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J. OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT, 14(3), 331-359
FALL 2002
REPORTING CASH FLOWS: AN INVESTIGATION
OF COLLEGE AND UNIVERSITY COMPLIANCE
WITH SFAS NO. 117
Mary Fisher, Teresa Gordon, Marla Myers Kraut and David Malone*
ABSTRACT. Reporting cash flows is a relatively recent development in college
and university financial reporting. An examination of the purported usefulness of
cash flow information to the users of college and university financial statements
including an examination of the relationship between accrual-based change in net
assets and cash provided by operations found private universities have implemented
the cash flow reporting requirements with a relatively high level of compliance
employing the indirect format for reporting operating cash flows. The principal
areas of deficiency were the reporting of split-interest, restricted gift activities and
the required disclosures of cash outflows related to interest and taxes. The
discussion of the compliance deficiencies and display findings leads to needed
disclosure guidance and future research.
INTRODUCTION
Business entities have been preparing and reporting cash flow
statements for more than a decade under the Financial Accounting
___________
* Mary Fischer, Ph.D., is the Pirtle Professor of Free Enterprise and Professor of
Accounting, College of Business & Technology, University of Texas at Tyler. Her
teaching and research interests include financial and governmental accounting as
it pertains to reporting, cash flows and accounting education. Teresa Gordon,
Ph.D., and Marla Myers Kraut, Ph.D., are a Professor and Associate Professor,
respectively, Department of Accounting, University of Idaho. Dr. Gordon’s
teaching and research interests include the use of accounting information in
decision-making particularly in not-for-profit settings. Dr. Kraut’s teaching and
research interests include revenue recognition, regulatory issues and the ethical
aspects of financial reporting. David Malone, Ph.D., is an Associate Professor,
Department of Accounting, Texas Tech University. His teaching and research
interests are currently in the area of knowledge management.
Copyright © 2002 by PrAcademics Press
332
FISCHER, GORDON, KRAUT & MALONE
Standards Board’s (FASB) 1987 Statement of Financial Accounting
Standards (SFAS) No. 95 “Statement of Cash Flows.” However, until
recently not-for-profit entities including colleges and universities were
exempt from reporting the statement of cash flows in their published annual
financial reports (FASB, 1987). The exemption was prompted by FASB’s
deliberations on a reporting display model for these entities. Six years after
SFAS No. 95 became generally accepted accounting principles GAAP,
SFAS No. 117 (FASB, 1993b) required not-for-profit entities to issue cash
flow statements beginning with fiscal years ending after December 1996.
In an effort to determine user preferences and reporting rationale, this
study examines college and university financial reporting together with the
accounting concepts and literature that encourage cash flow reporting.
Using published 1996-1997 college and university financial statements,
disclosure compliance, patterns, and issues are investigated and
comparisons made to business entity studies. Seventy percent of the
institutions in this study disclose sufficient information to enable financial
statement users to articulate cash flow statement data to the statement of
activity and the statement of financial position. Deficiencies in reporting
included failure to report interest and taxes paid and inadequate or unclear
reporting of split-interest agreements and other gifts restricted for long-term
use. The majority of institutions made a distinction between operating and
nonoperating income on the statement of activity. Both the change in
unrestricted net assets and voluntarily reported operating income were
better predictors of cash provided by operations than the total change in net
assets. These findings coupled with the importance of cash flow information
to financial statement users suggest that preparers and auditors need more
guidance in reporting cash flows, particularly as related to split-interest
agreements.
REPORTING CASH FLOW: PREFERENCE AND RATIONALE
Over time, the FASB has displayed a continuing interest in cash flow
data. In Statement of Financial Concepts (SFAC) No. 1, the FASB (1978)
stated that users of the financial information of business entities are
interested in the ability of entities to produce favorable cash flows. The
Board also stated that operating success or failure of entities can be
REPORTING CASH FLOWS: UNIVERSITY AND COLLEGE COMPLIANCE
333
determined by the extent to which cash returns exceed cash spent over the
long term. This same concern was later reiterated in SFAC No. 4 which
provides objectives for financial reporting by nonbusiness (not-for-profit)
organizations. Information about cash flows of not-for-profit organizations
is expected to be useful in assessing liquidity, interpreting performance
information, and evaluating financing activities (FASB, 1980: ¶54). In
SFAC No. 5, the Board specified that a full set of financial statements
should include “cash flow for the period” (FASB, 1984: ¶13). The
conceptual framework was implemented in 1987 for business entities
(SFAS No. 95) and in 1993 for not-for-profit entities (SFAS No. 117) when
the requirement for a statement of cash flow became part of generally
accepted accounting principles (GAAP).
It is important to note that the FASB believes that information about
organizational performance is best conveyed by accrual accounting
information (SFAC No. 1, ¶44 and SFAC No. 4, ¶50). Accrual accounting
recognizes transactions and events that affect performance but do not
necessarily coincide with cash receipts and payments of the period. Cash
flow information alone would not be sufficient to achieve the objectives of
financial reporting but it is, nevertheless, very useful in evaluating the
information provided in the income statement.
The need for cash flow information was illustrated by the financial
difficulties of New York City in the 1970s that resulted in the city
restructuring its debt, as well as the dramatic failure of W. T. Grant
Company in 1975. Accountants and financial analysts believe that financial
problems in these examples were concealed by accrual accounting.
Gombola and Ketz (1983) found cash flow to be useful in evaluating
distress as entities can report a high net income even though they may
experience low or negative operating cash flows.
