Here I am, the Devil's Advocate...lol...
First off, let me suggest this: Under the circumstances, could the first grade teachers have come to you to ask for additional funds? If so, would you have given them additional funds? If so, tell your friend that it can be looked at, even written up that way. An additional request for funds.
While I agree with the 'use it or lose it' theory, I think that you have to look at it a bit more flexibly. The Kindergarten teacher did 'use it', she just didn't use it the way someone thought she should. Since it is not in the bylaws either way, the Kindergarten teacher, you, AND your executive board were well within your rights.
We give each of our teachers and school clubs $100 reimbursement at the beginning of the year. This money is to be used for the classrooms, to help pay for necessities. They provide us with the receipts, we cut a check. Did I even think twice about "ok-ing" one teacher giving his/her monies to another teacher to purchase extra for their class? No. The money was earmarked for reimbursements, and that is what the money went to. You try to get teachers to attend meetings, you try to get teachers involved with PTO projects, you try to get teachers excited about PTO. Cut them some slack. The money still went to field trips. Kids had a good time in both circumstances. Ask your friend this: What would she have done as the Kindergarten teacher? As the first grade teacher? In your position? Ask her what she think the 'already earmarked' money could have been used for instead? Ask her to help write an addendum to the bylaws. Then, be done with it.
My personal view? OK. You asked. I think the teachers were right, but should have come to you first. I think that it benefited children. If the adults would look at it as 'sharing', something these children are being taught to do day after day in the two grades we are talking about, there wouldn't have been any fuss at all. Send your friend to 'time-out' until she learns to share. Pick a better battle and let this one die. It didn't cost any extra to the PTO. It was a nice thing to do. I'm glad the kids had fun. I'm sorry it became a problem between friends, much less a problem between PTO execs.
I hope you and your friend can get past this. This situation isn't worth losing a friendship over.