Charles H. Meyer - Accounting and finance for lawyers in a nutshell

__________

JESSE H. CHOPER

Professor of Law and Dean Emeritus,
University of California, Berkeley

JOSHUA DRESSLER

Professor of Law, Michael E. Moritz College of Law,
The Ohio State University

YALE KAMISAR

Professor of Law Emeritus, University of San Diego
Professor of Law Emeritus, University of Michigan

MARY KAY KANE

Professor of Law, Chancellor and Dean Emeritus,
University of California,
Hastings College of the Law

LARRY D. KRAMER

President, William and Flora Hewlett Foundation

JONATHAN R. MACEY

Professor of Law, Yale Law School

ARTHUR R. MILLER

University Professor, New York University
Formerly Bruce Bromley Professor of Law, Harvard University

GRANT S. NELSON

Professor of Law, Pepperdine University
Professor of Law Emeritus, University of California, Los Angeles

A. BENJAMIN SPENCER

Professor of Law,
Washington & Lee University School of Law

JAMES J. WHITE

Professor of Law, University of Michigan

FIFTH EDITION

By

CHARLES H. MEYER

Senior Vice President
Taxes and Senior Tax Counsel
GE Capital Aviation Services

Mat #41337719

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To
Joseph and Lisa Meyer

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The accounting world and accounting rules continue to change reflecting both changes in the business environment and refined thinking about how transactions and events should be presented in financial statements. The fifth edition reflects the key developments that have occurred since the fourth edition.

As in the case of both the third and fourth editions, the FASB adopted further changes to the rules regarding transfers of receivables and servicing rights and obligations, which continues to be a hot topic. Chapter 5 has been updated to reflect these further changes.

Changes to the rules for the consolidation of variable interest entities were duscussed in the fourth edition. Since then, the FASB has continued to refine these rules.

Since the rules regarding goodwill created in connection with business acquisitions were amended to require an annual quantitiative impairment review for goodwill rather than an automatic amortization of goodwill, companies have been concerned about the time and cost involved in performing these impairment reviews. As discussed in Chapter 8, the FASB has introduced a new concept for testing goodwill. VI A company now first undertakes a qualitative assessment to determine if it is more likely than not that an impairment of goodwill has occurred. If that is not the case, it is not necessary to undertake the quantitative testing of goodwill for impairment.

The requirement to present total comprehensive income in addition to the traditional net income continues to receive focus by the FASB. The FASB adopted new standards allowing companies to elect between preparing one continuous statement that presents both net income and comrephensive income or preparing two statements, one for net income and one immediately following that presents other comprehensive income and comes to a total that includes all the components of comprehensive income.

Aside from these substantive changes, one of the biggest developments in accounting in the United States was the issuance by the FASB of a codification of accounting standards that came out while the fourth edition was in production. The individual FASB statements and interpretations and other sources of official accounting guidance in the United States have been incorporated into a consolidated set of accounting rules. The FASB now periodically issues accounting standards updates that amend the codification. The fifth edition has been revised to reflect the new citations to the codification. There is also a cross reference table in the appendix that cross references between the old FASB (and APB) pronouncement VII numbers that were covered prominently in prior editions and the new codification references.

As always, I trust that this fifth edition will continue to provide law students, lawyers, and other readers with a sufficient understanding of the basics of accounting and finance so that they can better appreciate the significance of accounting and its importance in the commercial and legal world.

CHM

Norwalk, CT
October 2012

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FIFTH EDITION

The main subject matter of this Nutshell is financial accounting. Financial accounting involves the process of recording transactions in the accounting records of a business and periodically extracting, sorting, and summarizing the recorded transactions to produce a set of financial statements. Financial statements are the primary means by which businesses communicate financial information to various users. When a business issues a complete set of financial statements, there are four individual statements that are typically prepared. This chapter will introduce and describe the basic financial statements. Various items and concepts introduced briefly in this chapter will be discussed in more detail in later chapters. A general familiarity with the output of the financial accounting process should assist in understanding the accounting process and the issues that arise in the preparation of the financial statements.

The balance sheet, also called the statement of financial position, sets forth the assets, liabilities, and owners equity (the investment of the owners) of a business as of a particular point in time (typically, the end of the fiscal Year). The balance sheet is a snapshot as of the date it is issued. A sample balance sheet is shown in Exhibit 1.1. In a typical balance sheet, the assets are listed on the left hand side. On the right hand side are listed the liabilities of the business and the owners equity accounts.

Exhibit 1.1

Balance Sheet