The Complete Advanced Course Of Finance & Accounting | Chris Benjamin | Skillshare

The Complete Advanced Course Of Finance & Accounting

Chris Benjamin, Instructor, MBA and CFO

Play Speed
  • 0.5x
  • 1x (Normal)
  • 1.25x
  • 1.5x
  • 2x
32 Lessons (3h 53m)
    • 1. Advanced Finance and Accounting Intro 2018

      1:15
    • 2. Introduction

      5:20
    • 3. Deferred Revenue Introduction

      7:35
    • 4. Deferred Revenue Recognition of Revenue

      6:14
    • 5. Deferred Revenue Accounting

      4:33
    • 6. Deferred Revenue Tracking and Reconciling

      7:32
    • 7. Intercompany Transactions Introduction

      15:18
    • 8. Interco Transactions Examples

      13:42
    • 9. Interco Transactions Accounting

      11:51
    • 10. Foreign Currency Transactions Introduction

      9:34
    • 11. Foreign Currency Transactions Examples

      7:05
    • 12. Foreign Currency Transactions Accounting

      6:54
    • 13. Partnerships Introduction

      4:58
    • 14. Partnerships Examples

      13:32
    • 15. Partnerships Accounting

      8:32
    • 16. Options and Warrants Introduction

      11:08
    • 17. Options and Warrants Examples

      7:12
    • 18. Options and Warrants Accounting

      12:06
    • 19. Derivatives Introduction

      7:33
    • 20. Derivatives Examples

      6:41
    • 21. Derivatives Accounting

      7:03
    • 22. Consolidating Subs Introduction

      4:36
    • 23. Consolidating Subs Examples

      3:24
    • 24. Consolidating Subs Accounting

      6:01
    • 25. Intangibles Introduction

      2:47
    • 26. Intangibles Examples

      6:30
    • 27. Intangibles Examples V2

      6:30
    • 28. Intangibles Accounting

      5:03
    • 29. Leases Introduction

      3:49
    • 30. Leases Examples

      6:36
    • 31. Leases Accounting

      6:08
    • 32. Course Conclusion

      5:43

About This Class

Do You Want To Take Your Accounting and Finance Knowledge To The Next Level?

Do You Need To Take Control Of Your Companies Financial Reports?

Do You Want To Understand Accounting For Options and Warrants?

Does Your Business Lease a Property, Building or Office?

If You Answered "Yes" To Any Of The Above, Look No Further.  This Is The Course For You!

*** Updated June 2019 with new content! ***

Enroll today and join the 100,000+ successful students I have taught as a Top Rated instructor!

Three reasons to TAKE THIS COURSE right now:

  1. You get lifetime access to lectures, including all new lectures, assignments, quizzes and downloads

  2. You can ask me questions and see me respond to every single one of them thoroughly! 

  3. You will are being taught by a professional with a proven track record of success!

  4. Bonus reason: Udemy has a 30 day 100% no questions asked money back guarantee!

Recent Reviews:

Sandra E says  “Chris definitely is a pro when it comes to accounting.  His style of instruction is easy to follow, fun, and you will be empowered with accounting knowledge beyond the basics after this course.  I had several questions and Chris was quick to reply and help answer them.  As an entrepreneur I'm still learning the ropes on the finance side, and this course was perfect.  Highly recommended for everyone!”

 

What You Will Learn In This Course

The world of accounting can be vast and complex at times.  Once you get past the debits and credits, general ledger entries and financial reports, you realize there is much, much more to it!  In this course you and I will cover that much, much more! 

Learn the advanced accounting topics you only touch on in school, but actually are much more prevalent in the real world.  

This course goes into further detail, continuing on from my Finance and Account for Startups course.  We will focus on some general accounting topics that impact all companies, as well as specific topics of interest to growing companies. 

Issues such as deferred revenue, inter company accounting, international transactions accounting, and foreign currency accountingare discussed.  While interrelated, these modules can be taken individually if there are specific issues you want to focus on. 

Additionally, we talk about accounting for partnerships, as well as how to treatoptions, warrants, and other forms of derivatives.  Included are examples, the pros and cons of various instruments, and how they will impact your finances. 

The last part of the course focuses on financial reporting for multiple entities by consolidating subsidiaries,how to handle intangible assets, and lastly how to determine the type of lease agreementsand accounting for them. 

There is a downloadable item for each section, typically a checklist or example (for example, a sample partnership agreement).  There is also a quiz for each section. 

The video content for the course is approximately 5 hours.  Students should as well expect to spent approximately 2 hours completing quizzes, and an additional 2 hours reviewing the downloadable content. 

If you are a startup CEO or small business, don't be scared any longer of business accounting and finance.  Learn today how to manage your finances and grow your business! 

I will help you!

At any point during the course if you are confused or need clarification, send me a message! I'm here to help YOU the student, and I love interacting with you.  I've been in accounting & finance over 20 years and can most likely answer your question. 

If you are ready to roll up your sleeves, then lets get started today! 

I have also included a copy of my ebook "Fund Your Startup by Chris Benjamin" which you will find as a download in the last lecture.  Learn your options for funding, where to find investors, how to wow them, and lastly the must do steps to successful funding!

*** JOIN NOW AND LEARN FINANCE & ACCOUNTING EASILY FROM AN ACCOUNTING EXPERT ***


About The Instructor

Chris Benjamin, MBA & CFO is a seasoned professional with over 20 years experience in accounting and finance.  Having spent the first 10 years of my career in corporate settings with both large and small companies, I learned a lot about the accounting process, managing accounting departments, financial reporting, external reporting to board of directors and the Securities and Exchange Commission, and working with external auditors.  

The following 10+ years I decided to go into CFO Consulting, working with growing companies and bringing CFO level experience to companies.  I help implement proper best business practices in accounting and finance, consult on implementation of accounting systems, implementing accounting procedures, while also still fulfilling the CFO roll for many of my clients which includes financial reporting, auditing, working with investors, financial analysis and much more.  

Thank you for signing up for this course. I look forward to being your instructor for this course and many more!

