Assignments: page numbers are for 3d edition: use common sense to translate if you have a different edition.

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1 UNIVERSITY OF FLORIDA COLLEGE OF LAW ACCOUNTING FOR LAWYERS PROFESSOR WILLIS Required: Lawrence A. Cunningham, INTRODUCTORY ACCOUNTING AND FINANCE FOR LAWYERS (any edition) Participation: Participation may have some effect on your grade. Finance For Lawyers: Students who take Accounting for Lawyers must take Finance For Lawyers during the same semester; or, they must have taken it in a prior semester. The Finance For Lawyers materials include a glossary which defines most of the terms used in this course. You are responsible for those definitions in both courses. Prior Accounting or Finance Education: The College limits this course to students with six or fewer semester hours of college level courses in accounting. If you have more than six such credits, you must drop the course or obtain special permission. My office address Assignments: page numbers are for 3d edition: use common sense to translate if you have a different edition. Classes 1-3: Chapter One, pages Be prepared to discuss the problem at page 3. Also, be familiar with the following terms discussed in the book or in class (some are not in the book): FASB Financial Statements Income Statement Balance Sheet

2 Statement of Retained Earnings Statement of Cash Flows Owner's Equity Accounting Assumptions Accounting Principles GAAP GAAS IFRS SFAS AICPA SEC APB SAS ARB Independent Auditor's Report Unqualified Opinion Unqualified Opinion with an Explanation Qualified Opinion Adverse Opinion Disclaimer Internal Controls Engagement Letter Management Letter Legal Representation Letter Audit Committee Class 4-6: Chapter Two, pages Be prepared to discuss the problem at page 40. Also, be familiar with the following terms discussed in the book or in class (some are not in the book): Accounting Equation Double Entry Bookkeeping Debit Credit Ledger Journal Journalize T-account Post Trial balance Temporary account Permanent account Basis

3 Be prepared to discuss the problem at page 52. Also, be familiar with the following terms discussed in the book or in class (some are not in the book): Closing Entry Retained Earnings P&L Account Class 6: Chapter Three, pages Be prepared to discuss the problem at page 65. Also, be familiar with the following terms discussed in the book or in class (some are not in the book): Accrual Deferral Adjusting entry Classes 7: Chapter Four, pages Be prepared to discuss the problems at pages Be familiar with the following terms: Periodic Inventory System Perpetual Inventory System LCM Cost of Goods Sold (COGS) LIFO FIFO Gross Profit on Sales Cost Accounting IFRS Class 8: Chapter Five, pages Be prepared to discuss the problems at page 109. Be familiar with the following terms: Depreciation Amortization

4 Historic Cost Useful Life Salvage Value Contra Account Book Value Straight Line Depreciation Accelerated Depreciation We will also cover Tax Depreciation. To understand accounting statements, you must have some knowledge of Tax accounting, as well, particularly Tax Depreciation. Work the following problems. Note that several of them involve information covered in class, but not in the book; hence, you may not be able to answer them prior to class without outside research (which would be impressive, but is not expected) : 1. Define the following terms: Depletion Capitalize versus expense Direct costs Overhead costs 2. If you want to increase earnings would you choose a longer or shorter useful life? Which did GM do in 1988 and what was the effect? 3. If you want to increase earnings in the near future, would you choose to "capitalize" new carpeting or "expense" it? What would the possible accounting entries look like? Suppose the carpet cost $3000 and would last three years and you otherwise had $10,000 net income. 4. If you were to repair a copy machine in your office at a cost of $600 and you expected the life of the machine to last another 12 months, how would you treat it for accounting purposes if: A. You want to correctly and precisely reflect each month's income. B. You want to maximize earnings in the month you had it repaired. C. You wanted to minimize earnings in the month you had it repaired. 5. Child support obligations are a function of the combined income of the parents. For example, if father earns $3,000 per month and mother earns $2,000, father must pay 60% of the guideline amount to mother if she has primary residence, or mother must pay 40% of that amount if father has primary residence. Suppose you represent mother, who owns a dry cleaning business. Anticipating the child support litigation, how might you advise her regarding making and/or anticipating some significant repairs to some of the machinery? Or, how might you advise her regarding the purchase of some new machinery? 6. Read Commissioner v. Idaho Power Co., 418 U.S. 1 (1974). How did the Court require