The theoretical development of cash flow reporting can be traced to Lee
(1972, 1978, 1993) and Lawson (1972). Lee and Lawson’s advocacy of the
cash flow statement is based on the principles of utility and relevance to
users. They suggest that the user must be identified as well as the influence
and bearing that cash flow information has on their decisions and actions.
Other accounting research contains theoretical discourses about potential
decision-making advantages of cash flow statement information, especially
334
the limitations of accrual recognition measurements (e.g., Lee, 1993; Neill,
Schaefer, Bahnson, & Bradbury, 1991; Rappaport, 1988). Recent studies
have concentrated on the for-profit entity’s operating performance and
financial condition. For example, Ingram and Lee (1997) found that the
firm’s financial condition can be described by the long-term relationship
between reported net income and cash flows from operating activities. The
utility of cash flow information to different users, however, relies on
conjecture rather than empirical results (Lee 1981; Hackel & Livnat 1991;
Henderson & Maness, 1989). Lee (1981) found that accountants and audit
partners perceived cash flow data to be particularly relevant to bankers and
shareholders. Jones, Romano and Smyrnios (1995) claim that cash flow
information is relevant to all user groups except employees, consumers, and
suppliers.
The format of the cash flow statement has an important bearing on
information usefulness. SFAS No. 95 allows both the direct and the indirect
methods for presenting operating activities although the FASB encourages
adoption of the direct method. The direct method displays cash receipts and
payments such as cash received from student tuition, gifts, and other
transactions and cash paid to employees and suppliers. The indirect method
works backwards from the change in net assets by adding or subtracting
items included in revenue or expense that do not represent operating cash
flows.
The indirect method is chosen by a majority of publicly traded firms
because the data needed in its preparation is more easily obtained from
traditional accrual-based financial accounting systems (AICPA, 1998). In
addition, some argue that the indirect method conveys more information
because it details the differences between accrual accounting and cash flows
(Wolk & Tearney, 1997). This is a weak argument as the same information
is provided by entities that use the direct method since a reconciliation
between the change in net assets and cash provided by operations is a
requirement under SFAS No. 95. Other researchers argue that the direct
method of reporting operating cash flows is superior to the indirect method
as it enables the user to make future cash flow projections (Heath, 1978;
Lee, 1983, 1993; Sondhi, Sorter & White, 1987; Sondhi, Sorter, Ross &
White, 1988).
335
How important are cash flow disclosures to the users of the financial
statements of governmental and not-for-profit entities? The major GASB
study (Engstrom, 1988) unfortunately did not include the cash flow
statement perhaps because colleges and universities were not required to
report cash flows at that time. Khumawala and Gordon (1997) asked donors
about the importance of the statement of cash flows. In their study, donors
rated “details on cash flows including assets acquired and loans repaid” as
more important to them than details on liabilities, changes in net assets and
accounting policies. Cash flow information was, however, rated as less
important than information about “programs provided and organizational
goals and achievements,” the nature of expenses, and details about assets
(Khumwala & Gordon, 1997, p. 62). These findings may not be directly
applicable to college and university reporting since donors may be less
motivated to seek out financial information when giving to organizations
from which they received benefits in the past (Gordon & Khumwala, 1999).
IMPORTANCE OF CASH FLOW INFORMATION TO USERS OF
COLLEGE AND UNIVERSITY FINANCIAL DATA
The statement of cash flows for colleges and universities provides
information about activities that generate cash, pay debts and enhance the
ability to maintain or expand operating capacity. Analysis of this
information becomes critical in determining the financial health and
viability of the institution, particularly if the institution is dependent upon
tuition to fund its operating activities. Monitoring cash flows enables
institutional administrators to predict whether financial resources will be
adequate to meet needs. The monitoring process can identify weak
accounting procedures or financial anomalies to uncover poor receivable
collections or concerns in the disbursement process. College and university
cash managers are concerned with cash inflows and outflows on a day-today basis. These activities provide a clear understanding of the dynamics of
institutional operations and can help the administrators develop strategies
to meet contractual obligations or expedite cash collections. Cash flow data
provides valuable insights into relationships among operating, investing and
financing cash flows in addition to trends in each of the areas. The data may
also provide information regarding the cash available for future investment,
336
actual cash flows versus expected cash flows, and future cash requirements.
Cash flow clearly is a measure of financial health.
Governing boards, prospective donors, creditors, vendors and
consumers need to know the institution’s cash inflows and how they are
generated. They need to know the outflows and what they are being used
for. Since the statement of financial position does not reflect inflationary
impact, financial statement users may look to the cash flow statement to
evaluate operating success or failure. The change in net assets produced by
accrual accounting does not, by itself, provide sufficient information about
liquidity, financial flexibility or earning power of the institution.
Cash flow data may be helpful for comparative purposes in two ways.
First, for an individual institution, year-to-year comparisons of cash flows
from operating, investing and financing activities can be critically important
in developing financial and operating strategies. Such comparisons assist
financial managers in identifying trends in both sources and uses of cash.
Second, comparisons to other similar institutions provide useful benchmark
data in assessing the institution’s ability to generate cash as well as the
efficiency of its uses of cash.
COLLEGES AND UNIVERSITIES FINANCIAL REPORTING
Financial statements for colleges and universities attempt to provide full
and adequate disclosures of pertinent financial information. The financial
statements are prepared for four general types of users: (1) management and
trustees, (2) those with oversight responsibility such as grantors or providers
of financial aid, (3) resource providers (donors and creditors), and (4) other
stakeholders including students, their parents, and alumni. To provide
information for this diverse group, paragraph 6 of SFAS No. 117 requires
a statement of financial position, a statement of activities, a statement of
cash flows, and disclosure notes to the statements. The financial statements
must be prepared for the entire entity so that the entity can be viewed as a
whole. Revenues, expenses, gains, losses and net assets are reported by
type of restriction - permanently restricted, temporarily restricted, and
unrestricted.
