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FOR LAWYERS
http://acc.com
Presented by:
Joseph W. Lesovitz, CPA/ABV/CFF, CFA, CFE, Citrin Cooperman,
Jeffrey A. Carr, Esquire, Pepper Hamilton, LLP
INTRODUCTION TO
ACCOUNTING
COURSE SUMMARY
INTRODUCTION TO ACCOUNTING FOR LAWYERS
Attorneys often review and address accounting
documentation and information as part of their work.
Understanding the basics of accounting provides context to
the documentation and information being reviewed. This
program will provide an overview of financial
documentation including the income statement and the
balance sheet as well as an introduction to basic
accounting principles.
BENEFITS OF ACCOUNTING
https://www.youtube.com/watch?v=xwEKL1Qevg0&feature=youtu.be
FINANCIAL ISSUES IN NEGOTIATIONS
• Financial issues exist in almost every situation worth
negotiating about or litigating over
• Focus often includes the financial issues (in negotiations
or litigation)
• To be an effective advocate:
• Understanding of financial issues and how they are reported and
described is crucial
Accounting =
Language of Business
OVERALL OBJECTIVE OF ACCOUNTING
• To present financial information that is:
• Relevant,
• Reliable,
• Meaningful,
• Understandable,
• Consistent, and
• Comparable.
• To provide detailed financial information that is not biased
or misleading.
• Set of Accounting Guidelines
• Options Exist
• Disclosure
• Purpose: to facilitate the comparability of financial
statements among entities and over time
• Focus:
• Measurement
• Timing
• Disclosures
• Preparation and Presentation
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
• Grammar of Business
• Codification (Now versus Then)
• Single source of authoritative
non-governmental US GAAP
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
THE SECURITIES AND EXCHANGE
COMMISSION (SEC)• Role in the Accounting Profession
• Federal agency charged with administering the body of federal
securities laws.
• Securities laws apply to companies who issue securities to the
public.
• General Mission
• Protect investors
• Maintain fair, orderly, and efficient markets
• Facilitate capital formation
ACCOUNTING OBJECTIVES AND
FOUNDATIONAL PRINCIPLESStatement of Financial Accounting Concept #1
• Sets forth the following objectives of financial accounting and
reporting:
• To provide useful information;
• To provide information relating to an entity’s cash inflows and outflows;
• To provide information relating to assets, liabilities, and equity; and
• To provide information relating to the changes in assets, liabilities, and
equity during each reporting period
Accounting Qualitative Characteristics
• To achieve its objectives, accounting information should possess
the following qualitative characteristics:
• Primary
• Relevant (presented on a timely basis)
• Reliable (free from errors, biases, and misstatements)
• Secondary
• Comparable (as to other entities of like kind)
• Consistent (entity’s accounting information is prepared in a manner that
facilitates comparability from period-to-period)
ACCOUNTING OBJECTIVES AND
FOUNDATIONAL PRINCIPLES
• Recording transactions in business records
• Extracting, sorting and summarizing the recorded
transactions
Allows for analysis of the
Financial performance
TRANSACTION RECORDING
• Balance Sheet
• Income Statement
• Statement of Cash Flows
• Statement of Shareholders Equity
• Notes
FINANCIAL STATEMENTS
Why are there so many parts to a set of financial
statements?
Each part of the set of financial statements provide different, but
necessary information.
FINANCIAL STATEMENTS
FUNDAMENTAL EQUATION MAP
ASSETS LIABILITIES +OWNER’S
EQUITY
DR. CR.
=
DR. CR.
+
DR. CR.
=
SEQUENCE
JOURNAL LEDGER
(daily entries) (periodic summaries)
(end result for internal and
external users)
STATEMENTS
• The Journal (Daily Book)
• First book in the accounting system
• First record of each transaction
Journal Entry Format
DEBIT (to the left)
CREDIT (to the right)
JOURNAL ENTRIES
• Points to remember
• The fundamental equation is the balance sheet.
• Equation means one side equals the other side
• Balance means balance
• The balance sheet always balances
• The fundamental equation always equates
• To maintain equation and balance:
• Every accounting requires at least two entries.
• Entries are listed in accounts on the left-side or the right-side; left-side
entries are “debits”; right-side entries are “credits.”
• Debits always equal credits (the only hard/fast rule in accounting)
DOUBLE ENTRY BOOKKEEPING
BALANCE SHEET
ASSETS (Cash, A/R, Inventory, Equipment, etc. )
LIABILITIES (A/P, N/P, etc.)
