The following information is related to Indiana University functions solely and is not applicable for Indiana University Foundation.
Prior to reading the standard Financial Statements - Income Statement, it is beneficial to review the below sections to gain foundational information:
- Accounting Fundamentals Section
- Chart of Accounts and General Ledger Section
- Financial Statements - Balance Sheet Section
This standard discusses what makes up the income statement and how it is used internally within Indiana University. Information presented below will walk through a general understanding of the income statement along with presentation requirements specifically related to IU reporting and lastly will specify requirements and best practices for users of the financial statements. For further information on how to pull the income statement or any of the referenced reports in the Requirements and Best Practices section, refer to the Financial Statement Reports instructions.
The income statement, also known as the Statement of Revenues, Expenses, and Changes in Net Position, summarizes an entity’s revenue streams, expense categories, and overall profitability. The main purpose of this financial report is to measure the financial performance of the entity by comparing the revenue earned and the expenses incurred during the period. The net of the revenue and expenses is considered the net income and shows the overall financial health of the entity for a period of time (i.e. fiscal year, quarter, month). The net income is carried forward to the balance sheet as part of the fund balance.
An income statement is one of the three main financial statements, along with the balance sheet and cash flow statement. It represents the inflow (revenue) and outflow (expense) of resources the entity accumulates in a given period, most typically, a fiscal year.
The income statement is made up of multiple types of revenue and expense balances; see below for further explanation of common revenue and expense types. The income statement is based on the equation Revenues – Expenses = Net Income, commonly referred to as net position. If the net balance of revenue and expenses is positive, it is referred to as net income; if the balance is negative, it is referred to as a net loss.
Income statements list revenues first. Within Indiana University, revenue object codes have a range of 0001 – 1999. Transfer In object codes may not fall within this range because they have pre-determined mapping within the system. For further detail on this, refer to the Summary of Transfer Object Codes section.
Expenses are listed after revenue. Common examples of expenses include salary and wages, supplies and expense, computing services and contractual services. Expense related object codes have a range of 2000 – 7999 within Indiana University. Not all object codes are available for departments to use. Allotments and Charges Out plus Transfers Out may not fall in this range because they have predetermined mapping within the system. For further detail on this, refer to the Summary of Transfer Object Codes section.
While it is important to note some object codes may fall outside the ranges, it is also key to highlight that some object codes within the ranges 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 associated with system generated or limited use object codes, on your income statement, please contact your (RC) fiscal officer or campus office.
Both revenues and expenses are designated/classified as operating and non-operating.
- Operating revenues are defined as income associated with day-to-day operations of a business. These amounts are typically used to analyze the financial health of the organization and determine future cash needs.
- Non-operating revenues and expenses are defined as amounts that have been incurred outside the entity’s day-to-day activity. Common examples include gift revenue, gains/losses, interest income. These revenues and expenses are accounted for separately to better analyze the performance of the core business and ignore outside factors.
Indiana University presents the income statement at the operating and non-operating level to provide a further level of detail for external users.
Currently, the income statement in the Controller’s Office Reporting Tools presents revenue and expense information differently in order to align to internal user's needs. Users have the ability to set parameters based on the required level of detail (i.e. object code, level, etc). The Office of the Controller is currently working to create parameters that allow users to define operating and non-operating, but currently that level of detail is not a possible parameter.
Indiana University also accounts for encumbrances which are ear-marked funds set aside to cover future anticipated expenses. Encumbrance balances are not represented on the face of the income statement.
An organization’s revenue streams are listed first on the income statement and typically recorded as credit balances. Revenues are recognized on the income statement in the period they are earned, or when the good/service has been provided/performed for the customer. See the Accounting Fundamentals section and Revenue Recognition section for further guidance on revenue recognition and proper recording of revenue balances.
Typically, organizations have more than one revenue stream. Examples of Indiana University’s revenue streams include:
- Tuition and Fees – Fees collected from all students enrolled in a university class or program. Tuition revenue is split between several object codes based on student classification (full time, part time, etc) and academic period (fall, summer, etc). Fees associated to the student’s enrollment include activity, student health and technology in addition to others.
- Grants and Contracts – Funding received from the federal, state and local governments along with private entities to further IU’s mission and provide financial support for IU’s academic endeavors. Grants and contracts typically have requirements to receive the funds such as a certain service being performed, matching requirement, etc – this is considered restricted under IU fund accounting. This information is tracked by IU and reported back to the granting/contracting organization. There are also grants and contracts that are non-operating.