Chris Benjamin, Instructor, CFO & MBA

Transcripts

1. Advanced Finance and Accounting Intro 2018: Hi, everyone welcome my course. Advanced finance and accounting for startups. My name is Chris Benjamin and I'm the rogue CFO. I'm in accounting and finance professional with over 20 years in the industry the last 10 years. Specifically, I've worked as a consultant, working with smaller early stage companies and helping them grow, helping them implement all the best business practices they need to know when it comes to accounting finance. As such, I've had a lot of experience, and that's why I put together these courses. Song You, Demi hopefully have already taken my introductory class, which is just financing the county for start ups. Although if you already know a basic understanding of accounting and you just want to jump into the more advanced topics, that's okay. So when this course we're gonna get into more than needed greedy topics, things like stock options and appreciation and leases and amortization so beyond those basic concepts. Like I said, the courses over 3.5 hours, lots of great content read the reviews down below. On the course page, you'll see students were really enjoying it, so it's definitely a terrific follow up course to that original just finance and accounting for start ups. Or like I said, if you already have a basic understanding that this is the course for you to jump right in . So I encourage you to sign up today and let's get started on teaching you all about finance and accounting for startups. 2. Introduction: Hello, everyone. My name is Chris Benjamin and I wanted to take the time to introduce you to my new course Advanced finance and accounting for startups, if you take my previous course was just was just finance and accounting for start ups we went through. All kind of the basics remain is the Now this This course will focus on more specific topics as they apply to start ups that I've had in my experience, and we'll get into each of those in a little bit and talk about what those are gonna be. But first I wanted to introduce you to the course so first myself, just so you know who I am. My name's Chris Benjamin. I go by the name Rogue CFO. I work is a CFO for a kind of start ups and growing companies typically who are on their way to go in public. I have a B A in accounting and finance and an MBA from the University of Washington. 15 probably 17 years experience in accounting and finance and as the CFO of worked in public and private sectors, all different industries, from energy utilities to retail to dot com real estate so lots of different depth of industries I've worked with the last six years I've spent working as the road CFO. Before that, I was a corporate CFO working for both public and private companies. Eso basically, as it says, I'm an outsourced CFO to ghost adventures of help bring the public. My website is rogue CFO dot com. If you care to learn more about what it is that I do and I have several courses up on you, Demi now, feel free to check those out if you're free. Even so, definitely enjoy those and encourage us to at least take a look and see if they're of interest. So next is the course outline. So here's kind. Just a list of topics we're gonna talk about. I'm not gonna get into too much of each of these right now because we obviously get into it in each section. So first we'll talk about deferred revenue. Uh, next to be intercompany transactions, foreign currency transactions, partnerships, options warrants and then continuing on. We'll talk about derivatives consulting subsidiaries or subsidies, will refer to them intangibles and then leases and then finally will conclude the course. So So now talking just a bit about the format of the course. So in each section it consists of video instruction and slides. Much like this, each section is unique. It's its own topics. So, unlike other courses were not kind of building upon, you know, stepping stones up to something terrific. You know, when we build a financial model or not, each of these is its own kind of unique individual topic. So basically the format that I follow is I talk about it first, and then we go into some examples, and we also look at the accounting side of it. How do you account for this? Uh, so as appropriate. I used, like, real life examples that try to bring those in andan as well. There's downloadable content for each section. Sometimes it's example sometimes that PDS sometimes it's a checklist, whatever the section might be. So now a little bit about the goals of the course. So the goals are to provide you with an understanding of accounting topics beyond the basics. We've already talked about debits and credits and financial statements on that type of stuff. Now we're gonna talk about each of those topics which in pretty. If you're in some type of start up environment, hopefully at least one or two of those rang true with you. And that's something that you anticipate you'll have to deal with. Um, and often times it's multiple things and things. They're tied together like international transactions goes hand in hand with consulting subsidiaries. You'll also understand accounting for international companies, understand accounting for multiple companies, understand how warrants and options impact accounting and financial reports. And that could definitely get tricky and kind of confusing the people. It takes a lot of sink in why you account for them the way that you dio on in again. If you're in a start up environment, you're probably issuing things like options to employees and warrants to investors. Um, also understanding intangibles and the special accounting related to them and how it's changed over the years. Understanding leases types of leases on how to account for them again. It's not a straightforward eyes. You would think there's different criteria, which which then mandates how you then account for them. So that's kind of a brief overview of what we're gonna do, what our goals are definitely a little bit more intense content than the basic finance and accounting. But if you're in a situation where you're gonna be dealing with any of those topics, that stuff you need to know when I try to make it as kind of easy and cloak well as I can for everybody so that you understand. And it's not a bunch of accounting jargon. So before we start, do at any time feel free to email me with questions you have. Just relax and absorb the content and review the lecture. So I always like to say the best approach is to kind of take the course once, try to absorb it. Don't don't get too bogged down with jotting down notes and trying to memorize the examples just taken the course. Then go back and review the sections that really apply to you and that you really want to learn more about eso again. The goal is not to become an accounting expert, but to understand the accounting impact of special counting topics and how they relate to your business, you know, most likely, I anticipate there's not a lot of CFO's or accounted type people actually taking this course. I'm hoping it's more the CEOs on the entrepreneurs. We're taking it want to better understand how this stuff impacts their business and what they're going to see on those financial statements. So with that, that's the entire introduction I look forward to teaching. This course is always and we'll dive right in and start with our first topic. 3. Deferred Revenue Introduction: all right. In our first section here, we're gonna talk about deferred revenue. So this video is just kind of introduction. Will talk about deferred revenue. Then we'll get two examples in accounting. Eso first, what is deferred? Revenue deferred revenue is revenue, which has been collected but not yet earned. So think about that for a second common and membership based businesses. And then there's obviously special accounting treatment that goes along with that, which is why you're here. So we'll get to some examples now, and they will dive into some more come later on. So think of a gym, which sells an annual membership, and it collects the entire fee up front to say the fee is, uh, let's just say it's 100 $20 to make the mass simple. So you earn that over the years, so you're collecting 100 $20 now in January 1st, everybody has their New Year's resolutions, and they get a gym membership. But you earn that over the course of the year. That person has the right to come to your gym for 12 months with that 12 month membership. So what you in thinking about this and This isn't the specific accounting at need to spread that revenue over the 12 months cause that's really when you earn the revenue is over. A 12 month period didn't earn the revenue on day one. You earn it each month, piece by piece, $10 at a time. Think of insurance premiums. Client pays for six months of insurance up front, but and they paid in month one. But then they're covered for six months. Same idea. You know, they're paying, say, $600 in month one, but they're covered for six months to really earn $100 each month. And then, lastly, just another kind of quick examples of online site, which sells an annual membership. You know, Amazon Prime. They saw you on Amazon Prime annual membership for $79. I think it is right now, and I heard it's going up, but they earn that over the course of the year. They don't earn that all in the first month. So along with that there special accounting and all those examples. But I think those examples give you a taste of what deferred revenue is all about. It's money or collecting. Now be earned over a period of time. So the accounting principles which apply here are the revenue recognition policy on the matching principle. Revenue and expenses must be recognized in the period in which they're earned or incurred. So again, thinking of our example, we earn that revenue each month. We don't earn it all in the first month, and you need to determine what period to spread that revenue over and are examples. It was fairly clear, you know, six month policy, a 12 month membership. What happens if somebody buys a lifetime policy? Well, how long are they gonna live? What period do you account for that? Over until then, the money that you've collected is the liability. So until you've earned it all, it's a liability for you. You have money from somebody? Somebody gave you money. They gave you 100 $20 for a membership. But you haven't done the service that you haven't given them 12 months worth of Jim services yet. So it's a liability. You owe your customer 12 months worth of service. So each period, What happens on the accounting friend again? This is very kind of 10,000 foot level as you earn $10 of that $120 membership, and you still have on your balance sheet in your liability section, the other 110 that you have for the next 11 months and that decreases each month. So initially you recognize it always deferred revenue, and then in each month you actually bring it to your P and l $10 at a time. How do you track on this? I mean, it's simple. If we had one membership, you know, it would be fairly easy. What happens when you're saying a gym situation? Everybody's on a membership, Um, or your insurance company. You sell, you know, six months annual policies to everybody, depending on the situation. There's different ways to do it. Obviously, they have their own specialized software that, since that's the industry they're in. And that's just how it's done. Say you're in a situation, though, where you you're not that big and a good example comes to mind is one of my clients, and I won't give away exactly what it is that they do. But they do sell some type of membership, and it's spread over the course of one year but some people by two year and three year memberships. So the way that we do it is we tracking in spreadsheets. So, um, one I'll just mention now one of the downloads for this section. I think the only download it is an example of a spreadsheet. How you would treat that. It's in a very much a waterfall format if you're familiar with that. If not, you can just look at it and see how it's laid out. But essentially what happens is in each month, the top section of the spreadsheet tracks the total collected so month one. We collect it and actually herald this dried out for you. Since then, you can look at the actual download if you want, so we'll just do three months. A. We'll do January, February and March. Now here we will also have January, February and March, so let's make a quick grid here. So this top section, as the slide says, is the total collected in that period. So in January, we collected Let's just do one membership $120. No se. In February, we sold another membership for 100 $20 and in March we? We did really Well with still two memberships, $240. Oops. Yep. Um, you know what? I did this incorrectly a little bit. I apologize already. This should be down here in February. March, and then this would just be would really just be one line item If, say, you had different types of membership, see sold or some other classifications, maybe. Why division, like this is your your main location. And then this is your smaller location who didn't sell any. So here's your total sold. So your total is obviously the 1 2122 40 And this looks a lot nicer in the spreadsheet. Just so you know, So in the month, so going across is how much we sold up here. Now, in the second section, let's just see what the side says. Um, you spread the payments over the 12 month period or six months, whatever it might be. And as it says, referred example down here were saying, Here's how much we collect it. Here's how much we're gonna recognize. So in the month of January, we're only gonna recognize $10 of this. So we know that this is our annual spreadsheet. These are all our annual memberships. You probably have a different sheet for your six month or year to year, so we know that we're only gonna recognize 10 now in February. We still get to recognize 10 from here, and we also get to recognize 10 from here in March. We still get to recognize 10 more from this. We have to recognize 10 from this and we were get to recognize we'll see that really paid on the first of the month. First of March, we got to recognize 20 of that. It was two months. So here's your total. It's on the month of January 10 2040. So here are the amounts that you would recognize on your P and l would be like a total. So in the month of January, we earned $10 in the month of February were returned 10 from January and 10 from February. Um, in the month of marks were 10 10 and 20. So 10 2040. And we would still have a liability on our balance sheet for the delta between both too. So that's a quick example. If you're going to follow along terrific. If not it. It's one. It's slightly confusing and concept to This isn't the neatest presentation. If you look at the spreadsheet, hopefully that'll make more sense. So with that, that's an introduction to deferred revenue. We'll talk about more about now, the actual accounting behind this and the debits and credits and the mechanics behind that as well. Let's give you some more examples. 4. Deferred Revenue Recognition of Revenue: So next we're gonna talk about the recognition of revenue and how we go about that. I left her example up to stuff case we need to reference it so typically spread over the period, which it's earned So again, we already mentioned you have an annual membership. You spread it over 12 months, and that makes sense, and he would normally spread it evenly. You don't earn mawr of your membership in the first month in the last month. This is one area I'll just say, where a lot of people get their get confused or they want to argue a different side of it, they'll say, Well, I mean, sure people by an annual membership to a gym. But really, after two months, nobody comes back or most people donor. There's definitely a decline in use. So really, we earn the bulk of that revenue up front, and the reason they make this argument obviously is they want to recognize more revenue up front. They you know, they collect 120 but they're only able to recognize $10 on there. P N. L. They want to say, Well, we really were earned $50 of that you know, we should recognize 50 and then kind of decline. Unfortunately, accounting is all about being conservative and fair, so that doesn't fly. Um, so we're also we're going to get more into these things. But what do we do with a lifetime membership? Then what do we do when there's no refunds available to the customers again, you could make in our event well, way have their money. Whether they come or not, they're not getting a refund. So what can we do? What happens when revenue isn't evenly spread out? It is some type of membership where they use MAWR event in different months. Let's talk about that. So first, let's talk about the lifetime membership. So what's the period of time to use to correctly spread this this hour? You can't, you know, ask everybody when they're gonna dine, then spread their membership over that amount of time. So you have to determine what makes the most sense based on history. So if you have a historical performance where you can point to and say, well, people will buy a lifetime membership, typically they come a bunch of first and then it dies off. But in every year they kind of come back once in a while. But maybe after 10 years, they seldom come back or it's really it's really declined off. So if you actually have a history, you can point to and trends, and you could show that to somebody. Let's see if you could make an actual case for it with actual data, then you've got something that go on. So is it. Says example. Most lifetime memberships use it heavily for six months, and then it just trails off. And really, whether they bought a lifetime or an annual wouldn't matter, they still would have just trailed off. So in that case, you know, if that is the case where most people say come 95% of the time in the first year and then it dies off, you might just want to say, Let's just call it a year and spreading over a year. Um, so the key is to be able to justify it and to be consistent in your application, you obviously wouldn't apply this person by person. You just apply it to all lifetime memberships again, if you are either. Already, public companies are going public and going through the out, a process you have tow. Whatever your argument is, you have to be convinced into your auditors, and they have to buy into it as well. So what happens if there's no refunds available by $120 membership that that's it. You have their money, So do you recognize it all at once? They have no way of getting their money back. So it's not like you technically have a liability. You don't owe them any money or don't potentially over many money. The thing is, is that that liability isn't meant to reflect money. You might have to get back. That's not the purpose. The liability is to reflect the fact that you owe somebody some level of service over a period of time. So the accounting principle again of conservatism applies here. You should still defer to spread over the appropriate period, so they buy an annual membership. No free funds. You should still be spreading over 12 months, so that's fairly cut and dry. I mean, obviously people don't like that. I mean, people will always push back, will say no. I want to recognize as much revenue early as I can. Unfortunately, accounting doesn't work that way. I didn't set the accounting rule, so you just have to deal with how it is. But whatever you can justify, you can probably work that into your counting. But again, you need to be consistent and you can't say, Well, in this case, we want to do this. But in this case, we want to treat it differently, and that won't work either. So what happens with uneven revenue spread? So a customer pays in advance for a service which isn't performed evenly. So example, a company collects a retainer of $100,000. Uh, they recognize the revenue as it's earned. So in this case, I mean one kind of use the example that comes to mind would be a lawyer who collects $100,000 retainer. It seems about right. Um, you know, they're not going to do exactly. I mean, it's not say they collect 120,000 to make the Matthews and I are going to $10,000 worth of services evenly over six months. In this case, you need something more substantial in terms of being able to track how much of the money or how much of this? No payment they've sent you, your using each months on and you can recognize this revenue. So if it's trackable and justifiable, you know it's ours. Build or its percentage of completion. Maybe you're building your builder. You build something or somebody you collect $100,000 upfront to build them some small cottage. And you say, Well, we're you know, we can't recognize all this revenue in the first month because we haven't even built anything. But, you know, we're gonna build 30% of the house in January than 20 and 20 and 20 where I don't think that math adds up quite right, and then 10% at the very end. That's how you would then spread that out. It's by percentage of completion methods, so you have to find something again that's justifiable. You can actually track. You can show. Yes, we built 30% of the house, and as well you are consistent how you apply it. That's how you always treat it with your other customers as well. So there's three examples on how to kind of treat the deferred revenue and different examples. You know, like the lifetime membership, you know, uneven kind of earnings off deferred revenue. Hopefully, if you grasped the idea of deferred revenue now and just, I mean the biggest concept to get over, it's just that it's money you're collecting now that you haven't yet earned, and you recognize that as you earn it. The easiest way is to spread it evenly over a period of time, but only kind of as applicable, which it usually is. It usually is, especially at an online company. It's something like a membership that somebody paying for your site with that will move on to the next section. 