Accounting and Finance for Lawyers
Classified Balance Sheet (11-14) – snapshot of accts on a particular date
I. Assets:
a. current assets
i. used within 1 yr
ii. e.g. marketable securities, notes receivables, accts receivables, inventories, prepaid expenses
b. long-term investments
i. longer than 1 yr
ii. stocks and bonds held onto; notes receivables and accts receivables which cannot be collected within 1 yr; prepaid expenses that cover more than 1 yr
c. fixed assets
i. land, equipment, furniture
d. intangible assets
i. patents, goodwill
II. Liabilities (12)
a. current
i. less than 1 yr must be paid
1. notes payable: money borrowed under promissory notes due within one yr
2. accts payable
3. accrued liabilities or wages: services already performed
4. unearned revenues: amts which co will have to refund if it does not perform the services
b. long-term
i. lease; mortgage due in more than 1 yr
c. liabilities get priority when liquidation occurs, so listed before SH’s equity
i. secured claims: co has pledged one or more assets as collateral comes next during liquidation
III. SH’s Equity
Income Statement (28) – how much net worth (equity) has changed over a period
I. gives a summary of earnings or losses btw balance sheet dates
II. Revenues: increase in assets, decrease in liabilities from services central to operations
a. gains: increase in assets, decrease in liabilities from incidental txns not involving investments by owners
b. professional income
III. Expenses: decrease in assets, increase in liabilities from services central to operations
a. losses: decrease in assets, increase in liabilities from incident txns which do not involve distributions to owners
IV. Net Income = proprietorship
Statement of Changes in Owner’s Equity (49)
I. Drawings: dividends or distributions
II. SH’s Equity – 3 components (53) – used by accounts
a. capital stock: common stock, preferred stock
b. additional paid in capital/capital surplus: capital contributed in excess of par
c. retained earnings – track all undistributed profits that remain invested in the corp.
III. SH’s Equity – 3 components (61) – used by attys
a. stated capital
b. capital surplus
c. earned surplus
IV. Legal Capital or Stated Capital (54)
a. stated capital = issued shares X par value
i. e.g. 1000 shares at $1 par but sold for $20
1. stated capital = $1,000
2. capital surplus = $19,000
b. Capital Surplus = the amt of the shares sold that exceeds the stated par value
i. capital surplus is recorded as “additional paid in capital”
c. stated capital + capital surplus = the total capital that
of txns (borrowing, issuing new stock, or buying capital assets) greatly affect cash but do not appear in the income statement for the period and emerge on the balance sheet at the end of the period.
IV. Common Cash Inflows:
a. sales for cash
b. collection of accts receivable
c. short and long-term borrowings
d. sale of property, plant and equipment
e. issuance of stock for cash
V. Common Cash Outflows:
a. operating expense
b. acquisition of property, plant, equipment or other long-term assets
c. repayment of short and long-term debt
d. distributions to owners
VI. Statement of Cash Flows: reports the changes in cash and cash equivalents during acctg period and explains those changes.
a. Purpose: (listed on p124)
i. assess ability to generate positive future net cash flows
ii. ability to mt obligations, pay dividends, needs for external financing
iii. reasons for diff btw net income and associated cash receipts and payments
asses the effects on co’s financial position of both cash and noncash investing and financing txns during the period
