Accounting for Lawyers - American Bar Association

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Accounting for Lawyers November 6, 2010

Agenda • Accounting Overview • Financial Statements – Balance Sheet – Income Statement – Cash Flow Statement

• Accounting Fundamentals – – – –

Double Entry Accounting Cash v. Accrual Accounting Chart of Accounts Journal Entries

• Litigation and Other Disclosures • Financial Statement Sources – e.g. SEC Filings 1

Private and Confidential

Agenda

• Accounting Overview

2

Private and Confidential

Accounting Overview Journal Entries: Record the transactions of the business using the company’s chart of accounts (e.g. cash, accounts payable, accounts receivable, interest expense, sales revenue, etc.).

General Ledger: The accounting database that contains the Journal Entry data.

Balance Sheet

Income Statement + Revenues -

Assets

Expenses

=

= Net Income -

Cash Flow Statement

Liabilities +

Dividends

Owners Equity

= Retained Earnings

+ Net Income + Net Operating Cash Flows + Net Investing Cash Flows

The Cash Flow Statement is developed using and reordering the information in the Income Statement and the Balance Sheet

3

+ Net Financing Cash Flows = Increase or (decrease) in Cash

Private and Confidential

Agenda

• Financial Statements – Balance Sheet – Income Statement – Cash Flow Statement

4

Private and Confidential

Financial Statements - Overview Income Statement

Balance Sheet Assets = Structure

Liabilities + Owners Equity

+ Net Income

-

+ Net Operating Cash Flows

Expenses

= Net Income

+ Net Investing Cash Flows

-

+ Net Financing Cash Flows

Dividends

= Retained Earnings

Period

5

= Increase or (decrease) in Cash



A report that shows a company’s assets, liabilities, and owners equity. In other words, what the company owns and how it financed what it owns.



A report that details a company’s operating and non-operating revenue and expenses along with what cash the company distributed to its owners



A report that shows a company’s sources and uses of cash by activity type (operations, investing, and financing)



Reporting Period: As of a specific date (e.g. as of 12/312009)



Reporting Period: Over a specific time period (usually for a year or some portion of a year)



Reporting Period: Over a period of time (e.g. annual, quarterly, monthly)

Purpose

Reporting

Cash Flow Statement

+ Revenues

Private and Confidential

The Balance Sheet Assets Current Assets • • • • •

Liabilities Current Liabilities

Cash and Marketable Securities Accounts Receivable Inventories Other Current Assets Investments

• Accounts Payable • Short-Term Borrowings • Other Current Liabilities Long Term Liabilities • Long-Term Debt • Deferred Tax • Provisions

Fixed Assets

Owners Equity

• Plant, Property & Equipment • Intangible Assets

• • • •

Total Assets

Preferred Stock Common Stock Share Premium Retained Earnings

Total Financing

Items are listed in declining order of liquidity

6

Private and Confidential

The Income Statement

Revenue Gross Revenue

Gross Revenue - Adjustments

-

Net Revenue

Net Revenue

Income Statement

Less: Expenses - Cost of Goods Sold - Operating Expenses - Other Expenses Net Income Less: Dividends Retained Earnings

Sales Returns Sales Allowances Trade Discounts Cash Discounts Sales Tax

Expenses Cost of Goods Sold • Material Costs • Labor Costs • Transportation & Other Costs Operating Expenses • Selling, General, and Administrative • Research & Development • Depreciation & Amortization Other Expenses • Interest • Income Tax

7

Private and Confidential

The Cash Flow Statement

Operating Cash Flows • Net Income • Depreciation & Amortization

Cash Flow Statement

• (Gain)/Loss on Sale of Property, Plant, & Equipment • Other Non-Cash Expense/(Income)

Net Income

• (Increase)/Decrease in Accounts Receivable

+ Net Operating Cash Flows

• (Increase)/Decrease in Inventory • Increase/(Decrease) in Accounts Payable

+ Net Investing Cash Flows g Cash Flows + Net Financing Increase or (Decrease) in Cash

Cash Flow from Investing Activities • (Capital Expenditures) • (Investments) • Sale of Property, Plant, & Equipment • (Acquisitions) • Divestments

Cash Flow from Financing Activities • Share Issue / (Repurchase) Note: The purple items are based on information in the Income Statement while all other items are based on information in the Balance Sheet

• (Cash Dividends) • Debt Issue • (Debt – Interest Payments) • (Debt Repayment)

