Q: How come we didn't put in the capital contributions in the business cash flow? We took out distributions, but not contributions.
A: Distributions and capital contributions are two different sets of activities. Distributions are operating activities that pay income taxes and owner compensation. As such, they directly reduce business cash flow.
Capital contributions, on the other hand, are financing activities. They provide cash to help meet the cash flow shortfall from business cash flow. Therefore, they are classified as financing activities that do not impact business cash flow.
Further, the equity injection of $4.1MM was a conversion of debt to equity. Therefore, no cash capital contributions were made in 2018. Mr. Schumacher had loaned this amount to Sequoia Properties. As a result of the conversion, the loan balance of “Notes Payable – Due to Shareholder” decreased by $4.1MM and equity increased by the same amount.
Course overview: Ratios, Borrower Cash Flow, and the First Way Out