Scott Van Meter PPT - State Bar of Texas Bankruptcy

Understanding the Basics:
Using Financial Statements
In Bankruptcy and Litigation
Presented By: Scott Van Meter
Managing Director
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Objectives of Financial Reporting
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How Do We Meet the Objectives
► Relevance v. Reliability
Example: You are considering an investment in either C1 or C2
Balance Sheets look the same, but….
• Spends $1M on land
• Property Depreciates
• Everything else is equal
Accounting Sacrifices Relevance for Reliability. You must check
footnotes!
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• Spends $1M on land
• Property Depreciates
• Everything else is equal
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Accounting Rules: GAAP
► The accounting profession has attempted to develop a
set of standards that are generally accepted and
universally practiced
► This common set of standards and procedures is called
general accepted accounting principles (GAAP)
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Accounting Rules: Who Sets Them in
the US?
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The Main Financial Statements
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The Balance Sheet
Creditors’
Claims
Total Business
Resources
Owners’
Claims
10
The Balance Sheet
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Assets and Expenses
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Assets and Expenses: Example
► Company XYZ participated in an industry
trade conference, and spent $90,000 on a
reception attended by clients and contacts.
– Is this an asset or an expense?
– Who decides it in a company?
– Will the decision change if your compensation
or bonus depended on it?
– Other factors to consider:
• Earnings in relation to analysts’ expectations.
• (For regulated entities) Effect on pricing and tariff.
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Asset/Expense: R&D
► Patents resulting from $1 million spent on
R&D. (Note: R&D is successful and we got
patents).
– Are these patents an asset?
– Are future benefits reasonably certain?
– Are there specific accounting rules on how to
handle this?
– What does FASB Statement No. 2 (issued in
1975) say about R&D costs?
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Example Balance Sheet:
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The Income Statement
► Shows the performance of the company for a
given period of time (e.g. quarterly, annual).
► Income is measured using accrual accounting.
– Revenues and expenses are recognized when
service is provided and related costs are incurred, not
when cash is received or paid.
– The purpose is to match revenues and expenses
– Hence net income differs from cash flow from
operations.
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Example Income Statement:
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Statement of Cash Flows
► Shows all of the sources and uses of cash (and
cash equivalents) during the year.
► Cash flow statement is best used as a measure
of earnings quality.
Types of Cash Flows
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Example Cash Flow Statement:
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Cash Flows and Earnings Quality:
Enron Example
Six Months Ended June 30 (Millions of $)
Net income
Cumulative effect of accounting changes
Depreciation, depletion and amortization
Deferred income taxes
Gains on sales of non-merchant assets
Net margin deposit activity
Changes in other working capital items
Price risk management activities assets
Realized (gains) losses on sales
Proceeds from sales of merchant assets
Additions of merchant assets
Unrealized losses on merchant assets
Other, net
Net Cash Used in Operating Activities
2001
2000
$ 829 $ 627
(19)
453
364
188
31
50)
(90)
(2,342) (350)
(800) (174)
782 (799)
(64)
29
479
553
(175) (1,206)
21
111
357
(639)
(1,337) (547)
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Footnotes and MD&A
►
Footnotes provide important information about the bases and
assumptions used to create the financial statements.
► Management's Discussion and Analysis (MD&A) presents
management's perspective on the financial performance and
business condition of the firm. U.S. publicly-held companies must
provide MD&As that include a discussion of the operations of the
company in detail by usually comparing the current period versus
prior period
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Relationships Between the Statements
►
Assume the following at the beginning of the year:
–
–
–
–
Your checking account balance is $5,000, savings account balance is $15,000 and
you have a stock and mutual funds investments worth $300,000
Your 3 cars are worth $120,000 in total and have all been fully paid off
You have a house worth $750,000 which has a mortgage of $400,000
Finally you have unpaid credit card bills of $5,000
Personal Balance Sheet as of the beginning of the year
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Relationships Between the Statements
(cont.)
► Assume the following occurred through the year
– You earned a salary of $250,000.
– You paid $23,000 by cash or check for food, entertainment, clothing, etc.
You also paid credit card bills of $70,000. However, you still have balance
of $2,000 owing on your credit card.
– You invested $20,000 into mutual funds.
– You paid off $25,000 of your mortgage. Interest payments were $28,000.
– Your cars are now worth $100,000 due to normal wear and tear. There is
no change in the value of your house.
– Finally you paid $80,000 in taxes.
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Relationships Between the Statements
(cont.)
Income Statement for the year
Revenues
Expenses
$250,000
Cash Expenses
Credit Card Exp. for this year
Mortgage Interest
Depreciation
Taxes
Net Income
23,000
67,000
28,000
20,000
80,000
$32,000
Statement of Cash flows for the year
Cash Flows from Operations
Net Income
Depreciation
Decrease in Credit Card Bal.