8

Private and Confidential

Agenda

• Accounting Fundamentals – Double Entry Accounting – Cash vs. Accrual Accounting – Chart of Accounts – Journal Entries

9

Private and Confidential

Key Principle - Double Entry Bookkeeping Double entry book-keeping is the foundation for how accounting works – all transactions must have equal, and offsetting entries (debits/credits) in the books

• Each transaction entry that is made has an equal and opposite entry (total

debits must equal total credits) • This is why the two sides of the balance sheet

must always balance • Another way to think about it:

A Assets t

Liabilities and Owners Equity

$20,000

$20,000

- If an entity owns assets it must have paid for them in some way Total Resources (Assets)

Total Funding (Liabilities and Owner Funds)

=

10

$$ Auto Loan

Private and Confidential

Key Principle - Cash v. Accrual Accounting Of the two primary forms of accounting, the accrual basis better matches revenues and expenses to the period in which most of the efforts to generate the sales were made Cash Basis of Accounting

Accrual Basis of Accounting

• Recognizes revenues in the period when cash is received from customers and expenses in the period when cash expenditures are made m

• Recognizes revenues in the period when goods are sold or services are rendered. Expenses are recognized in the period when the revenues that the expenses help generate are booked

• The cash basis of accounting has two major weaknesses:

• The accrual basis of accounting provides a superior measure of operating performance to the cash basis for the two following reasons:

– Does not match the costs of efforts required in generating revenues with those particular revenues – Unnecessarily postpones the recognition of revenue

– Sales activity during a given period are more accurately reflected – Period expenses are more closely matched to revenue

• The cash basis of accounting is used, for example, in the preparation of personal income tax returns • Example: Cash flow statement

11

Private and Confidential

• Most clients use the accrual basis of accounting • Examples: Balance Sheet and Income Statement

Sample Chart of Accounts: Balance Sheet

Income Statement

100-199 Assets

400-499 Revenues

100-109 Cash 101 Cash – Regular Checking 102 Cash – Payroll Checking

Product Sales 401 Store #1 Sales 402 Store #2 Sales 403 Store #3 Sales

110-119 Receivables 111 Accounts Receivable 112 Notes Receivable

Other Income 411 Interest Revenue

120-129 Property, Plant, and Equipment 121 Buildings 122 Equipment q p

500-599 Expenses Direct Expenses 501 Materials 502 Labor 503 Payroll Tax Expense 504 Freight

200-299 Liabilities 200-209 Current Liabilities 201 Notes Payable 202 Accounts Payble 203 Wages and Salaries Payable 204 Taxes Payable

Indirect Expenses (Overhead) 501 Salaries & Wages, Office & Sales 502 Accounting 503 Advertising 504 Legal Fees 505 Utilities 506 Office Supplies

210-219 Long-term Liabilities 211 Mortgage Loan Payable 212 Bonds Payable 300-399 Owner’s Equity 300-309 Stock 301 Paid-In Capital 302 Retained Earnigs 12

Private and Confidential

Journal Entry Examples and the Impact on the Financial Statements 1. On 1/1/10, Bill Buzzard deposits $25,000 in a bank account in the name of Buzzards, Inc. 2. On 1/31/10, Buzzards, Inc. purchases $500 in supplies and pays $200 cash and agrees to pay $300 to the supplier in the near future (on account). 3. On 1/31/10, Buzzards, Inc. pays $800 for February rent. 4. On 2/15/10, Buzzards, Inc. sells $1,000 worth of stuffed buzzards. Payment is due in 30 days. 5. On 2/28/10, Buzzards, Inc. records rent expense for February, $800.

13

Private and Confidential

Journal Entry and the Impact on the Financial Statements 1. On 1/1/10, Bill Buzzard deposits $25,000 in a bank account in the name of Buzzards, Inc. Journal Entry: Entry Number 1

Date 1/1/2010

Account Number 100 500

Account Type Asset Owners Equity

Account Title Cash Paid-In Capital

Debit 25,000

Credit 25,000

Record Bill Buzzard's contribution to Buzzards, Inc.

