Notes to the Financial Statements

A very important part of an organization’s financial reports is the accompanying notes. Accurate numbers on the Balance Sheet, Income Statement, and Statement of Cash Flows don’t paint the full picture.
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The Board and the Auditor

It is common for board-led organizations to have their books audited by a third-party expert, but the ultimate purpose of the audit and accountability of the auditor are often not clear. The purpose of a financial audit is to have an external non-biased party examine the organization’s financial records and provide a written report on their accuracy so the board, and in turn the owners, have reliable financial information on the organization.
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Statement of Cash Flows

The statement of cash flows provides very important financial information, but tends to be provided to the board less often than the income and expense statement and balance sheet. Due to lack of familiarity with this form, many board members find it more difficult to understand. This document provides a succinct summary of where the organization got the cash to pay its bills and where the cash went. It is important for the board to review the statement of cash flows at least annually to ensure that the organization has adequate liquidity; that is, that it has enough funds to make required payments and thus stay in business. Unfortunately many organizations with profitable business potential are forced to close their doors due to cash flow deficits. The statement of cash flows helps the board and management oversee the organization’s finances to ensure that cash flow problems don’t result in avoidable business closure or setbacks.
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The Income and Expense Statement

The income and expense statement is an essential part of management’s financial report to the board. It informs the board about the volume and scope of the organization’s activities. This statement allows the board to compare actual income and expenditures with past and planned financial activities. To enable this valuable board oversight, it is desirable for management’s income and expense report to include this year’s figures to the end of the previous month, this year’s budget for the same period, and last year’s actual figures for the same period.
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Board Review of the Balance Sheet

It is important that the board is aware of changes in assets, liabilities, and equity so it can make reasonable financial decisions on behalf of the organization. Therefore, the balance sheet which summarizes what the organization owns, what the organization owes, and the organization’s equity is an essential part of the financial report to the board.

The balance sheet provides a snapshot of the organization’s financial position as of a specific point in time. When the board reviews the balance sheet it is helpful to have recent numbers and the figures from the same date the previous year. This allows the board to assess both the organization’s current position and trends in the assets, liabilities, and equity categories.
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