Financial Statement Review and Ratio Analysis
Q: Do distributions in a Partnership and Subchapter S corporation have to align with the partners’ and owners’ equity percentage or will the distributions vary based on whatever the partners or owners decide?
A: There is no requirement that distributions align with relative ownership shares. Relative ownership shares are usually the starting point for actual distributions to the partners or owners, but the actual amount depends on agreements between the partners and partners and can vary greatly for many reasons. The reasons are commonly linked to the relative importance of the partner or owner to the success of the business enterprise, which may be a function of management skills, knowledge of the industry, reputation in the industry, likely financial support in a crisis, and so on.
Q: For working capital calculations, would you want to exclude the Due from Officers / Stockholders as this will likely not be paid back by owner in the next period?
A: You are correct. Normally, an account such as Due from Officers / Stockholders would be excluded in computing working capital. The same usually applies to Prepaid Expenses, since the cash to create the Prepaid Expense left the company in the past and cannot be converted back to cash to pay down current liabilities coming due in the next period. The computation guidelines will vary by lender and may vary by type of borrower.
Course overview: Financial Statement Review and Ratio Analysis