies those three categories as its core components. 

Think cash, investments, receivables, property, debts, and other obligations. What remains after liabilities are subtracted from assets is reported as net assets, rather than shareholder equity. 

For donors, one of the most useful questions is: How much of what this organization holds is actually available for general use? A nonprofit can appear asset-rich while some resources are restricted or otherwise unavailable for near-term operations. AICPA explains that liquidity disclosures are specifically intended to help financial-statement readers understand which resources are realistically available to meet operating needs.

Statement of Activities: What changed during the year?

This is roughly the nonprofit equivalent of an income statement. It shows the organization’s revenue, expenses, and change in net assets over a period of time. CLA describes the Statement of Activities as the nonprofit P&L and highlights revenue, expenses, fundraising effectiveness, and resource allocation as key information readers can draw from it. 

That can include:

• Contributions
• Investment and other income
• Program or other revenue
• Expenses
• The resulting change in net assets

One important detail: nonprofit reporting distinguishes between resources with donor restrictions and without donor restrictions. So even if net assets increase substantially during the year, that does not necessarily mean every dollar is available for general use. AICPA specifically identifies net-asset classes and donor-imposed restrictions as core elements of nonprofit financial reporting.

Statement of Cash Flows: Where did the actual cash go?

An organization can report a surplus and still have cash-flow problems. The Statement of Cash Flows helps explain why by showing how cash is generated and used through operating, investing, and financing activities. Together they separate real cash movement from the surplus reported on paper. 

In practical terms, it helps answer: Is the nonprofit bringing in enough usable cash to keep paying its bills and carrying out its work? 

Functional expense information: What was the money spent on and for what purpose?

Here things get particularly nonprofit-specific. Expenses are analyzed both by their nature—such as salaries, rent, technology, or supplies—and by their function, such as program services, management/general, and fundraising. 

Donors may see this presented as a separate Statement of Functional Expenses, but a standalone statement is not the only acceptable presentation. Current nonprofit financial-reporting guidance allows the nature-and-function analysis to appear in the Statement of Activities, a separate statement, or a schedule in the notes, as long as it appears together in one place.

AICPA specifically identifies the analysis of expenses by function and nature as a current GAAP reporting issue and provides examples showing that presentation can vary when GAAP permits it.

Net Assets and Donor Restrictions, Without the Accounting Jargon

“Net assets” sounds like one of those terms designed to keep non-accountants at a safe distance, but the basic idea is simple. After subtracting a nonprofit’s liabilities from its assets, what remains is its net assets. What matters next is whether someone outside the organization has placed limits on how those resources can be used.

Net assets without donor restrictions

These are resources that are not subject to donor-imposed restrictions. The nonprofit generally has more flexibility to use them in support of its mission.

That does not necessarily mean every dollar is sitting around waiting to be spent. A nonprofit’s board may designate some resources without donor restrictions for a particular future purpose, reserve, or project. But a board designation is different from a donor restriction because the limitation was created internally. Board-designated net assets are resources without donor restrictions that the governing board has chosen to set aside for particular purposes.

Net assets with donor restrictions

These are resources subject to limitations imposed by the donor. The restriction might specify what the money should support, when it can be used, or both. Purpose restrictions and time restrictions are the two common forms.

In Miami County terms, imagine two gifts. Someone makes a general contribution to support MICOCF’s charitable work wherever it is most useful. That potentially gives the Foundation broader flexibility. Another donor gives specifically for an eligible scholarship purpose. That contribution comes with a much narrower intended use.

A restriction is not the same as continuing ownership of the money. Once assets are contributed to a community foundation under an applicable charitable arrangement, the foundation retains legal control and responsibility for administering them according to the fund agreement, charitable purpose, accounting requirements, and law. The Council on Foundations’ updated 2025 guidance emphasizes this legal control and the community foundation’s ultimate authority over distributions. 

