GPSOLO January/February 2008
Accounting and Finance for Lawyers in a Nutshell, Third Edition, By Charles H. Meyer
As a recent inductee into the civilian world after a four-and-a-half-year stint in the U.S. Air Force Judge Advocate General’s Corps, and a recent turn as general counsel for the Indiana state agency that oversees the controversial property tax assessment and local government finance systems, I thought I’d read West’s Accounting and Finance for Lawyers in a Nutshell.
This book is the third edition and was republished with updates in 2006, so it is fairly up to date on the law. Chapter 1 outlines “Basic Financial Statements” and discusses the balance sheet, the income statement, the statement of owners’ equity, and statement of cash flows. This chapter lays the groundwork for the rest of the book—subsequent chapters constantly refer back to the balance sheet and the other key concepts introduced here.
The accounting process in general is outlined in Chapter 2, which introduces an important term called “double-entry bookkeeping,” a concept referenced throughout the book. Double-entry bookkeeping means that the assets of a business (what the business owns) must equal its liabilities and equity (how the assets are financed) in the balance sheet. This chapter also discusses the accrual method of accounting. For example, under an accrual method of accounting, a business reports income in the year earned even though no cash may have been received. This accounting method is different from the cash basis method of accounting, which most individuals and small businesses purportedly use. This chapter also delves into deferred revenue and expenses (when cash is paid before an expense has been incurred or cash is received before revenue has been earned) and depreciation expenses (types of “adjusting entries” made to the financial books of a business).
Chapter 3 is dedicated to “Generally Accepted Accounting Principles” (GAAP) and discusses their official sources, for example the statements of the Financial Accounting Standards Board (FASB) and prior Accounting Principles Board (APB) opinions that may apply to particular transactions. The chapter also discusses governmental regulation of accounting and guidance from the Securities and Exchange Commission (SEC).
Chapter 4 explains two key concepts regarding revenue and expenses: the “revenue recognition principle” and the “matching principle.” Chapter 5 tackles accounting issues related to current assets and liabilities. In this chapter, “cash” is defined as “the first asset listed on the balance sheet of a business.” The chapter goes onto discuss marketable securities, receivables, and accounts payable. Inventories are covered in Chapter 6. The chapter begins by discussing the different techniques for determining physical inventory quantities and then explores the manner in which inventory is valued.
Chapter 7 discusses noncurrent assets such as property, plant, and equipment. These assets are expected to be used longer than one year. Naturally, this chapter covers accounting for depreciation, including an overview of the various methods of depreciation (e.g., the straight line method) and the benefits of each.
Intangible assets are outlined in Chapter 8. Chapter 9 covers accounting for investments such as bonds and stocks. The chapter covers three basic methods for accounting for investments in stock and provides summaries on each. The chapter also discusses special purpose entities (SPEs) and their effects on financial reporting. (An SPE is typically a business trust created to meet a narrow, specific objective—primarily to isolate financial risks, such as bankruptcy; the SPE may also be a limited liability company, limited partnership, or corporation.)
Accounting for long-term debt is discussed in Chapter 10. Long-term debt is generally debt with a term to maturity of more than one year. Think of a mortgage. This chapter also covers bonds, including issuance costs such as attorney fees and printing costs, something I frequently see in the world of local government finance (but mostly in the form of general obligation bond issuances by municipalities and school corporations). There are also two sections on restructuring long-term debt (for example, through a reduction in the interest rate on the debt) and convertible debt (debt that a bond holder can turn into stock of the issuing corporation).
Chapter 11 builds upon the theme of the previous chapter and discusses the accounting for leases, another topic I frequently encounter in my current position. Long-term leases are an alternative to the use of debt financing for the acquisition of assets. In my job, I often see it in the form of lease rental agreements to fund municipal capital projects.
Chapter 12 covers accounting for other long-term liabilities, such as pension liabilities and deferred income taxes. Chapter 13 discusses accounting for stock and stockholders’ equity. This chapter examines the accounting for the distribution of dividends. Partnership accounting is covered in Chapter 14. Naturally, accounting for a partnership is different from the accounting for a corporation because of the fact that a separate account is maintained for the owners’ equity of each partner, and the book value of each partner’s interest may vary from that of the other partners. Accounting for business combinations (created when a corporation and one or more incorporated or unincorporated businesses are brought together into one accounting entity) is examined in Chapter 15.
Chapter 16 outlines how the information in financial statements is used by security analysts to evaluate the securities of a particular company and to compare the financial health of a company with other companies. Earnings per share and financial ratios are discussed in this chapter. Chapter 17 covers “special reporting issues” related to financial statements. Chapter 18 examines valuation of business enterprises and the valuation of the individual securities issued by businesses, and Chapter 19 concerns international accounting issues.
The book also contains several useful appendixes. Appendix A summarizes the key provisions of the Sarbanes-Oxley Act of 2002, which was drafted in reaction to the major accounting scandals involving Enron, Tyco, and WorldCom. Appendix B reviews an alternative method of accounting for business combinations, the “pooling of interests method.” Appendix C discusses the time value of money, a concept I learned about my sophomore year in high school Economics class. The underlying idea of the time value of money is that $1 today is more desirable than the same $1 available at some time in the future.
Accounting and Finance for Lawyers in a Nutshell covers a lot of ground on an admittedly very dry topic. I found it to be a good reference book for lawyers who may need the occasional refresher on basic business finance and accounting terms and concepts. I see this book being used as a valuable supplement and quick guide to lawyers who are looking for a bird’s-eye view on a particular topic, such as accounting for depreciation. I am confident I will use this book again.
Note: West Group is a corporate sponsor of the General Practice, Solo and Small Firm Division; this article appears in connection with the Division’s sponsorship agreement with West Group. Neither the ABA nor ABA entities endorse non-ABA products or services, and this review should not be so construed.
Timothy J. Rushenberg formerly served in the U.S. Air Force Judge Advocate General’s Corps and practiced law in Elkhart, Indiana. He is currently the general counsel for the Indiana Department of Local Government Finance in Indianapolis, Indiana, and may be reached at firstname.lastname@example.org.