5. Deferred Revenue Accounting: So now we're gonna talk a little bit about the accounting for dirt deferred revenue now that we know what it is and concept, how it works, where the actual accounting entries for this. So I'm just some general information. First, there's two sets of entries, so one when the money is received when the customer client pays you, and second is each month's recognizing that deferred revenue, depending on how complex on how many separate items you have, will determine how elaborate become. So we raced our example here, but, you know, we could have had multiple different items. We could have had six months, 12 months, you know, semiannual or, you know, two year memberships. Whatever the case might be, obviously, each of those ads to the level of complexity, or you have to track each one individually again. If you're in a bigger scale operation like you're in a gym and they have specialized software, which tracks that's for you. It's going to do all the math. It will know how long people's memberships for and how long you should be recognized them and do that math for your month in. But if you're like me for example, in working with startups to, you know, sell some memberships don't but aren't at the point of needing some crazy, specialized software. You have to do a lot of this manually and excel. Eso gap accounting generally accepted accounting principles, matching revenue and expenses with the period earned or incurred. So again, we're trying to match that revenue that shows on your P and L with the actual period that you are in it. So when the monies received, somebody comes in January 1st and gives you that $120 membership fee. Um, so that way we have a few examples here on the slide. So we debit cash, which is an asset account. So I'm giving you cash and give me my $120. You have that now. It's an asset like reading deferred revenue, which is a liability. So again, I'm giving $120 you, at that very moment, only $120 worth of gym membership services. There's no piano impact. We haven't done anything yet, and that's that's the second part of this where we recognize revenue each period. So, um so just know that it's very simple at first people give me money. It's dem Akash, uh, credit deferred revenue. So when the moneys earned now So we're just going to go with this 12 months gym membership , if you will. So you earn 1/12 of the amount collected each month, so you're in the $10 each month and ideally, in theory at the end of the month is when you're in that it becomes becomes one of your month end closing items to recognize deferred revenues again. If you're in kind of this ah, situation, we have to do it more manually. Or even if you do have an automated system, which calculates deferred revenue, it's something you want to look at and make sure it's calculate correctly in the entry supposed to correctly. So the entries that either you will post manually or their system will would be to debit deferred revenue so you're reducing your deferred revenue. Liability remembers the liability count. You're crediting your revenue, and how much you're doing it for is the 1/12 in the situation. So would be the $10 because that's how much you've earned. In one month, you've earned 1/12 of that $120 So the net effect is that you reduce your liability each month and you recognize 1/12 collected his revenue, and that's what we had on here that are race. You would get that $10. It's now revenue. So if you were looking P and L. A and see, you know membership revenue $10 you don't necessarily, and I don't think I've even seen it where you would somehow denote that that was deferred revenue where you were recognizing it. It doesn't matter. Certainly you could break it out. If you, for some reason wanted to separate what you're recognizing us deferred revenue versus some other type of revenue. Maybe you sell one month memberships and knows you recognize in the month you want to separate those out completely. Go ahead. Typically, I haven't seen it where you would just show membership revenue, and that's about it. The accountings remarkably, fairly straightforward that the devil is in the detail and the tracking and ensure the tracking is correct. And at any point, you could go and so say, you know, six months in. You have this huge deferred revenue liability on your balance sheet, and you want to get out. Ah, feel for if that's correct, you know, Did you? Is it being accounted for correctly? One way would be to just kind of go back month by month and say, Well, we collected X amount in January. We correct 120. So now, halfway through the year, we should have recognized, you know, half of that already and do the same for the other months and come up with a total and say , Well, roughly our balance should be X amount. And if it is terrific, if it's way off than either you're recognizing too much too quickly or you're not recognizing enough each month, just a quick way to air. Check that. So there you go. That's the accounting for deferred revenue. 6. Deferred Revenue Tracking and Reconciling: So in this last section of deferred revenue, we'll talk a bit more just about the tracking of it, keeping that straight since, as I mentioned in the accounting, it's fairly straightforward. It's the tracking that I could get a bit hairy, and you want to make sure you do correctly. You want something that's easy, and I'm assuming you don't have a system that does it for You need to somehow manually do this. You want something that's easy to use. Easy to follow. Somebody else looked at it. They could kind of look out and see. Okay, I see here is how much they collected here so much they recognized. That makes sense now. Of course, when you get into things where you're selling different like levels of memberships or maybe you have different locations, you sell different types of memberships and you have all these tabs. It could get a little bit out of control, but you want to keep it kind of uniform and simple at the same time. So how the best track? I'm a fan of Excel spreadsheet or whatever spreadsheet you might use? Typically, that's how I've seen it done, and in the sample I give. That's a screenshot of the of a deferred revenues tracking tool in Excel. Um, as it says, refer to the sample for ideas so each product line or time frame should be tracked separately and once, once a set out month a month, it's not difficult. So setting up this spreadsheet will take some work and thinking through. That's what I hope the example will help you with. And then you can be on your way into our tracking revenues. So in terms of tracking to set up a tab for each revenue streams, you have annual memberships, lifetime membership, six month memberships. You need to do those on different tabs and that you don't have to. You get certainly building some formulas and do it. But I think it makes it a lot more simple if it's very separated by the time frame, because then you know everything on this annual tab and just give you example. I'm sure you're all familiar with excel, but you have your grid. I won't draw the lines, and, um, down here you have your tabs, so you'd want, like your one year, your six months, you're lifetime whatever. Maybe have two year on each tab. You have your you know, your January or February and march, as we talked about. Then you have your revenue stream, so maybe it's since we're on the one year tab. Right now, you have revenues from your US site and from your European side and from your self American site. You could certainly do that and then show down here how to recognize those. Or you could even break this out. We have a one year tab for the US one year tab for the European etcetera, so as detailed as you want to get. And I think there's no harm in this situation of having a lot of level of detail just because it can get a little bit complex and you want to make sure it looks like, for example, when the 13th month comes, you want to make sure you're not recognizing any more of the previous, you know, January its revenues. Um, so, however the shakes out, however you set it up, it should also reflect how you record the entries so somebody could go into your account system and say, Hey, here's the deferred revenue entry for January Okay, I see you know, an entry for us, for European for one year. You know, for South America, one year it's the US No European Centre, South America for six months were able to quickly see. And then they can tie those numbers back to your spreadsheet again. Just thinking of, say, an auditor who is revealing it will make their life a lot easier in your life and future. You know, you go back because you think there's maybe a problem. You're trying to recreate stuff. And if numbers air just lumped together so you just took the total amount that you need to recognize and put it one entry and the numbers wrong. Then you need to start digging in and figure out what? Where did it go wrong versus if you had each line and individually, you know, us European, one year to year, it's a lot easier to go back as I Oops, we messed up this specific item. I mean, hopefully that's not a case, but certainly will know in accounting and month and closed urine rush heirs can happen. And if anything your auditors will review, it will make their life a lot easier eso each month total, uh, what you brought in for payments. So calculate how much should be recognized in the current month. So it kind of showed you that example on a few videos ago, but where you would list out 120 care 120 120 120. We're gonna recognize $10 of each of those. So we brought in X amount. We're gonna recognize why so reconcile ing the spread. Shoot. So after you've entered all these values done your month end and make sure everything, Then you want to make sure everything ties out. So you should have an ending deferred balance on your spreadsheet that she'd be able to tie this to your balance sheets. So, in theory, let's just erase this. Simplify it. Month of January, you brought in 120 KR just 120 years old. One membership for January. You recognize $10 down here, you should be able to say so this is brought in or whatever you want to call it received. And this is, you know, recorded or recognized. It's called recognized. You received 100 20 k you recognize 10. Do some math on the Delta's 1 10 you should be able to go to your deferred revenue liability for liability, and it should show 1 10 because after you do your entries even think about the entries. When we first got the money, we debited cash. We credit Differ, Graham. In 120 the end of the month, we recognized $10. We debited deferred revenue for $10 credited membership revenue. You're deferred. Liability should be the net of these, which is 1 10 Now, add in all the other you know, uh, types of revenues you brought in and all that You should build it, do all this math and come up with your deferred revenue liability. Um, just a note on this up to you. If you want to have just one line item on your balance sheet, that's deferred revenue liability. Or maybe you mere this and you have one for deferred revenue liability, one year memberships to year memberships, etcetera. And for the different countries, that's up to you and how specific you want to get in practice. I've just had I've kept this spreadsheet. I've had one line item for deferred liability, but I always make sure this number ties out to the balance sheet, cause if this matches, then you know that all the detail is up in here and you can figure out that at any given point. Well, how much do you have for the U. S. Or for one years? That draft. So that's reckoned signing. And you should do that every month. If I mean, definitely do it every quarter. But I'd encourage you to do it every month again because you can't get errors, because what happens to just thinking of human errors. So you start getting, you know, February and March, and then over the course of time, this becomes zero. I'm not saying affair in March, but then this becomes zero, and then this becomes zero. But you have new line items down here like $10.10 dollars. You want to make sure that your total at any time is recognizing this? I've seen it. I found Aaron selling spreadsheet where it was cut off here. So for the first few months, it was fine because it was recognizing safe Jerry. February, March 10 10 you know, and then money was here, and then 10 10. But then you get over here, and it was only but you had 10 more dollars down here, and it wasn't picking that up in your totals, and they weren't reconcile ing and either. So what happened was they were only recognizing, say, 30 out of $40. So they should be recognizing 40. That messed up this total to nestle mess it up, but they weren't recognizing enough of it. But if they had kind of done that gut check that would have seen like, Hey, we're not recognizing enough revenue. So hopefully that makes sense for you. But if not the point of story being always tied us out and make sure your formulas check out, and with that, that's ah, that's about it for tracking and recording all of this deferred revenue 7. Intercompany Transactions Introduction: next in the course, we're gonna be talking about intercompany transactions. So this first section will just give you an introduction. What it is, I have a few examples we'll talk about in general what they are on. And then in the next two videos will talk about actually more specific examples and then also the accounting for them. So first off, let's just start with some examples of intercompany transactions, right? Get to detailed here. But just to give you an idea so you know what we're talking about. So when there's two transactions between two companies, or maybe more, which are owned by the same parent company when a parent conducts a transaction with a subsidiary company and we're gonna discuss this a little bit more when one division conducts the transaction with another division or when one subsidiary or division in one country conducts a transaction with another country sub or division. So it's all I can go lots of different ways. But what it all amounts to is that somehow these companies air, all related, they're all owned by the same companies. So whether it's the parent here, let's just draw this So you have your parent company than you have multiple, say subsidiary companies, and the parent mayor may not even do business itself. Parents job might just be toe only subsidiary companies. Or maybe the parent is kind of the primary business unit and these air other subs that do other things that it doesn't really matter. And then each of these might have different divisions. We won't do it for each of these, so any time you have transactions between here, or maybe between here, you have one down to here or here, up to the parent, any direction there's transaction. There's a need for some type of accounting to be to handle those type of transactions and you'll see more wise, we get through the slides. But just know that enforces. It's not just as simple as, say, this division's air say this division sold something that this subsidiary new book, a sale and an offset and cost of goods sold. There's additional accounting treatment for that. Um, when we'll get to that, I don't want to get too far ahead of myself, So why does it matter? Um, so one What's a fair price for the transaction, you know, does does your parents sell things cheaper to its subs, and it sells to the outside world. Um, is are they allowed to do that? Duplication of transactions when financials air consolidated. And I'll show you that in a second and creative accounting people, you know, start lowering profits and high tax divisions and increasing profits in low tax division. So there's the reason we need in our company. Transaction primarily is to get rid of duplicate accounting and creating an unfair picture . So the one example I want to give and will probably touch on this several times through this section. So one company sells, say they make widgets, the parent will seize P for parent. And here's our subsidiary makes widgets. And then our subsidiary uses those widgets to build some other type of device. So they let's say these people make chairs. These parent makes chairs that really got making chairs. They have a subsidiary. Maybe they bought a company. That's how they ended up with the subsidiary who sells tables and chairs, tables and chairs so the parent makes chairs, sells them here. These guys make their tables parent with these chairs, and then they sell them to the market. So a couple of questions. What does the parent cell, the chairs to them say the parent is also selling out in the market, Just chairs and they sell them for $10 apiece. Should they sell them to $10 piece to here? Or could they give him a bit of a discount? Is there a subsidiary? It's all the same company, right? Say they in theory, they could sell them for a dollar and really increase the profitability of the subsidiary. They could also, in theory, change the pricing. You know, like, oh, this month will sell for $2 because we need more profits than they need it. Say to even make this a little bit more complex. The parents in the United States, these guys air in Europe, kind of run out of space here. But we