Question

Analyze, in general terms, the financial statements that must be prepared by a private college or university and those that must be prepared by a public college or university. Identify the major format differences in financial reporting for public and private colleges and universities.

Answer 1

The objectives of colleges and Universities differ from those of commercial enterprises for which the profit is the profit is the primary motive in that colleges and universities seek to provide educational services within the existing levels of revenue available, although a slight level of excess revenue may be desired by some governing boards. A balanced budget where expenditure remains within available revenues is always expected of a financially responsible college or revenue. A major reduction in the net assets of an institution should be cause for concern and may be signal of financial instability.

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REVENUE AND ASSETS

The primary sources of revenue vary depending on whether an institution is public or private. Most private institutions depend heavily on student tuition as the major source of revenue, while public institutions receive a mixture of state appropriations and student tuition. The portion of the budget that comes from state appropriations may vary from state to state depending on the policy position of each state as to the percentage of the budget that tuition is expected to support.

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Expenditures

Higher education institutions are very labour intensive, with the major portion of expenditures being devoted to salaries and benefits. Other expenditure requirements include such items as utilities, travel, scholarships and fellowships, communication costs, debt service on capital assets, supplies, and contractual services. In 1999-2000, total expenditures in higher education were $257.8 billion. Of this total, public institutions accounted for $159.7 billion and private institutions for $98.1 billion.

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As a foundation of the accounting system, most higher education institutions maintain expenditures by functional classification. These classifications include instruction, research, public service, academic support, student services, institutional support, operation and maintenance of plant, scholarships, and auxiliary enterprises. Current operating activities are further identified and separated depending on whether the source of revenue is unrestricted or restricted. Unrestricted revenues are presumed to be available for current operations without specific external restrictions being placed on the use of the revenues. Restricted revenues,

which are available for current operations, must be used for the purpose designated by the donor or granting entity.

Colleges and universities also have other specialized accounts that are used for the unique functions of those institutions. Loan accounts are used to record loans to students, faculty, and staff. Specific reporting requirements may be imposed on loan funds (such as the Federal Perkins Loan Program) depending on the source of funding. These accounts function on a revolving basis accounting for principal, interest, and amounts available for new loans. Another special set of accounts are agency accounts that are used for resources held by the institution strictly in a custodial role.

Many institutions are the recipients of gifts and donations for which the donor stipulates that the principal be invested with the earnings available for designated purposes. Endowment accounts are used for these types of purposes. The account is deemed to be a true endowment if only the earnings can be spent with the principal remaining intact. A term endowment allows the principal to be used after some period or specified event. Governing boards may designate funds to function as endowments, but the board may rescind these decisions.

Three specialized types of accounts are used for plant activities. These types include accounts for the construction or acquisition of capital assets, resources set aside for the repair and replacement of capital assets, and resources set aside for the repayment of principal and interest (debt service) on capital assets.