Cash Flow Statement

Prerequisites

Prior to reading the instructions on the cash flow statement, it is beneficial to review the below sections to gain foundational information:

  1. Accounting Fundamentals
  2. Chart of Accounts and General Ledger
  3. Financial Statements – Balance Sheet
  4. Financial Statements – Income Statement

Preface

The following information within is related to Indiana University functions solely and is not applicable to the Indiana University Foundation. This section discusses the Cash Flow Statement and how it is used internally within Indiana University. Information presented below will walk through a general understanding of the cash flow statement, its presentation specifically relating to IU reporting, and lastly will specify requirements and best practices. For information on how to pull the cash flow statement, or any of the referenced reports in the requirements and best practices sections, refer to the Financial Statements Reporting Instructions section.

Introduction

What is a Cash Flow Statement?

The Cash Flow Statement also known as Statement of Cash Flows, is a financial statement that summarizes the amount of cash and cash equivalent entering and leaving an entity. It is one of the three main financial statements, along with the Income Statement and Balance Sheet, and reflects the change in cash within an entity by Operating Activities, Investing Activities and Financing Activities. Similar to the Income Statement, the Cash Flow Statement is presented for an entire period, typically a fiscal year.

Indiana University is required to use the accrual method as opposed to the cash basis method of accounting. While this is beneficial in helping to access the revenue stream, expense categories and overall profitability for a given period, it does make it more difficult to highlight an entity’s cash position. The Cash Flow Statement complements the other financial statements by providing the cash position of an entity so internal and external users can review its overall financial health and position. For more information regarding the two types of accounting, please see the Accruals Section.

The main purpose of the cash flow statement is to explain the change in cash and cash equivalents. While it has many similarities to the Balance Sheet, the Cash Flow Statement is focused solely on the movement of cash and excludes almost all non-cash or non-cash equivalent activity. Other common uses of a cash flow statement include:

  • To evaluate an entity’s liquidity
  • Identify why there is a lack of cash within an entity – typically lack of cash is due to capital purchasing
  • Understand the entity’s inflows and outflows of cash
  • Show the impact on cash flow from changes in asset, liabilities and equity, and
  • Allows users to calculate common benchmark ratios such as: liquidity ratio, etc. (financial analysis perspective)
  • Helps predict future cash flows. Cash flow is the main factor that impacts the interest rate paid on IU debt. Low cash flow results in a higher borrowing rate which has a negative and costly impact for IU.

How is the Cash Flow Statement Organized?

The cash flow statement is comprised of the cash activity in a given period from both the balance sheet and the income statement. Since it includes object codes from both a balance sheet and an income statement, object codes range from 0001 – 9999. It is key to highlight that some object codes within the range may not be available for departments to use because they are either system generated or are limited to use by either the Campus, Treasury or the Controller’s Office. If you have questions related to balances or system generated/limited use object codes, please contact your (RC) fiscal officer or campus office.

Presentation Methods

The Cash Flow Statement can be presented in two ways: the direct and indirect methods. Both methods result in an ending cash balance which ties to the balance sheet. The main difference between the two methods is their presentation. Breakout between the two methods are as follows:

  • Direct Method – This method uses actual cash inflows and outflows from the entity's operations, such as revenue received from students for tuition, instead of modifying the operating section to include non-cash items such as depreciation.
  • Indirect Method – This method uses increases and decreases in balance sheet line items to modify the operating section of the cash flow statement. The beginning line item in operating activity is always the net income for the period pulled directly from the income statement and all other increase and decreases in operating activity are then pulled from the balance sheet. This method is based on accrual accounting and includes cash inflows and outflows that are recorded in the GL, but the cash may not have been received or spent.

For internal presentation of the cash flow statement in the Controller’s Office Toolkit, the indirect method is used. Users do not have the option to change the cash flow presentation method within the Controller’s Office Toolkit. For internal purposes, users will not be asked to use the direct method. Refer to the Indiana University’s consolidated financial statements for a more detailed example on the direct method presentation.

Below is a comparative example of the direct and indirect cash flow methods of presentation, noting that the ending cash balances remain the same in either method. While the headings are the same, also note how the lines that make up the calculations differ especially under Cash Flows from Operating Activities.

comparative example of the direct and indirect cash flow methods of presentation, noting that the ending cash balances remain the same in either method.

Cash Flow Statement General Format

The cash flow statement is a mechanism used to present the cash activity, cash received (inflow) and the cash spent (outflow), in an organized and consolidated manner. In either cash flow presentation method, changes in cash activity are classified in three separate categories: changes in operating, investing and financing activities.

  • Cash Flow from Operating Activities – operating cash flows mainly related to transactions that come from the Income Statement. Examples of operating activities on the cash flow statement include cash inflows from students paying their tuition for the semester and cash outflows related to payments to suppliers through BUY.IU.