OWNERS’ EQUITY (Residual Interest in Assets)
+
OR… Assets = Liabilities + Owners’ Equity
=
• Accounts are set up to track different categories
• For example:
• Cash
• Inventory
• Plant
• Equipment
• Referred to as “Balance Sheet Accounts”
• Name of Account not Key
• Combining Accounts Allowed
• i.e. Plant & Equipment
BALANCE SHEET ACCOUNTS
COCA-COLA COMPANY
COCA-COLA COMPANY
INCOME STATEMENT
REVENUES (Increase in equity)
EXPENSES (Decrease in equity)
NET INCOME (Net Loss)
=
OR… Revenue - Expenses = Net Income
-
NOVA NATION
• Philadelphia hosted Sweet Sixteen (Philadelphia Sports Congress)
• Generate 10,000 hotel rooms
• $18.2 million in economic revenue
• Nova Parade
• $22k in cost, $6k for city
• Economic Impact $$$$
• Nova National Championship
• NCAA Distribution Pool
• Annual payout for 6 years
• Based on Unit Value
• 2016 – 6 wins x $260,525
• $1.6m
• 2017-2021 = >$7.8m
ECONOMIC IMPACT
INCOME STATEMENT
• Assets and expenses are directly related.
• Expenses paid in advance create assets; when used, the
asset becomes an expense.
• Assets are almost always pre-paid expenses - they will be
used in the business somehow or another to generate
revenue.
• Hence: the balance sheet (listing assets) is a set of
permanent accounts, “as of” a certain date (i.e. As of Dec.
31, 2018).
• The income statement (listing expenses) is a set of
periodic accounts, “for” a period of time (i.e. For the Year
Ended Dec. 31, 2018).
ASSETS AND EXPENSES
• Concepts:
• Revenues - Expenses = Profit (or Loss)
• Profit (a/k/a Net Income) increases Owner’s Equity
• Linking Profit to Owner’s Equity is linking Income Statement to
Balance Sheet
• Closing Process: (close the income statement into the
balance sheet)
• Step 1: Close each Revenue and Expense Account into nominal
account called Profit & Loss (“P&L”) Account
• Step 2: Close the nominal account into the “Retained Earnings”
account which is part of Owners’ Equity
CREATING THE INCOME STATEMENT
Vernacular: Empty the Buckets!
CLOSING INCOME STATEMENT ACCOUNTS
MAPPED TO FUNDAMENTAL EQUATION
ASSETS
=
LIABILITIES+
O.E.
Balance
Sheet
EXPENSE
Income
Statement
+ - - + - +
- + + -
P&L
(1)
CLOSE
EXPENSE
(3)
CLOSE
P&L
REVENUE
CLOSING INCOME STATEMENT ACCOUNTS
MAPPED TO FUNDAMENTAL EQUATION
ASSETS
=
LIABILITIES+
O.E.
Balance
Sheet
EXPENSE
Income
Statement
+ - - + - +
- +
REVENUE
THESE ARE TEMPORARY ‘BUCKETS’
• Accounts are set up to track different categories
• For example:• Revenue/Sales
• Interest Income
• Cost of Goods Sold• Direct Material
• Direct Labor
• Overhead
• Purchases
• Salaries/Wages
• General and Administrative Expenses• Supplies
• Rent
• Telephone
• Referred to as “Income Statement Accounts”
• Name of Account not Key
INCOME STATEMENT ACCOUNTS
COCA-COLA COMPANY
CASH BASIS VS. ACCRUAL BASIS
• Record Transactions
When:
• Money is received (Revenue)
• Money is paid (Expense)
• Generally used by
individuals, and for tax
purposes, by small
businesses
• NOT recognized as GAAP.
• Uses Matching Principle:
• Record revenue when
earned.
• Record expenses when
incurred
• Receipt of payment is
irrelevant with regards to
revenue recognition
• Payment of cash is
irrelevant with regards to
the matching principleMOST OF US USE THE
CASH BASIS IN
CONDUCTING OUR
PERSONAL AFFAIRS.
• When should a company recognize revenue?
• Four revenue recognition criteria must be met:
• Persuasive evidence of an arrangement exists;
• Delivery has occurred or services have been rendered;
• The seller’s price to the buyer is fixed or determinable; and
• Collectability is reasonably assured
• When should a company record expenses?
• Recorded when incurred
REVENUE RECOGNITION
STATEMENT OF SHAREHOLDERS’ EQUITY
OWNERS’ EQUITY
• Determine sources of cash during the period (cash
inflows)
• Determine uses of cash during the period (cash outflows)
• The difference is an increase or decrease in cash during
the period
• Cash at the end of the period as reported on the
statement of cash flows should match the cash recorded
on the balance sheet
STATEMENT OF CASH FLOWS
Net Income & Cash are different!
• “Common Sized” Financial Statements converts dollars
into percentages so “apples to apples” comparisons can
be made for a company year over year or a company
compared to its peer group.