Balance Sheet: Cash Balance (1) Entry Balance

Supplies

0 25,000 25,000

Assets Accounts Receivable

0

0

Income Statement: (no impact) Revenues Balance (1) Entry Balance

14

Private and Confidential

Expenses

0

0

Prepaid Rent

0

Total Assets 0 25,000 25,000

=

Liabilities Accounts + Payable

Owners Equity Paid-In Capital 0 25,000 25,000

Journal Entry and the Impact on the Financial Statements 2. On 1/31/10, Buzzards, Inc. purchases $500 in supplies and pays $200 cash and agrees to pay $300 to the supplier in the near future (on account). Journal Entry: Entry Number 2

Account Number 100 100 200

Date 1/31/2010

Account Type Asset Asset Liability

Account Title Supplies Cash Accounts Payable

Debit

Credit 500 200 300

Purchase of supplies on account and with cash.

Balance Sheet: Cash Balance (1) Entry (2) Entry Balance

Supplies

0 25,000 -200 24,800

Assets Accounts Receivable

500 500

Prepaid Rent

0

0

Total Assets

=

Liabilities Accounts + Payable

0 25,000 300 25,300

Owners Equity Paid-In Capital 0 25,000

300 300

25,000

Income Statement: (no impact) Revenues

Expenses

Balance (1) Entry (2) Entry Balance 15

0

0

Private and Confidential

Journal Entry and the Impact on the Financial Statements 3. On 1/31/10, Buzzards, Inc. pays $800 for February rent. Journal Entry: Entry Number 3

Account Number 100 100

Date 1/31/2010

Account Type Asset Asset

Account Title Prepaid Rent Cash

Debit 800

Credit 800

February 2010 rent payment.

Balance Sheet: Cash Balance (1) Entry (2) Entry (3) Entry Balance

Supplies

0 25,000 -200 -800 24,000

Assets Accounts Receivable

Prepaid Rent

500 500

0

800 800

Total Assets

=

Liabilities Accounts + Payable

0 25,000 300 0 25,300

Owners Equity Paid-In Capital 0 25,000

300 300

25,000

Income Statement: (no impact) Revenues Balance (1) Entry (2) Entry (3) Entry Balance

16

Expenses

0

0

Private and Confidential

Journal Entry and the Impact on the Financial Statements 4. On 2/15/10, Buzzards, Inc. sells $1,000 worth of stuffed buzzards. Payment is due in 30 days. Journal Entry: Entry Number 4

Date 2/15/2010

Account Number 100 600

Account Type Asset Revenue

Account Title Accounts Receivable Sales Revenue

Debit 1,000

Credit 1,000

Sale of stuffed buzzards net 30.

Balance Sheet: Cash Balance (1) Entry (2) Entry (3) Entry (4) Entry Balance

Supplies

0 25,000 -200 -800 24,000

Assets Accounts Receivable

500 800 1,000 1,000

500

Income Statement: Revenues Balance (1) Entry (2) Entry (3) Entry (4) Entry Balance 17

Private and Confidential

1,000 1,000

Prepaid Rent

Expenses

0

800

Total Assets 0 25,000 300 0 1,000 26,300

=

Liabilities Accounts + Payable

Owners Equity Paid-In Retained Capital Earnings 0 25,000

300

300

25,000

1,000 1,000

Journal Entry and the Impact on the Financial Statements 5. On 2/28/10, Buzzards, Inc. records rent expense for February, $800. Journal Entry: Entry Number 5

Date 2/28/2010

Account Number 700 100

Account Type Expense Asset

Account Title Rent Expense Prepaid Rent

Debit 800

Credit 800

February 2010 rent expense.

Balance Sheet: Cash Balance (1) Entry (2) Entry (3) Entry (4) Entry (5) Entry Balance

Supplies

0 25,000 -200 -800

Assets Accounts Receivable

Prepaid Rent

500 800 1,000

24,000

500

1,000

-800 0

Total Assets 0 25,000 300 0 1,000 -800 25,500

=

Liabilities Accounts + Payable

Owners Equity Paid In Paid-In Retained Capital Earnings 0 25,000

300

300

25,000

1,000 -800 200

Income Statement: Revenues Balance (1) Entry (2) Entry (3) Entry (4) Entry (5) Entry Balance 18

