Q: The financials that we were provided on Shockproof did not show distributions on the income statement. It was only on the credit refresher. This caused confusion when our group was doing the exercise.
A: Good point. Note, however, that we can compute distributions from the financial statements by reconciling the change in retained earnings.
To compute distributions by reconciling retained earnings add 2015 net profit of $538,570 to 2014 retained earnings of $1,430,723 reported on the balance sheet. The sum of these two amounts is $1,969,293, which would be the 2015 retained earnings balance IF all profit were allocated to retained earnings and not reduced by distributions to owners. However, as we see actual ending 2015 retained earnings were $1,530,917. The difference between the "what if" amount of $1,969,293 and the actual amount is $438,376 which is the amount of 2015 distributions.
Q: There were also no footnotes to the financial statements.
A: Correct. The financial statement footnotes were not provided in the financial statement excerpt for this session. If you had a complete financial statement it would include footnotes, which would is a great source of additional information but not necessarily about distribution. However, if the complete set of accrual financial statements included a FASB 95 statement of cash flows – which is customary and required document – the FASB 95 statement would explicitly state the amount of distributions.
Q: Clarification. You made a comment that interest expense was already accounted for in traditional cash flow, correct?
A: Yes. Traditional cash flow is commonly defined as net income plus non-cash charges, e.g., depreciation and amortization expenses. GAAP net income includes interest expense.
By contrast, the other cash flow proxy – EBITDA – does not include interest expense, since it is defined as earnings before interest expenses, income taxes, depreciation, and amortization.
Q: In 2015 wouldn't there have been accelerated depreciation? Why isn't depreciation expense higher?
A: It's very common for a company to use straight line depreciation for its accrual financial statements and accelerated depreciation for its business income tax returns. Straight line depreciation provides a more attractive bottom line number, which is more pleasing to lenders. Accelerated depreciation drives down taxable income, which is a primary objective of every personal and business taxpayer.
Note that a company can use one depreciation method for its accrual financial statements, which conform to GAAP, and a different one for its business income tax returns which conform to the IRS tax code; hence one of the differences in accrual income and taxable income.
Q: Shouldn't we pick up the CPLTD in 2014 as well to figure out increases in LTD in 2015?
A: We pick up 2014 CMLTD, which is due and payable in 2015, in our calculation of principal debt that would have been paid in 2015. We deduct it from Business Cash Income to get Cash after Debt Repayment.
However, we compute new long-term debt by taking the difference between 2014 long-term debt (excluding the CMLTD since it has been paid in 2015) and compare this amount with the sum of 2015 CMLTD and 2015 Long Term Debt. The difference is the amount of new long-term debt arranged in 2015.
Course overview: Uniform Credit Analysis (UCA) Cash Flow Statement