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law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
law.wustl.edu
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law.wustl.edu

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  • 1. BUSINESS ACQUISITIONS BASIC ACCOUNTING CONCEPTS AND FINANCIAL STATEMENTS © 2006 Joseph D. Lehrer
  • 2. PURPOSE FOR ACCOUNTING
    • To Report Financial Results (Income Statement)
      • For a Period of Time (Usually One Year)
      • Revenue, Expenses and Profits
    • To Report Financial Status (Balance Sheet)
      • Assets, Liabilities and Shareholders’ Equity
    • To Report on the Sources and Uses of Cash (Statement of Cash Flows)
  • 3. ACCOUNTING CONCEPTS
    • Generally Accepted Accounting Principles (GAAP)
    • Accrual vs. Cash Accounting
    • Consolidation & Combination
  • 4. CONCEPT OF GAAP
    • Generally Accepted Accounting Principles (GAAP) are the General Accounting Rules used to Prepare Financial Statements
    • Adopted by the Financial Accounting Standards Board (FASB) the American Institute of Certified Public Accountants and the Securities and Exchange Commission (SEC)
    • Sarbanes Oxley Has Further Affected the Concept of GAAP by Instituting the Public Corporation Accounting Oversight Board (PCOAB)
  • 5. SOX Accounting Provisions
    • §101,et. seq. Establishes PCAOB
    • Title II establishes Rules Relating to Auditor Independence
    • §301 Places Accounting and Audit Oversight Upon Audit Committee of the Board
    • §302 of SOX Requires Certification of Financial Statements by the CEO and the CFO
    • §404 Requires Internal Audit Function, which is Assessed by Management, which Assessment is Attested to and Confirmed by Independent Auditor
  • 6. AS DEFINED IN ACQUISITION AGREEMENTS
  • 7. CONCEPT OF ACCRUAL BASED ACCOUNTING
    • Revenue From Selling a Good or Service Is Recognized in the Period in Which the Good Is Sold or the Service Is Performed
      • As Opposed to Cash Basis Accounting Where Revenue Is Recognized Only When Cash Is Received
    • Expenses Recognized When Incurred
      • As Opposed to Cash Basis Accounting Where Expenses Are Recognized Only When Actually Paid
  • 8. CONCEPT OF CONSOLIDATION
    • All Companies which are Commonly Controlled are Reported on a Consolidated” Basis
      • This is a Requirement of GAAP
      • Generally, 50% or More Owned Subsidiaries will be Consolidated with the Parent
      • Transactions among Companies which are included in a Consolidated Statement will be Eliminated
  • 9. BASIC ACCOUNTING STATEMENTS
    • Balance Sheet
    • Income Statement
    • Statement of Cash Flows
  • 10. Income Statement Reports the success or failure of the company’s operations for a period of time. Balance Sheet Statement of Cash Flows
  • 11. Balance Sheet Reports assets and claims to those assets at a specific point in time. Income Statement Statement of Cash Flows
  • 12. Statement of Cash Flows Provides information about cash receipts and cash payments of a business for a specific period of time. Income Statement Balance Sheet
  • 13. TIMING OF ACCOUNTING STATEMENTS
  • 14. BALANCE SHEET
    • Indicates the Financial Status of a Company
    • At a Specific Point in Time
    • Has a Listing of Assets
      • Current Assets (e.g., cash, inventory & receivables
      • Non-Current Assets (e.g., buildings, equipment)
      • Other Assets (e.g., intangibles, goodwill)
    • Has a Listing of Liabilities
      • Current (e.g., accounts payable, accrued expenses)