This is where accounting language starts turning into an actual donor decision. At MICOCF, someone may arrive knowing only that they want to help Osawatomie schools, support education generally, create something lasting, or simply give back to Miami County. Tammy Booe described the Foundation’s process as starting with that intention and then talking through the fund structures the Foundation offers, including endowed funds, expendable funds, and scholarship funds. 

One nuance is worth keeping straight: fund labels in general use, such as “endowed,” “pass-through,” “scholarship,” or “designated,” are not automatic synonyms for the accounting categories “with” or “without donor restrictions.” The classification depends on the terms attached to the particular gift or fund.

And once we know which resources can be used for what, the next accounting question becomes much easier to understand: when the nonprofit spends that money, how does it classify the expense? That is where program, administrative, and fundraising costs enter the picture. 

Functional Expenses: Program, Administration, and Fundraising

Once a nonprofit receives money, the next question is where the spending actually belongs. For organizations filing the full Form 990, Part IX breaks applicable expenses into three functional buckets: program services, management and general, and fundraising. The categories are useful because they show not only what an organization bought or paid for, but why that expense existed in the first place.

Program services

These are expenses tied directly to activities that advance the nonprofit’s exempt mission.

For a scholarship organization, that might include grants awarded to students or costs directly connected with administering the scholarship program. For another nonprofit, it could be counseling services, educational programming, community events, or whatever work actually fulfills its charitable purpose.

Management and general

This is the organization-wide infrastructure that keeps everything functioning. The IRS includes costs such as accounting, auditing, human resources, general legal services, board meetings, insurance, office management, and investment management in this category when they benefit the organization as a whole rather than one particular program.

Fundraising

Fundraising expenses cover the work of securing charitable contributions: solicitation campaigns, certain advertising and communications, fundraising consultants, preparation of fundraising materials, and the portion of staff time devoted to asking for gifts.

And that last part matters. If an employee spends 40% of their time fundraising and 60% working directly on programs, the IRS’s 2025 instructions say the salary should be allocated accordingly. A nonprofit cannot simply put 100% of that salary under “programs” because the resulting percentage looks better. Allocation methods must be reasonable, accurate, and documented. 

The important thing for donors is not to assume that anything outside the program column is somehow money “lost” to the mission. Accounting systems, staff, technology, governance, insurance, reporting, and financial controls all cost money. Underinvesting in staff and infrastructure can actually make nonprofits less effective, not more. 

So functional expenses are useful, but they are not a morality score. The better next question for Miami County donors is whether those expenses make sense alongside the organization’s financial health, transparency, and actual community impact.

Join us in shaping a better tomorrow for Miami County. Your support is more than just a donation. It’s an investment in our community.

What Miami County Donors Should Look For in Nonprofit Financials 

For donors, the goal is not to become amateur accountants or hunt for one perfect expense percentage. A useful review of a nonprofit’s financial statements is much simpler: look for financial information that is current, understandable, consistent with the organization’s mission, and detailed enough to raise reasonable questions and answer them.

That is also what separates nonprofit evaluation from traditional accounting for profits. With a charitable organization, financial performance matters, but the ultimate question is whether the resources are being responsibly converted into mission impact. 

A practical review can start with five questions:

1. Can I find recent financial information? Look for recent Forms 990, financial statements when available, and annual reporting. A 990 can reveal valuable information about finances, governance, and programs, but also warns that it is not a complete, real-time picture of an organization.
2. Can I connect the numbers with actual work? Good nonprofit financial statements make more sense when you can connect spending with recognizable programs, scholarships, services, grants, or other outcomes. Financial data without a clear explanation of the mission only tells half the story.
3. Are restricted gifts explained clearly? If the organization administers scholarships, memorial funds, endowments, or designated gifts, look for information about how those resources are restricted and administered. This is an especially important piece of charitable giving transparency because a large asset balance does not necessarily mean all of that money is available for general spending.
4. Do the numbers make sense across several years? Do not panic over one strange-looking year. Instead, compare revenue, expenses, and assets over time and then investigate large changes. Candid’s current nonprofit-evaluation guidance specifically recommends reviewing these figures across multiple years to identify trends relevant to a giving decision.
5. Can someone explain what I am seeing? Particularly with a local organization, transparency should not end with posting a PDF. Donors should be able to ask reasonable questions about a fund, an unusual financial year, or how a contribution will be administered.

