Using Federal Tax Returns for Ratio and Cash Flow Analysis explores in detail the form and content of business and personal income tax returns, the role of the Section 179 Deduction, the information content of Schedule K-1, the construction of personal cash flow statements, the information content of Schedule M-1, the construction of key performance ratios, and the construction of cash flow proxies and the Uniform Credit Analysis (UCA) cash flow statement. At the end of the eight online sessions, participants will know how to properly compute key performance ratios, cash flow proxies such as traditional cash flow and EBITDA, and the Uniform Credit Analysis (UCA) cash flow statement from information in federal income tax returns.
Target Audience
Analysts and lenders interested in exploring and mastering the proper computation of ratios and cash flow statements from information in federal income tax returns.
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1. Business Income Tax Returns
... ... where's the beef
In the first webinar session, participants examine the major differences between Subchapter C corporations, Subchapter S corporations, partnerships and limited liability companies, and sole proprietorships and how those differences flow through to the associated business income tax returns. They review the purpose of business income tax returns by type of business organization and explore the role of Schedule K, Schedule K-1, Schedule L, and Schedule M-1. In addition, participants identify the schedule and line number that capture net taxable income on each set of business income tax returns, as well as identify, if available, the amount of federal income tax due and payable on taxable business income. They explore the manner in which income tax regulations determine the channels and mechanisms for providing compensation to business owners, and they identify the role of dividends, distributions, and withdrawals in assessing borrower risk.
Target Audience:
Analysts and lenders interested in exploring and mastering the proper computation of ratios and cash flow statements from information in federal income tax returns.
Prerequisites:
Familiarity with accrual financial statements and the use of ratios and cash flow statements in assessing borrower risk.
Objectives:
By the end of the webinar session, participants will be able to:- Identify the differences between business organizations and how the principal differences are reflected in business income tax returns for each business organization.
- Identify the sole purpose of business income tax returns for Subchapter C corporations, Subchapter S corporations, partnerships and limited liability companies, and sole proprietorships and how that purpose may differ by business organization.
- Identify the role and information content of Schedule K, Schedule K-1, Schedule L, and Schedule M-1, as applicable, for Subchapter C corporations, Subchapter S corporations, and partnerships and limited liability companies.
- Identify the schedule and line number in each set of business income tax returns that reports the total taxable business income generated by the business organization and, if applicable, the schedule and line number that reports the amount of federal income tax due and payable by the organization or by its owners or partners.
- Identify how income tax provisions determine the channels and mechanisms for providing compensation to business owners by type of business organization.
- Identify the role of dividends, distributions, and withdrawals and the importance of their proper classification as operating events or financing events in assessing borrower risk.
Materials and Preparation for this Course:
- Terms and Concepts - Business Organizations
- Credit Refresher on Business Income Tax Returns
- Credit Refresher on Guaranteed Payments to Partners
- Form 1120: U.S. Corporation Income Tax Return
- Form 1120S: U.S. Income Tax Return for an S Corporation
- Form 1065: U.S. Return of Partnership Income
- Schedule C: Profit or Loss From Business
- Exercise for the Session 1 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read Terms and Concepts – Business Organizations.
- Read the two Credit Refreshers.
- Review Form 1120, Form 1120S, Form 1065, and Schedule C.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Using Federal Tax Returns for Ratio and Cash Flow Analysis
2. The Section 179 Deduction
... credit analysis in good times and bad
In the second webinar session, participants examine the purpose of the Section 179 deduction. They examine its conditions and limitations for use and its role in establishing taxable business income for each of the standard business organizations. They identify the impact, if any, of the Section 179 deduction on a borrower's accrual financial statements. They trace the impact of the Section 179 deduction on the personal income tax obligations of partners and owners of partnerships, limited liability companies, Subchapter S corporations, and sole proprietorships. In addition, participants examine the impact of the Section 179 deduction on borrower performance ratios and cash flow statements - including the Uniform Credit Analysis (UCA) cash flow statement - computed from information in the business income tax returns as well as from information in the accrual financial statements.
Target Audience:
Analysts and lenders interested in exploring and mastering the proper computation of ratios and cash flow statements from information in federal income tax returns.
Prerequisites:
Familiarity with accrual financial statements and the use of ratios and cash flow statements in assessing borrower risk.
Objectives:
By the end of the webinar session, participants will be able to:- Identify the fundamental objective of the Section 179 deduction and the conditions and limitations for its application and use.