      • Long Term (e.g., loans and debt)
  • 15. BASIC BALANCE SHEET FORMULA
    • TOTAL ASSETS – ALL LIABILITES = NET WORTH
    • OR
    • ASSETS – LIABILITES = SHAREHOLDERS’ EQUITY
  • 16. BALANCE SHEET FORMULA ASSETS = LIABILITES + SHAREHOLDERS’ EQUITY OR WHAT THE BUSINESS OWNS = WHAT IS OWED TO OTHERS + SHAREHOLDERS’ EQUITY ASSETS – LIABILITIES = SHAREHOLDERS’ EQUITY ASSETS – LIABILITIES = NET WORTH OR OR
  • 17. BALANCE SHEET FORMULA (A Balance Sheet Must Balance) CURRENT ASSETS Cash $xxxxxxxxx Receivables $xxxxxxxxx Inventory $xxxxxxxxx Total Current $xxxxxxxxx FIXED ASSETS Land Improvements $xxxxxxxxx Equipment $xxxxxxxxx Depreciation ($xxxxxxx) Total $xxxxxxxx TOTAL ASSETS $ xxxxxxxx CURRENT LIABILITIES Trade Payables $xxxxxxx Accrued Expenses $xxxxxxx Current portion of Long-Term Debt $xxxxxxx Total Current $xxxxxxx Long Term Debt $xxxxxxx TOTAL LIABILITES $xxxxxxx SHAREHOLDERS EQUITY Paid In Capital $xxxxxxx Capital Surplus $xxxxxxx Retained Earnings $xxxxxxx Total $ xxxxxxx TOTAL LIABIITIES & S-H EQUITY $ xxxxxx
  • 18.  
  • 19.  
  • 20. SHAREHOLDERS EQUITY
    • Two Major Categories
      • Capital Stock
      • Retained Earnings
    • Capital Stock
      • Stated Capital
      • Capital in Excess of Par Value
    • Retained Earnings
      • Total Cumulative Amount of Earnings Retained by the Company (Cumulative Profits less Cumulative Dividends)
    • Reduced by “Treasury Stock” (Stock Which has been Redeemed)
  • 21. INCOME STATEMENT a/k/a Statement of Operations
    • Gross Sales
    • Net Sales (net of allowances & returns)
    • Cost of Sales (COGS)
    • Gross Margin
    • Operating Expenses (R & D, Admin., Selling)
    • Operating Income
    • Other Income & Expense (e.g., Interest)
    • Taxes
    • Net Income
  • 22. INCOME STATEMENT
  • 23.  
  • 24. ACCRUAL BASED ACCOUNTING
    • Revenue is Recognized On Sale is Made or Services Performed, even though Cash is Not Received
      • When Sale is Made on Credit, Account Receivable is Recognized on Balance Sheet
      • Revenue is Booked so that Revenue is Recognized
    • Expenses are Recognized before Bill is Paid
      • An Incurred Expense is Shown on Balance Sheet as Account Payable or Accrued Expense
      • Expense is Booked as Operating Expense
  • 25. CASH BASIS ACCOUNTING
    • Not Often Used, and Used Primarily by Service Firms (Law, Engineering, …Etc.)
    • Revenue Is Not Recognized Until the Cash Is Actually Received From the Customer
    • Therefore, a Balance Sheet Does Not Reflect Accounts Receivables.
    • Expenses Are Not Recorded Until the Money Is Actually Paid
    • Accrued Expenses Are Not Reflected on the Balance Sheet.
  • 26. Statement of Cash Flows
    • Determine Changes In Cash By Reason Of:
    • Cash from Operations
    • Net Income + Depreciation +/- Working Capital Changes
    • Cash Flows from Investing (Purchases and Sales of Assets)
    • Cash Flow From Financing (From Debt and Payments of Debt and Dividends)
  • 27. STATEMENT OF CASH FLOWS IS NECESSARY Because revenues reported do not always equal cash collected. . . . . . and expenses reported do not always equal cash paid . . . Income is usually not equal to the change in cash for the period.
  • 28. STATEMENT OF CASH FLOWS +/- Cash Generated or Used as the Result of Operations +/- Cash Invested or Provided from Investment or Capital Activities +/- Cash Paid or Received as the Result of Financing Activities = Increase or Decrease in Cash
  • 29.  

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