32,000
20,000
(3,000)
Cash Flows from Investing
Investment in Mutual Funds
(20,000)
Cash Flows from Financing
Payment of Mortgage
(25,000)
Cash at beginning of the year
20,000
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Relationships Between the Statements
(cont.)
Personal Balance Sheet as of the end of the year
Assets
Cash (and equivalents)
Stock and Mutual Funds
Cars
House
Total Assets
$
24,000
320,000
100,000
750,000
--------------$1,194,000
=========
Liabilities
Credit Card Debt
Mortgage
Total Liabilities
2,000
375,000
_______
$377,000
Equity
Your Net Worth
$817,000
Total Liabilities & Equity
$
$1,194,000
=========
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Accrual v. Cash Basis Accounting
► The main difference between accrual and cash basis
►
►
►
►
accounting is the timing of when revenue and expenses are
recognized
The cash method accounts for revenue only when the money
is received and for expenses only when the money is paid out.
On the other hand, the accrual method accounts for revenue
when it is earned and expenses goods and services when they
are incurred. The revenue is recorded even if cash has not
been received or if expenses have been incurred but no cash
has been paid.
Accrual accounting is the most common method used by
businesses.
The cash method is most used by small businesses and for
personal finances.
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Accrual v. Cash Basis Accounting
(cont.)
Cash Basis: Revenue recognized
when received
Accrual Basis: Revenue recognized
when earned and realized
Not GAAP
GAAP
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Balance Sheet Valuation Methods
► Historical cost is used for most items.
– Inventory
– Property, plant and equipment, net
– Intangible assets
► Market value is used for financial assets
and liabilities.
– Derivatives, hedges
– Marketable securities, some equity
investments
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Management Reporting
► Management reporting, also referred to as managerial or
cost accounting, is the process of identifying, measuring,
analyzing, interpreting and communicating information for
the pursuit of an organization's goals
► Managerial accounting encompasses all fields of
accounting aimed at informing management of business
operation metrics
► Managerial accountants use information relating to the
costs of products or services purchased by the company
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Key Performance Indicators
► A key performance indicator (“KPI”) is a measure, either
financial or non-financial, which is used to reflect
organizational success or progress in relation to a
specified goal
► The purpose of KPIs is to monitor progress towards
accomplishing the strategic objectives that are typically
communicated in a strategy map
► KPIs are typically included in a reporting scorecard or
dashboard that enables top management, the board or
other stakeholders to focus on the metrics deemed most
critical to the success of an organization
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Common Examples of Management
Reporting
► Accounts receivable ledger and aging
► Accounts payable ledger and aging
► Projections and budgets
► Pipeline/sales reports
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Accounts Receivable Ledger and
Aging
►
The accounts receivable ledger, also called the customers ledger, is
a subsidiary ledger that lists all the customers that owe money to the
company along with their current balances
► The accounts receivable ledger is a summary of all current and
outstanding accounts receivable at the end of a period
► When a customer purchases a product on credit, the store debits its
A/R balance and credits a sale account. When the customer makes a
payment to pay down his account balance, the debits cash and
credits the A/R balance. Both of these transactions are tracked in the
subsidiary ledger, so at the end of the period the bookkeeper can
print a report with the total balances owed by each customer. They
can also use this ledger for debt collection purposes on customers
who aren’t making their payments.
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Example Accounts Receivable Ledger
Accounts Receivable Ledger
Business Name:
Invoice
Invoice Date
Number
01/05/16
1-1005
02/05/16
1-1006
02/15/16
2-856
03/05/16
1-1007
04/05/16
1-1008
05/05/16
1-1009
05/12/16
3-242
05/27/16
2-857
06/05/16
1-1010
07/05/16
1-1011
08/05/16
1-1012
Gekko & Co.
Customer
Teldar Paper
Teldar Paper
Genco Olive Oil
Teldar Paper
Teldar Paper
Teldar Paper
Duke & Duke
Genco Olive Oil
Teldar Paper
Teldar Paper
Teldar Paper
Total Due: $ 31,000.00 Current Date:
Total Amount Due Date Balance Due
$ 20,000.00
20,000.00
4,200.00
20,000.00
20,000.00
20,000.00
4,200.00
12,200.00
20,000.00
20,000.00
20,000.00
Grand Total $ 180,600.00
02/05/16
03/05/16
04/15/16
04/05/16
05/05/16
06/05/16
06/12/16
07/27/16
07/05/16
08/05/16
09/05/16
$
Payment 1
8/15/2016
Payment 2
Payment 3
$ 10,000.00 $ 5,000.00 $ 5,000.00
1,000.00
10,000.00
5,000.00
4,000.00
3,000.00
100.00
100.00
1,000.00
10,000.00 10,000.00
10,000.00
5,000.00
5,000.00
1,000.00
19,000.00
4,200.00
6,000.00
2,200.00
2,000.00
2,000.00
10,000.00
5,000.00
5,000.00
20,000.00
20,000.00
$ 31,000.00
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Example Accounts Receivable Aging
Accounts Receivable Aging
Business Name:
Customer
Gekko & Co.