- Identify the role the Section 179 deduction plays, if any, in establishing taxable business income for each of the standard business organizations, i.e., for Subchapter C and S corporations, for partnerships and limited liability companies, and for sole proprietorships.
- Identify the relationship between the Section 179 deduction and the accumulated depreciation balances on Schedule L for Subchapter C and S corporations, for partnerships, and for limited liability companies.
- Identify the impact of the Section 179 deduction on the personal income tax returns for owners of each standard business organization.
- Identify the impact of the Section 179 deduction, if any, on the computation and use of key performance ratios computed from a) information in a borrower's business income tax returns and b) information in a borrower's accrual financial statements.
- Identify the impact of the Section 179 deduction, if any, on the computation and use of two popular cash flow proxies and the Uniform Credit Analysis (UCA) cash flow statement computed from a) information in a borrower's business income tax returns and b) information in a borrower's accrual financial statements.
Materials and Preparation for this Course:
- Credit Refresher on The Section 179 Deduction
- Excerpts from Sandover Contractors, Inc.'s Form 1120S
- Accrual Financial Statements for Sandover Contractors, Inc.
- Form 1040 for Douglas McPherson
- Exercise for the Session 2 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the Credit Refresher on The Section 179 Deduction.
- Review Schedule 1120S, Schedule K, and Schedule M-1 in the excerpts from the information-only business income tax returns for Sandover Contractors, Inc.
- Peruse the accrual financial statements for Sandover Contractors, Inc.
- Peruse the owner personal income tax returns and the personal financial statements for Douglas McPherson.
- Complete as many of the steps in the exercise as time allows prior to the session.
Using Federal Tax Returns for Ratio and Cash Flow Analysis
Program level: Intermediate
Recommended CPE credits: 2.4
Recommended field of study:Taxes
Advanced Preparation: Printing and reviewing course materials
Delivery Method: Group Internet Based
3. Understanding Schedules K-1
... ... follow the money
In the third webinar session, participants review the information content captured in Part I on Schedule K-1 (Form 1065) and in Part I on Schedule K-1 (Form 1120S). They examine the information provided in Part II on Schedule K-1 (Form 1065) with specific attention to amounts recorded for a) non-recourse financing liabilities, b) qualified non-recourse financing, and c) recourse financing for a partnership or limited liability company. They explore the similarities and differences between Schedule K-1 (Form 1065) and Schedule K-1 (Form 1120S) with respect to information requirements and their relevance to analysis. In addition, participants track the migration for data entered in Part III of both schedules to specific locations on the personal income tax returns. Further, they identify cash and non-cash amounts recorded in Part III on both Schedules K-1 and again on the designated schedules in the personal income tax returns.
Target Audience:
Analysts and lenders interested in exploring and mastering the proper computation of ratios and cash flow statements from information in federal income tax returns.
Prerequisites:
Familiarity with accrual financial statements and the use of ratios and cash flow statements in assessing borrower risk.
Objectives:
By the end of the webinar session, participants will be able to:- Identify the purpose and information content of Schedule K for a partnership or limited liability company (Form 1065) and for a Subchapter S corporation (Form 1120S) and understand the relationship between each Schedule K and Schedule K-1 for both partnerships or limited liability companies and Subchapter S corporations.
- Identify any significant differences between the two Schedules K and associated Schedules K-1 and explore the apparent reasons for those differences.
- Track the information flow from Schedule K-1 (Form 1065) and from Schedule K-1 (1120S) to the owner's and partner's personal income tax returns.
- Identify the cash and non-cash amounts of revenue and expenses mapped from Schedule K-1 (Form 1065) and from Schedule K-1 (Form 1120S) to the personal income tax returns.
- Define non-recourse, qualified non-recourse, and recourse financing reported on Schedule K-1 (Form 1065) and identify the use of that information in establishing partner obligations and guarantees.
- Assess the most pragmatic use of information in the Schedules K-1 to assist in the process of assessing borrower and guarantor risk.
Materials and Preparation for this Course:
- Credit Refresher on Schedule K-1 (Form 1065)
- Credit Refresher on Schedule K-1 (Form 1120S)
- Excerpts from Partner's Instructions for Schedule K-1 (Form 1065)
- Excerpts from Shareholder's Instructions for Schedule K-1 (Form 1120S)
- Excerpts from Form 1065 for Information Access Partners
- Excerpts from Form 1120S for Information Access, Inc.
