Cash Flow Analysis and Borrowing Causes
Q: Should an analyst or lender relate the amount of Distributions and/or Loans to Owners to the estimated income tax each owner will be required to pay when considering a “pass-through” entity? Is it appropriate to determine whether Distributions and/or Loans to Owners are excessive and impair business cash flow?
A: Always. The tax-free status of Distributions and Loans motivates owners to maximize the use of these vehicles, sometimes to the point of injuring the “pass-through” business’ cash flow. A prudent lender should seek out the amount of Distributions and Loans to Owners in addition to estimating the taxes due from the owner to assure that excess Distributions are not in play that jeopardize company performance.
Q: Why isn't the UCA calculation of fixed asset spending agreeing with the difference in Furniture & Fixtures and Vehicles on the balance sheet?
A: The proper computation of fixed asset spending is the difference between total Property, Plant, and Equipment – Net adjusted by depreciation expense for the period and then further adjusted by the gain of loss on the sale of fixed assets. In the case of Total Coverage, the UCA computation of fixed asset spending matches the change in Gross Fixed Assets, which was $73,318 in 2018. This amount is identical to the calculation of UCA fixed asset spending for 2018 on Slide 76 in the presentation.
If there is no retirement of assets and if there is no gain or loss on sale of assets, then the change in gross fixed assets will equal fixed asset spending calculated using the UCA methodology.
Course overview: Cash Flow Analysis and Borrowing Causes