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Last Minute Accountancy and Finance for Lawyers Exam Essential
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A complete in-depth but succinct summary of all the KCs and lecture notes for Accountancy and Finance that will help you ace your exams!
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WEEK 1Reading
Chapter 1 Rhee
Podcast
- Accounting is the single most important tool to have in the lawyer's toolbox - no one expects you to
be a sophisticated accountant. Business lawyers should be able to read financial statements and assess
them in a competent fashion. Depending on area of specialization the knowledge of this should be
more eg. mergers and acquisition lawyers should have an expert sophisticated understanding of A
and F in a level of accountant or investment banker. Should be conversant on issues relating to
financial statements and should be able to relate it to legal issues at hand. Business lawyers in startups
should also have an understanding of this eg. understanding what solvency, liquidity and financing
issues are and understanding how to read f statements. Finance is at the heart of every transaction.
- This week's lecture : purpose of financial statements, the three main types of financial statements -
learn the balance sheet statement out of it. The reporting standards on which financial statements are
prepared.
KC 1 : Purpose of financial statements & accounting standards IFRS, US GAAP, Dutch law
This video: how you can derive a first financial status from a financial statement and what the idea is behind
the financial reporting standards.
Goals
Aim and purpose of financial statements
Uses of financial statements
And the rationale behind financial reporting standards
Financial statements
● One cannot make major business decisions without reviewing the firm’s financial status or
circumstance as reflected in the financial statements
● The financial statement tells you about the financial status of a firm. They answer three basic
questions about a particular company :
- How much assets and liabilities and equity does a firm have? : balance sheet
● As presented in this sheet, tells us about the risk associated with the firm
● On the balance sheet you can find the financial position of a firm at the end of the
period eg. at the end of a year
, ● Can provide answers to questions such as what does the firm owe to other people,
what valuable items called assets does firm possess as security for my loan, how
much of the business capital is borrowe and how much has been invested by owners
- How much does a firm earn? : income statement or profit and loss accounts : more
information on the return that the firm is making, so the income and expenses and how
much it earns
● This is also called the statement of profit and loss And is presented for a period
● Income statements can provide answers to questions such as what revenue is the firm generating,
What costs is it incurring in generating the revenue And do these costs exceed the revenue,If the firm
is making a profit what has it decided to do with it, How much has been reinvested in a business
for a future growth, And how much has been taken out of the business by the owners,
- How much cash does a firm generate? : cash flow statement
● The amount of cash that a firm generates in that period can be found in the cash flow
statement
● It shows whether the firm has sufficient cash which is an important part of what is called
the liquidity of the firm
● The cash flow statement can provide answers to questions such as how much cash does the firm
generate, is there sufficient cash to cover the firms’ investments for future growth, If there is not enough cash
from the firm's own activities what sources are used to make up the cash short flow
● This information about firms assets, liabilities, equity, income, expenses, and cash flow along with
other information such as the notes to the financial statements, is useful to a wide range of users in
making economic decisions. For example it can help users in predicting this firm's future cash flow As well as the
timing and certainty of this cash flow
● These three basic questions relate to three financial statements
Users of financial statements
● The groups of people who might use the financial statements will depend upon type and size of the
company
● For example small firms uses financial statements for internal purposes not so much for outside
investors, while large public firms are even required to file these financial statements On a
quarterly and annual basis And to provide an annual report
● Some example of these users include the following
- Owners :They wish to know whether the company is earning a sufficient profit or return on
the money they have invested in the business. So they need information to know about
whether they are making enough profits, if they have sufficient cash to pay their bill, to
whom they owe money or who owes money to them
● The existing or potential investors like the owners Will be interested in knowing
what sort of return they can earn from their investment
- Managers- The managers will need the financial information to help them manage the
business. They wished to know whether the company's performance like the company's
profitability, can be improved or maybe they want to compare it to other peers of similar
companies. So they will need past information to help them monitor the progress, they will
need current information to carry out the day to day operational management they control
and to forecast financial information to plan activities in the future.
, - Shareholders and Creditors : can be used as a tool to monitor performance as capital
providers. Existing shareholders will be concerned about the prospects of future returns on their
investments. Potential future shareholders will also be interested in this information when
they are considering whether or not to purchase shares in the company.
