Q: Under UCA cash flow calculation, distributions and loans to partners are deducted from Cash after Operations. How are contributions from partners and / or loans from partners to the company treated? Are these adjustments recorded in the same section of the UCA cash flow statement?
A: Partner or owner capital contributions and loans to the company are not consolidated with distributions and / or loans to owners nor should they be reported as an operating activity on the UCA cash flow statement. Capital contributions should, instead, be treated and classified as a financing activity intended to strengthen the company’s overall financial position. Owner loans to the company should be recorded as a related party activity since they fall outside the core operating activities and traditional third party lending used by the company. Maintaining this separation in reporting these business activities and associated cash flow impact preserves the integrity of the nature and amount of each transaction type.
Consolidating or recording capital contributions and partner or owner loans to the business as operating activities would erroneously affect Net Cash after Operations and cash flow available to service debt. The net effect would be to distort our analysis and our view of the debt capacity of the borrower.
Course overview: Advanced UCA Cash Flow: Part I of II