Accounting Outline

ACCOUNTING FOR LAWYERS CLASS NOTES
 
What is accounting?
 
So the joke goes that a company needed to hire a chief financial officer and three candidates came to interview with CEO. The CEO asked the first candidate what is 2 + 2 and he answered 5. He was not hired because the CEO found him stupid. The second candidate was asked the same question and answered 4. He was also not hired. The third candidate was asked the question and he answered—what do you want it to be? Of course, he was hired.
 
Although accountants are referred to as bean counters, we will see that accounting is not exact and is subject to interpretation and judgment calls. From recent scandals such as Enron we can see that it is also subject to manipulation as expressed by the third candidate in our story.
 I. Chapter One – Introduction to Bookkeeping
     A. Importance to Lawyers
        -WHY SHOULD ATTORNEYS LEARN ACCOUNTING?
        -Can be beneficial in your personal lives
         –If you have your own practice it would be helpful to
           understand accounting concepts when making decisions
           regarding financing or evaluating your practice
         –It would be beneficial if looking into investing in a
           company or a business
        -In your professional life you may have to review
         financial statements for a client or on its behalf
        -WHAT IS ACCOUNTING?
        -The language of business.
        -A process for reporting and recording financial data.
        -WHAT ARE THE FOUR FINANCIAL STATEMENTS USED IN
         ACCOUNTING?
        -Balance Sheet
        -Income Statement
        -Statement of Changes in Owner’s Equity
        -Statement of Cash Flows
        -WHAT IS THE PURPOSE OF THESE FINANCIAL STATEMENTS?
        -To describe the financial condition of a business and
         the results of its operations.
        -Financial statement is used to determine whether the
         entity owns enough current assets to pay liabilities as
         they come due.
        -Disclosure on financial statements must be clear.   
        -WHAT IS ONE LESSON LEARNED FROM THE ENRON SCANDAL?
        -You will not have a true picture of a business’
         financial health unless you have all four financial
         statements available.
        -WHO MIGHT LOOK AT FINANCIAL STATEMENTS AND WHY?
        -Investors – To determine if business is worth putting
         money into.    
        -Current owners/stockholders – To determine how the
         business is doing, to stay in or get out, to assist in
         pursuing course of action such as obtaining additional
         financing, paying off debt, bring in other investors.
        -Banks/financial institutions – To determine whether to
         lend money to the business.
        -Vendors/suppliers – To determine whether to extend
         credit to business.
        -Creditors/Attorneys – To determine whether there are
         any assets to pursue for collection purposes.       
     B. The Balance Sheet
        -WHAT DOES A BALANCE SHEET SHOW?
        -The business’ assets, liabilities and net worth/equity
         at a particular moment in time. Think of it as picture.
        -A balance sheet is also known as a statement of
         financial position or statement of financial condition.
        -Called a balance sheet because the total of assets must
         equal the total of the liabilities.