Friday, January 17, 2014

Assets and Liabilities Outline: Accounting for Lawyers

Assets and Liabilities Outline: Accounting for Lawyers

  • Asset definition:
    • Probable future economic benefit
    • Firm controls because of past event or transaction
  • Asset recognition:
    • Right to use
    • Results from past transaction
    • Future benefit can be quantified
  • Asset Valuation:
    • Historical cost (acquisition cost), ex: land, goodwill, intangible finite life
    • Value in use (acquisition cost), ex: building, equipment
    • Fair Value (under GAAP: exit value, under IFRS: current exchange value)
    • Present value of future net cash flows (discounts future cash flows to present)
    • Net realizable value (net cash value today), except what if you can’t sell it
  • Current assets: Assets that a firm expects to turn into cash, or sell, within one year
    • Cash: short-term, safe, liquid sources of funds- currency on hand, bank deposits, savings accounts, CDs
    • Accounts Receivable (AR): aka receivables- amounts due from customers for sale of goods or services (right to collect from customers, banks use as collateral)
    • Inventory (INV): goods to be sold- can be completed goods, in-process goods, and raw materials
    • Other: prepaid expenses (money paid in advance of goods and services; ex: rent), marketable securities (stocks, bonds, etc, measured by market value)
  • Non-current assets: assets held and used for several years
    • Net Property, Plant & Equipment (Net PP&E): long term assets used in operations, including land, buildings, machinery (priced at acquisition cost)
      • Depreciation is a non-cash charge that
        • Reduces the (net) value of tangible assets on the balance sheets
        • Is an expense on the income statement that reduces earnings
        • Is an attempt to capture the deterioration in an asset’s value caused by time and use (though it’s a rough measure)
    • Other: intangibles (patents, trademarks, goodwill= difference between cost of an acquired firm and the value of its individual assets)

  • Definition: probable future sacrifices of economic benefits, arising from present obligations to transfer assets or provide services in the future as a result of past transaction
  • Recognition: represents a present obligation that exits as a result of a past transaction and requires probable future economic resources that can be quantified with sufficient reliability
  • Measurement: most liabilities are financial, requiring settlement with cash or other assets
  • Current Liabilities: obligations a firm expects to pay within one year
    • Automatic sources: informal liabilities incurred in the ordinary course of business
      • Accounts payable (AP): money owed under informal credit agreement
      • Accrued expenses: expenses incurred through passage of time, but not yet due (utility bills, taxes, wages, etc)
      • Does not include: notes, loans, any other category of debt
    • Debt: Loans, notes, etc: any liability that is not an automatic source
      • Usually requires interest payments
  • Noncurrent liabilities & shareholder’s equity: sources of funds where the supplier does not expect to receive them all back within a year
  • Contingencies: liabilities that are uncertain (timing and/or amount)
    • Recognition criterion under GAAP – no precise threshold, practice indicates approximately 80%

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