Expenses

1,000 1,000

-800 -800

Private and Confidential

Agenda

• Litigation and Other Disclosures – Notes to the Financial Statements

19

Private and Confidential

Litigation Disclosures: 10-K Table of Contents PART I • Item 1. Business • Item 1A. Risk Factors • Item 1B. Unresolved Staff Comments • Item 2. Properties • Item 3. Legal Proceedings • Item 4. Submission of Matters to a Vote of Security Holders PART II • Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities • Item 6. Selected Financial Data • Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations • Item It 7A. 7A Quantitative Q tit ti and d Qualitative Q lit ti Disclosures Di l Ab Aboutt M Market k t Ri Risk k • Item 8. Financial Statements and Supplementary Data • Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure • Item 9A. Controls and Procedures • Item 9B. Other Information PART III • Item 10. Directors, Executive Officers and Corporate Governance • Item 11. Executive Compensation • Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters • Item 13. Certain Relationships and Related Transactions, and Director Independence • Item 14. Principal Accountant Fees and Services PART IV •

Item 15. Exhibits and Financial Statement Schedules

20

Private and Confidential

Litigation Disclosure - Example ABC Restaurant 10-K Item 3. Legal Proceedings Labor Related Matters On February 5, 2004, a former employee of ours, on behalf of herself, and allegedly other employees, filed a class action complaint in Los Angeles County, California, Superior Court, and on March 16, 2004, filed an amended complaint, alleging causes of action for: (1) failure to pay reporting time minimum pay; (2) failure to allow meal breaks; (3) failure to allow rest breaks; (4) waiting time penalties; (5) civil penalties; (6) reimbursement for fraud and deceit; (7) punitive damages for fraud and deceit; and and, (8) disgorgement of illicit profits. On June 28, 2004, the plaintiff stipulated to dismiss her second, third, fourth and fifth causes of action. During September 2004, the plaintiff stipulated to binding arbitration of the action. On March 2, 2008, and on March 19, 2008, one of Plaintiff’s attorneys filed a notice with the California Labor and Workforce Development Agency, alleging failure to keep adequate pay records and to pay Plaintiff minimum wage. To our knowledge, the Agency has not responded to either of these notices. In November 2008, the parties agreed to settle this matter subject to approval from the arbitrator and/or the court. The terms of this proposed settlement are not considered by us to be material to our consolidated financial position.

21

Private and Confidential

The Financial Statement Notes contain detailed information that are vital to the understanding / interpretation of the company’s accounts Other Notes

Key Notes • Litigation disclosure

• Research & Development

• Accounting policies

• Pension liabilities and other provisions

• Segmental analysis of revenue, profits and assets

• E&P activities (for Upstream companies)

• Various operating cost items • Personnel expenses • Financial income / expense • Exceptional items • Taxation • Acquisitions / disposals • Asset and liabilities analysis • Financial instruments (debt) 22

Private and Confidential

Agenda

• Financial Statement Sources – Company Websites – SEC Filings

23

Private and Confidential

• Risk exposures, derivative positions, etc. (especially for financial services companies) • Post balance sheet events • Share based payments / stock options • Credit rating • Board make-up • Other governance matters

Financial Statement Sources • All publicly traded companies will have financial information publicly available • Most have them in PDF format on their websites – check under “investor relations” • In the US, under SEC requirements, quoted companies must produce: – An Annual Report (10-K) is one of the most comprehensive, published sources of financial information (3 months after close of fiscal year) – A 10-Q Quarterly Report contains more limited information (45 days after end of fiscal quarter) – An 8-K Current Report is intended to reflect important events (e.g. change in control, acquisitions and divestitures, resignation of directors)

• SEC requirements for foreign registrants – May elect to file registration and reporting forms used domestically – Filing requirements for foreign firms is less stringent • •

20-F’s (similar to 10-K) due six months after close of fiscal year, optional quarterly reports and little segment disclosure 20-F’s must identify accounting methods used, identify material differences from GAAP and reconcile reported income to GAAP

• Companies which both have primary listings in London and ADRs* on NYSE must meet both SEC and UK filing requirements • European companies are usually required to present an annual report and interim statements (abbreviated and non-audited)

*American Depository Receipts 24

Private and Confidential

Useful Resources • SEC Edgar (for financial filings) (www.sec.gov)

25

26

Private and Confidential

Kurt Needles, CPA

Rona Seams

Needles & Associates, LLC

Charles River Associates

350 Interlocken Blvd. Suite 220

One South Wacker Drive, Suite 3400

Broomfield, CO 80021

Chicago, IL 60606

303-430-4225

312-377-9213

www.needles-audit.com

[email protected]

Private and Confidential

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Accounting for Lawyers - American Bar Association

Accounting for Lawyers November 6, 2010 Agenda • Accounting Overview • Financial Statements – Balance Sheet – Income Statement – Cash Flow Statement ...

460KB Sizes 6 Downloads 18 Views

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