The statement of financial position provides information about the
institution’s assets, liabilities and net assets and their relationship to each
337
other. This information helps financial statement users assess the
institutions’ liquidity, financial flexibility, ability to continue operations,
ability to meet obligations, and future financial needs. The statement of
financial position focuses on the institution as a whole and uses the
homogenous group concept, aggregating financial statement elements into
similar groups, such as cash and cash equivalents, accounts receivable,
marketable securities, land, buildings and equipment, accounts payable, and
bonds payable. The financial position statement reports total assets,
liabilities, and net assets. Net assets with donor imposed permanent or
temporary restrictions are reported separately from unrestricted net assets.
Permanently restricted net assets are those resulting from contributions
and other asset inflows whose use is limited by donor imposed stipulations
that neither expire by passage of time nor can be fulfilled or otherwise
removed by actions of the institution.
Temporarily restricted net assets are those resulting from contributions
and other asset inflows whose use is limited by donor imposed stipulations
that can be met by either the passage of time or can be fulfilled or removed
by actions of the institution. These net assets may involve time restrictions
(such as requiring that the assets be used after a certain date or in a certain
time period) or purpose restrictions (such as requiring that the net assets be
used for a certain program or activity). Temporarily restricted net assets are
reclassified to unrestricted net assets when the time or purpose restriction
is met by the institution.
The statement of activity provides information about the effects of
transactions and other events that change the amount and nature of net
assets and how the institution’s resources are used in providing various
programs or services. Like the statement of financial position, the statement
of activities focuses on the institution as a whole and reports the change of
net assets by level of restriction for the financial period. These changes link
the beginning net assets to the ending net assets displayed in the statement
of financial position.
In general, a restriction expires when the period of the restriction has
lapsed or when an expenditure for an authorized purpose is made. If an
expense is incurred for a purpose for which both unrestricted and
temporarily restricted net assets are available, the donor-restriction is
338
deemed satisfied (FASB, 1993a). Donor restricted contributions whose
restrictions are met in the same reporting period may be reported as
unrestricted net assets provided that the institution reports consistently from
period to period and discloses its recognition policy (FASB, 1993a).
Expenses incurred by the institution are reported only as decreases in
unrestricted net assets and are displayed by their functional use such as
instruction, research, and public service. Functional display of expenses is
required because it enables the financial statement user to determine the cost
of various programs offered by the university (AICPA, 1996).
The third required statement, statement of cash flows, provides relevant
information about cash receipts and cash payments during the period. The
statement of cash flows shows why cash changed during the period and
reports net cash provided or used by operating, investing, and financing
activities. SFAS No. 117 amended SFAS No. 95, by extending its
provisions to not-for-profit organizations. It also expanded SFAS No. 95
to require additional mandatory and voluntary disclosures and provide
guidance on issues unique to not-for-profit organizations.
Contributions to acquire fixed assets or contributions of plant assets
should be reported as temporarily restricted support over the life of the asset
(i.e. during the period depreciation is being recognized) if (1) the donor
restricts the use and disposition of the assets, or (2) the institution has a
policy of imposing a time restriction that expires over the life of the donated
assets or the life of the assets acquired with donated money (FASB, 1993a).
When the restrictions lapse or as depreciation expense is recorded,
temporarily restricted net assets are reduced and unrestricted net assets are
increased in the statement of activities. Cash flows that are restricted by the
donor for long-term purposes such as the purchase or construction of longlived assets are classified as financing activity, and the purchase of the longlived asset is reported as an investing activity in the statement of cash flows
(AICPA, 1996).
Donor restricted revenues and cash flows also include endowment gifts,
split interest agreements and other long-term fund raising transactions.
Endowment gifts are permanently restricted as the institutions are required
to invest the resources permanently and expend only the investment
earnings. New endowment gifts received in cash are reported as financing
339
activities in the statement of cash flows while the acquisition, disposition,
and maturities of investments are investing activities.
The not-for-profit sector has developed a number of trust and similar
arrangements under which the charity receives benefits it shares with other
beneficiaries. Such arrangements include charitable remainder trusts,
charitable gift annuities and life income funds. Referred to as “split interest
agreements,” the arrangements create long-term liability and long-term asset
accounts. The difference between the liability to other beneficiaries and the
fair value of the gift is recorded as a contribution. Generally, the
agreements stipulate that the institution invest the donated assets and
provide payments to the donor or other donor-identified persons during
their lifetimes. The payments can be either an established amount set out
by the agreement, or the investment income earned on the donated assets.
The AICPA audit guide (AICPA, 1996) states that the institution’s
beneficial share of a new split-interest agreement’s cash inflow should be
reported as a financing activity on the statement of cash flows. Under
SFAS No. 116, the interest accrued on pledges or promises to give is
recorded as additional revenue from contributions (rather than interest
revenue) on the statement of activities. Accordingly, it can be argued that
the cash flows related to investment income received on split-interest
agreements should be reported as contributions on the statement of activities
and as a financing activity on the statement of cash flows.
Subsequent to the initial gift, the fair value of split-interest agreements
may change due to changes in underlying assumptions such as the expected
life of the other beneficiaries. These adjustments could conceivably be
considered contribution revenue. The audit guide states that the amounts
should be disclosed as separate items either on the face of the statement of
activities or in the notes (AICPA, 1996). Guidance for preparation of the
statement of cash flows is less specific. Fair value adjustments are not cash
flows, per se. On a statement of cash flows prepared using the indirect
method, they would appear in the cash provided by operations section as
adjustments to the change in net assets as no cash was received.