At MICOCF we offer a useful example of why that multi-year perspective matters. Our latest publicly available filing covers 2024 and was filed May 12, 2025. It reports $249,516 in revenue, $663,709 in expenses, and $1,375,535 in year-end net assets. The prior year looked very different: 2023 showed $493,336 in revenue, $263,262 in expenses, and $1,722,885 in net assets. 

Those numbers are worth noticing, but they are not enough on their own to explain what happened. Without reviewing the underlying filing, schedules, fund activity, and relevant organizational context, it would be irresponsible to turn the 2024 change into either a red flag or a reassuring story. That is precisely the point: good financial evaluation starts with the numbers and then asks why.

For an individual donor, that may be enough due diligence to feel comfortable asking the next questions. For a financial advisor recommending a nonprofit on behalf of a client, however, the review usually needs to go a step further, into tax status, gift eligibility, governance, and whether the charitable vehicle actually fits the client’s plan. 

What Financial Advisors Should Check Before Recommending a Nonprofit

For financial advisors, evaluating a nonprofit is not just about whether the organization seems reputable. The recommendation also has to fit the client’s tax situation, charitable goals, and the specific giving strategy being considered.

Confirm tax status and gift eligibility

Start with the basics: is the organization currently tax-exempt, and is it eligible to receive the type of gift the client wants to make? The IRS Tax Exempt Organization Search lets advisors verify exemption status, deductibility, recent Form 990 filings, and whether an organization has lost its exemption.

But do not stop at the organization’s name. The specific fund or charitable vehicle matters too. A donor-advised fund, for example, may be perfectly appropriate for one strategy but cannot currently receive a QCD. Fidelity’s guidance on QCD-eligible charities specifically lists donor-advised funds, private foundations, and supporting organizations among the recipients that generally do not qualify for QCDs. 

Look beyond one year of financial results

Review several years of revenue, expenses, assets, liabilities, and liquidity. Look for unusually large swings, heavy dependence on one revenue source, significant donor restrictions, or transactions that deserve a closer look.

The point is not to find flawless numbers. It is to understand why the numbers changed and whether the organization appears financially capable of carrying out the work the client wants to support.

Review governance and transparency

Form 990 can also reveal board composition, compensation, governance responses, related-party transactions, and other information that financial statements alone may not show.

A reasonable advisor review might ask:

• Is leadership information easy to find?
• Are recent filings available?
• Are related-party transactions explained?
• Does the organization clearly describe its programs and use of funds?
• Will someone answer questions when the paperwork does not tell the whole story?

Make sure the nonprofit actually fits the client

Tax efficiency is useful, but it should not become the purpose of the gift.

We recommend beginning charitable-planning conversations with the client’s philanthropic goals and personal interests, then determining which financial strategies support them.

That is where community foundations can be especially useful. A client may know they want to support education, youth, mental health, historic preservation, or simply “something meaningful back home” without knowing which nonprofit or fund makes the most sense. Community foundations are partners in donor stewardship and philanthropic planning, including legacy and multigenerational giving.

The division of labor should stay clear: the financial advisor helps determine what makes sense for the client’s financial and tax plan; MICOCF can help translate the charitable intention into an appropriate local giving option. And once that option is chosen, the next question is how a community foundation actually keeps multiple funds, purposes, and donor instructions organized under one roof. 

