Instructor Blog - Credit College - Commercial Business

Q: How would the UCA snapshot calculation be different if they use cash basis accounting? Would it simply not include the changes to the ARs and APs? 

A: The UCA basically changes the income statement from accrual to cash accounting, thus you do not need to convert each operating account to cash using their counterpart accounts if you already have a 100% cash-based P & L to complete a full UCA cash flow. Thus, in a cash based scenario, a UCA snapshot is of little use. Note if you wanted to use a snapshot, then all of the operating accounts, not merely A/R and A/P should already be reflected on a cash basis on the financial statements; however, depreciation (which can often be lacking or misrepresented since cash-based financial statement are not GAAP compliant) on a cash based statement, would need to be added back on UCA snapshot. 

The full UCA cash flow statement identifies the cash amount for all revenue and expenses reported on the accrual income statement, thus a cash-based income statement will provide those amounts. On a full UCA, begin with the Cash based income number, then make the adjustments for Distributions and Loans to Owners to arrive at Net Cash after Operations.  Business Cash Income is the cash counterpart to accrual net income after adjustments for Loans and Distributions. On a long form UCA an adjustment for Interest Expense is needed to arrive at Business Cash Income. 

The full long form UCA goes further than the snapshot adding value to your cash flow analysis.  It determines if there is sufficient cash flow to pay down long-term debt as scheduled. It identifies the amount of cash spent on fixed assets and other long- term investments. It identifies a financing requirement for the year. It identifies the sources of cash to meet the financing requirement. If the statement is properly constructed, the calculated change in cash - the financing requirement less the financing - will equal the change in cash from the company's accrual balance sheet.

Notes: Most borrowers are not pure cash businesses. Cash based financials are not GAAP compliant. Beware, sometimes you may see depreciation included and sometimes it may be excluded. Depreciation would be an add back if using a UCA snapshot. 

If the business is not a 100% cash business or if you only have a cash-basis federal tax return and no financial statements, a critical first step is to get the underlying accrual financial statements from the borrower. If they are showing A/Rs and A/Ps, then you know they are not a pure cash business.  The accrual financials exist, since every borrower will keep track of receivables (unless it’s a pure cash business), inventory levels (if the borrower has inventory), and payables and accruals (unless, again, it’s a purely cash business).

Course overview: Cash Flow Analysis and Borrowing Causes