  • Cash Flow from Investing Activities – investing cash flows related to the purchase and sales of investments and long term/capital assets. Regardless of which presentation method is used for the cash flow statement, the investing activity will be presented in the same manner. For most users at Indiana University, the only activity that should be flowing through investing activities is related to the purchase or sale of a capital asset. A breakout of the activity that is generally included in the investment category on the consolidated financial statements is listed below:
    • Includes purchase/sale of investments + investment income
    • Includes purchase/sale of capital assets net of depreciation
    • Includes purchase/sale of intangible, business unit, patents, etc.

Examples of investing activity presented on the cash flow statement include cash outflows from the purchase of a new building that will be converted into a residence hall and cash inflows from the sale of a truck previously purchased by IU, net of depreciation.

  • Cash Flow from Financing Activities – cash flows related to the liability and fund balance section of the balance sheet. Activity that is generally include in the financing category at IU is included below:
    • Debt and debt related investing activity
    • Capital lease payments
    • Transfers and subsidies (internal only)
    • Activity related to joint ventures
    • Bond offerings and repurchasing

For most individual entities at Indiana University, there will be very little activity flowing through the financing section of the cash flow statement other than activity for the income statement transfer object codes – 1699 and 5199. Examples of cash inflows would be the issuing of a new bond offering and cash outflow would be the monthly payment for a building lease.

Since the Cash Flow Statement reflects cash activity during a specified period, internal management and external users (e.g. external auditors) can use this information to access the overall financial health of the organization.

Cash Flow Statement Presentation

Since the cash flow statement shows financial activity over a given fiscal period, internal management and external users can use this information to compare one fiscal period to the next. Below is a cash flow statement extract highlighting the activity in the cash flow statements which can be pulled from IU’s internal reporting site, Controller’s Office Toolkit. For further information on how to pull a cash flow statement, see the Financial Statement Report Instructions.

Illustration of a Direct Method Cash Flow Statement

Requirements & Best Practices

This section discusses how to interpret the cash flow statement and procedures all users need to follow when pulling the cash flow statement report. By pulling the cash flow statement on a regular basis, users are able to ensure an entity’s financial health. It is important that each entity monitors and analyzes their cash flow statement on a quarterly basis at minimum.

This section also outlines requirements related to the cash flow statement review, as well as best practices. While not required, the best practices outlined below allow users to gain a better picture of the entity’s financial health and help identify potential issues on a more frequent basis. This allows organizations to identify errors, mistakes and pitfalls which can be remedied quickly and prevent larger issues in the future.

Requirements

The (RC) fiscal officer is responsible for the accuracy, reliability, and completeness of the cash flow statement. Quarterly Activities:

  1. Run the cash flow statement at least quarterly. Please refer to Financial Statement Report Instructions for more information. Users will be required to run prior year and current year for comparatives.
  2. Complete a variance analysis for all operating accounts on a quarterly basis. As part of this process organizational units need to be able to provide explanations of material variances to The Office of the University Controller, upon request only. Please check with your campus and/or RC, as they may require variance analysis submission on a quarterly or annual basis. Please see the Closing Process Instructions – Variance Analysis for more information on Variance Analysis.
  3. Determine if the ending cash balance is negative through quarterly review of the Cash Flow Statement. If it is a negative balance, what line items are causing the negative balance?
  4. Compare inflows and outflows of cash to examine where cash is being expended or received in your entity. (only cash positive bc your unit gets IUF gifts or subsidies?)
  5. Campuses and some units will have specific cash reserve requirements. Check with your campus budget office for further information. Review IU policies and requirements for reserve requirements to ensure your entity is in line with requirements

Best Practices

  1. Review the cash flow statement at year-end and consider the below checklist of questions. The (RC) fiscal officer is responsible for reviewing and analyzing the operational needs of the RC/organization. Analyzing the cash flow statement allows the fiscal officer to determine if the current financial position is going to meet the organization’s operational needs. The University Controller’s Office recommends using standard cash ratios to assess cash balances and liquidity.The questions that need to be asked will vary depending on the needs; however, the following questions are some common examples:

    • Is there enough cash to support overall cash flow and operations? An entity should always keep their ending cash balances & activity positive to ensure enough cash flow for future operational needs.
    • Is ending operating cash activity for the period negative? If the ending operating activity is negative, it means that the entity expended more cash than they received during the year. This may indicate that expenses need to be cut or a revenue stream underperformed that will need to be further analyzed.
    • Does debt activity outweigh general operating activity? In periods with high financing activity, this could indicate a future cash flow issue.
  2. Evaluate the organization’s financial trends for 3-10 years and determine if there are any predictable patterns that may impact future periods. It is difficult to evaluate overall performance by comparing current activity to the prior year only, so performing trend analysis will be a beneficial to determine potential issues that could impact the future.
  3. Analyze the cash flow statement and review any discrepancies or errors and consider some big picture questions which may impact your organization’s fiscal health.