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SAMPLE SELECTION
To perform a content analysis on the financial statements of all 1800
private colleges and universities in the United States would have been
prohibitive. Instead, the population for this study is all private colleges and
universities with accredited engineering programs. This provides a base
level of consistency among the institutions to be examined since
engineering programs are generally capital intensive with consistent cost
structures among institutions. The selection of the sample was designed to
provide adequate sample size while minimizing the considerable task of
performing a financial statement content analysis on the schools in the
sample.
In an earlier phase of this study, requests for published financial
statements were sent to all private institutions with accredited engineering
programs with a response rate of 72 percent. Of those responding, four
schools declined to participate and 13 sent inappropriate presidential or
treasurer statements that did not include audited financial statements. Two
requests were made of each school for its 1997 annual report. The final
study population includes 61 institutions with as much regional diversity as
was possible. Given that private colleges and universities are concentrated
in the eastern regions of the U. S., the proportion of schools represented in
each region of the country is, therefore, not consistent. A list of schools in
the study is provided in Appendix A.
The schools in the study are reasonably representative of accredited
engineering programs with respect to geographic location. Compared to the
general population of four-year institutions, both the schools included in
this study and accredited engineering programs are skewed toward doctoral
granting institutions. As shown in Appendix B, 54 percent of the sample
schools are doctoral granting institutions. Thirty-one percent are
comprehensive and the remaining 15 percent are liberal arts colleges and
specialized engineering and technology schools. A Big-Six accounting firm
audited all but two of the institutions.
Although schools were selected from a working population of private
colleges and universities with accredited engineering programs, the data
reported in Table 1 reflects the broad range in size represented in the
sample. Schools in the study are skewed toward institutions with higher
341
TABLE 1
Descriptive Statistics
Mean
Enrollment
8,057.6
Std.
Minimum
Deviation
6,349.9
628
Maximum
29,132
Annual Tuition Rate
$16,712
$4,936
$400
$28,230
Audit Letter # of Days after End
92.61
40,26
25
304
of Year
Change in Cash and Cash
$2,410
$34,414 -$127,961
$174,903
Equivalents
Total Assets
$1,781,096 $2,648,320
$23,002 $15,354,479
Total Liabilities
$328,709
$433,681
$9,854 $1,931,637
Total Net Assets
$1,452,386 $2,272,955
$12,266 $13,422,842
Permanently restricted net assets
Change in total net assets
Operating Income
Change in Unrestricted Net
$293,803
$206,725
$30,853
$118,025
$420,442
$384,691
$51,482
$189,334
$1,209
-$10,079
$-7,841
$-1,070
$2,404,605
$2,490,581
$231,954
$1,012,636
Assets
Change in Restricted Net Assets
Tuition & fees revenue
Unrestricted total revenues
Cash provided by operations
$88,700
$103,452
$557,889
$32,620
$254,025 -$10,283
$95,702
$1,109
$663,146
$14,417
$65,997 -$302,045
$1,925,354
$380,675
$2,378,195
$225,452
* Dollar amounts, except tuition rate, are stated in thousands.
enrollments (mean 8,058) and tuition rates (mean $16,712). Eighty percent
of the schools that chose not to participate in this study were smaller
comprehensive and liberal arts schools such as Capital College in Maryland
and Hocking College in Ohio. A comparison of the schools in the study
and nonparticipating institutions found this study’s sample comprises a
majority (64 percent) of the total enrollment of all private colleges and
university with accredited engineering programs.
COMPLIANCE WITH ACCOUNTING STANDARDS
All sixty-one institutions in the study provided a statement of cash
flows. An overwhelming majority (95 percent) used the indirect method of
342
presentation (Table 2). Those institutions that used the direct method of
reporting included the required reconciliation. Regardless of the method
employed in the statement of cash flows presentation, cash flow data
articulated to the statement of financial position and statement of activities
for 43 of the institutions in the study (70 percent).
According to SFAS No. 95 ¶7, the cash flow statement is based on
changes in cash and cash equivalents. The reporting entity is required to
disclose its policy for determining which items are treated as cash
equivalents (SFAS No. 95 ¶10). Fifty-one of the 61 institutions (84 percent)
used the cash and cash equivalent terminology but three of the 51
institutions failed to define cash equivalents.
SFAS No. 95 ¶11 states that information about the gross amount of cash
receipts and cash payments during a period is generally more relevant than
information about the net amounts of cash receipts and disbursements.
SFAS No. 95 ¶16 specifies that cash inflows from investing activities
include the receipts from sales of equity and other investment instruments.
Paragraph 17 lists payments to acquire equity investment instruments as
cash outflows from investing activities. Fifty-six of the 61 institutions (92
percent) reported investment acquisitions and investment sales at their gross
amount. The five institutions that did not report gross amounts included an
amount for the "net change in investments" among investing activities.
SFAS No. 117 and the AICPA Audit Guide (1996) modified the SFAS
No. 95 investment activities category to include cash contributions that the
donor restricts for the acquisition of property, plant and equipment. The
Audit Guide argues that cash received with such donor-stipulations should
not be aggregated with cash available for current use in the statement of
financial position. Although each institution in this study reported
temporarily restricted revenues and temporarily restricted net assets, none
reported restricted cash contributions for the acquisition of property, plant
and equipment as financing activities on the statement of cash flows.1
The change in cash and cash equivalents reported by each college and
university in this study was reconciled to the cash and cash equivalents
balance displayed in the current assets section of the statement of financial
343
position. Some institutions may have invested the cash restricted for
acquisition of plant assets in the endowment investments as a means to
attain segregation; however, such resource segregation was not reported on
the face of the statement of financial position or disclosed in the footnotes.