• Trending a company’s performance
• Benchmarking a company to its peers
• Comparing companies of different sizes
• Common Sized Income Statements are line item
expenses as a percent of revenues.
• Common Sized Balance Sheets are line item assets as a
percentage of total assets, and line item liabilities as a
percentage of total liabilities.
COMMON SIZED FINANCIAL STATEMENTS
COCA-COLA COMPANY
(in millions) 2016 2017 2018
Revenue $41,863 100% $35,410 100% $31,856 100%
Cost of Goods Sold (16,465) -39% (13,255) -38% (11,770) 37%
Gross Profit 25,398 61% 22,155 62% 20,086 63%
Selling, General and Administrative Expenses (15,370) -37% (12,654) -36% (10,307) -32%
Other Operating Charges (1,371) -3% (1,902) -5% (1,079) -3%
Operating Income 8,657 21% 7,599 21% 8,700 28%
Interest Income 642 1% 677 2% 682 2%
Interest Expense (733) -2% (841) -2% (919) -3%
Equity Income (loss) – net 835 2% 1,071 3% 1,008 3%
Other Income (loss) – net (1,265) -3% (1,764) -5% (1,121) -4%
Income Before Taxes 8,136 19% 6,742 19% 8,350 26%
Taxes (1,586) -3% (5,560) 16% (1,623) 5%
Net Income $6,550 16% $1,182 3% $6,727 21%
Revenue Growth -8% 5%
Income Statement (Common Sized)
COCA-COLA COMPANY
Income Statement (Horizontal Analysis)
(in millions) 2016 2017 2018
Revenue $41,863 100% $35,410 85% $31,856 76%
Cost of Goods Sold (16,465) 100% (13,255) 81% (11,770) 71%
Gross Profit 25,398 100% 22,155 87% 20,086 79%
Selling, General and Administrative Expenses (15,370) 100% (12,654) 82% (10,307) 67%
Other Operating Charges (1,371) 100% (1,902) 139% (1,079) 79%
Operating Income 8,657 100% 7,599 88% 8,700 100%
Interest Income 642 100% 677 105% 682 106%
Interest Expense (733) 100% (841) 115% (919) 125%
Equity Income (loss) – net 835 100% 1,071 128% 1,008 121%
Other Income (loss) – net (1,265) 100% (1,764) 139% (1,121) 89%
Income Before Taxes 8,136 100% 6,742 83% 8,350 103%
Taxes (1,586) 100% (5,560) 351% (1,623) 102%
Net Income $6,550 100% $1,182 18% $6,727 103%
SUPER GROWTH, INC.
(in millions) 2016 2017 2018
Revenue $5,000 100% $7,500 100% $15,000 100%
Cost of Goods Sold (3,500) -70% 5,000 -67% 9,750 65%
Gross Profit 1,500 30% 2,500 33% 5,250 35%
Selling, General and Administrative Expenses (2,000) -40% (2,200) -29% (2,600) 17%
Operating Income (500) -10% 300 4% 2,650 18%
Interest Income 1 0% 3 0% 5 0%
Interest Expense (10) 0% (15) 0% (20) 0%
Other Income (loss) 5 0% 10 0% 15 0%
Income Before Taxes (504) -10% 298 4% 2,650 18%
Taxes (10) 0% (20) 0% (30) 0%
Net Income $(514) -10% $278 4% $2,620 18%
Revenue Growth 50% 100%
Income Statement (Common Sized)
SUPER GROWTH, INC.
(in millions) 2016 2017 2018
Revenue $5,000 100% $7,500 150% $15,000 300%
Cost of Goods Sold (3,500) 100% (5,000) 143% (9,750) 279%
Gross Profit 1,500 100% 2,500 167% 5,250 350%
Selling, General and Administrative Expenses (2,000) 100% (2,200) 110% (2,600) 130%
Operating Income (500) -10% 300 260% 2,650 730%
Interest Income 1 100% 3 300% 5 500%
Interest Expense (10) 100% (15) 150% (20) 200%
Other Income (loss) 5 100% 10 200% 15 300%
Income Before Taxes (504) 100% 298 259% 2,650 726%
Taxes (10) 100% (20) 200% (30) 300%
Net Income $(514) 100% $278 254% $2,620 710%
Revenue Growth 50% 100%
Income Statement (Horizontal Analysis)
• Contain additional financial information
• Provide explanations for content in the financial
statements
• Present conventions selected:
• Inventory methods
• Depreciation methods
• Receivables write-offs
• Provide disclosures required by Generally Accepted
Accounting Principles
FOOTNOTES
CONTACT INFORMATION
JOSEPH W. LESOVITZ
Citrin Cooperman, LLP
215-545-4800 x4522
JEFFREY A. CARR
Pepper Hamilton LLP
609.951.4116
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