know these guys air. In Europe, there's different tax rates, so you can kind of see how it's easy to start. I want to say, manipulating the numbers, you could start charging different prices. I mean your market prices fairly set, but your prices between here could be easily changed to move profits one way or another. hence the need for intercompany transactions and we'll get to the mechanics of those. But basically what it does is it negates these transactions. It takes them out. So they're not impacting your your financials. So all of this that I've mentioned, this section here at least, is also referred to his transfer pricing. So the prices charged from one party to another need to have some basis. You can't just charge $10.1 month, 20 the next, etcetera needs to be some set price and need to have some kind of basis for setting that price. The general rule lot of land is whatever is charged in a normal arm's length transaction, which would be out to the market, is what you should be charging here. So you're charging 10 with the market. You wholesale them. You charge $10 to your subsidiary, then all this fair in order can come in a look at this and go. That's fair. I mean, you're making $10 regardless of where you sell them, can be used for the sale of goods between related companies. Also services sale of an asset loaning money. So again, those type of transactions are all gonna get eliminated and intercompany, transactional imitations. But just so you know, now, maybe the chair plant has a piece of equipment that they sell to our subsidiary. Well, how much do you sell it for? Sell it for the same amount you would normally sell it for. Maybe the parent is actually a, uh, manufacturing consultant. They're consultants. They consult out in the market at, let's say, $100 an hour if they consult with their substance, aided by a company which becomes their subsidiary. That's why they have this kind of weird relationship they do consulting with the subsidiary . They should be charging $100 an hour to the subsidiary as well. So it's all about being fair in a determined herbal price. So I mentioned intercompany eliminations a little bit. So, uh, there's different types of eliminations. One is theologian ation of Inter Company's stock ownership, which is not. This will be the 3rd 1 on her list here in early elimination of intercompany debt. So, you know, the parent lends money to our subsidiary, an elimination of inter company revenues and expenses, so that will be this example. Let's talk about each of these now. So first is intercompany eliminations, stock ownership. So when a parent investing a subsidiary that shown as an investment to them erased some of this, we have our parents. We have our sub parent. Investing a subsidiary shows is an investment to them and his equity, Um, problem. This is that a company can buy shares of its own stock. So the parent, you know, bias gives them some cash. So, you know, they get some cash and they give so they give cash and they get equity. So they're bolstering their balance sheet equity, right? Are their, er their assets. I should say they're showing now that they have all this equity buildup in some company, which just happens to be there. A company can buy shares of its own stock and bolster its assets and equity, hence the need for elimination. So what this company is showing is, let's just get rid of these. These arrows, they show a decrease in their cash. They show an increase in their assets, their investments. Meanwhile, on this guy's balance sheet there showing an increase in cash, and they're showing a increase in equity, which is on the other side of the balance sheet. So this is somewhat unfair because you could technically bolster up the subsidiaries balance sheet quite easily. Just have the parent give them a bunch of money and buy equity back in them. Their cash increases on their asset side, their equity increases on their liabilities and equity side having all of the sudden their total assets until liabilities equity or being bolstered up. But all you've really done is transferred assets and cash here and then equity back here, and that's not really fair. So basically, the elimination and we'll get more to the elimination when we get toe the accounting for it . But it negates this whole transaction basis has No, I mean the transaction happens, but when you present your financials, you don't get to include this is part of it. Um, just a heads up and will probably get to it as well. But when I'm talking about is when you have ah, consolidated financial statements, the thinking of like a corner and er a year end, the typical way you would do it is he would show the parent and then all the subs that you have three subs you know you have all your assets and liabilities and then you have a grand total. These air consolidated if you just add up across this cash automatically wipes itself out. These guys went down, these guys went out, but here you had an increase in an asset in their investment. You had an increase in equity, those need to be eliminated. So as you add across and then you eliminate these transactions and come up with your true consolidated financials. And again, the whole point, for the most part, is to get rid of this type of dynamic where you're showing increases in assets and then equities or increases in profits because of the way you played with the pricing. Um, the next to be one company loans another company money. Just get rid of this. So similar to if they bought equity, It's just now there's a debt on the subsidiaries book. So creates an accounts receivable on the lender's books and accounts payable on the receivers books when consolidated. Now both of there are inflated, so we give them dollars so our dollars go down, there's go up. They also have a payable which goes up, which is a liability. We also have a receivable which goes up. So ours is all assets, but there's is in the assets and in the liabilities. So again, rather than equity in our last example, now we have We're bolstering their at their cash. Their assets were bolstering their liabilities and equity. And they're, you know, they're totals for those section looked increase. Um, the cash obviously cancels itself out. But the elimination piece of this is to get rid of the receivable, get rid of the payable, and then show the true picture. Because in the end of the day, always remember, we're talking about cummings that are related. So this substance jury is owned by the parent. Um, you know, if the parent transferred money from one bank account to another bank account, it wouldn't show, uh, receivable on one bank account. The liability on the other. It would just all be within the same company. Same kind of concept here, except for accounting purposes. You do need to need to book this transaction that saying the night need not book it. We do need to eliminated as well. So next is revenues, expenses. And if this seems a little bit confused and hopefully be clear as well. Let's get to more of the accounting of it would go through it a bit more detailed and more specific examples, so companies can only sell products and service system third parties that can't sell them to themselves. They they do sell them to themselves. But that needs to be kind of eliminated. So one cos cells, they're consulting services to another company. Um, you know, justice an example. This creates the sale and it cost of goods sold which need to be eliminated. So again, just to give you the the idea, we have their parents. So this time, rather than giving cash, we're giving services. So we give $100 let's say, worth of consulting services. So our revenues go up by $100 Um, at our receivables go up by $100. So this is on the assets. This is on your P NL revenue. Over here we have a cost of goods sold or cost of services, if you will, of $100 or some expense. I mean heads on how they treat their cost of goods sold and whatnot. Let's assume it's a cost of services of $100 cost of services. So it's under P NL. Um, they also have a, um, liability. They haven't accounts payable now $100 accounts payable, which is a liability. So through this whole transaction, you've created revenue. You've created expense you've created receivable. You've created the payable you've created for things which ultimately get net out and end up with zero impact. Um, kind of a drastic example of this is you could have a parent constantly providing services to the subsidiary. The parent would show a terrific piano at the end of the month and have this huge receivable, but that have all kinds of revenue which they generate it. But what they're ignoring is the fact that they also have the expense of it on the other side at the same price. So really, those to do net out to no impact. But if they were trying to somehow make the parent look more impressive than it waas, they could do that. That's why, though, when you, um, do your eliminations and you consolidate everything at wife's itself out. Certainly if you just added across to say we didn't eliminate anything, you would have your consolidated sheet here, you would show revenues of 100. You should cost of goods sold over 100 which is a zero profit and then on your balance sheet would have a receivable and payable of 100 100. Certainly they kind of wash themselves out just in the nature of the transactions, like we have no net net profit from this transaction. But let's say instead of cost of services now, these people recognize this is just a G and a expense, you know, whatever it might be, um, I don't know what types of services they provided. They recognize that expense rather than a cost of sale still on their P nl. But now, so you have your 100 revenue. Your cost of sales is zero from this transaction, so you have a gross profit of 100. Then down in your expenses, you have this 100 and your you know, your total net income is still zero end up at a zero either way. But now you're gross profits 100. So just by changing how the transaction was handled, you look at a consolidated balance sheet with no eliminations, and it looks like they have a terrific profit. And you could do that all day long. You could push up their revenue, increase their expenses. Bottom line impact zero. But you're creating this kind of mid gross profit line that looks inflated. So again, this is the reason for the eliminations. We get rid of this, all of these, and in this case you get zero and you get zeros all the way down. Then you just get the rial transactions. So with that, that's the introduction to eliminations. Hopefully, it makes sense and concept, and that's all that I really want you to get out of. This is just know that there's transactions which can kind of, um, inflate different aspects of your financial statements. When you do transactions between divisions and parents and subs that you need to get rid of and the reason to get rid of them, it's so you can fairly present your financial statements and the next will move into some more specific examples and as well the accounting on how this all works. 8. Interco Transactions Examples: Okay, so we're going to start off with some examples here. We're gonna go through four different types of examples, will start off with transfer pricing. And that's if you remember. It's the price that you set between no company, the parent cells to the sub one. You know, the U S division cells to the European division, whatever it might be and that transfer pricing relates to that pricing that used between those eso. We're gonna go with company peas in the United States. Parent on sells goods to company s who is overseas, and they sell them for $100,000. Company us then. So let's just write this down really fast. Hopefully weaken. Keep this clear, parent and sub and they're in different countries. We said $100,000. Let's do 100. This is the Fail. The company s then sells those goods for 200,000 to their customers, so they then sell so they have when the how old to note this. But we'll put in 200 over here because that's here. Even Salvi's so they bought for 100 and then they sell for 200. So company s has profit of 100 and they have profit off here. Let's just move this 100 over here to keep it consistent. They have profit of 100 so everybody has a profit of 100. Right now, we're ignoring cost of goods, sold things like that. But now there's twist. The tax rates in the U. S are much higher than overseas, so they're gonna get tax a lot heavier here than these guys will. The company P parent, has an incentive to charge company s far less to reduce the profits. So remember, at the end of the day, these air all one company So whether they that's why there's that incentive to try and juggle these numbers to reduce your outside tax. So this mentions Company P sells it for 20 so they buy it for 20 but they sell it for 200 still itself. So now they have 180 k They have 20 k They're still 200 profit, but there's only 20 k a profit on the parents books. There's 180 k and profit on the subsidiaries books, um, so than 20 k and yes, so this consolidates so the revenue when consolidate will be the same. But these guys, they're, say, paying 30% tax. These guys, they're paying 10% tax. You are allowed to do this, but within reason the price is used. Need to be set. A sui mentioned before they kind of need to be are at arm's length transaction rates so you can't arbitrarily make this a dollar. You can't just say there's gonna be a dollar. They get a dollar on, make effectively eliminate the taxes over here. You don't have to do that. This transaction needs to be on at arm's length rate. What would they sell those goods to outside parties here to another company, regardless of where they were. So when it comes to transfer pricing, this is your transfer price. The main thing to keep in mind is the transfer price needs to be fair, and I think you keep that in mind. You'll be set in terms, and then, in terms of taxes and whatnot, they shake out how they shake out. You can't manage your taxes. You can't change your prices to try and get better tax rates. So the tax rates flipped here or what happens if you have a subsidiary in another country and the tax rates there are 40% do hiss. So then your incentive would be to keep more of it here. So here you sell it to them for a cheaper price. Come, we're sorry for Ah, you would sell it to them for luck. So in this case, you want to sell it at a higher price because you want all the revenue to be here at the cheaper tax rate. And you want these guys to barely break even essentially. But they still need to do their sale in order to make all this. Obviously, they obviously and as the whole make profit. But maybe then they want to sell it here for 1 50 and then these guys sell it for 200 they only make 50 K versus 100 K on these guys make more money at a cheaper tax rate. You can't do that. Needs to be the same price wherever you go on. So, in summary, that's, uh, all we need to say about transfer pricing. Just know that the price doesn't need to be established. It needs to be fair. Usually would use an at arm's length transaction to set that price needs to be justifiable , and you can't constantly be changing it. So next is stock ownership. It's just erase this. It's a stock ownership eliminations. So the previous one so much an elimination, it was more just about setting up a transaction that would then probably be a limit. It would be eliminated for consolidated financials. But that was more where you do things with numbers for tax purposes. So live in our company. P has ownership of company s 20% of it. The price per share was a dollar. They bought 200,000 shares. Company P has less cash, but they have a long term asset now, so we kind of did this example. The previous video a little bit has an increase in cash company assets, increase in cash and increase inequity. So let's just lay this out again. We said it was a dollar. A share was 200,000 so their cash goes down 200 k Their investments or their assets was just called. Asset goes up 200 their cash goes up, their equity goes up and there you go. So consolidate. There's no change in cash when you add across. They spend 200. They received 200. Those transactions eliminate themselves, but we do need to eliminate the unfair boost and assets and equity. If you consolidated this as it waas, let's just put our consolidated over here. You're gonna show out, ignoring everything else that's on your financial statements. Your assets went up 200 your equity 200 so it balances course. County always balances double entry, but this is unfair because now somebody reading your financial statements goes, and now look at their. Their total assets are increasing. That's terrific. That's a good thing. Their equity is increasing. That's terrific. But really, it was just a transaction between your companies. So this needs to be eliminated. And just to show you, I keep talking about these eliminations, but how they actually would work. In theory, you would have a financial worksheet where you would list out your parent, your sub, your sub, your sub. You would list all the assets, liabilities, equity, etcetera. You know your revenue and your expenses. So you have dollars for each of these we want to each other. It's just to this, you would have your unadjusted consolidated financials, financial statements which would just be Italia cross so down, then you would have your eliminations or adjustments, whatever you want to call them. And then you would have your final consolidated. Here is where you would then see Well, we increased our 200 K assets here in our equity here. So you would reduce this 200 reduce your equity 200 and it would add across his member over here we had whatever it was, our assets went up 200 her subsidiaries equity went up 200. The cash also went up 200 but it went down 200. So that eliminated itself. You would also have a footnote in a little reference here, Like a because you're probably gonna have several adjusting transactions and then down here somewhere, you would say a eliminate, you know, transaction xz from February 21st. You know where parent bought, you know, $200,000 worth of equity of subsidiary and he would maybe have additional backup. So that's just to show you. So then this just nets out to what it needs to be, which was the original mouths. I should say the original mounts. It's the corrected amounts. This is then what you would then show on external financial statements. Whether you're a public company, these would be your adjusted consolidated financial statements. This is all done internally again. Your auditors will be checking things like this is not like you could just not do it. Um, when that's about it, that's That's how you go about consolidated financial statements. I think in I came here for the later example here or in one of the other sections we talk about internationally and we have a special elimination accounts and there's a reason for those. But in this situation, you don't have that. So debt eliminations, and that's gonna leave this up here. Company P Lens 200 kr yet to indicate a company s they have a decrease in cash s has an increase in cash, so that's kind of the same. In this case, they would have the parent would have an increase in their receivable, so this would actually be you would actually list out each account here, so you would have cash and receivables so you would have a decrease of 200. You have an increase in receivables. The sub Let's just make one sub would have an increase of 200 cash. They would have, Ah, an increase in a liability, their accounts payable. Same thing the cash eliminates itself. You need