- Excerpts from Form 1040 for Peter Keys
- Exercise for the Session 3 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the two Credit Refreshers.
- Peruse the excerpts from the information-only business income tax returns for Information Access, Inc. and Information Access Partners.
- Peruse the excerpts from the personal income tax returns for Peter Keys.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Using Federal Tax Returns for Ratio and Cash Flow Analysis
4. Personal Income Tax Returns and Cash Flow
... ... what is cash and what is not?
In the fourth webinar session, participants review the fundamental purpose of personal income tax returns. They examine the information content and cash or non cash amounts reported on Schedules A, B, C, D, E and appropriate Schedules K-1. They identify the relationship between business income tax returns and personal income tax revenue and expenses for owners and partners of pass-through entities. Further, participants conduct a step-by-step manual construction of a personal cash flow statement using information from the personal financial statement, the personal income tax returns, and accrual financial statements for the borrower. As the final step in the webinar, they assess whether a personal cash flow surplus or a guarantor's liquid personal assets is the best estimate of guarantor cash support in a business crisis.
Target Audience:
Analysts and lenders interested in exploring and mastering the proper computation of ratios and cash flow statements from information in federal income tax returns.
Prerequisites:
Familiarity with accrual financial statements and the use of ratios and cash flow statements in assessing borrower risk.
Objectives:
By the end of the webinar session, participants will be able to:- State the purpose, format, and content of personal income tax returns, including Form 1040, the major supporting schedules, and associated statements.
- Identify the differences between personal taxable revenue and expenses and personal cash revenue and cash expenses indicated by information on Form 1040, the major supporting schedules, and Schedules K-1.
- Track the migration of revenue and expense information from business income tax returns to personal income tax returns for owners of Subchapter S corporations, partnerships, limited liability companies, and sole proprietorships.
- Construct a personal cash flow statement from information on a guarantor's personal financial statement and personal income tax returns to determine the guarantor's dependency on cash flows from the business he or she owns in whole or in part.
- Assess the value of guarantor cash support based on his or her personal cash flow statement and access to highly liquid assets in the event of a company cash flow crisis.
- Determine whether personal cash flow or access to highly liquid personal assets is the better indicator of guarantor cash support for business debt service obligations in a company cash flow crisis.
Materials and Preparation for this Course:
- Credit Refresher on Personal Cash Revenue
- Personal Financial Statement and Form 1040 Excerpts for Douglas McPherson
- Financial Statements for Sandover Contractors, Inc.
- Exercise for the Session 4 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the Credit Refresher.
- Review the personal financial statement and excerpts from the personal income tax returns for Douglas McPherson.
- Peruse the financial statements for Sandover Contractors, Inc.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Using Federal Tax Returns for Ratio and Cash Flow Analysis
Program level: Intermediate
Recommended CPE credits: 2.4
Recommended field of study:Taxes
Advanced Preparation: Printing and reviewing course materials
Delivery Method: Group Internet Based
5. Schedule M-1 and the Accrual Income Statement
... credit analysis in good times and bad
In the fifth webinar session, participants explore in detail the information captured in Schedule M-1 and the use of that information in explaining reasons for differences between accrual net income on a company's accrual financial statements and the taxable income its partners and owners must report on their personal income tax returns. In the process of examining the information content in Schedule M-1, they address the roles of guaranteed payments to partners and the Section 179 deductions in establishing net taxable income for partners and owners of partnerships and Subchapter S corporations. In addition, participants examine the process for transforming information in the business income tax returns for a partnership or Subchapter S corporation into an accrual income statement, which then allows proper computation of performance ratios, cash flow proxies, and the Uniform Credit Analysis (UCA) cash flow statement.
Target Audience:
Analysts and lenders interested in exploring and mastering the proper computation of ratios and cash flow statements from information in federal income tax returns.
Prerequisites:
Familiarity with accrual financial statements and the use of ratios and cash flow statements in assessing borrower risk.
Objectives:
By the end of the webinar session, participants will be able to:- Understand the information content of Schedule M-1 for partnerships and limited liability companies and, therefore, provide the reasons for differences between accrual net income on a partnership's financial statement and taxable income reported at Line 9 on Schedule M-1 in Form 1065.
- Understand the information content of Schedule M-1 for a Subchapter S corporation and, therefore, provide the reasons for differences between accrual net income on a company's financial statement and taxable income reported at Line 8 on Schedule M-1 in Form 1120S.