- Employees : They might be interested in information that helps them decide whether or not to
continue their employment in this firm or to join them as an employee. Employees or trade
unions may consult financial statements when negotiating their pay for their terms of
employment.
- Lenders or potential lenders : will wish to know whether there is a risk that the money lent
will not be repaid. They will also be concerned about the securities for their loan : does the
firm have valuable assets that can be sold to raise money to repay the loan if necessary.
- Existing and potential customers: will be concerned about whether the company will be able to
provide the goods and services eg. the after paid services. Also in long term relationships, the financial
stability can be very imp. The potential customer of a building firm would not want the
builders to go into liquidation halfway through a construction job. A supplier who has been
asked to send slips with payment due later will want to know whether the bill will be paid
when it falls due. They will also need to ensur,e that their customer would be capable of
paying the goods and services they supplied and also to ensure long term viability of the
other party in case of long term relationship.
● This is not an exhaustive list of all the users of the financial statements. It just covers some main
categories. other examples of users include the public or the government eg. the tax authorities
or the competitors. Some users are directly connected with the firm like employees or managers
while others are not but may be affected by the management of finance or financial stability like the
general public.
- the investors
- regulators
● Users need to be confident that the financial statements provide a true and fair view of the
particular company’s financial affairs. The financial statement have two purposes in general - an
instrumental/ internal and public/ external purpose :
- First of all the financial statements are needed to operate any company of some
sophistication, the internal figures can be drawn up entirely at one's own discretion. So you
can count yourself as rich as you want.
- The external for the public purpose of financial statements means that they, especially when
they are audited, provide an indication of trust in the marketplace – users need to be confident
that the financial statements provided true and a Fairview of the particular company's
financial affairs. That is why the legislation and regulations must be complied with when
preparing external Financial figures.
● Every public company is required to produce financial statements. The contents and the
presentation of the published financial statements is regulated by a series of accounting standards and also
partly by company law and for listed companies, for instance also by additional Stock Exchange requirements, So one
needs to comply with legislation and regulations when preparing the external financial statements.
- These laws and regulations may, of course, differ by country
- within the European Union, strong harmonization has been achieved with regards to
the legislation regarding financial statements in the 1980s.
, - To determine the result of an organization (?) some standards and principles have been
developed. These principles are accepted worldwide. Only the explanation may differ
locally.
Accounting standards
There are two main Accounting Standards: the IFRS, and the US GAAP.
-They have the same goal : transparent and full disclosure of financial reports
-in order to achieve more convergence between reporting standards and National accounting rules, the
International Accounting Standards boards (IASB) started to develop Global Accounting Standards.
These standards are called the international financial reporting standards or IFRS. It was
previously known as the International Accounting Standards
● from 2005 onwards all EU publicly listed companies : those are the EU companies that
have issued Securities on the EU regulated markets, including the banks and insurance
companies are required to prepare the consolidated accounts in accordance with financial
reporting standards. Hence, these companies are permitted to apply the IFRS to the financial
statements
● by now the IFRS are required in more than 140 jurisdictions, including countries in the
European Union.
● The idea is that using common Accounting Standards improve the transparency and the comparability of a
company's financial statements thus increasing market efficiency and reducing the cost of raising capital for
companies. These Accounting Standards represent the largest body of guidelines and
principles on matters ranging from the valuation of assets and accounting for leases to the
content of cash flow statements and accounting for taxes.
● Most listed European companies prepare the company financial statements according to
IFRS either compulsory or voluntarily
● and local GAAP is largely aligned or harmonized with IFRS in almost all European
countries. As you can derive from the map, most of the world's most significant Capital
markets now require IFRS or some form thereof for the financial statements of public
interest entities.
US GAAP
- Public companies in the US are required to follow the generally accepted accounting principles. The
US GAAP is a standardized set of principles that aims to provide a uniform set of rules and formats to facilitate
analysis by investors and creditors.
The difference between the two
The differences between two sets of Standards tend to arise due to the level of specific guidance
provided. IFRS is often referred to as being principles-based, while US GAAP is said to be more rules
based : This means that there are rules that create Clarity and they draw bright lines. While principles-based has more open
Norms because of the idea that rules can be circumvented. And the letter of the law is not always the same as the spirit of the law.
The Dutch case
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