SFAS No. 95 ¶29 requires disclosure of interest and taxes paid during
the year for both the direct and indirect methods for reporting operating
cash flow. Although sixty institutions reported long-term debt on their
statement of financial position, only fifty-four (88 percent) disclosed
interest paid on the face of the cash flow statement or in the notes. No
institution reported paying as part of the cash flow display.
Each of the institutions in the study received an unqualified opinion
from their auditors which implies the reporting and disclosures were
reviewed for GAAP compliance. The two cash flow disclosure
requirements reported as zero compliance in Table 2 may be misleading.
Cash gifts restricted by donor stipulation for the acquisition of property,
plant and equipment may not have been material or the cash could be
included in the long-term investments which is segregated from resources
available for current operations. Either of these situations would result in
nondisclosure. The lack of disclosure of taxes paid would indicate
noncompliance only if the institution earned unrelated business income.
Three institutions (4.9 percent) reported note disclosures that unrelated
business tax (UBIT) obligations existed but provided no details. Another
11.5 percent specifically reported no UBIT obligations while 83.6 percent
included nothing regarding UBIT in their financial statement disclosures.
Had the three institutions disclosing the tax obligation made any tax
payment, then the tax disbursement should have been reported in the cash
flow statement. Without payment there would be no taxes paid to disclose
on the cash flow statement. Whether that is the situation could not be
confirmed on the statement of financial position because those institution
reporting the obligation did not display taxes payable among their
liabilities.
As discussed above, SFAS No. 117 ¶30 amended SFAS No. 95 ¶18 to
include as financing activities those restricted resources that by donor
stipulation must be used for long-term purposes. This requirement has led
to a significant difference in practice. Little consistency was found in the
344
TABLE 2
College and University Cash Flow Reporting and Disclosure
Compliance Report Card
Reporting or Disclosure Requirement
Compliance
Percentage
100%
61
95%
58
Statement of Cash Flows prepared using the direct method
5%
3
Statement of Cash Flows articulated to other financial
statements
Used cash and cash equivalent terminology
70%
43
84%
51
Disclosed definition of cash and cash equivalent
79%
48
Reported investment purchase and sale activities at gross
amount
Disclosed cash gifts restricted by donors for acquisition of
property, plant and equipment as a segregated amount not
available for operating activities
Amount of interest paid disclosed
92%
56
0%
88%
0
54
Amount of taxes paid disclosed
0%
0
Statement of Cash Flows included in audited financial
statements
Statement of Cash Flows prepared using the indirect method
N
reporting of split-interest agreement gifts. As shown in Table 3, 38 of the
institutions (62 percent) in the study reported split-interest gift activity in
the statement of financial position or statement of cash flow. Split-interest
cash transactions were reported in both the operating and financing sections.
Fair value adjustments to the beneficiary liability were reported by fifteen
institutions (40 percent) as an operating activity and two institutions (5
percent) as a financing activity. Twelve institutions (32 percent) reported
new split-interest gifts as financing activities in compliance with SFAS 117,
whereas eight institutions (21 percent) reported them as operating activities.
Thirteen institutions (34 percent) reported gift disbursements to
beneficiaries as financing activities.
Income earned on investments on split-interest gifts might be available
for operations under the terms of the agreement and accordingly classified
345
TABLE 3
Split-Interest Agreement Reporting and Disclosure
Institutions Reporting Split-Interest Agreements
Number
Percentage
of Sample
-----------------------------------------------------------------------------------------------------------Disclosed on Statement of Financial Position
35
57%
Disclosed only on Statement of Cash Flows
3
5%
Disclosed only on Statement of Financial Position
5
8%
Institutions reporting split-interest agreement activity
38
62%
Split Interest Agreement Presentation on Statement of Cash Flows
Operating Activities Financing Activities
Number
%
Number
%
------------------------------------------------------------------------------------------------Income earned on investment
3
11%
2
7%
Change in fair value
15*
58%
2*
7%
New gift amounts
8*
31%
12
41%
Payments to beneficiaries
13
45%
Column Totals
26
100%
29
100%
Note: The number of institutions reporting split interest agreements is not the sum
of the disclosures due to inconsistently display choices
*
The asterisk indicates that the presentation does not appear to be consistent
with GAAP. Cash contributions received under a split interest agreement
should be reported as a financing activity. Fair value adjustments to split
interest agreements would normally be a noncash recognition in the
statement of activity change in net assets rather than a disclosure in the
statement of cash flows.
as an operating activity. Investment income might also be reported as a
financing activity if it is restricted for reinvestment in trust principle. Three
institutions identified investment income as operating cash inflows and two
institutions reported the investment income as financing cash flows. Splitinterest agreement investment income accruing to the other thirty-three
institutions with split-interest agreements could not be identified.
346
As shown in Table 3, institutions display in an inconsistent fashion the
effects of the different types of split-interest cash flows (e.g., initial
contribution, change in fair value, investment returns, and payments to noninstitutional beneficiaries). Neither SFAS No. 117 nor the AICPA Audit
Guide specifically addressed the cash flows associated with split-interest
gift agreements.
