Finance and Accounting for Lawyers

November 2011 Hardcover (313 pages)

Brian Brinig

Business Valuation Resources, LLC

This textbook serves as an introductory textbook for attorneys working with accounting and the business valuation world. It is the textbook used for a law school course of the same title.

The principles of accounting and finance directly extend to contract issues, torts, business and securities matters, taxation issues, partnership disputes, gift and estate matters, to name only a partial list. These areas of jurisprudence are often based significantly on substantive financial questions, and their measurement can be the heart of the entire matter. The application of broad accounting principles to countless business transactions requires an understanding of the objectives of financial reporting and the needs of the users of financial information.

Contrary to popular belief, accounting is not a mathematical formula or calculation, but rather an organized system that logically summarizes business transactions into useable information that is meaningful to management, creditors, business investors and other stakeholders. This text takes readers through the system of accounting and the development of financial statements. Complexities and limitations of accounting information are explored, culminating in a study of ratio analysis of financial statements to glean relevant insights. The objective of this introductory study of accounting is to provide a broad, workable knowledge base that will facilitate the use of accounting information as it relates to the practice of law.

The finance and valuation chapters present concepts and calculations of simple and compound interest, present value and  annuities.  In the area of business valuation, the reader is exposed to Revenue Rulings 59-60 and 68-609, two seminal rulings on business valuation issues as well as a complete example and explanation of a small business valuation analysis.

The text contains three chapters on damages covering definitions, legal concepts underlying damages analyses and classifications of damages (general, special, economic, non-economic and punitive).  One chapter is devoted to personal economic loss calculations and another focuses on lost profits. Finally, the text concludes with a chapter on opinion evidence and expert testimony with consideration of the legal privileges applicable to experts and techniques for taking effective expert depositions and cross-examining experts at trial. 

Table of Contents:

A Quick History of Accounting  
Introduction to Finance 
Finance, Accounting and the Law 

Accounting: An Introduction 
The Accounting Process 
Generally Accepted Accounting Principle 
Limitations of Accounting Information 

Double Entry Accounting System 
The Transaction  
The Account  
Debits and Credits  
Double Entry Accounting System  
Recording a Transaction  
Posting to the General Ledger  
Preparing the Trial Balance 
Finalizing the Bookkeeping Process and Preparing Financial Statements    
Preparing Financial Statements 
Closing the Books  
Further Discussion  
Proprietorships versus Corporations  
The Relationship between the Balance Sheet and the Income Statement Conclusion 

Accrual Accounting 
Accrual Basis Accounting  
The Realization Principle—the theory behind revenue recognition 
The Matching Principle—the theory behind expense recognition 
Violating the Realization Principle and the Matching Principle 
Cash Basis vs. Accrual Basis 
Accounts Receivable and Revenue Recognition
Converting from Cash to Accrual and from Accrual to Cash 
Accounts Payable and Expenses  
Prepaid Items and Deferred Revenue 
Another Deferred Item—Taxes  

Fixed Assets and Depreciation 
Accounting for Fixed Assets 
The Concept of Depreciation 
The Mechanics of Depreciation Accounting 
Methods of Depreciation 
Gains and Losses on the Sale of Fixed Assets 
Natural Resources and Depletion 
Intangible Assets and Amortization 

Inventory Accounting and Cost of Goods Sold 
The Business Cycle as It Relates to Inventory 
Inventory—The Basics 
Two Types of Inventory Accounting 
Methods of Costing Ending Inventory under the Periodic Method 
Comparison of the Differences in Methodologies 
Errors in Inventory Accounting 
Inventory in Manufacturing Companies 

Financial Statement Analysis 
Concepts for This Chapter  
Methods of Financial Statement Analysis 
Analysis of Financial Statements
Profitability Ratios
Solvency, Liquidity and Leverage Ratios 
Management and Activity Ratios

Introduction to Finance: The Time Value of Money 
Wealth, Capital and Money 
The Time Value of Money: Interest 
Definition of Terms for This Chapter 
Simple Interest 
Compound Interest and the Time Value of Money
The Concept of Present Value 
Regular Mortgage Loan Calculations 
Advanced Mortgage Calculations 
The Amortization Worksheet 
Ordinary Annuities

General Principles of Appraisal and Valuation of Businesses 
General Principles of Appraisal 
Approaches to Determining Value  
Standards of Value 
Premise of Value 
Valuing Small Businesses 
Overview of the Business Appraisal Process 
Possible Methods of Valuing a Business 
Capitalization of Excess Earnings Method 
Balance Sheet Review (Determination of Net Tangible Assets) 
Adjustments Generally Required in the Analysis 
Tax Consequences of Making Adjustments 
Income Statement Review 
Example: ACME Industries, Inc. 
Excess Earnings Analysis  

Chapter 9 Appendix A: Sample Appraisal Report 
Chapter 9 Appendix B: IRS Revenue Rulings  
IRS Revenue Ruling 59-60  
Rev. Rul. 68-609 197

Definition of Damages 
Legal Concepts Underlying Damages 
General Classifications of Damages  
Specific Sub-Categories of Damages 
Classifications and Categories of Damages 
Spectrum of Damages Calculations 
Damages in Contracts 
Financial Concepts Underlying Damages Analyses 

Personal Economic Losses 
Different Types of Losses 
Other Important Issues in Personal Economic Loss Calculations 
Lost Earnings/Lost Earnings Capacity Analysis 
Lost Earnings and Lost Earnings Capacity Distinguished 
Conceptual Framework of a Lost Earnings Capacity (“LOE”) Analysis 
Graphic Presentation of a Lost Earnings Capacity Analysis 
Sample Problem for Chapter 11  
Calculating a Plaintiff’s Lost Earnings Capacity 
Mitigating Earnings 
Loss of Household Services 
Medical, Life Care and Other Expenses 
Conclusion of Example 
Personal Consumption 

Chapter 11 Appendix: Discount Rate Calculations 
Discount rate theory
Selecting a proper discount rate
Net discount rate methodology
Conclusion of discounting conventions

Opinion Evidence and Expert Testimony 
Opinion Evidence 
The Attorney’s Role Versus the Expert’s Role Generally, and the  Financial Expert Specifically 
Legal Privileges Relating to Expert Witnesses
Using and Opposing Experts in Litigation 
Taking Effective Expert Depositions 
The Effective Expert Deposition  
Eliciting Opinion Evidence at Trial