to eliminate the receivable. Need to eliminate the receivable or the liability. And so it's actually a positive here. Increase in your liability. See, have your receivable in your liability. Both increase just different companies and you eliminate them. Um, same reasoning behind this. You're increasing your assets. You're increasing. Your liabilities are unfairly bolstering your financial statements. So let's clean this up a bit less. The streets, for example. First for we raised too much company Peace sells 200 K worth of consulting services to company s company P shows the sale and the receivable company s shows the S air, the expense and the payable on. We kind of ran through this example already. Let's do it on here. Just toe. I kind of show you Sorry. This a bit messy. Company peace sells the service. They have a receivable. They also have a sale. Now we're down here on the P and L section, so this would be a credit. This to be a debit R S or subsidiary has a expense of 200. They have a liability of 200. This would be a devotee. Has to be a credit. Same thing here. If you just added across your unadjusted would be 200 and 202 100 200 you've artificially increase your revenue. And I mean, I'm trying to think of another good example where this would be a bad thing. Maybe you have a bank loan separate from this completely. And one of the covenants is that you have to meet revenues of a $1,000,000 1/4. Companies could use something like this to bolster their revenue. And unfairly, Shohei we sold, You know, more revenue than you. Actually, Dick. That's really just to the transaction between your divisions. Another reason why it needs to be eliminated. Kind of a fair presentation of financial statements. Same thing though you would eliminate thes right here, and there would be no increase in revenue or expenses, etcetera and assets and liabilities from this transactions. It would just be the actual natural transactions, and you're kind of due course of business that you would actually show in those examples. So that's some examples. Those air kind of the primary reasons you would have intercompany transactions is equity transactions, loans, sale of goods or services between divisions. That pretty much covers the bulk of them. So what that will move into as well the accounting in the next video this so bit more would probably end up doing something similar to this, but also and also in the download for the section you'll see. There's an example that is this, and we actually is the same example. I believe in International Transaction Section, because the sample I provide has deals with intercompany transactions, transfer pricing. It deals with exchange rate changes. So it kind of has everything all in one, so you can see how it does get. Complex pretty quickly, nonetheless will move into the counting for intercompany transactions in the next video 9. Interco Transactions Accounting: Okay, so next we'll talk about the accounting for this first, let's just a race. Some of deliver examples, so intercompany transactions are usually eliminated an aggregate at the end of a period. So you don't do this transaction by transaction. You go to your period. And so whether that's the end of the month or the end of the quarter and one of your to do list on your month and close would be to book any type of intercompany eliminations. Intercompany elimination accounts are used when only one side of a transaction is not one company's books, and one side of the transaction is on another company's books. So I mentioned last video. Sometimes we use additional accounts called just called intercompany Eliminations, and we'll get to that. So transfer pricing accounting. So accountings fairly straightforward, the price setting ISMM or the topic for discussion. So we mentioned that in the last video, the first thing we talked about with transfer pricing of what's a fair price and using an arm's length transaction. There's no special accounting needed for that, necessarily. You just do the transaction, at least when talking about transfer pricing. Specifically, you're talking more about the price in that case, not the accounting the accounting for that does fall under revenue. An account or revenue and expense eliminations. So stock ownership elimination. So we kind of went through these examples. Now let's look at more of the accounting and we kind of touched on it Company P by its 20% . Um, here it says $100. Let's just use the 200 again or whatever the example was will use 200. Company P needs to remove the long term asset slash investment and come and clear it against the elimination account company s needs to move it against their equity. So let's draw this out again. I'll show I'm talking about we have our some do. Our parents are sub. This is unadjusted. These are adjustments and these air consolidated. We have our assets lie ABS equity and then ravin expenses will just put the ball down. For now. Company P invest in company s When we were going to give the number 200. So they're asked, their cash goes down. That's actually write out their cash and their investment cash goes down 200. Their investment goes up 200 groups and that silly impact for this transaction. Company s gets cash of 200 their equity goes up 200. As we said, the cash as you move across pretty much eliminates itself. You don't need to worry about that. The problem is, the investment, um, bolsters your assets on the equity is bolt shirt. Now, we said you simply just adjust this so you would, you know, do 200. Negative 200. Negative. And in the end, that results of zero. So that's where we were at the end of the last video. And this is all still true. The problem is, with accounting is a double sided entry. Um, we can't simply book this entry because this portion is on the parents books. This portion is on the subsidiaries books. We don't want to touch the cash because we don't want toe change the parents cash amount because the parent did give out $200.200,000 in cash. We can't Don't want to show that. So what do we need to dio? Just erase this just toe? What kind of look at it from both sides. So on the parents books. Um the original transaction with cash and then investment. So I went down 200 when and then investment was up 200. So end of the period we need to eliminate. We've said the cash is gonna take care of itself because it's gonna clear against the other cash transaction. So we have this investment 200. So how do we do an entry to get rid of this? The way we do it is we would at say quarter and they say it's your in 12. 31. This is an asset. So this is a debit currently. So we're gonna credit investment of 200. We need to debit something that we don't want a debit cash because the true cash on the parents books only give him back the 200. They don't have $200 or $200,000. What we use is a company called simply Intercompany eliminations or Interco transactions will call eliminations. Usually, this would be a like if you were to put this in a chart of accounts, who would number it like 9999 No very bottom of your chart of accounts. It will always equal zero when it's consolidated, we'll see that in the second. So this is a count. 99999 for 200. So when the parents books, they have this fictional account, which is intercompany eliminations for 200 K it's not necessarily an asset or a liability or anything else. It's just on additional account. You would may be classified as, like, another other expense if you want, but it is going to eventually eliminate itself on the subsidiaries books. They have the same problem. They got 200. They also did equity of 200 for what they gave you over here. They need to eliminate that. They don't want to change their cash because they got $200,000 in cash. Um, these tuned that it 20 on the consolidated Same thing for them, though A 12 31. They want to get rid of this equities. They need to Devon it. So Equity 200 and they credit Interco eliminations. Now the limb for 200. Now, remember, that's on their books. That's on the parents books. Um, if you're run trial balances for these companies, you would see intercompany eliminations. You see, a debit here for 200 you'd see a credit on there's for 200 but when you consolidate this all together, this will also be account. 99999 The same account just on their books. Those wipe each other out, and they always they have to wipe each other out. Or there's something done incorrectly here. The reason for doing it this way again. It's so that you can eliminate on your books, but there's no way toe physically do a debit here and a credit on someone else's books. It needs to all be kind of in this vertical fashion, if you will. So that's why we use this extra count, which at the end of the day, nets to zero itself, doesn't get to zero. Then there's a problem. Um, so if you kind of grasp that concept, the same logic will apply to the rest pretty much whether this is an investment or this was alone, this was equity or it's in accounts. Payable was long. If the cash illuminates itself, you're gonna have these on transactions that you need toe pair with something toe, have a debit and credit, and that's where you used in your company eliminations. So that's the point of those. You will see these on any financial statements, external financial stands, because remember, they do zero out. So again, when you're looking at your your trial balances, if you will, Where we had a listed out parents stop and the new added across intercompany transactions will just eliminate itself out then. So debt eliminations Company A lens company s 100 I have here remove the receivable and clear against intercompany elimination account company asked the sub remove the payable and clear against Inter company. So again, this is now payable. This is now a receivable. This is still an asset. So in theory, this is premised exact same This became instead of being equity is now payable it the liability same kind of transaction and sense that your liabilities and equities would be the same sign and same thing. You would just eliminate your cash. Eliminates. Use your intercompany elimination account. You get rid of your receivable, get rid of your debt and it's eliminated. I'm thinking back to what we had drawn up here before with the columns. It would be the same thing as you add across. You would have your adjustment column. You'd show the 200 for receivable toner for payable. Little footnote on right The description of the transaction that you're eliminating down below. So revenue and expenses eliminations. Company peace sells goods company s need to remove the sale and remove the A R. So in this case, you're kind of removing two things. Remove the cost of goods sold or inventory if they're still holding it in inventory and remove the accounts payable. So in this case, you don't necessarily need to move. Used in intercompany elimination transaction. It's on your parents books. You have a revenue, which would be actually a debit or credit story of 100. You have a receivable of 100 and if you really want to get technically, would probably also have a cost of goods sold and a reduction in your inventory. But we'll keep this a little bit simple. Over here you have a expense or COGSA or maybe an inventory. Let's say these guys put in inventory them and sold it yet to make it a little bit interesting. That's a debit debit here. Um, and they paid us cash where they have a papal Let's do it payable. I haven't paid us yet. Come of 100 credit. So in this case, we need to eliminate a few things. But we have enough that we don't need to use theater company transaction account is what I'm saying. There's nothing that is both cash on both sides. And that's that was the trick with the previous two examples is when you're using the same account on both sides, they eliminate themselves when you don't have any kind of the same accounts. Now you can just book your elimination entries to reverse this. Reverse this all on your books. So over here we score over there would be square, and as the consolidated it all comes together and thats zero and that's the ultimate impact . So just keep in mind that intercompany eliminations account is used when you're already kind of eliminating across here without an entry, you know what kind of would reduce the number of entries that you dio in this situation? You shouldn't really ever run into a situation where you have the same, um, same transactions. So, in summary, I was kind of a lot to cover and Hopefully you could follow my back and forth between parents and subs. The purpose of intercompany transactions and eliminations is to remove the effects of transactions between related companies and divisions. Remember, they're related. Intercompany transactions can present misleading picture of the company win consolidated If they're not eliminated, I would add to this just to add to the summary. Always remember that things need to net out to zero when you eliminate. You don't need to eliminate transaction by transaction. You can do it. It's an aggregate at the end of your quarters. Lets you know exactly what it is you need to be you want. Probably keep track of those things. Um, remember these are related companies but their own separate books. So that's why you have to do entries over here and entries over there. So with that, that's the section for intercompany transactions hopefully enjoyed, and we'll move on to the next lecture. Siri's 10. Foreign Currency Transactions Introduction: So in this next section, we're gonna be talking about foreign currency transactions so, um, somewhat can relate to the previous sexual. We talk about intercompany eliminations. If your foreign currency transaction also happens to be with a division of your own, this might come into play. Additionally, or more likely, it's just transaction where you're dealing with another party, 1/3 party, maybe you're selling your goods, or in the United States who sell to Europe or vice versa. Maybe you're in Europe to sell the U. S or u Maybe buy your product for sale. You buy from Europe and you sell it to China. Who knows? Whatever the case might be, foreign currency transactions deals primarily with the exchange rates and who bears the burden for the exchange rates. The timing of payments on things like that. So it's do a quick introduction, and we'll get into more of the accounting and the examples. So in general, transactions dominated in a currency other than the local domestic currency would be kind of applicable here, and we'll assume that were in the United States. Whatever it is that we do, whether we're buying or selling and we sell to Europe or China. Foreign currency or transaction risk is a risk of the consequence of fluctuations in exchange rates, and we'll talk a bit about it here in a second. Even if a company does not engage in foreign sales and purchases, it can still be subject to foreign currency transaction risk because of exchange rate fluctuations. So because the price of its foreign competitors products might be changing, etcetera, so just toe kind of ad somewhere flavor to this. So starting with that last point, you might just do business domestically, and maybe you sell widgets, whatever that widget might be. Your competitors, your primary competitor A. Is located in Europe or China, and they also sell to the United States. But it turns out then that the exchange rate works in their favor because, I mean, obviously, exchange rates are continually fluctuating, usually in a narrow kind of range. But say there's a more drastic range, and now it's cheaper for them to produce their goods. And it's cheaper for them to sell over here, Um, or and maybe not even so much cheaper for themselves. But they can get a better profit because they exchange rate works in their favor, so they can still sell it for $100. But $100 now means a greater profit to them. Eso That is a situation where the exchange rate does impact you even though you don't, you don't manufacture outside the U. S. You don't sell it outside the U. S. Etcetera. Because of the nature of a global economy, exchange rates impacted you. Um so backing up, it talks a bit about foreign currency and transaction risk. So you enter a contract with the company, Say you do So now we're US base. We buy our parts to build our widget from Europe. We have a contract with them that we're gonna by $100,000 worth of parts next month. So depending on how the contract is written, you know, if the $100,000 is $100,000 us that we're gonna pay. But if we and if that's the set amount, regardless of exchange rates than your protective and that contract is in your favor. If the contract was written that you were gonna pay 100,000 euros for the parts now there's a bit of exchange possible exchange rate risk because ah, 100 euros could mean 80,000 us. That could mean 120,000 us. And you won't know until you actually make payment on then further extrapolate on that, depending on how the contracts written. When is the price set? Is the price set when they deliver when they shipped the goods, when you receive the goods when the payment is made, I mean, I would assume if you owe them 100,000 euros, you just over 100,000 euros at the time of payment. It doesn't. They don't care what it means for you on your side. So, um, part of what we'll get into here is better ways to protect yourself in those situations. Unfortunately, sometimes you just can't. I mean, they they're selling you something. They charge 100,000 euros. They don't care that you're in the US and subject to exchange rate risk. They just want their 100,000 euros. So you kind of bear that risk that the rate might change from today until the day that you pay, and it could change in your favor, but it might not. So we kind of entered in this a little bit. Who takes the risk? Uh, and that's the biggest part of exchange rate discussion now. So when the exchange rate changes between the original purchase or sale transaction data on the settlement date, when you actually pay there's a gain or loss on the exchange. So ever views the denominated currency, which the transaction takes place, as we mentioned, like 100,000 euros as the foreign currency takes the gain or loss. So, you know, in this case, the euro is our foreign currency. You know, our domestic could be the U. S. Dollar. So we take the loss or gain possibly a wind. We pay companies that make many foreign currency transactions made by in this work. It's a little bit more complicated. Forwards currency contracts get a guaranteed rate. So businesses with only a few transactions, you know, year quarter, whatever it might be, probably don't do that. They just pay. They just take that risk and they across their fingers essentially hope for the best. Or they may try to pay quickly, so they anticipate that rates are going to go against them. They try to pay it sooner. Um this mentions talking about forward contract. I believe we talk about it more in the example video. But what a forward contract basically is is it's insurance. So it's just a quick example while we're here. So we owe 100,000 euros, just write 100 euros and right now 100 euros equals. I have no idea, honestly what a euro is worth, but it's USD. $80 will get us 100 0 So we like that. So this is on January 1st. So the bill coming, we get our goods. The bill comes everything else. We owe them 100 euros, but 100 euros. The exchange rate has gone haywire is now $120. Um so we don't like that. But unfortunately, that's just the situation we have to deal with. We'll get into the counting and the counting video. So what I want I wanted to talk about with the forward. So say we're back here