Q: I have a question regarding slide 59 of the printed-out presentation. For the “adjustments-Loans to Shareholders” I’m confused on where the numbers are coming from. Could you please help me understand how those numbers were derived?
A: From our presentation, you may remember that Distributions and Loans to Shareholders for Subchapter S corporations must be deducted from reported profit net profit because they represent cash out of the company from the balance sheet used to pay taxes and any amount exceeding the tax obligation represents compensation.
As such, these amounts (for taxes and compensation) represent operating expenses taken from the balance sheet that belong on the income statement.
Distributions are determined by reconciling retained earnings in each year and Loans to Shareholder are found by reviewing the Change in Loans to Shareholders from one year to the next in the Current Asset section of the balance sheet.
Accordingly, the difference between Loans to Shareholders for 2017 is $65,286 ($65,478 – 192) and the difference in Loans to Shareholder for 2018 is $67,254 ($132,732 -65.478). These amounts represent new loans taken by the shareholder for 2017 and 2018.
Course overview: Financial Statement Review and Ratio Analysis