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

jlesovitz@citrincooperman.com

215-545-4800 x4522

JEFFREY A. CARR

Pepper Hamilton LLP

carrj@pepperlaw.com

609.951.4116

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