DISCUSSION AND COMPARISON WITH BUSINESS CASH FLOW
REPORTING
Ninety-five percent of the institutions in this study used the indirect
method to prepare the statement of cash flows, slightly lower than the 98
percent of the publicly-held companies in the U. S. that report using the
indirect method (AICPA, 1998, p. 485). Usefulness of the cash flow data
could only be judged by the method used to prepare the statement.
Anticipated future cash flow projections should be more easily computed
from those statements prepared using the direct method. Such projections
could provide useful information on the ability of the institution to pay
existing or anticipated debt obligations. The information also provides data
on aggregate operating inflows and outflows.2
Articulation between the statement of cash flows, statement of
activities, and statement of financial position was achieved by a majority of
the colleges and universities (70 percent). Each institution began the
operating activities presentation (or the comparable reconciliation required
under the direct method) with the change in net assets amount reported on
the statement of activities. Changes in working capital accounts, however,
and other information on the statement of financial position could not be
supported for 18 institutions due to summarized information,
reclassifications and other adjustments. Unidentified nonoperating changes
in the current accounts and operating changes in noncurrent accounts may
also have contributed to the nonarticulation. Bahnson, Miller and Budge
(1996) found 75 percent of publicly traded companies reported cash flows
from operating activities that could not be reconciled with net income
through changes in current amounts and other information on the balance
sheet.3 Since only 30 percent of the statement of cash flows presented by
colleges and universities in this sample could not be reconciled, the
statements were considerably more transparent than those of the
corporations studied by Bahnson et al. (1996).
347
Eighty-eight percent of the institutions in this study reported interest
payments in accordance with SFAS No. 95 ¶29. This is significantly less
than the 97.2 percent of all publicly held companies in the U.S. that display
interest payments. Forty-five percent of for-profit companies report interest
paid on the face of the statement while another 55 percent disclose the
information in the footnotes (AICPA, 1998). These differences may relate
to disclosure by publicly traded firms of expenses by natural classification
on the face of the income statement rather than the functional expense
categories reported by nonprofit entities.
For-profit organizations rarely receive gifts to acquire long-lived assets
or enter into split-interest trust agreements. Therefore college and university
noncompliance with the reporting requirements on these resources appear
to be unique to not-for-profit organizations.
Cash Flow Relationships and Measures
Ingram and Lee (1997) found that over time a relationship exists
between reported operating income and cash flows from operations.
Although data over time was unavailable for this study, analyses were made
to determine what relationship, if any, existed between college and
university accrual and cash based measurements. Pearson product moment
correlations are presented in Table 4. This analysis found a strong positive
correlation between cash flow from operating activities and the change in
cash and cash equivalents. In contrast, the correlations between the change
in cash and accrual based income measures (change in total net assets and
operating income) were not statistically significant. Although cash and cash
equivalents change in a comparable manner to the cash flow from
operations, the relationship between the two is inconclusive as cash is
provided or used by operations and influenced by financing and investing
activities.
Neither tuition nor enrollments are highly correlated to the accrual or
cash based operating income. Regression analysis4 found tuition rate and
enrollment together explain only 10.82% (probability .01) of the variance
in operating income and 4.8% (probability .08) of cash flow from
operations which underscores the low correlations. The strong positive
relationship between enrollment and tuition revenue net of discounts was
expected: the correlation of .881 indicates that enrollment by itself explains
348
78 percent of the variation in total tuition revenue. However, the tuition rate
and the net tuition revenue relationship was unexpected as the tuition rate
explains only 27.7 percent of the tuition revenue (r = .527). The relationship
may reflect the result of tuition discounts being netted against tuition
revenue as required by the AICPA (1996) audit guide.
Geiger (1986, p. 169) puts forward the paradoxical generalization1 that
“the higher the tuition a private college or university charges, the less
tuition-dependent the institution is likely to be.” The highest tuition rates
are charged by private institutions that have other substantial sources of
income such as research universities and highly selective liberal arts
colleges. Conversely, less selective private schools often have few other
sources of income and are highly dependent on tuition.
The FASB believes that the change in unrestricted net assets can be
considered an operating measure (FASB, 1993b). However, the majority of
the institutions in this study (69 percent) chose to make a voluntarily
distinction between operating and nonoperating income in the statement of
activities. This is permitted under SFAS No. 117 but the board provides no
guidance so the resulting operating income figures are probably not entirely
comparable. For example, some institutions reported all investment income
as operating income while others displayed investment income in
accordance with their endowment income spending policy. That is,
reinvested investment income was displayed as nonoperating income while
the income authorized by the endowment spending policy to support
programmatic activities was reported as operating revenue. The latitude in
the standard is intended to let not-for-profit organizations make distinctions
that they believe will provide more meaningful information for the users of
their financial statements (FASB, 1993b).
The change in unrestricted net assets and the voluntarily reported
operating income figure were positively correlated (r = .448). Both accrualbased measures of operations should be more clearly associated with cash
provided by operations than the overall reported change in total net assets.