Invoice Date
Current Date:
8/15/2016
Invoice
Amount
Total Amount Due Date
Number
Outstanding
Teldar Paper
01/05/16
1-1005
Teldar Paper
02/05/16
Genco Olive Oil
Current
Aged 1-30 Aged 31-60 Aged 61-90 Aged > 91
20,000.00
02/05/16
1-1006
20,000.00
03/05/16
1,000.00
1,000.00
02/15/16
2-856
4,200.00
04/15/16
3,000.00
3,000.00
Teldar Paper
03/05/16
1-1007
20,000.00
04/05/16
-
-
Teldar Paper
04/05/16
1-1008
20,000.00
05/05/16
-
-
Teldar Paper
05/05/16
1-1009
20,000.00
06/05/16
Duke & Duke
05/12/16
3-242
4,200.00
06/12/16
Genco Olive Oil
05/27/16
2-857
12,200.00
07/27/16
Teldar Paper
06/05/16
1-1010
20,000.00
07/05/16
-
Teldar Paper
07/05/16
1-1011
20,000.00
08/05/16
-
Teldar Paper
08/05/16
1-1012
20,000.00
09/05/16
$
Grand Total $ 180,600.00
$
-
$
1,000.00
1,000.00
-
-
6,000.00
20,000.00
-
6,000.00
20,000.00
$ 31,000.00
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Accounts Payable Ledger and Aging
►
Similar to an accounts receivable ledger, an accounts payable
subsidiary ledger is an accounting ledger that shows the transaction
history and amounts owed separately for each supplier from whom
the business receives credit for purchases
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Projections and Budgets
► A budget is defined as management‘s
quantitative expression of plans for a forthcoming
period
► Budgets are prepared at various levels of an
organization
► The master budget is defined as the overall
financial plan for the period, which reflects the
organization's goals and objectives
►
The master budget includes both operating and financial budgets
► Operating budgets show the company’s planned sales and
operating expenses
► Financial budgets reflect financing plans such as borrowing,
leasing, and cash management
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Pipeline/Sales Reports
►
A sales analysis report shows the trends that occur in a company's
sales volume over time
► In its most basic form, a sales analysis report shows whether sales
are increasing or declining
► At any time during the fiscal year, sales managers may analyze the
trends in the report to determine the best course of action
► Managers often use sales analysis reports to identify market
opportunities and areas where they could increase volume
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Relationship to Financial Accounting
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Potential Uses of Management
Reporting
► Preparation of schedules
► Identification of questionable transactions
► Evaluation of management
► Valuation of company
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Ratio Analysis
►
A ratio analysis is a quantitative analysis of information contained in a
company’s financial statements based on line items in financial
statements, like the balance sheet, income statement and cash flow
statement; the ratios of one item – or a combination of items - to
another item or combination are then calculated
► Ratio analysis is used to evaluate various aspects of a company’s
operating and financial performance such as its efficiency, liquidity,
profitability and solvency
► The trend of these ratios over time is studied to check whether they
are improving or deteriorating
► Ratios are also compared across different companies in the same
sector to see how they stack up, and to get an idea of comparative
valuations
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Ratio Analysis Examples
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Ratio Analysis Examples
(cont.)
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Tax Returns
►
Tax returns and compiled financial statements give a financial
breakdown of a business for investors, lenders and shareholders;
despite containing similar information, these two methods of financial
reporting feature different information and uses
► The users of taxable income are usually governmental, whereas the
users of financial income are typically individuals or businesses
User of Taxable Income
User of Financial Income
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Tax Returns (cont.)
►
Most companies report different financial and taxable income
► Accounting management prepares the financial books using a full
accrual method but, for the tax return, uses a modified cash method,
which uses some elements of GAAP and some elements of the cash
method
►
►
►
For example, the company may accelerate asset depreciation
Using the cash method of accounting, total income is recorded when it’s
received – i.e. when money changes hands and the company doesn’t
have an accounts receivable
Likewise for expenses: The company records expenses only when the
expense is paid — the company doesn’t have an accounts payable
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