on January 1st and we owe $80 while we owe 100 euros. Now we think that by the time we get the bill, the rates go up, but we don't know what to what what is going to go to and we just we don't want to tolerate that risk. It could go down but it's more than likely going to go against us. We're gonna owe more than our 80. So what we do is we buy a forward contract that we buy a forward contract 400 years. So we buy some investment tool, if you will, either on the market or privately. We work with a company that basically says it's almost the option to buy 100 euros at a set price and maybe that prices $80. We have to pay some type of fee for this and maybe what we ultimately pay is another five K for that price. So five K and fees. So for five K spent now, we're guaranteed to only have to pay 80,080 Whatever you want dio USD for 100 year old. So regardless on March 1st it could be 120. It could be 100 50. We dont care. We have a contract in hand that says, Hey, we're only paying $80 we get 100 euros and who's the person who sold us? This contract is the one tape now taking the risk, we've essentially shifted our risk to them. Why would they sell us this? They have a conflicting view. They probably think no rates going to go the other way. It's gonna go down. These people will never use this contract, and I make $5000 clear. Um, and that happens if you're familiar at all with the options market or the futures market. That's essentially what it is. It's people buying and selling contracts, and they're on opposite sides. This person thinks it's gonna go up. This person thinks it'll go down. They'll, you know, pay each other fees to kind of back up what their thoughts are and somebody wins and somebody doesn't. It's eventually a zero sum game, you know, some we paid five K. They get the five K, but they might take the bullet on the 80 if the price actually went, you know, does go to 122 150 cause now they're the ones having to provide us 100 euros, and they're paying this amount. But we only pay 80 so I hope that makes sense. Um, this would be considered a topic like hedging. If you hedge companies that are again do a lot of international transactions will probably be heavily involved in this. If they seriously thought the price was going to go to 70 they wouldn't bother with this. Um, what else? Um, just to give you an idea. Utility companies do this all the time. You know, they will buy futures on utility costs cause they buy, you know, they bide, say, natural gas at their continually buying it if they think the price is going to increase. Still buy futures contracts say, Well, we're only gonna pay 80 in this example, but will pay a few $1000 for the right to only have to pay 80. And that if they don't end up using this than terrific to see, the price did fall to 75 down here. Well, you're not gonna execute your contract to pay 80. You would just pay the 75. You lost your five K and fees. You effectively netted any 80 K anyway, So good reason to ensure that's just a little bit about hedging on the exchange rate. So, uh, that's it. So we'll get into some examples and some accounting now 11. Foreign Currency Transactions Examples: Okay, so now, for an example and well, I know there's a lot on this slide. Well, let's read through the whole thing and then we'll start drawing out some how the Ted how to deal with this? So an American company U S companies sells electrical equipment to a buyer in France for one million euros. The equipment is to be delivered in 90 days when payment and that's when payment is made her. Before payments made at the time of the sale was made, the exchange rate was 1 25 euros per dollar. So let's write some of this down. So we're gonna sell so us. This is France. Think it said, um, one million euros exchange rate is 1.25 um, euros per dollar. This meant that the company was counting on receiving something in the neighborhood of 1.25 million for the transaction. So we're selling. So we're selling to them. We think we're going to get, you know, $1.25 million because of the current exchange rate. Does the American movies cost for producing delivering equipment was 1.15 million and it was counting on making 100 k and profit. So this was our sale. Our cost of goods sold was 1.15 1,000,000. We were gonna net you know 0.1, which is 100 K is what it is. This was what was anticipated when we entered this transaction, however, the value of the euro falls to 1.1. So by the time the American company receives payment but didn't find ahead of 50 k loss in 700 K profits in reality, they still paid us 100 euros. But the 100 euros is now only worth 1.10 we have our costs of goods sold of 1.15 So we lost 50 K in the transaction. This is exchange rate risk. That's a perfect example. So at the same time, not kind of continuing on with this at the same time, the transaction that's before about the American company writes the contract so that payable $1.25 million. So now these guys air bearing the risk, we're guaranteed to this. Um and that's what I mentioned in the video before this where you really want to structure contracts to be in your favor or if you are taking the risk, you back it up and you hedge it. Ideally, though, you structure it this way because you're not in the business of playing the exchange rate game. You're in the business of selling electrical equipment to France or wherever it might be, so you want to be guaranteed to run 0.25 So if you can less Number one is to guarantee your rates than you don't have to deal with any of this. You don't care what the exchange rate is day to day. All you care about is that they pay you. You do somewhat care, because if the exchange rate does turn against them, um, there is more likely than my default. They might take longer. That pay, they might hold out. They might say, Well, we think exchange rates going to get better. So we're just gonna wait so it could still impact your business. But at least you're not the one taking the dollar impact. So same as before, um, one million euros. American company buys currency futures to hedge against. So this didn't happen. We didn't We didn't set the price in us, Dees we're we're here, so let's, uh okay, so that's still the same. So we buy Fern your currency futures to hedge against fluctuations in the rate. So this kind of goes back to the original example that I was talking about. So let's just read through this that will draw it out. So if the rate never goes sour, the cost of the futures was basically an insurance. If the transaction does go against them, go sour. The futures can be used to recuperate some of the cost. So we buy a futures contract. We're here. We think we're making 100 k We know that's a pretty slim margin, and we know exchange rates can change and we're looking at several months before they pass . We buy some type of futures contract that basically says, um, you know, if they sent anyone sending us, uh, one million euros, we get a locked rate. So we're going to get 1 25 Or maybe you just set some lot bigger, have to pay a fee for this. So maybe you want to set it, so hey, we're gonna buy a 1 20 Ultimately, $1.2 million few contract and it costs us. I mean, this might cost a substantial amount. Maybe it ends up costing us 50 k to get this. So now this would be 1 20 We only get 50 here, but we paid 50 and fees, and we net out to zero. At least we didn't lose any money. We just didn't make any money. We bought ourselves an insurance contract, and I don't know that it would constant much. But basically, what you try to do is juggle this so you still have the potential for profit If things got start to go sour, you have some type of insurance and think of futures contracts as insurance, your ensuring the amount that you're going to get. And they could have insured it for 1 25 They could have insured it for 1 50 But the more you insured for, the more that you're gonna pay for this, so and ultimately, are you gonna make any money? So that's the nuts and bolts of foreign foreign currency transactions. They're not overly difficult. It's more about who to who takes the risk, who burns the risk. If it's you burdening the risk, you want to somehow ensure yourself or you want to push for a quick transaction. So there's not time for this to to fluctuate, and I've seen companies definitely get burned. You'll see in the examples for this section. This lectures, um, is a financial statement, so and we'll talk about the accounting in the next video, but you'll see in other operating income and expenses where you recognize gains and losses on exchange rates. So when you do these transactions with the company could say you sell them this and you record the revenue and then you get paid. So that's the other kind of piece of this and again, we're kind of jumping ahead of it. But so here we were going to get a This was originally 1 25 are gonna get 100 K profit. So we recognize this in January. We recognize that we sold them something that 125 1.25 million. Then come march, they pay us. They only pay us what we say. 1.1. We have to recognize a loss now of the 0.15 or what's 150 k um, on our financial statements so that's when the actual loss gets recognized gets recognized as other income and other loss. I believe it's called gain on gain or loss on foreign corn currency transactions and the reason it's below the line. It's because it's not your primary business. It's not what you're in business to do. And you did in 37. 1.25 million worth of goods. Just you took the hit on the exchange rate. You don't take the hit on what you sold them. You still sold them the same thing. But we'll get to that. I don't wanna, you know, eat up too much of the accounting examples video. So that's the just of it. Hopefully you understand, and just know that it's about who burns the risk and how you can then insure yourself against the risk 12. Foreign Currency Transactions Accounting: okay, it's now talking about the accounting. Let's just going to read through this first. Then we'll get into a bit more. So accounting for current for foreign currency transactions has two sections, so the first section is recording the original transaction. The second section is recording when the company pays or receives money in a foreign currency. The foreign currency exchange rate will allow the account to then translate the foreign currency into his own, and changes in the exchange rate will result in the gain or loss on the transaction. Businesses with few for foreign currency transactions are more likely to convert currency on the spot. Um, etcetera. So we mentioned that before, and also what I mentioned before, where you recognize your sale in the month of sale is made. We sold in January for 1.25 million in our example. The money came in on Lee for 101.1 million in March or April. That's when we recognize the loss. It's unrelated to the it's related to the original transaction. But what the specific causes foreign currency adjustments. Not that, like somebody returned something or it was defective. So continuing on we used the spot rate on the day that transaction was first recorded to measure of the transaction initially. So you know, if we did sell them in and that the term was they would give us a 1,000,000 euros, Um, we would then translate and say, Well, what's a 1,000,000 euros worth today? We said 1.25 million us. The way we came up with that, without knowing, is that we use the currency transaction rate on the day of the sale. That's how we came up with the sale amount. Uh, we measure the accounts that require foreign currency settlement from the first step on each balance sheet date, using the spot rate, etcetera. So I say we go seldom in January. February rolls around. They haven't paid us yet, and we want to present a balance sheet to whoever our investors are stockholders. We should revalue it at that point, cause we haven't receivable that we originally booked at 1.25 million, but maybe the rate is already dropped drastically. We need to revalue that. Recognize our gain or loss in the current month when you should be doing that each month. Some counties will only do it on the quarterly basis, which is fair. You can have to gauge what the purpose of your financial statements are. If they're just for internal use, maybe you don't adjust it at the flip side. If you know the exchange rates already drastically fallen, you might want to start adjusting them now rather than it be a surprise three months from now when the money comes in. Um, and on the settlement date, we measure for a final time using the spot rate that at that time with the gain or loss, etcetera. So again, that's what we talked about. The money comes in. It's only worth 1.1 million. You then ultimately have to take that loss if you haven't already recognized some of it along the way. But the net impact is at some point you're gonna have to recognize that loss on currency translation. So another little example. On 12 10 of whatever year we have a sale of good for 100 euros currently worth $80. Let's just so this is the actual accounting son. Forget what date it says here. 12. 10. So we're gonna debit. We're gonna credit. We're gonna debit. They are going to credit sales. The the in 80. We're ignoring inventory and cost of goods sold here just cause it doesn't matter much. We're talking more about the currency Translation part of this 12 31. So our year end we need to generate financial statements. We revalue the receivable. 100 euros is currently worth $90. So we need to increase our receivable because right now, if they paid us, we would actually get 90. Actually. Sorry we read, we increase it by 10. So the net is 90 on then. We have a foreign currency game called us. Right, FC, gain of 10. So this is on the income statement. So a credit to this would be kind of the same as revenue, if you will. It's a positive thing. It's not really revenue that you generated. Like I mentioned. It's down below in the other section. But here we have recognized part of our game. So on 1 20 in the next year, payments received that's currently worth 110. So with 1 10 dab it, we're credit gonna run out of room here, I think. But I was So we need to reduce our A our by 90 which is Thies too. So it's currently worth 1 10 We're gonna debit or cash for 1 10 So we have a $20 discrepancy, and it needs to be a credit. I think you know what it is, but, um, it would be foreign currency gain. So things worked out for us in this example. So from start to finish, we sold something we thought was worth 80. We ended up getting 100 10 for it. So we have we sold have sales of 80 and we have foreign currency transaction gains of 10 plus 20 which is the extra 30 um, we had originally are We bumped it up by 10 and then we reduced it at the time of the transaction. There's no need to kind of re evaluate here. You could have made this a bigger example. If you increase your a r and then, you know, brought in your cash. That's the second transaction. But there was no need to, um but nonetheless. So you see what happens here? We clear down over. There are air. We got 110. We still recognise sales of 80 and we have our foreign currency gain of 30. So very drastic example. It's I mean, it's somewhat unlikely that you would get a gain of 30 on the sale that was only 80 but nonetheless points out the kind of the accounting side of it, which is kind of the point of this. Obviously, if this went several months, you'd be re evaluating each month and reach quarter. And, um, if you had bought futures contracts would be an additional entries in here for where you have the expense of buying those contracts, Um, and then you would still show your cash. In this example, we wouldn't have used our contracts because we already got more than we were expecting. But if the price have gone the other way against us, this would be foreign currency loss. It would be a day, Yeah, be a debit ondas possible to that? Things flip flop between these two transactions, but I I assume you're smart enough to figure those those entries in and out. It's just whether it's a debit or credit. Here we have our accounts up. That is about it for foreign currency transactions, so fairly, hopefully fairly straightforward again, a topic that, in theory sounds fairly complex. See, all those exchange rates and different timing of payments ultimately isn't too difficult. You just have toe determined how it's gonna be treated and know that it is treated as a gain or loss, and it's not your primary revenue source, so it is other income or other expense. 13. Partnerships Introduction: Welcome back to our next section. And in this section we're gonna be learning about partnerships. And the same old thing will be doing the accounting on some examples. And we'll talk a bit in this video, which is just introducing you to partnerships. Just a bit of information. So let's START. S O partnership is a for profit business. It's an association of two or more people, so it doesn't have to just be to people. And I think that's probably one misconception that a lot of people have. So you can for in partnership with three or so. Once you get over a certain number, partnership won't be as attractive for several reasons. That will kind of talk about some of the pros and cons of partnerships through the section . Um, so you have got to see why might. After, you know, after get 2345 it starts toe. Maybe you should form a different type of legal entity, so a person. So in this partnership, we have persons, and we'll just assume it's a two person partnership. But a person can be an individual, a company or corporations. You could have to corporations come together form a partnership agreement, and each of those corporations is the person. So you have to companies coming together rather than two individuals to keep that in mind. Partnerships are governed by state law, at least in the United States. Partners are liable and could be sued. So that's one disadvantage already off the top. I believe we get into more of the specifics and comparing it to other alternatives that you have. But keep in mind that if you form a partnership agreements and say you form a partnership, you know you are really good at building chairs. You find another person who's really good at building tables to decide to form a partnership, and you're going to sell this table chair combination so you go through the process. You formed this partnership, and it turns out that the tables are faulty. They're horrible. You make the chair, so you feel like, well, I'm not. That's more his fault, like he's bringing the table side of this. But unfortunately, if somebody was to sue you, not only could they sue both of you because you're both on the partnership could sue you personally for your personal assets. So keep that in mind. And one pro, though it's their simple form. So say this is once again I want sound like a broken record. But I think we get to some examples. So you would come together just for a short period time. You decide that for the holiday season you are gonna bring your table and chair business together, sell this set for Christmas and do lots of advertising. And then, once the holiday season's over, yield kind of dissolve the partnership, or you set it up front where it automatically dissolves day after the 15th of January. Um, so you formed this partnership? They're easy to form. You don't have to go through as much paperwork and filing and fees etcetera to do so. So there are some pros and cons. So speaking about the United States rules now, So one thing is, partnerships do not report income on a tax return to the government. All income and losses passed down to the partners. So if you're familiar with s corporations, it works much the same. Assuming or not, what happens is, you know, backing up thinking of ah, typical company. You know that does business. They sell their goods. They pay for the goods they pay their employees at the end of their they have their profit and say they made $100 just for example. They were then pay tax on the $100. Well, that would be kind of a normal corporation, like an LLC or maybe a C Corporation, a publicly traded companies in a partnership agreement. The partnership does not file on income tax return. What happens is that profit that $100 would then be allocated to the individual partners. And they would report that income on their personal returns and pay tax at that level. So again, a possible pro possible con there, You know you're not having to file tax returns for this partnership. The con site is you have to take that income down to your personal returns. And if you get into things like tax planning, you know, maybe your personal rate is higher than the company's rate would have been. Had you been formed. Does a saying L. L C You would have paid less tax on it at a corporate level if the company had been a different formation. But that's something you have to work through and again it's a pro and con, you have to figure out, is the ease of forming a partnership offset the possible higher taxes? And the next can also specified general or limited partners so you can specify in agreements. Now think of an agreement between three people your chairperson, your table person and maybe your person. You hire someone to do some marketing and they want to be part of the partnership agreement . But they say I want to be limited. I don't want to be sued. I don't shouldn't be held liable because you guys build faulty products. I'm just kind of in charge of selling them and marketing them. You could form the agreement where the general partners are the ones liable, the limited partner not liable to be sued. Typically, that comes hand in hand with, you know, they own maybe a lesser part of the partnership. They don't earn as much etcetera on. Also worth noting is at least one partner has to be a general partner. You can all say you're limited partners, sudden. Nobody could be sued. That doesn't work. So that's about it. That's Ah, quick introduction to partnerships again we'll get into the accounting of it and the some more examples of it and talk through how it works and hopefully enjoy. 