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January 20, 2009

I thought it was an interesting class today.

I didn’t spend any more time today on the review of financial statements.  You should be spending time making sure you have all the financial statement equations memorized.  Also, you should be learning the direct form of presenting cash flows from operating activities.

I reminded the class that by Thursday, Jan. 30, you should read a seven part series on IFRS listed on my blog, as well as reading the SEC proposed roadmap for transitioning to IFRS.  We will be talking about it in class on that day.

I presented a lsit of all items on the right side of the balance sheet.  It represents what is called the capital strucure of the company.  Basically, the capital structure of a company where the money comes from for having purchased the resources available to the company.  The money comes either from having borrowed it (with a few exceptions) or from owner contributions.

Current Liabilities

Accounts & other payables
Accruals (usually for employees)
Services or products owed
Current maturities of long term debt
Total current liabilities

Non-current liabilities

Notes Payable (this is non-current portion only)
Bonds payable (this is non-current portion only)
Services or products owed
Pension liabilities
Preferred stock

*** Note, contingent liabilities frequently exist, but unreported on

*** Note, there is no total for either non-current liabilities or for total liabilities.

Stockholders equity

Contributed capital (common stock + additional paid in capital)
Retained earnings
Accumulated items of other comprehensive income
Treasury stock
Total stockholders equity

Then, I talked about the accounting for contingent liabilities, then we talked about chapter 13, exercise 13.  The discussion could have been unsettling, as there was no “right” answer to report, just a number that is at least $900,000.  The discussion was intended to highlight the current state of affairs where the correct number is not always an accountant’s call.  Ultimately, the number reported is decided by corporate executives after consultation with accountants and lawyers.  This is just the way it is.

This leads, possibly, to circumstances where executives wish to report complete fiction. Reporting fiction is called fraud, and can result in jail time.  Don’t do it.  I recommend always keeping six months of take home pay in the bank, and then resign immediately if an executive insists on “fraud.”

Most situations, however, range somwhere between complete fiction and absolute truth.  It’s a gray area where we say judgment abounds.  Actually, its an area where personal preference abounds.  A corporate executive may prefer a more liberal number and you might prefer a more conservative number.  Personal preferences are not related to moral issues.  You might have to go along with someone else’s personal preference.  If you repeatedly disagree with an employer’s personal preferences, then you might want to get back in the job market and search for a better fit.

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