- Sales & Services Revenue– Revenue that is outside Indiana University’s general mission. Examples of auxiliary revenue at IU include ticket sales revenue, parking permit payments and catering services.
- Other Income – Miscellaneous smaller revenue streams outside of Indiana University’s general mission. Examples of other revenue at IU include parking citations, matching fund revenue and collections on bad accounts.
- State Appropriations – funding received from the state through permanent law or an annual appropriations act. Appropriations are most commonly restricted for use in student financial aid and daily operations of the university.
- Gifts – donations received from the public, either from individuals or organizations. Typically gifts do not require anything to receive the money, but may be earmarked for a certain purpose.
- Indirect Cost Recovery – Money received by the university as reimbursement related to the costs of implementing the project or contract. The indirect rate (% of direct costs incurred related to this project) is stipulated by the granting organization.
An entity’s expense streams are listed after revenue on the income statement and are recorded as debit balances. Expenses are defined as the cost incurred to do business or the outflow of resources associated with the general operations of an entity. Since Indiana University operates on an accrual basis of accounting, expenses are recognized as they are incurred (i.e. when the good is received or service is performed) and should be recorded in the same fiscal period as the related revenue – this is considered the matching principle. See the Accounting Fundamentals section for further guidance on expense recognition and recording expense balances.
Typically, organizations have more than one expense stream. Examples of Indiana University’s expense streams include:
- Compensation – Payments made to IU faculty and staff. Compensation comprises an employee’s salary along with overtime, bonus payments, time-off and commission (if applicable). Compensation makes up IU’s largest expense.
- Benefits – Payments made on behalf of IU faculty and staff to provide additional non-cash compensation to employees. Benefits range from health and dental insurance, retirement plans and employee assistance programs. Benefits are lumped in with compensation on IU’s income statement. Benefit expense is based on an approved pooled rate and is not charged based on direct expense. Benefit expense is automatically calculated when processing payroll – see Payments section for further detail on benefit pool rates.
- Student Financial Aid – All scholarship awards IU has provided to its students. IU provides various financial aid packages to students to encourage qualified students to attend who otherwise may not.
- Travel – expenses associated with traveling for IU business related activities which can include transportation and lodging expenses.
- Supplies and General Expense – Expenses to supply employees’ items required for daily job function. Supplies can range from janitorial items to desk supplies, light bulbs, and uniforms. These expenses are unrelated to the entity's mission as they do not have a direct impact on the goods or services IU provides to its customers.
- Cost of Goods Sold (COGS) – Costs incurred to maintain IU’s normal operating expenses. These costs are used to fulfill goods and services IU has agreed to provide. This expense code is most commonly used in auxiliary units. Common examples of expenses included in COGS are cost of materials, inventory costs, and direct labor.
- Depreciation Expense – the allocation of the cost of a capital asset expensed over the expected life “useful life” of the asset. This is a monthly recurring expense that as has no cash impact.
- Interest expense – interest payments made on existing debt such us lines of credit, loans, etc. External debt and related expenses is typically handled by the Office of the Treasurer.
Net income is the difference between revenues and expenses on the income statement. In general, it is the amount left over after all expenses have been subtracted from cumulative revenue streams. Net position is typically looked at on a historical and comparative basis by comparing numerous fiscal years to one another. Changes in net position are a representation in improvement or decline of the entity’s overall financial health.
Since the income 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. In order to truly recognize patterns and trends, users are encouraged to review multiple fiscal years from the Controller’s Office Reporting Tools.
As an additional function available on the income statement, the budget column is included for comparative purposes. Currently, the report logic is based on a hierarchy where it looks at Adjusted/Base Budget (BB) first, then Current Budget (CB) and lastly Monthly Budgets (MB) which are defined below.
