Financial Statements & Divorce: How to Value a Small Business and Protect Your Rights  

AMORTIZATION: This refers to the depreciation of an intangible asset such as a trademark, copyright or patent. 6.9.16.Andersen-Law-PC.Financial-Statements-Divorce

DEPLETION: The same concept in the context of mining and natural resources.

CAPITALIZING: Deferring an expense until later. Usually it is pretty straightforward as to what should be capitalized and what should not, but sometimes, it’s not so clear. For example, if you change the tires and oil on a fleet of trucks, that’s maintenance. But overhauling or replacing engines may be something that should be capitalized. These are things you may not know when handed a financial statement but may want to be consider. Start up costs (initial legal and filing) were once capitalized but now it is expensed on a cash basis.

TIME VALUE OF MONEY: This compares PV “present value” and FV “future value.” There are no hard and fast rules as to what discounts should be in certain situations. It is a subjective area. The longer you wait to collect, the less the money equivalent is worth today. On the other hand, invested money may be worth more due to having a high return based on interest, capital gains, etc. Factors such as inflation, interest and risk of collection will factor into the diminishing value of money. For a pension, the PBGC — pension benefit guarantee corporation — publishes interest rates. Actuaries make estimates of present and future value. There are also programs readily available online to make these calculations. For example, a $500 maintenance payment in 10 years may be worth $306 today based on a 5-percent interest discount. Remember, however, that if you run out and spend this money on coffee, clothes, cigarettes and doughnuts today, it will be worth nothing in 10 years.

BALANCE SHEET: This is as it sounds: a snapshot of the company’s balance between assets on one side and liabilities plus equity on the other side. It is cumulative. Both sides should zero out. The formula: ASSETS  =  LIABILITIES + EQUITY.

On a Modified Cash Basis, current assets include things like cash, short-term investments, accounts receivable, inventory, prepaid expenses. Items that are cash, easily converted to cash or used up within one year are counted as current assets.

Fixed assets include leasehold improvements, vehicles, furniture and fixtures, buildings, lands, etc., less accumulated depreciation.

Current liabilities include things like accounts payable, accrued expenses, “current” portion of capital and financing lease obligations (lease backs that are part of financing), bank notes, long-term debt, deferred revenue and accrued liabilities.

Long-term liabilities include payable loans, deferred compensation, deferred rent, long-term leases (including net portion of capital and financing leases), deferred tax liability, leasehold incentives and mortgages. These liabilities are totaled and combined with equity to create the Liabilities and Equity side of the balance sheet.

Equity is the member or stockholder equity.

Retained earnings refer to owners’ equity.

INCOME STATEMENT: This statement, also called a P&L, or profit and loss, tracks revenue and subtracts operating expenses (or costs of goods sold) to calculate income for a services business (or gross profit for a merchandise business). Net operating revenue and expense are factored in to calculate net income. Interest expense may be included as a non-operating expense. A little company may run something off of QuickBooks, which is fine, but it may be better to look at a summary and then get details where you see a concern.

STATEMENT OF CASH FLOW: These track operations, investing, financing and reserves.

TIME PERIODS: A three-year period is a good time period to make an assessment. For example, a consolidated income statement might compare line items from the past three years.