Real-Life Math
For a corporate lawyer, logical thinking and paying attention to
detail are more important than knowing calculus or algebra. "Attention to
detail is very important for the corporate side of law," says Mike Wiley,
a law professor.
Still, there are times when the ability to add up
a group of numbers without using your fingers comes in handy.
"A lot
of what we do deals with financial statements," says corporate lawyer Rick
Wilson. "It helps if you can tell at a glance if you've got reasonably accurate
accounting information."
A key part of a financial statement is the
balance sheet. A balance sheet is simply a statement showing how well the
company has performed. The first section of the balance sheet contains the
assets, which include property and other items the company owns.
The
second section describes the liabilities. Items that would be considered liabilities
are loans and items the company has bought on credit.
The final section
is the net worth. Basically, this section tells you what the company would
be worth if it closed tomorrow, sold off its assets, and paid off the creditors
listed in the liabilities section.
You might think that the items listed
as liabilities would be written as negative numbers, while the assets and
net worth would be written as positive numbers. Accounting doesn't work that
way. Instead, on a company balance sheet, the total of the liabilities and
net worth must equal the assets.
Assets = Liabilities
+ Net Worth
It makes sense when you turn the equation
around:
Net Worth = Assets - Liabilities
You
are a corporate lawyer working for a large firm. Your client wants you to
handle a merger between his oil company and a smaller oil company. But before
you start drawing up contracts, you need to advise him whether the merger
is a good idea in the first place. To do this, you need to examine the other
company's financial statements.
At a meeting with the presidents of
the two companies, the president of the company your client wishes to merge
with hands you a balance sheet. You need to go over it quickly and make sure
the figures are correct.
Here is the balance sheet for last year:
Balance
Sheet
(In thousands)
| Assets |
| Current Assets | 7,855 |
| Cash | 829 |
| Account Receivables | 326 |
| Property and Equipment | 80 |
| Total Assets | 9,090 |
| Liabilities |
| Accounts Payable | 271 |
| Income Taxes Payable | 355 |
| Unearned Revenue | 1,407 |
| Total Liabilities | 2,033 |
| Net Worth |
| Retained Earnings | 6,607 |
| Total Retained Earnings | 6,607 |
| Total Net Worth | 6,607 |
Accounts receivable is a service you have performed
for a customer but haven't been paid for yet. Unearned revenue is the opposite
case: the customer has paid you for the service but you haven't done the work.
Retained earnings are the amount of profit the company has made in past years
and not spent.
Calculate whether the figures in the balance sheet add
up.