- Identify the role that guaranteed payments to partners plays in establishing accrual net income on a partnership's financial statement and on its taxable income reported at Line 9 on Schedule M-1 in Form 1065.
- Identify the role that Section 179 deductions plays in establishing accrual net income on a partnership's and Subchapter S corporation's financial statements and on taxable income reported at Line 9 and Line 8 on Schedule M-1 in Form 1065 and Form 1120S, respectively.
- Identify adjustments to Schedule 1065 and Schedule 1120S, using only information in the business income tax returns, necessary to transform both schedules to accrual income statements.
- Implement the process for constructing accrual income statements from information in Schedule 1065 or Schedule 1120S, along with information in Schedule K and Schedule M-1 in business income tax returns, which, in turn, allow proper ratio and cash flow analysis.
Materials and Preparation for this Course:
- Credit Refresher on Schedule M-1 (Form 1120S)
- Credit Refresher on Guaranteed Payments to Partners
- Credit Refresher on The Section 179 Deduction
- Excerpts from Form 1065 for D & J Installation Contractors
- Financial Statements for D & J Installation Contractors
- Exercise for the Session 5 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the three Credit Refreshers.
- Review the excerpts from the information-only business income tax returns for D & J Installation Contractors.
- Peruse the accrual financial statements for D & J Installation Contractors.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Using Federal Tax Returns for Ratio and Cash Flow Analysis
6. Business Income Tax Returns and Ratio Analysis
... credit analysis in good times and bad
In the sixth webinar session, participants examine the differences in key financial performance ratios computed from business income tax returns and accrual financial statements. Building on the issues explored in the prior webinar session on the use of information in Schedule K and Schedule M-1 in constructing an accrual income statement, they revisit and extend the process of transforming the quasi-income statement on the first page of business income tax returns for partnerships, limited liability corporations, and Subchapter S corporations - Schedule 1065 and Schedule 1120S - into an accrual income statement. Further, participants assess the value of discarding business income tax returns as the basis for borrower analysis in favor of transforming Schedule 1065 or Schedule 1120S into an accrual income statement for use in proper ratio construction and borrower assessment.
Target Audience:
Analysts and lenders interested in exploring and mastering the proper computation of ratios and cash flow statements from information in federal income tax returns.
Prerequisites:
Familiarity with accrual financial statements and the use of ratios and cash flow statements in assessing borrower risk.
Objectives:
By the end of the webinar session, participants will be able to:- Identify differences in the revenue and expense amounts on business income tax returns and revenue and expense accounts on the accrual income statement along with the reasons for the differences.
- Use information captured in Schedule M-1 on the business income tax returns to reconcile accrual reported profit with taxable income on the business income tax returns.
- Determine differences, if any, between the Schedule L balance sheet on business income tax returns and the accrual balance sheet.
- Identify the similarities and differences between statements to the business income tax returns and footnotes to accrual financial statements.
- Identify the role a Section 179 deduction plays in computing key performance ratios for each business organization.
- Identify differences in critical performance ratios computed from business income tax returns and accrual financial statements and the relevance of these differences in conducting financial analysis.
Materials and Preparation for this Course:
- Credit Refresher on Business Income Tax Returns and Ratio Analysis
- Terms and Concepts - Financial Risk Indicators
- Form 1120S for Benson Manufacturing, Inc.
- Accrual Financial Statements for Benson Manufacturing, Inc.
- Exercise for the Session 6 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the Credit Refresher.
- Peruse Terms and Concepts - Financial Risk Indicators.
- Peruse the information-only business income tax returns and accrual financial statements for Benson Manufacturing, Inc.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Using Federal Tax Returns for Ratio and Cash Flow Analysis
7. Business Income Tax Returns and Cash Flow Analysis
... credit analysis in good times and bad
In the seventh webinar session, participants briefly review the process of transforming the quasi-income statement on the first page of business income tax returns for partnerships, limited liability companies and Subchapter S corporations - Schedule 1065 and Schedule 1120S - into an accrual income statement. They use the converted accrual income statement to compute cash flow proxies and contrast the results with cash flow proxies computed from unadjusted business income tax return information. Further, participants explore whether the Uniform Credit Analysis (UCA) cash flow statement can be constructed from unadjusted business income tax returns. They identify the reasons why unadjusted business income tax return information is insufficient to do so and use the converted accrual income statement, along with information in Schedule L, to properly compute the UCA cash flow statement.
