Q: If the Subchapter S corporation is not profitable and still distributing funds to owners, unless they have cash on the balance sheet, they may be borrowing to make those distributions. Should you include those distributions in cash flow if it is borrowed funds.
A: Yes. Include the cash distributions as a cash outflow in a cash flow statement since one of the major objectives of a cash flow statement, especially the UCA cash flow statement, is to identify the borrowing cause or causes. In the case you cite, one borrowing cause could well be distributions at a point in time when the company did not have the cash resources to make such distributions. It is very important to know this to assess the risk profile of the company and borrower and to correctly identify the source of cash used by the borrower to meet its debt service.
Course overview: Business Income Tax Returns