Presentation on theme: "Financial Statements for Dummies"— Presentation transcript:
1 Financial Statements for Dummies
(and Lawyers)
2 CPA, ABV, CFF, CGMA, CIA, CFE, ASA, MBA
MICHAEL S. JONES JONES & McCOY, P.A. KATIE McCLAFLIN MANSON KARBANK McCLAFLIN MATT BARBERICH CPA, ABV, CFF, CGMA, CIA, CFE, ASA, MBA MARKS NELSON CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS ADVISORS
3 LEGAL MATTERS Involving Financial Statements
Business Litigation Damages Lost profits Shareholder disputes Breach of contract Transactions Receiver Banking and Financial Litigation Family Law / Divorce Division of assets Child support Maintenance TAX LITIGATION AND CONTROVERSIES CRIMINAL LAW White collar defense Restitution Consumer protection PUNITIVE DAMAGES PROBATE CORPORATE M&A BUY/SELL AGREEMENTS
4 WHAT ARE FINANCIAL STATEMENTS?
HOW ARE THEY USED BY LAWYERS? CIVIL LITIGATION BUSINESS LAW FAMILY LAW
5 What Is A Financial Statement?
A Formal Record of Financial Status of: An Entity An individual Results are for specific periods: Balance Sheet – Specific Date All Others – Specific Period of Time
6 Types of Financial Statements
BALANCE SHEET STATEMENT OF FINANCIAL CONDITION INCOME STATEMENT STATEMENT OF OPERATIONS STATEMENT OF CASH FLOWS STATEMENT OF CHANGES IN FINANCIAL POSITION STATEMENT OF RETAINED EARNINGS
7 Balance Sheet (STATEMENT OF Financial condition)
A “still” financial picture of the business on a given date. ASSETS LIABILITIES EQUITY
8 Types of Assets CASH AND CASH EQUIVALENTS INVENTORY TRADE RECEIVABLES
TANGIBLE AND INTANGIBLE PROPERTY
9 TYPES OF Liabilities TRADE OR OTHER PAYABLES SHORT-TERM BORROWINGS
LONG TERM BORROWINGS
10 Equity ASSETS – LIABILITIES = EQUITY EQUITY IS THE
INVESTMENT OF THE OWNER PLUS ANY ACCUMULATED PROFITS OR LOSSES ASSETS – LIABILITIES = EQUITY COMMON STOCK CONTRIBUTED CAPITAL RETAINED EARNINGS
11 ANY SMALL BUSINESS, INC. Balance Sheet December 31, 2017
ASSETS Current assets: Cash and cash equivalents$30,000 Accounts receivable 2,740,000 Inventory3,865,000 Total current assets ,635,000 Plant and equipment: Plant and equipment5,250,000 Accumulated depreciation(1,635,000) Net plant and equipment3,615,000 Total assets $10,250,000 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable$2,139,000 Line of credit 1,687,000 Total current liabilities ,826,000 Notes payable2,900,000 Stockholders’ equity: Common stock100,000 Retained earnings3,424,000 Total liabilities and stockholders’ equity$10,250,000
12 Income Statement (Statement of Operations)
A “moving picture” of expenses against revenues over a period of time to show net profit or loss. Revenue Cost of Sales Gross Profit (Revenues less Cost of Sales) Operating Expenses Operating Income (Gross Profit Less OpERATING EXPENSES) Other Income (Expenses) Net Income
13 ANY SMALL BUSINESS, INC. Income Statement For the Year Ended December 31, 2017
ITEM Amount Percent Total revenues$21,800, Cost of sales14,850, Gross profit on sales6,950, Operating expenses5,110, Operating income1,840, Other income (expenses)(330,000)(1.51) Net income$1,510,
14 Statement of Cash Flows
Shows how changes in balance sheet accounts and income affectcashand cashequivalents, and breaks the analysis down to operating, investing and financing activities. Cash Flows from Operating Activities Cash Flows from Inventory Activities Cash Flow from Financing Activities Total Change in Cash & Cash Equivalents
15 Financial Statements – Comparisons
Comparison made to prior accounting periods: Same period in prior year Last prior period Year-to-Date Financial Ratios Common size statements
16 BUSINESS VALUATION METHODS
Net Asset Value Method ASSET APPROACH Liquidation Value Method Discounted/Capitalized Cash Flow Method INCOME APPROACH Excess Earnings Method MARKET APPROACH Guideline Public Company Method Guideline Merged & Acquired Company Method Direct Market Data Method
17 NET OWNER BENEFIT
18 Business law BUSINESS LITIGATION SHAREHOLDER DISPUTES
BUY/SELL AGREEMENTS MERGERS & ACQUISTIONS
19 FAMILY LAW CHILD SUPPORT INCOME MAINTENANCE INCOME PROPERTY DIVISION
If you’re evaluating financial statements of a company for purposes of divorce, other than for valuation purposes, you are likely dealing with a small business, closely held corporation, professional practice, sole prop. or partnership. Owner’s compensation will typically depend- and may fluctuate- based on cash flow or performance of the business. It’s less likely to be directly tied to a market rate, like you would expect to see with larger companies. It can be important to look at financial statements, if available, as well as tax returns and bank statements.