As shown on Table 4, the change in total net assets was not significantly
correlated with cash provided by operations (r = -.174). However,
operating cash flows were positively correlated with the other two accrualbased measures of income: change in unrestricted net assets (r = .300) and
operating income (r = .465). It appears that voluntarily
349
TABLE 4
Pearson Product Moment Correlation Coefficients with Significance Level
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
----------------------------------------------------------------------------------------------------------------------------------------------------------------Annual Tuition Rate
.380(**)
Change in Cash & Cash Equivalents -0.062
-0.024
Change in Total Net Assets
.379(**)
.392(**)
-0.206
Operating Income
.312(*)
.305(*)
0.214
.311(*)
Change in Unrestricted Net Assets
.356(**)
.391(**)
0.195
.819(**)
Change in Restricted Net Assets
.309(*)
.301(*)
-.458(**) .904(**)
0.136
.495(**)
Total Tuition and Fees
.881(**)
.527(**)
-0.079
.571(**)
.415(**)
.523(**)
.475(**)
Unrestricted Total Revenues .597(**).512(**)
0.092
.718(**)
.574(**)
.776(**)
.509(**)
.744(**)
Cash Provided by Operations
0.223
.622(**)
-0.174
.465(**)
.300(*)
-.486(**) .272(*)
.265(*)
.448(**)
.397(**)
Note: Column (1) = Enrollment; Column (2) = Annual Tuition Rate; Column (3) = Change in Cash & Cash Equivalents; Column (4) =
Change in total net assets; Column (5) = Operating Income; Column (6) Change in Unrestricted Net Assets; Column (7) = Change
in Restricted Net Assets; Column (8) = Total Tuition and Fees; Column (9) = Unrestricted Total Revenues
** Correlation is significant at the .01 level (2-tailed)
* Correlation is significant at the .05 level (2-tailed)
350
disclosed operating income figures may be more relevant than simply
reporting the change in unrestricted net assets. Nevertheless, operating
income explained less than a quarter of the variation in cash provided by
operations in this sample.
To further examine the issue, we looked at only those 42 institutions
that chose to report a measure of operating income. The correlation
between operating income and cash provided by operations was not
dramatically higher (r = .492, p = .001) but the correlation between the
change in unrestricted net assets and operating cash flow declined below
the level of statistical significance (r = .251, p = .109). The differences
suggest that institutions that believe the change in unrestricted net assets
may not be a relevant measure of operating income are more likely to
voluntarily report an alternate figure more closely associated with the cash
provided by operating activities.
Table 4 has a number of other significant correlations of interest. For
example, enrollment, the annual tuition rate, and unrestricted revenues are
positively correlated with most of the other variables. The change in cash
and cash equivalents is positively related to the cash provided by operations
and negatively related to the change in restricted net assets.
A measure of complexity for the institutions in this study is difficult
to describe or identify. Dwyer and Wilson (1989), Rubin (1992), and
Johnson (1996) posit that organizational complexity can be measured in the
number of days that lapse between the end of the fiscal year and the date
of the published audit attestation letter. Audit delays also were found to be
associated with the change in equity (Carslaw & Kaplan, 1991; Kinney &
McDaniel, 1993; Lawrence & Bryan, 1998; McLelland & Giroux, 1998).
Given the average ‘audit days’ found in this study (92.6 days), it appears
that colleges and universities are less complex and their audits are more
efficient when compared to the 119 days required of publicly-traded forprofit companies (Carslaw & Kaplan, 1991). This may or may not be a
measure of quality or a function of the audit firm’s performance. However
unlike the other studies, audit delay was not found to be associated with the
change in equity (correlation 0.05 with a 0.676 probability). It is
interesting to note that the institution whose auditors needed 304 days to
complete the review was constrained by a federal financial aid audit that
resulted in an $8 million adverse finding.
351
CONCLUSION AND SUGGESTIONS
Compliance by institutions in this study with cash flows reporting and
related disclosure requirements was generally satisfactory with respect to
SFAS No. 95 requirements. Large audit firms such as the Big-5 are
accustomed to preparing this statement, which has been a GAAP required
report by for-profit entities since 1988. However, the disclosures unique
to not-for-profit entities added under SFAS No. 117 were deficient at least
partially due to lack of sufficiently detailed guidance.
Seventy percent of the institutions in this study disclose sufficient
information to enable the financial statement user to articulate the statement
of cash flow data to the statement of activities and statement of financial
position. As colleges and universities become more familiar with reporting
cash flow activities, they may begin to summarize financial information so
as to diminish the transparency of the articulation. Summarization,
reclassifications, and transfers, together with unidentified nonoperating
changes in operating accounts, result in an articulation rate of only 25
percent in for-profit financial reports as reported by Bahnson, et al. (1996).
Colleges and universities are encouraged to make the
operating/nonoperating distinction in their statement of activities because
the information is a better predictor of cash provided by operations than the
overall change in net assets. A longitudinal verification of our crosssectional model would be important to confirm that net operating income
is a more relevant number than the change in unrestricted net assets for
calculating cash flows from operating activities displayed in the statement
of cash flows.
A number of institutions in this study failed to report interest or taxes
paid as required by SFAS No. 95. This lack of compliance may well change
as colleges and universities become more accustomed to preparing and
interpreting the statement of cash flows. Over time, the college and
university statement of cash flows could become more like those of
publicly held corporations.
The lack of consistency in the reporting of split-interest gift
agreements is attributed to the lack of definitive guidance. Cash flows arise
352
from these agreements at their inception, during their term and at their
conclusion. At inception, the cash inflow is accounted for in two parts; the
present value of the future benefits due the non-institutional beneficiary and
the remainder representing the contribution to the institution. During the
agreement’s term, dividends and interest earned on the invested gift and
payments made to the non-institutional beneficiary are recorded. Noncash
transactions may be needed for actuarial adjustments to the present value
of the future benefits due. At the agreement’s termination when the liability
to the non-institutional beneficiary is liquidated, cash inflows or outflows
may result, according to the donor’s stipulations. Clearly, more specific
reporting and disclosure guidance is needed given the complexity of
reporting split-interest gift agreement activities and the importance of these
gifts as a fund-raising vehicle. These research findings should be used by
accounting standard bodies to create an omnibus GAAP disclosure
guidance standard.