How MICOCF Organizes Funds, Reporting, and Local Accountability

A community foundation can look like one organization from the outside while functioning as an umbrella for many different charitable purposes underneath. That is where the accounting and administrative structure starts to matter: a scholarship fund, an endowed fund, an expendable fund, and gifts given for general community needs cannot simply become one indistinguishable pool of money.

MICOCF is a 501(c)(3) community foundation based in Paola, Kansas, and its latest publicly available Form 990 covers 2024 and was filed in May 2025.

Holding several distinct funds under one roof is the normal shape of a community foundation. Updated 2025 guidance from the Council on Foundations explains that community foundations may manage assets associated with different funds, beneficiaries, restrictions, and accounting treatments, which creates a need for careful tracking and reporting within the larger foundation structure. 

At MICOCF, the process starts before any bookkeeping entry. Tammy Booe described sitting down with prospective fundholders to understand what they want their charitable dollars to accomplish, walking through possible fund structures, and completing a fund agreement before the account is established through the Foundation’s banking relationship. Fundholders currently receive monthly statements, and when they want an eligible charitable distribution made, MICOCF coordinates that process with the bank. 

That relationship between accounting and purpose is easier to see in a real example. Tammy described a retired couple, both doctors, who had been giving to several causes independently. They chose to centralize their charitable giving through MICOCF, allowing contributions to causes such as their church and youth camps to be administered through one charitable structure instead of managing everything separately themselves. 

Why does any of that matter to a donor? Because keeping different funds identifiable is what makes it possible for one family’s charitable dollars to support one purpose while another donor’s money supports something entirely different. Under the same MICOCF umbrella, one fund may focus on education, another on mental health, another on a designated institution, while other gifts are given without being tied to a single purpose. 

Green flags and things worth investigating

For donors or advisors reviewing MICOCF, or any nonprofit, the paperwork becomes much more useful when paired with a few practical signals:

Green flags

• Recent financial and tax reporting
• Clear explanations of what individual funds are designed to accomplish
• Consistent treatment of donor restrictions
• Leadership that is accessible when questions arise
• Financial information that can be connected to identifiable charitable work

Worth investigating

• Missing or persistently outdated filings
• Large financial swings with no available explanation
• Vague descriptions of programs or fund purposes
• Related-party transactions that are difficult to understand
• An organization unwilling to answer reasonable questions about how gifts are administered

Notice what is not automatically on the red-flag list: administrative costs. Nor should one unusual year or one less-than-perfect ratio automatically disqualify an organization. The better question is whether the nonprofit can explain what the numbers mean and connect them to responsible stewardship.

That brings us back to the real value of understanding nonprofit financial statements in the first place. The goal is not to memorize every line of a financial statement. It is to know enough to recognize transparency, ask better questions, and make sure charitable intentions have a structure capable of carrying them out.

If you are reading these statements for an organization you plan to start, see our guide to launching a nonprofit; if you are a donor, an organization’s GuideStar profile is the quickest place to find them. Local groups can also review the grants the Foundation awards. Grantmakers read these statements closely, and eight grantmaking tips show what they look for.

Nonprofit Financial Statements: Enough to Ask Better Questions 

You do not need to become an accountant to evaluate a nonprofit responsibly. A basic understanding of nonprofit accounting already goes a long way: know what the main financial statements are telling you, understand why donor restrictions matter, recognize how program, administrative, and fundraising expenses are classified, and—most importantly—know when a number deserves a follow-up question. 

For Miami County donors, that means reading MICOCF’s public Form 990, exploring its current charitable funds, and asking how a particular fund is structured, administered, and used. Financial advisers can bring MICOCF into the conversation when a client wants local impact, while continuing to guide the tax, estate, and investment side of the plan. 

Good nonprofit accounting does more than keep the books balanced. It turns trust into something donors can verify—and charitable intentions into resources that can actually reach the places they were meant to support. 

Are you interested in learning more or contributing to our cause? Reach out with any questions you may have. With just one click, you can transform lives. Your donation has the power to create a significant change.