Notes for the Accountancy and Finance for Lawyers course (3rd year Global Law, Business Minor), includes lecture and reading notes (embedded in class notes).
Includes all equations and their context and explanation.
Week 1
Purpose of financial statements & reporting standards
- Financial statements
- Importance: helps make business decision - firm’s financial status important
- 3 basic questions
- How much assets and liabilities does a firm have? BALANCE SHEET
- Risk associated with firm
- Financial position of firm at the end of period
- How much does a firm earn? INCOME STATEMENT
- Info on return firm is making - income, expenses, earning
- Statement of profit and loss
- Revenue of firm? Costs of firm? do costs exceed revenue?
- How much cash does a firm generate? CASH FLOW STATEMENT
- Does the firm have sufficient cash
- How much cash does firm generate
- Future growth?
- Other sources of cash if firm is not generating enough?
- Used to make financial/economic decisions
- Users of financial statements
- Depends on size and purpose of company
- E.g smaller firms - internal purposes, larger firms - required to file quarterly basis +
annual report
- Owners, employees, managers, society, regulators, customers, lenders, investors
- need to be confident that financial statements provide a true and fair view of the
particular company’s financial affairs
- content and presentation of the published financial statements is regulated by a series
of accounting standards
- Company law / stock exchange requirements
- Relevance to lawyers
- Underpins commercial transactions
- Common documents in business law practice
- Form 10-K/annual reports
- Prospectus (IPOs)
- Information memorandum
, - Accounting standards
- 2 main standards
- IFRS
- Principle based, issued by IASB
- US GAAP
- Rule based standards issued by FASB
- Differences in financial reporting
- Balance sheet (order in which assets are presented)
- Treatment of assets when they lose value etc
- Cashflow statement (recording of dividends and interests)
- Netherlands
- Dutch GAAP refers to the whole body of authoritative accounting literature in the
Netherlands
- Book 2 Title 9 of the Dutch Civil Code
- The Framework and the Guidelines on Annual Reporting (‘Richtlijnen voor
de Jaarverslaggeving’) from the Dutch Accounting Standards Board (DASB)
- Case law
- European Directives
Intro to Balance Sheet Statement
- ‘Snapshot’ of business at a point in time
- Communicates what the business owns & owes
- Prepared at the end of the accounting period
- 3 main components
- Assets (owned)
- Liability (owed)
- Equity (any investment made in firm)
assets = liabilities + equity
- Balance sheet always has to be in balance ^
- Owners only gets paid after all
creditors are paid in full
, - Equity as a statement of risk
- Debt holders have first claim on organizations assets
- “Equity is the accounting and economic concept of residual interest. It is the ownership
interest after fixed claimholders (creditors) are paid off.”
- All assets (left) are owned by either creditors or equity holders (right)
- Claims of creditors are (1) fixed and (2) prior to the claims of equity holders
- Assets - anything of value / resources
- Current (short term, e.g. cash) vs non-current assets (>1 year, long term, e.g. land)
- Tangible vs intangible assets
- Liabilities
- Debt / financial obligation
- Current (less than 1 year) and non-current (more than 1 year)
- Equity
- Initial amount invested
- Net worth
- Remaining after liabilities are paid
equity = liabilities - assets
- Stockholders equity
- Paid in capital
- Preferred stock
- Common stock
- Treasury stock
- Retained earnings
- Dividends
- Unrealized gains/losses from investments
- Book value
- The balance sheet statement records transactions at historical cost or book value
- Value of firms assets/equity/liability at cost at which they were originally purchased
- Market value
- The accounting “books” do not necessarily reflect current market value or intrinsic value
- Book value ≠ market value
- Market value usually bigger
, Risk associated with firm?
- How are the firm’s assets financed?
- How much liquidity does the firm have to meet its obligations?
- What is the size and value of the assets, liabilities & equity (capital structure)?
Balance sheet analysis
- Vertical
- Comparing value of firm's assets against equity + liability
- Horizontal
- Dividing balance sheet
- Working capital
- Amount of capital to finance operations
- Reach short term obligations and debts?
- Capital assets and sources of finance
- Assessment of how capital assets are financed
Tutorial questions
Question 1: There are two main international reporting standards used in different countries
around the globe. What are these reporting standards, and how do they differ? Why do you think
we need international reporting standards? Provide at-least two examples to motivate your answer.
- IFRS
- Principle based, issued by IASB
- US GAAP
- Rule based standards issued by FASB
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