Definitive disclosure guidance also is needed to address not-forprofit’s reporting of temporarily restricted resources that, in accordance
with donor stipulations, are held to acquire long-lived assets. Gifts to
acquire long-lived assets including property, plant and equipment are
critical to colleges and universities’ margin of excellence but were not
clearly displayed in the statement of cash flows.
The relationship between the change in net assets and operating cash
flows provides information associated with future performance.
Theoretically, both accrual and cash-based data is useful for predicting
future cash flows and financial performance. Neither measure alone,
however, is capable of conveying this information. In this cross-sectional
study, only the predictive ability of accrual-based data could be tested.
Longitudinal research would be needed to ascertain whether cash-based or
accrual based measures are best suited to predicting future operating cash
flows.
Several other opportunities exist for future research. For example,
reviews of the definition and classification of cash flow items in the
operating, investing and financing activities would be a worthwhile area of
research. Studies would be useful in ascertaining the benefits of cash flow
353
statement standardization to resolve inconsistencies and ambiguities of
items displayed in the statement’s operating, investing and financing
categories, including the reporting of interest and unrelated business
income tax paid. And finally, the level of importance attached to cash flow
data of not-for-profit entities by users is another interesting issue in need
of examination.
Based on the findings reported in this paper, the cash flow statement
would be more useful if there were a higher level of consistency in
disclosure. It also appears that an operating income figure other than the
change in unrestricted net assets would be useful to the users of college and
university financial statements. For these improvements to be realized, we
believe that additional guidance by FASB or the AICPA is needed for the
special circumstances that pertain to not-for-profit organizations.
NOTES
1.
In order for the statement of cash flows to reconcile beginning and
ending cash and cash equivalents (AICPA1996 Audit Guide ¶3.18),
cash contributions restricted for acquisitions of plant assets must be
reported as in inflow under financing activities with a simultaneously
reported outflow under investing activities for either the purchase of
the plant asset or the purchase of investments restricted for the
purchase in a later period.
2.
Jones et al. (1995), however, found aggregate inflow and outflow
amounts displayed using the direct method could not be directly tied
to the accrual based revenue and expense items presented on the
statement of activities.
3.
Bahnson et al. (1996) analyzed financial statements for U.S.
companies for 1987 through 1990 in the Compustat PC data set that
had sufficient data points to reconcile cash flow articulation among the
required financial reports. No cash flow display information was
reported other than the articulation percentage.
4.
Tests for multicollinearity and extreme values were negative.
Univariate analysis Shaprio-Wilks statistic, W, indicated a normal
distribution.
354
5.
One explanation for the paradox is that high tuition rate schools often
provide large tuition discounts . Thus only a portion of the tuition rate
may be realized in cash making these schools actually less tuition
dependent than appears on the surface.
APPENDIX A
Universities Included in Study
Boston University
Bradley University
Brown University
Bucknell University
California Institute of Technology
Case Western University
Christian Bros University
Columbia University
Cooper Union of Science & Art
Cornell University
Dartmouth University
Dayton, University of
Denver University
Detroit University
Drexel University
Duke University
Gannon University
George Washington University
Gonzaga University
Harvard University
Harvey Mudd
Howard University
Illinois Institute of Technology
Johns Hopkins University
Kettering University
Lehigh University
LeTourneau University
Loyola Marymount University
Marietta College
Mercer University
Merrimack University
Miami University
Massachusetts Institute of Technology
Monmouth University
Northwestern University
Notre Dame University
Ohio Northern
Pacific, University of
Pennsylvania, University of
Princeton University
Rensselaer Polytechnic Institute
Rice University
Rochester Institute of Technology
Rose-Hulman University
Seattle Pacific
Seattle University
Southern California University
Southern Methodologist Univ.
St. Thomas University
Stanford University
St. Martin's University
Swathmore University
Trinity University
Tufts University
Tulane
Tulsa, University of
Tuskegee
Vanderbilt University
Washington University
Worcester Polytechnic Institute
Yale
355
APPENDIX B
Description of Institutions Included in Study
Panel A – Regional Accrediting Agency
Percentage Number
------------------------------------------------------------------------------------------------New England Association of Schools and Colleges
15%
9
(CT ME MA NH RI VT)
Middle States Association of Colleges and Schools
26%
16
(DE DC MD NJ NY PA PR VI)
North Central Association of Colleges and Schools
25%
15
(AZ AR CO IL IN IA KS MI MN MO NE
NM ND OH OK WV WI WY)
Southern Association of Colleges and Schools
17%
11
(AL FL GA KY LA MS NC SC TN TX VA)
Northwest Association of Schools and Colleges
7%
4
(AK ID MT NV OR UT WA)
Western Association of Schools and Colleges
10%
6
(CA HI GU)
Total
100%
61
------------------------------------------------------------------------------------------------Panel B - Carnegie Classification
Percentage
Number
------------------------------------------------------------------------------------------------Research I and II
38%
23
Doctoral I and II
16%
10
Comprehensive I
31%
19
Liberal arts and specialized engineering
15%
9
100%
61
------------------------------------------------------------------------------------------------Panel C – Audit Firm
Percentage
Number
------------------------------------------------------------------------------------------------Arthur Andersen LLP
3%
2
Coopers & Lybrand LLP.
34%
21
Deloitte & Touche LLP
10%
6
Ernst & Young LLP
11%
7
KPMG Peat Marwick LLP
29%
17
Price Waterhouse LLP
10%
6
Other Audit Firms
3%
2
Total
100%
61
___________________________________________________________
356
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