14. Partnerships Examples: so welcome back to partnership examples. And in this section, we're actually gonna talk him or just about not walk through specific examples. I think even in the introduction, we kind of walked through kind of the general process of why you would form a partnership. Now we're gonna talk more about the advantages and disadvantages just more about partnerships. So just more general information to keep you going. So there's not much in the way of specific accounting when it comes to partnerships. All profit and loss of passed on the partners for tax purposes. You still do the books for the partnership. You determine what the net income or losses to do the financial reporting. So you still maintain your books. You do all the financial reporting. It's just on the tax front. That's when the income then gets passed down. Wouldn't this mentions that there's not much in the way of specific accounting for partnerships? There really isn't. I mean, you would do like there's no specific rules, and accounting that air just apply to partnerships may be somewhat when you set up the agreement. You know this partner, you know, our table and our chairperson are gonna work hand in hand, but because the table person, you know, maybe has to work twice as hard. They're going to get 67% of the net income and are our chair personally gets the remaining 33%. So you could write that up and then you would split that up in your equity section. But fairly a fairly simple process to do that. Otherwise it would just be normal accounting revenues caustic. It sold all that type of stuff that said he was still do your financial reporting month a month again. It's just the tax part that's passed down. So talking now about some reasons for partnerships. So we went through a few examples. But let's see what else we have. So pass through taxes, eliminates double taxation and allows partners to do their own tax planning so you can look at the tax Expect of it as a pro because, as this mentions one, you know, if you join a partnership and you know that that income is gonna come down to you, you can plan ahead for your own taxes. Or maybe it's a situation where you know that for the first year of your partnership, you're going to incur a loss. And you actually want to take that loss down to your personal income to offset some other income and that you have and reduce your taxes. That's fine. That's all part of tax planning. Um, and then as well it mentions it eliminates double taxation. You may have heard of double taxation, depending on the type of corporation that you have, Um, the the thought processes and will just draw this really quickly appear on the board. So you have your partnership here. Graham will just do a visual of the circle, and it turns 100 k So, actually, sorry, but it's back this up. This isn't a partnership. Now we're gonna talk about double taxation, so we'll assume this is a little limited liability corporation or C corporation. They're in 100 K And because the this company is an actual entity, it it pays taxes unless just the suit pays 35%. So 35 k is going to taxes, and that leaves 65 K and profits. So, um, end of the year. The company wants to distribute this profit now down to all of its owners, whatever, regardless of what type entity. This we just know it's not up a partnership on and say it has three partners, and it's splits the income evenly. Just for sake of example, it's gonna be, um, 2150. Sure gonna be 22? Well, the state 20. They leave a residual let's say in the business. So now each person, our shareholder gets this now, each of these people. So I get, as you know me say, I'm a shareholder in this company. Coming made 100 K had already paid 35 K and taxes. It has 65 K less to distribute. I get my share. My share turns out to be 2150. Well, now I have to pay tax on that. At my personal rate, let's say I pay 35%. I'm not gonna do the masses to be a bit painful about that quick, but let's say it's gonna roughly 1/3 of this 67 bucks. It's about seven bucks a little over seven. Actually, seven K is going to taxes, and I'm left with 28 so out of our 100 K and profit. So this was bottom line profit. The government got 35 K and taxes. There is going to get 777 another 21 K and taxes here so effectively they're getting 56 K in taxes. They got over 50% of taxes, and that's that's essentially what double taxation is. So again, it's a downfall to, you know, different forms of corporations and companies. Partnerships avoid this because you eliminate this. The 100 K would be split evenly, so it would have been 33 33 33. Instead of these, you would have paid 30%. I believe that's what we said or 1/3 on this. So what about 11? 11. 11 and everyone would ended up with 22. I think that's correct. Um, so they paid 11 and he would end up with 22. So the government here only gets 33 K up here. They're getting 35 plus another 21. So hopefully that demonstrates what double taxation is but moving on. So losses air limited to the amounts. So that's another reason for partnership. Losses were limited to the amounts invested by the partner, so each partner invests. A 50,000 are original example. We just brought her skill sets together. But LCH Partners investing $50,000. That's the most you can lose. You know what? You're what you're liable to lose ability to pull money for a specific purpose. So in our example, we had this table and chair manufacturer who just wanted to combine for the holiday season . They didn't want to form a new company. They don't want to go through the paperwork in the cost to do so. They just thought, Hey, if we bring our to proxy together, we can offer this holiday bundle and really sell well, let's do that. So that would be a good kind of example where partnership would make sense. It's for a limited time, easy to form. You know, These are two people who aren't necessarily in business to do lots of paperwork and tax returns. They won't have beyond the partnership once the partnership dissolves. That said in January 15th they're gonna have to worry about circling back at the end of the year to do a tax return for this short term partnership. None of that so it seems to make sense flexibility on allocations. So it's easy enough and actually provided as part of this section is a sample partnership agreement. Kind of a template you could use. Um, so it's easy to allocate, So you could say, Hey, in our example, I'm bringing the tables. You know, I'm bringing the chairs, tables, air a lot tougher for me to make, and I'm gonna be spending twice as much time. So I should really get 2/3 of this partnership. And it's easy to just kind of set that up and allocate it that way. Um, and then hasn't mentioned here. It's easy to form and easy to report on. I mean, there's no tax reporting, just easy to form. You form a partnership agreement and enduring business. And the main kind of reason for the partnership agreement is it's illegal documents. Let's say you had a problem. You're the chair manufacturer and you got your table guy and you form this agreement, you say, Hey, we're each gonna bring 100 like you bring 100 tables, I'll bring 400 chair, so each table with four chairs by December 1st we're going to sell these and you know the swap meet. I don't know and so be it. But somebody kind of defaults like that. The chair guy brings his product the table guy just so that couldn't make them and doesn't do it. But he still feels he's entitled the profits. You would have a legal document that kind of spelled everything out. So if you had to sue the other party, it is a legal kind of formation that you can, um, and force against the other person. That's the reason for forming the partnership agreement. I really encourage you to at least get that document in writing and signed. You don't want to just casually form a partnership. And then you hear a lot of examples about partnerships going sour because one partner doesn't fulfill their obligations, etcetera. So advantages continued. Two or more people can run the business. So again, it's that kind of ease of use. If you had three or four people, just bring them all in. You don't have to fill out, you know, limited liability or C corporation paperwork, and wait for the state to send that back. You just get your partnership agreement signed, you probably get notarized and you're in business. It could literally be done in the day. Better borrowing ability. So you will. But it's not gonna be necessarily easy borrowing. Not these days. But it does kind of add a legitimacy to the business you for in the partnership for a specific reason. So now if you were to go to a bank or an investor and say, You know we need to raise 100 K to help us build more tables and chairs, it's easier for you to do that as a partnership and show. Hey, we've sold a bunch of tables and chairs together in the past. Does this partnership versus just one party or the other going? It may lend itself to know. Now you have two parties who could be liable on the debt if you were to borrow money to people, maybe one person that's stronger credit than the other. So you have more options when it comes to borrowing money. Uh, limited external regulations again, thinking more about the tax side of that also mean besides federal tax or state taxes. Yet city taxes, different reporting. You need to do payroll employees payroll reporting in taxes, such if you form a company with a partnership none of that partnerships just in agreement between two or more parties to engage in some business activity for some set amount of time . Easy to change structure later on. So say your table and chair businesses going terrifically and you guys were just like, You know what? We should We need to just, like, do this all the time. Like we're both selling way more than we would individually as a set. You could easily then morph that into a limited liability company or C corporation, whatever it might be, Um, you would just kind of start that process. But you've already got who your partners are. You've probably all written out some of the rules and regulations and you know, you have your original agreement, which can be, as I mentioned, kind of more after adapted into, like, a limited liability agreement, for example, Um and you know, when you form a company, do things like you know, the charter and kind of the rules that you kind of stand by as six company. So a lot of that information can come from your partnership agreement. So now, thinking of some disadvantages so partners air personally liable for the business. We talked about this again. You get sued the tables or shoddy Everybody starts to sue your one year both liable. Unless one of you is a limited partner, they would be excluded to your personally liable. So somebody say somebody is a horrible example. Somebody about your table chair set. Uh, the table and chair set completely falls apart and somebody dies because of it. And you are sued for $2 million you know, product, you know, defective caused death suit. You're personally liable for that. So say you were just in business for a few months to try and sell these table chair sets during the holiday season. Now, in a sudden, your house, all of your assets, your retirement money, all of that is liable or is not liable. Soria's fair game When it comes to the lawsuit, you really don't want that kind of exposure. So if you have ah, heavy asset base and just the hassle of having to deal with all of your personal assets and now dragged into this, so if you can, I would suggest you become a limited partner or try to get corporate protection. Um, unless it is a really short term kind of business in the partnership Makes sense. A Z I mentioned partners liable for each other, So the fact that it was the tables that Consummated I, um and you're just the chair guy. That doesn't matter. You're both in this partnership together, so you're both completely liable on uneven amount. Each partner is an agent of the business cycle. Legally bind agreements. So this is a big one to say. You get in business in your table chair partnership agreement and your partner on the notes to you goes to the bank and signs alone for $100,000 he's able to do so and it uses, you know, the credit of the business. And, you know, his own credit may be on. I mean, you're always not there, So he's not using your own personal credit, but he goes and spends that $100,000 partnership dissolved. You know, you don't even know about it. Partnership develop dissolves, this guy just disappears and bank comes knocking and says, Hey, you want $100,000 you're like, What are you talking about? Like your partner signed this agreement on behalf of your partnership and and your partnership, who is both of you is now responsible for it so horrible situation to be in. I know that each partner is an agent of the business. So besides, take out a loan they could sign, get you into insurance agreements again by assets, make contracts with other companies, all kinds of trouble could be caused. So keep that in mind on one set up, adding and subtracting partners can cause issues on valuations that state. Originally, it's just the two of you, your 50 50 partners or 66 34 whatever it is, um, later, you find a guy who makes tablecloths and he wants in on the business. Well, now, how do you divvy that? You've been doing fairly successful and you decide. Hey, we're gonna bring in this third party. Well, he's the new guy, so we shouldn't get as much his products really small. But he wants, you know, he feels he's entitled 1/3 of the business. It creates more turmoil. When you bring in 1/3 partner, you'd almost be better off dissolving the partnership and forming an entire new partnership . Um, or again If it's growing and you're adding parties, maybe it's time to form a company. So with that, that's my speech on partnerships, advantages and disadvantages, primarily so in the next, sexually will talk a little bit about some more accounting for partnerships. 15. Partnerships Accounting: Okay, so now let's talk about some accounting for partnerships. So I mentioned in the introduction that countings fairly straightforward. The only riel kind of accounting specific to partnerships is when you have that kind of equity section of your balance sheet, if you will. That's when people put in capital and want to take withdrawals or dissolve the partnership . So we'll talk through all that eso just some general information again. The day to day accountings fairly straightforward, specific counting relates to the contribution capital withdrawals, like we just said so. Contributions of capital. So two partners partner a partner be it could be our chair in our table. Guy partner gives $100 Partner be gives $50 so combined you have $150 in equity In this business, Um, agreement states that their 50 50 owners and profit and loss So this is important and this goes for a limited liability. Corporations, I think llp's as well it the amount of capital contributed doesn't necessarily specifically relate to them how you split profits and your ownership in the business that's dictated through your savior Partnership agreement. In this case, the two are irrelevant. Just because partner A is giving 100 partner bees giving 50. Maybe partner be also does double the work. So in this case, a partner B is our table guy who's like, Well, I do twice amount of work. I'm only gonna contribute 50 bucks. You give 100 bucks, you have to put in more money because you're gonna be doing less work. And then it kind of evens out in in some way, or you guys both feel that's a fair agreement. So the agreement states there 50 50 owners. So, um, so the journal entry for this and I'm not gonna write it down. It's fairly straightforward. You would get $150 in cash or think of $150,000 if you want, um, credit capital partner, 100 capital partner. Be $50 that would be in your equity section. So when I will draws just a quick balance sheet, you have our assets cash 1 50 then her total assets. That's right. That 1 50 and that our lie abs are zero our equity. We have heard again Excuse my horrible, horrible writing. I think it was 1 100 then 50 1 50 Our balance sheet balances. We have no liabilities. So that would be the counting just to set up the partnership. First entry on the books. Okay, so withdrawal. So you've been chugging along. You've been making some money around. She doesn't quite look like this anymore. Partner be wants to withdraw $20. So, you know, you've been going along for three months to say, Let's say this is a longer term partnership than just two months or whatnot. In example, we've been using It's a year to or it's just ongoing. You don't have to specify how long it's where Partner be says, Hey, I need a withdrawal of 20 bucks Now we're making a lot of money. You would debit withdrawals, partner, be 50 and credit cash. What I will write out here. So credit cash. $50 That says $50. It should be $20 for each of these. Um, obviously, that would really be tricky accounting. So partner be Let's say he just wants to withdraw $50. Um, so you would credit cashier withdrawing cash and then in your equity section withdrawals, partner