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Tuesday, February, 9, 2010

More Than A Corporate Tightrope Act: What's In A Balance Sheet

Once every couple years or so, someone asks Toolbox what's in a company's balance sheet, and invariably the first thing out of Toolbox's mouth is an item actually found on the statement of cash flows, or worse, an item found on a company 8-K filing. But that's why Toolbox readers are lawyers and not accountants — because we cannot be counted on to remember, item for item, what goes into that "snapshot in time" of an entity's financial condition. Toolbox is really good at remembering case citations, like Gideon v. Wainwright, 372 US 335 (1963) or United States v. Nixon, 418 US 683 (1974). And who could forget Bush v. Gore, 531 U.S. 98 (2000)? That's already an oldie. But as to whether it's assets + liabilities = stockholders' equity or some other permutation, Toolbox needs a cheat sheet. And you may feel likewise when some of your clients with accounting know-how try to put you on the spot.

Well, from here on out, just take a quick glance at this week's accounting cheat sheet and you'll quickly know that Toolbox was completely wrong on the above equation, which should be:

Assets = Liabilities + Stockholders' Equity

That's thanks to The Balance Sheet, by Lawrence M. Cirelli (Hanson Bridgett LLP) who is every lawyer's best friend when it comes to learning the basics of accounting, if only because he is a lawyer, and thus he speaks our language. In this mini-introductory accounting class, you'll get a glimpse at the most fundamental basic of all, the balance sheet — what's on it and why it's important in terms of understanding an entity's financial health. So if you don't know the difference between an accounting liability and a legal liability, and you have clients who like to rub your face in your ignorance, don't give them case citations, tell them right to their face, "Accounting liabilities are 'claims against an entity that must be satisfied with cash, other assets, new obligations or services.' So stick it in your Bivens v. Six Unknown Named Agents of the Federal Bureau of Narcotics, 403 US 388 (1971)."

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