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Performance Evaluation for Not-for-Profit Organizations | Governmental Accounting | CPA Exam FAR

4,233 views · Published 5 February 2018 · 17:29 · Indexed 12 October 2026

Channel: Farhat Lectures. The # 1 CPA & Accounting Courses · 2018 · Education

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How do you evaluate the financial performance of a not-for-profit organization? This lecture covers financial statement analysis for not-for-profits — common size analysis and key ratios like the program expense ratio and working capital ratio — a FAR topic for CPA candidates and accounting students studying not-for-profit and governmental accounting.

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Video Timeline & Key Concepts:
0:00 — Introduction: why financial analysis matters for not-for-profits
0:30 — Common size analysis: scaling items by revenue or total assets
6:42 — Program expense ratio (program service expenses / total expenses)
11:57 — Additional not-for-profit ratios
13:28 — Working capital ratio and estimating months of sustainability

Frequently Asked Questions:

What is common size analysis?

Common size analysis scales each financial statement item by a base amount, usually revenue for the income statement or total assets for the balance sheet, so you can compare organizations of different sizes using percentages instead of raw dollars.

What is the program expense ratio and why does it matter?

The program expense ratio equals program service expenses divided by total expenses. It shows how much of each dollar goes toward the mission versus administrative and fundraising costs, and a higher ratio is generally viewed favorably.

How is the working capital ratio used for a not-for-profit?

The working capital ratio compares current assets minus current liabilities to total expenses. Multiplying the result by 12 estimates how many months the organization could operate without new revenue.

Why analyze not-for-profit financials if there is no profit motive?

Even without a profit motive, financial analysis is essential to evaluate an organization’s efficiency, stewardship of donor funds, and long-term financial health.

Do not-for-profits use the same analysis techniques as for-profit entities?

Many techniques overlap, but not-for-profits emphasize mission-focused ratios such as the program expense ratio and measures of financial sustainability rather than profitability.

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