5 the company to treat depreciation on trucks used in constructing a building? 7. Suppose you want to build a house (or represent the person wanting it built). The contractor has a contract providing that his fee is "cost plus 10%." Is this clear? Would you consider the contractor's salary (or part of it) as one of the costs? What about the concrete, lumber, pipe, and such materials? What about overhead such as a portion of the utilities used in his office and the salaries paid his office staff? What about the fees paid an architect and laborers who worked on your ( or your client's) house? What are some other overhead (indirect) costs that might present a problem with such a contract? How might you reword the contract to be clearer? 8. Describe the difference between "full costing" and "successful efforts" methods used in the oil and gas industries. How do they differ? What do the accounting entries look like? 9. What does the Court in Massey Motors, Inc. v. United States, 364 U.S. 92 (1960) teach us? Did the taxpayer really make profits from the sale of the cars? What do "useful life" and "salvage value" mean? 10. Do the experts described in footnote 7 of the Massey case really disagree? Consider a simple version. Suppose you have a machine with a cost of $1,000 and an economic life of ten years and an economic salvage value in ten years of zero. How would it be allocated on a straight line basis, if we use economic life and ultimate salvage value? In contrast, suppose you knew that the machine would be used by your particular business only for three years and would have an estimated salvage value in three years of $700. How would the cost be allocated? 11. Describe the following depreciation methods: straight line units of production inventory method accelerated methods: declining balance double declining balance SYD (sum of the years' digits) method 12. Briefly describe the history of tax depreciation. 13. Describe "modified ACRS" as currently in use for tax purposes. Evaluate it in terms of GAAP. Class 9: Chapter Six: Generally read pages [postpone until later]. This chapter is difficult. It contains some very important information, relevant to a general practice. It also discusses some more sophisticated issues which are beyond an introductory level course. I will try to keep the class discussion on a reasonable level for this chapter. I will distribute additional material on Goodwill.

6 Answer the following questions: 1. Define the following terms: Goodwill amortization R&D Start-up or organizational costs 2. Consider the Problems on pages How might the varying possible resolutions of these issues affect legal issues such as compensation, labor contracts, share of profits, or ability to pay alimony or child support (in analogous situations)? 3. Is goodwill compensable under the 6th Amendment? Would it be compensable in tort? How would it be measured? Does it matter whether the plaintiff has "carried" goodwill on its books for accounting purposes? 4. In many states, Florida included, "marital assets" are divided "equitably" on dissolution of marriage. Such assets include property includes "assets acquired... during the marriage, individually by either spouse or jointly. by them...." It also includes "The enhancement in value and appreciation of nonmarital assets resulting either from the efforts of either party during the marriage or from the contribution to or expenditure thereon of marital funds or other forms of marital assets, or both." F.S (5)(a). Would "goodwill" be such an asset? If so, how could it be divided? 5. If the value of goodwill is the present value of the future income potential resulting from reputation, customer base, customer relationship, location, and other such inchoate items, could the increased earning ability resulting from education also be a type of "goodwill." Could it be measured or somehow accounted for? If so, could it be a "marital asset" dividable on dissolution of marriage? At least two states - New York and Michigan - have treated "education" as a type of intangible asset divisible on divorce. 6. Suppose that two years ago, Mother spent $25,000 getting a business setup and organized. It is now operating and producing significant annual "income." What impact does her accounting treatment of the start-up and organizational costs have on her legal obligation to pay child support, which is a function of her "income." Should her accounting treatment have any effect? You may want to examine the Florida Child Support statutes. F.S Particularly, examine F.S (11) which lists various modifications to "income" that a judge may consider. In paragraph (k), the statute describes "Any other adjustment which is needed to achieve an equitable result...." How might you consider arguing in favor or opposition to "accounting adjustments" to income? 7. I.R.C. section 195 permits, for tax purposes, the amortization of "startup" expenditures over 180 months or more. Taxpayers who elect to amortize such costs pay less tax as a result, because they choose to deduct the amortization expenses. The alternative is to capitalize the costs and deduct them only on the sale of the business. The bottom-line is that taxpayers who make the election save taxes and are thus better off financially. However, if their financial statements are consistent with their tax returns, which is often

7 the case, they appear worse off. As a result, if any legal consequence - such as child support or alimony - flows from the person's "ability to pay," a paradox results. Those who are better off (those who elect) appear worse off and thus pay less. But, those who are worse off (no election) appear better off and thus pay more. What's a family practitioner to do? Classes 10-11: Chapter 7, pages This is a difficult chapter. It introduces many corporate issues. Some of you will have had the course on Corporations and will see this as a review. Others will find this chapter particularly helpful when you later take the course on Corporations. Be familiar with the following terms: Capital Par value Stated value Preferred Stock Common Stock Participating Cumulative Earned Surplus (corporate) Retained Earnings (accounting) Earnings and Profits (tax) Insolvency (both tests) Treasury Stock Cash Dividend Stock Dividend Stock Split Class 12: Ratio Analysis: Chapter Nine. Be familiar with the following terms: Current Ratio Acid Test Ratio P/E Ratio Working Capital Return on Sales Return on Investment Debt/Equity Leverage

8 Class 13: Chapter Thirteen, pages Class14: Deferred Compensation Plans. Be familiar with the following terms: IRA Keogh Defined Benefit Plan Defined Contribution Plan 401(k) 403(b) Deferred Compensation Pension Non-qualified deferred compensation Qualified Plan