Target Audience:
Analysts and lenders interested in exploring and mastering the proper computation of ratios and cash flow statements from information in federal income tax returns.
Prerequisites:
Familiarity with accrual financial statements and the use of ratios and cash flow statements in assessing borrower risk.
Objectives:
By the end of the webinar session, participants will be able to:- Compute two proxies for business cash flow - net income + non-cash charges and EBITDA - and compare the results and messages about borrowing causes, sources of cash to service interest-bearing debt, and the borrower's financing requirement for the year using unadjusted business income tax information only.
- Convert Schedule 1120S or Schedule 1065 to an accrual income statement using information from Schedule K and Schedule M-1 and compare the results to the actual accrual income statement for the borrower.
- Assess the different messages about borrower cash flow provided by cash flow proxies based on unadjusted business income tax information and those computed from the converted accrual income statement.
- Construct a UCA cash flow statement using the converted accrual income statement and information from Schedule L and associated statements.
- Identify the differences in messages about borrowing causes, sources of cash to service interest-bearing debt, and the borrower's financing requirement for the year provided by the two cash flow proxies and the UCA cash flow statement.
- Identify differences in the income statement conversion process and subsequent UCA cash flow construction for a partnership or limited liability company that reports its information-only results on Form 1065.
Materials and Preparation for this Course:
- Credit Refresher on The ABCs of Cash Flow
- Credit Refresher on Business Income Tax Returns and Ratio Analysis
- Credit Refresher on Business Income Tax Returns and Cash Flow Analysis
- Form 1120S for Benson Manufacturing, Inc.
- Accrual Financial Statements for Benson Manufacturing, Inc.
- Exercise for the Session 7 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the three Credit Refreshers.
- Peruse the information-only business income tax returns and accrual financial statements for Benson Manufacturing, Inc.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Using Federal Tax Returns for Ratio and Cash Flow Analysis
8. Cash Based Income Tax Returns
... ... is cash enough?
In the eighth and final webinar session, participants review the methodology for transforming the quasi-income statement - reported on a cash rather than accrual basis - for a partnership, limited liability company or Subchapter S corporation - Schedule 1065 and Schedule 1120S - into an accrual income statement, using information in Schedule K, Schedule M-1, and associated statements. They explore the differences in key performance ratios computed from cash-based business income tax returns and accrual financial statements. In addition, participants examine the differences between ordinary business income reported on a cash basis on Schedule 1065 or Schedule 1120S and actual Business Cash Income reported on the Uniform Credit Analysis (UCA) cash flow statement. Further, they assess the importance of identifying the source of cash to service interest-bearing debt, as well as the necessity of using accrual financial statements for ratio and cash flow analysis.
Target Audience:
Analysts and lenders interested in exploring and mastering the proper computation of ratios and cash flow statements from information in federal income tax returns.
Prerequisites:
Familiarity with accrual financial statements and the use of ratios and cash flow statements in assessing borrower risk.
Objectives:
By the end of the webinar session, participants will be able to:- Identify information on cash-based business income tax returns for a partnership and for a Subchapter S corporation necessary to convert Schedule 1065 and Schedule 1120S to an accrual income statement, which allow proper construction and interpretation of key performance ratios.
- Construct a modified Uniform Credit Analysis (UCA) cash flow statement using a converted accrual income statement and information in Schedule L and supporting statements.
- Identify differences between ordinary business income on Schedule 1065 prepared on a cash basis and Business Cash Income on the UCA cash flow statement and assess their importance.
- Compare and contrast the messages provided by the UCA cash flow statement and Schedule 1065 about the borrowing causes, the cash sources of debt service, the financing requirement, and the cash sources used to meet the financing requirement.
- Assess the role that borrower balance sheet and income statement management play in explaining cash flow results for the period and the resulting implications about meeting future debt service obligations.
- Understand the necessity of combining cash-based business income tax return information and accrual financial statement information to fully assess the financial status and risk profile of a borrower.
Materials and Preparation for this Course:
- Credit Refresher on Cash Based Income Tax Returns
- Form 1065 for Carter Park Mill Works
- Exercise for the Session 8 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the Credit Refresher.
- Review the information-only business income tax returns for Carter Park Mill Works.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Using Federal Tax Returns for Ratio and Cash Flow Analysis
