Financial Management for Public, Health, and Not-for-Profit Organizations, 3E
REPORTING THE RESULTS
THE ACTIVITY AND CASH
QUESTIONS FOR DISCUSSION
The Activity Statement is often referred to by other names, including the Income Statement,
Statement of Changes in Net Assets, the Operating Statement, Profit and Loss (P&L)
Statement, Earnings Report, Statement of Revenues and Expenses, and Statement of Revenues
All organizations need to measure their net income, surplus, or excess of revenues over
expenses. This allows them to determine whether their asset inflows exceed or fall short of
their asset outflows. Public service organizations need to have adequate profits to sustain,
update, and expand the services provided. Failure to earn a profit, or at least break even, can
endanger the organization. However, because their mission is largely one of public service,
many organizations do not wish to maximize their profits. The purpose of the income statement
is to provide management with information they need to steer the organization as necessary to
best accomplish its objectives.
Revenues and expenses can only be recorded if certain conditions are met. Revenues are
recorded if they have been earned and realized. The first requirement, being earned, is met only
if the organization has provided goods or services to the customer. If a legal transfer has
occurred, raising a legal right to collect payment, then the revenues have been earned. To be
realized we must be able to objectively measure the amount of money owed, and there must be
a reasonable likelihood of eventual collection.
Support recognition is allowed even though the gift has not been received, and even though
no goods or services have actually been provided. In fact, pledges are enforceable contracts.
We record pledges as support if there is a specific amount and a reasonable likelihood of
Some types of expenses are
costs, and other types of costs are
costs are those expenses that are directly connected to providing goods and services. They
become expenses as they get used up. Period costs are those that relate to the passage of time,
rather than the direct provision of services. They become expenses as they expire over time. For
example, rent on a machine for a specific month or year expires as time passes.
It is unlikely that all numbers in the organization’s bookkeeping records are exactly correct. If
numbers are reported to the nearest dollar or to the penny, there is an inference of greater
accuracy than is likely to actually exist. By rounding off numbers, the financial statements
provide a better sense to the user that this is approximately what has occurred, rather than
exactly and precisely what has happened.