20 Normalization of financial statements
Personal expenses through company accounts: travel allowance, internet, vehicle, fuel, employing family members, maintaining boats, planes, condos Also look for retirement contributions, life insurance premiums Many expenses perfectly legitimate from an income tax viewpoint, not so for purposes of support Ask for Normalized income statements prepared for other purposes Look for one-time gains/expenses unrepresentative of the business The CS guidelines define domestic gross income as gross wages (before any salary reduction amounts), whether taxable or nontaxable, regularly and periodically received from any source other than public assistance. Reasonable business expenses for self-employed persons, are those actual expenditures reasonably necessary for the production of income.
21 Income from s-corporations
In re Marriage of Brand, 273 Kan. 346 (2002): In situations where the individual with the support obligation is able to control the retention and disbursem*nt of funds by the corporation, he or she will bear the burden of proving that such actions were necessary to maintain or preserve the business. factors a district court should consider when deciding what amount, if any, of a subchapter S corporation's income should be included when calculating support: * the past earnings history of the corporation, review history of retained earnings and distributions * ownership share * shareholder's ability to control the distribution or retention of net profits in the business S-Corporation, shareholders report the corporation’s income on their individual tax returns in an amount proportionate to their ownership interest. The corp decides whether and in what amount the income is distributed to shareholders or retained by corporation. Income taxes are assessed to shareholder on the entire amount of income earned by the corporation (in proportion to ownership interest) regardless of whether it is retained or distributed. Brand case – the issue was really aimed at determining whether the shareholder was attempting to hide money in the form of retained earnings within the S Corp to reduce his child support obligation. KS Supreme Court case.
22 Income from s-corporations
In re Marriage of Unruh, 32 Kan. app. 2d 770 (2004): Court can adjust upward parent’s income for amounts not “primarily related to nor necessary for the production of income” * No presumption that an individual's share of a Subchapter S corporate income should be included * A case-by-case inquiry should be made to determine what income is actually ‘received’ when determining ‘Domestic Gross Income’ for the self- employed under the Guidelines * Distributions designed to pay the income tax on the money distributed to shareholder were included as income for purposes of child support. But distributions designed to pay income tax on Corporation’s retained earnings were excluded.
23 Income from llc or s-corporations
In re Matthews, 40 Kan. App. 2d 422 (2008): Heightened scrutiny should be exercised if the shareholder can control distributions * analysis was focused on whether the dividends actually distributed to the shareholder were income for purposes of child support * Shareholder had used distributions to purchase additional equity in the company pursuant to a Stock Purchase Agreement. Court of Appeals held these distributions should be included in income for purposes of child support
24 Useful Tools and Methods
CLIENT DOCUMENTS SHAREHOLDER DISCLOSURE STATUTES (KSA ) DISCOVERY INTERROGATORIES REQUEST FOR PRODUCTION OF DOCUMENTS REQUEST FOR ADMISSIONS DEPOSITIONS THIRD-PARTY SUBPOENA RFPD: Request financial statements, audited or reviewed, as well as bank statements and tax returns, but also partnership agreements and operating agreements, or other agreements that will help you analyze how distributions are made to the party with the interest in the company Small business and professional practice statements likely to be lower level of professional accounting treatment BUSINESS RECORD SUBPOENA SUBPOENA DUCES TECUM WITNESS TESTIMONY AT TRIAL
25 Types of Documents to Look For
Financial Statements Balance Sheet Profit & Loss Statement General Ledger Accountant & CPA Documents Work Papers Audit Tax Returns Personal W-2 K-1 Corporate Extensions Final Returns from IRS Appraisals Real Property Equipment Collateral Financial Statements- Audited: Most complete and reliable, CPA firm has performed an audit, prepared in accordance with generally accepted accounting methods, contain footnotes that explain policies and provide some details Reviewed: Reviewed by independent CPA and may contain detail/footnotes found on audited statements, often prepared in accordance with generally accepted accounting standards Compiled: putting together information provided by management, may be prepared by CPA firm or by company Tax returns: Some small companies don’t keep financial statements but only have tax returns Bank Documents Account Statements Loan Applications Loan Documents Personal Financial Statements Business Financial Statements New Account Documents Credit Card Statements Documents from Other Litigation
26 Follow the Money… Revenue Operating Expenses Company Bank
“Owner Benefit” Personal Bank W-2 K-1
27 A brief word about New Tax Law Issues
Corporate / Personal Income Tax Rates Increased Standard Deduction Elimination of Exemptions for Dependents Deductibility of Alimony Deductibility of Interest Expense Pass-Through Income Deduction
28 Questions??? THANK YOU!!!
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