|Type of Budget||Description|
|Adjusted Base Budget (BB)||The Adjusted Base Budget is defined as the initial July 1 budget load adjusted throughout the year through the use of base budget adjustments. The adjusted base budget is the basis for budget construction for the upcoming fiscal year.|
|Current Budget (CB)||The Current Budget is loaded along with the base budget load on July 1 and reflects any budget adjustments to the current year only. Common examples include: 1. A one-time expense, 2. A prorated amount in the current year. For example, a budgeted position was vacant and filled as of January 1. For the current fiscal year, you would only need 6 months of salary and would realize 6 months of savings which could be moved through a current budget adjustment and utilized elsewhere to cover expense.|
|Monthly Budget (MB)||Monthly Budgets allow departments to spread their annual budget into 12 different buckets. This is important when entities have revenue and expense lines that are not earned or incurred evenly over the 12 months of the fiscal year. This may include: 1. (Fall) Tuition Revenue- Earned August/September and utilized thru December, 2. Academic 10 Month Salaries- Paid August thru May, 3. Cyclical Auxiliary Activity -Football ticket revenue is typically earned from September-November|
Within the financial statement reports, the budget column displays the current or monthly budgets compared to actuals. Currently, the monthly budgets allows departments to spread their annual budget into 12 different buckets. If users do not utilize the monthly budget function and make adjustments, then the budget is spread evenly across the remaining open periods. UCO is currently evaluating including other budget options within the financial statement reports for those units who do not complete monthly budgets.
To gain better insight on the financial statement reports, below is an income statement extract highlighting two comparative periods’ revenues, expenses, and net incomes which can be pulled from IU’s internal reporting site, Controllers Office Reporting Tools. For further information on how to pull an income statement, see the Financial Statement Reports instructions.
The above sections provide users with a better understanding of the purpose of the income statement along with what is included and how the income statement if formatted for IU internal reporting. This section will discuss how to interpret the income statement and procedures all users need to follow when pulling the income statement report. By pulling the income 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 income statement on, at least, a quarterly basis. This allows organizations to identify errors, mistakes and pitfalls which can be remedied quickly and prevent larger issues in the future.
The (RC) fiscal officer is responsible for the accuracy, reliability, and completeness of the income statement.
Run the income statement at least quarterly with comparative balances. Please refer to Financial Statement Reports instructions for more information.
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 UCO, 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 Variance Analysis section for more information.
Users must make this supporting documentation for the entity’s income statement available upon request for audit or other purposes. Documentation should be maintained for all non-system generated transactions. For further information see the Income Statement Substantiation section.
- Run the income statement as of year-end and review for the below information:
- Negative balances on the income statement that are prior to year-end. Analysis should be done to further evaluate if any adjustments are necessary. For instructions on how to run this report, please see the Account Negative Balance Report instructions.
- Complete a detailed variance analysis for all operating accounts. Compare ending revenue and expense balances to the budgeted amounts for the fiscal year. Variances should be analyzed based on specific thresholds for the current fiscal year. Refer to the Fiscal Year-End Closing Checklist for those thresholds.
- Review the income statement monthly 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 income statement allows the fiscal officer to determine if revenues are exceeding expenses to ensure profitability for the period. The questions that need to be asked will vary depending on the needs; however, the following questions are some common examples:
- Are you operating at a profit or a loss?This analysis can help future budgeting and determine areas of surplus or areas that spending needs to be cut.
- What is your contribution margin (sales minus variable costs) and how does it compare to prior periods' contribution margins? An entity’s contribution margin should generally be increasing from period to period.
- Are there certain expenses or revenues that are significantly over/under budget? If an entity is over or under budget on a line item, that may have a large impact not only on that specific entity, but throughout IU.
- Are all non-cash items included and booked at period end? By ensuring all non-cash transactions such as accruals, transfers and manual entries, are reported, entities are correctly reporting their ending net position and not artificially inflating/deflating ending balances.
- Does the entities cash position meet operational needs – is the entity working on a surplus or deficit?Discuss within your department to determine if resources are being used correctly and/or if any changes in spending should be considered. Additionally, just because you have a positive net income doesn’t mean the entity has enough cash.
- Are expenses properly matched to revenues? Expenses should be accounted for in the same period as revenue is received, no matter when the cash changes hands.
- Evaluate the department’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.
- Review select financial ratios as noted in the standard procedures and ensure calculations are in-line with IU’s policies and requirements. Refer to the Financial Ratios document for more information on ratios.
- Contribution Margin Ratio
- Gross Margin Ratio
- Compare and analyze current year to budget or prior year balances helps assess the entity’s profitability and ensure that enough funding is received to cover costs.
- When reviewing, make sure that all account balances align with either the expense or revenue normal balance for the specific account. This helps to ensure correct balances and eliminate potential errors when reviewing the Account Negative Balance Report.