B. So just focusing on the equity section. We originally had her capital contributions partner, a capital partner, be 100 50 and then we had our total equity of 1 50 Now we will have additional lines. Withdrawals, partner, a withdrawals partner be. I think we said it was partner be and we said he wanted to do 50. So this is now 100. Your cash would go down by 50 would also be 100 now, in theory, if nothing else happened so hopefully that makes sense and the reason I want to break this out and not just deduct it from here. You want that clear kind of trail, if you will, you don't need to do. Each one, obviously, is a line item, but if you can see contributions and withdrawals separately, that does come in handy. When you're kind of analyzing your books, so are your imbalances. Eso the equity section partner A. It's exactly aside from way, said 20 and then use 50 else. Just use 20. That's horribly confusing. They contributed 50. They withdrew 20 1 30 and I'll probably actually fix this on the slides before you guys see this, So all that will make any sense. Um, so there are car, actually, section looks just like this. We have our capital partner, a cattle part of beer withdrawal. On we net toe 1 30 partner a has a claim to 100 of equity that partner be as it claimed the $30 of equity they put in 50. They took out 20. This has nothing to do with kind of their share of income. This is just how much equity they have in the business on it makes sense to say, assuming day one they put in their money day to they came in and partner be said, Hey, I need to pull out 20 of my dollars. Um, partner, He agrees to that. For whatever reason, this is where they would stand now. He only has 30 and he has 100 contributed again. The 50 50 split is on netting. Coming has nothing to do with their capital accounts. So they go in business, they move along, things go OK, but obviously they decide they want to shut down the business for some reason. Ah, there's about 500 kr 500 cash remaining and the net balances in the equity section. We're still that we had our capital should have maybe left those up our withdrawals or withdrawals. A B 20. They have zero. They have 100. He has 50. That's 1 30 They have cash. And I got drought. The whole balance sheep of $500. They've sold some stuff. So be it. So first thing you do when you shut down a business is returned. The partners capital. So these guys were in a fortunate position. They're shutting down a business that has some equity. It has some cash available to disperse. So step one is returned to return the money. So I'm gonna race this so you would give partner A was right partner and partner be he would get 100 out of this. He would get, um, 30. And that leaves 3 70 in the bank account. And I believe that's what we have on here. So, yes, return to Capitol 100 partner. A 32 partner. Be. There's 3 70 left. So now the capital's return What's left to get split between their partnership agreement, which was the 50 50 split. So it hasn't the remaining part has nothing to do with the amount of equity that contributed. Now we're looking at kind of their net profit after you know the part is Capitol's been result returned what's left over, and maybe they have assets as well that are worth some money. But let's just focus on cash so you would split the 3 70 that's remaining equally so I'd be 185 to each partner. So 1 85 and 1 85 so is the whole partner, and it would be deducted and we would end up with zero cash partner. A. Ended up with 2 85 out of this business partner be ends up with 2 15 out of the business. And there you go. So partner, be got a little bit less money. But you know what? They put in a little bit less money. So and that was just kind of the partnership agreement as it stood. And that's it for a simple example. I mean, really, between aspires, that counting goes, there's not much more to it. Obviously, if you had a maybe a dividend or dispersement sometime, like midyear at the end of your one, it would just be a withdrawal. A swell, and you try to keep things as simple as possible. While you still show that level of detail like by showing the capital accounts on the withdrawal accounts, you would probably did go year to year, you would have a retained earnings Lina's well or whatever you want to call it an income gross income on your balance sheet that's carry forward. We're not gonna get into that too much. Um, if you understand just kind of general financial statements, that's where that would come from. So, um, but that's it. And hopefully enjoy that, and we'll move on to the next action. 16. Options and Warrants Introduction: So welcome back in this next section now we're gonna talk about options and warrants. So obviously something, um, definitely that I believe a lot of start up companies that are growing and maybe on the way to go in public would be interested in just cause you issue. At least in my experience, there's a lot of issuances up both options and warrants. Let's do the usual and talk through cuts kind of more about them. And then we'll do some examples on some accounting. So first, let's read through this. So warrants and options air similar in that they're both derived from shares, bonds, industry indices or other investment products like warrants options also have a lifetime and expiration. We're gonna get to more of all this. So don't worry if you're not totally following along Lifetime, an expiration exercise price. The price depends on a lot of same factors and develop in the same way as warrant prices. So to get from that, warrants and options operate very similarly. They do have different kind of purposes and ways. Their forms, um, they're both known might be jumping how to myself, but they're both known as derivative instruments they derive their value from something else, Um, typically share price, so in the startup company will probably think more about the stock price. So you know you're given 100 options or 100 warrants to buy common stock and has a set expiration date. So those options or warrants are only good for maybe five years. They have a set price. You're able to buy stock at a set price, and we'll get to more of that. I have a feeling getting ahead of myself. Um, warrants are typically issued by the company options air typically created and traded on exchanges between unrelated parties. Although companies can create their own options and award them, there's specific reasons why they would do so. So thinking just of warrants now and again when we talk about Warren or an option for most intensive purposes there, they operate in the same manner. Warrants tend to be more investment related. So you buy one share, you get a warrant as a bonus, and I've seen this in many companies, so it's kind of a an incentive. So you tell someone Hey, give us privately $5 per share. You know you by X amount of shares will give you that share. But Ross gave me a warrant to buy an additional share. Now, you're not actually getting the additional share without worrying the right to buy an additional share at some set price. That's very attractive if you believe the share price is going to increase. So, um, all this write this down. I don't see it here on the slide. So say I sell, um, one share at $5. This is privately we're gonna do this. It's before it comes public. And as a bonus, I'm gonna give you one warrant. As so you give me $5 you get your share. You also get one warrant, and the terms of this warrant are you're able to buy one more share of stock at a price of $5. Also, it's good for five years, and I believe that is this This would be called the exercise or the strike price, Or so essentially, there can be a vesting period. You might say you can actually use these for two years. This will be a two years vesting five years, you know, valid or they expire in five years. So what this means is that you have the right to buy an additional share at $5. Well, you think Well, I could just buy shares that $5 now. Very true, but say then a year goes by and the stock price you go public or this company goes public and the shares skyrocket to $20 a share. So you're one shares now worth $20. So you bought for five? It's now worth 20. You have this warrant that it's a $5 price, so you're able to you have the right to buy an additional share at $5. You don't need to pay the market price of 20. So you exercise your warrant, you pay another $5 but you meet it, get a share worth $20 and that's it. Well, we did it to wait two years for it. The vest vesting is when you're able to actually execute this warrant, your option So but if you look at the totals here, we spent 10 in total. We have a $40 um, price that we can sell. So we made $30 So we crowd Rupel their money, um, in doing this so rather than this go from 5 to 20. We we somehow went from 10 to 40 but you didn't necessarily have to execute this. Say that the price never went up. It stated five or went down to four. You would never execute this warrant. Never actually go through and pay the $5 to only have a share that's now worth $4. So think of this is a contract or right to buy shares at $5. It's only valid for a certain amount of time and really able to use that after a certain amount of time on. That's pretty much how words were off work. At least in this example, you can have limited warrants. A board approves the warrant pool that issued out it cannot exceed that amount. So, um, your board of directors will probably if you're familiar with corporations, they have a set amount of stock that can issue when they form their corporation. That might say, you know, there's 100 million shares available to sell, so the most shares this company can ever sells 100 million. So it has to keep that in mind when it's selling these shares at $5 a price. We just sell all your shares. You have no more shares to sell in the future. So typically, companies authorized way more shares than they actually need currently. So you might only sell, like, 10 million shares on the market. Originally toe like investors and you still have 90. Shouldn't 90 million shares left over? Likewise with warrants the board might say, Well, we're only gonna authorize 20 million warrants maximum. The reason for this is because remember that each warrant can be turned into a share of stock. So, um, on this goes into things like dilution. So when you have your investors and they're looking at this and you have to kind of think ahead in the future as well, you know, if there's 20 million warrants out there, say you issued all these warrants? Uh, yeah. So saying we sold 20 million in stock and we also have 20 million warrants out there. These warrants have a claim to, you know, 20 million more shares of this so essentially what they would call us its fully diluted. You have 40 million shares already issued because if all these people just executed their warrants There's now 40 million shares combined issued, and that makes a big difference to investors because now there's only 60 million left instead of 80 million left originally. That's why there has to be a set pool. So this is kind of set to a specific amount. This is set to a specific amount so that investors know Hey, they cannot issue more than this. We're not going to get screwed by them issuing way, more shares or way more warrants. And the reason is to protect investors that can't be diluted past the pool amount. So this has very much factors into dilution. If you've heard that if you look at companies financial statements, they might show their average or weighted number shares them. They'll show before dilution and after dilution. And what that means is if every single person who has an option or warrant was to execute it, how much like what would the share numbers be then? One other thing. Just to mention this, if you're really interested, Um, when it comes to dilution and only factors in warrants which people would logically execute . In our example, the price went from 5 to 20. It makes sense for the people with $5 warrants to execute those because they then have a share. Let's worth $20. If the share price is $4 nobody in their right mind would execute and pay $5 for share. Execute their warrant toe have only share that's worth $4. So, UM, those air referred to is underwater. They're below that threshold. You know, the $5 threshold. Nobody would actually execute those. When you look at dilution tables, it only includes warrants and options that are above water. So you're not going to get all the ones that are underwater moving on to options, so options come in many, many forms. So if you're familiar with comes stock trading and may have heard of options and put in call options their contracts bought and sold in the markets. Options created by the company issued employees a signing bonus annual bonus, etcetera. So there's while options operate in the same manner. They so options also have an exercise price $5 vesting period, although if you buy options in the market there immediately, best that you're not buying options that are invested, but they have ah vesting period of strike price and expiration date options, as I mentioned here on the slide, come in two forms. So you have the ones that air puts and calls. We're not gonna focus on these as much. And then you have kind of the internally generated ones, like given to employees. Um, and whoever else, you know, board a director is etcetera. These operate much the same as warrants except in our warrants. Example we were giving them to investors is kind of like a kicker and incentive to invest. Options given on the corporate level are typically mawr to incentivize your employees or your board of directors. You say hey, and you see this a lot in start up companies. Hey, new employees, your salary is gonna be way under the market price that you could earn elsewhere, But we're gonna give you 1,000,000 options at $5. The stock price is currently not even the price because we're not public. Once we go public, those options may or may not have value. There's a lot of risk and taking options, but there's a lot of upside as well. If you're okay with your salary and you have these options that you're being given. That may have a tremendous value at some point. Terrific. Think of companies like Google and what are Microsoft police who were given stock options than than the prices took off? They could execute those options for $5 selling for $500 the shares and make instant money with some other rules and regulations around that, um, puts and calls are created in the market not created by the company. Same idea. Exercise price, expiration. Not so much investing period calls give you the right to buy a shared a certain price. So I might buy a $5 call on whatever given stock X Y z stock, um put operates kind of the reverse Its the right to sell a shared a certain price. So you would buy a put if you thought the price was gonna take. I buy a $5 put because I think the price is going to go from $10 to $1. I'm able to sell my shares at $5 because I have this contract. But we won't focus on this as much focused more on this. So much the same as the warrant discussion in terms of exercise, price and all that. So that's it. In the next few slides, again, we'll talk more about accounting and some more examples for options and warrants. 17. Options and Warrants Examples: So welcome back in this section now, or this video, we're gonna talk about options, warrants and just more about examples of them. So we kind of talked through a lot about how they operate and why you would issue them and , you know, kind of the limits and dilution. Let's get to a little bit more specific. So example one company is privately raising capital. In order to entice investors, they offer one warrant in new addition to one share of stock purchase. I will mention just hero ticket inside. Oftentimes, this is called a unit, so the company will offer a private placement memorandum. So it's something officials An official document which investors can read through, read all about the company. The risks associated with this investment. It will be for one unit. A unit then is made up of one share of stock and one warrant. Um, so you essentially paying $5 for the unit? Not specifically. The share with the Warren Attash, um probably does not matter to you whatsoever. Especially as an investor. You just want your share in your warrant matter somewhat. In the Burbage of legal context of the agreement, we won't get into that too much. The world will have an expiration date. I five years from the issuance, the world will have an exercise price. Same is the current share price. So often you see the exercise price somewhere around the current price or the price of the shares. Well, um, if you are selling stock for $5 a share again privately and you add in a kicker warrant and the warrant is exercisable at $20 a share, there's not much incentive there. You need to wait for the share price to go to $20 before that warrants even break even. And even at that point need the price to go higher. Terrific if you think the share price is gonna skyrocket. But in some ways, that's unfair to the investor. Um, who's contribute capital? Taking on the risk. So usually a lot of times exercise prices directly, the same as the share price there somewhere relatively close to it. So example to Company B hasn't an outstanding debenture. So where they have agreed to pay quarterly interest with options. So they took out a loan from private investors for half a $1,000,000. I don't think I have a mountain here? No. And then, um, they know that they can't pay interest every quarter, at least not currently. So that maybe the adventure comes, Do I don't believe I have. I don't want to start throwing out numbers that I have different ones written here. The dependent comes due in 10 years, but it's part of that agreement. They say, Hey, we want to pay you interest, but we know we won't have the cash. Really? We want to use that 500 k from the debenture, too. Fund operations and growth or whatever else we don't want to like be bleeding cash back out . Um, that kind of goes into discussion of debt versus equity. Typically, people one kind of reason against debt taking on debt is that they have to then make payments. So if you can strike an agreement where hey, we won't actually pay you cash in terms of interest, we're gonna pay you with options. So, um, there's a risk for that to investors. So investors essentially getting kind of equity. They're turning that interest payment into an equity tool through the option. But there's some risk with that. What happens if the company doesn't go public. What happens if the stock price never arises? So there's a premium they say. Okay, well, we'll take options instead of interest. But there's a premium for doing so in lieu of cash payments of 20% bonus. So the way that would operate then is you would calculate the interests payments. You would still have a stated interest rate. Maybe it's 10% per year. So it's 2.5 per quarter. Um, so you would take the total interest, you would calculate what that amount is gonna be, and then he would say, OK, we owe you. And I'm just not using actual Matthew, you know, we owe you 10 grand and interest for this quarter. So we're gonna add a 20% bonus toe that so 10 grand becomes 12 grand. Divide that by the fair value of the options and determine how maney to issue. So we're basically giving you a kicker, so let's just actually write it out. So we said 10-K and interest plus two K bonus. So essentially, we're saying we're gonna pay you 12 k worth of something. It's not gonna be cash, but we're gonna pay you 12 K even though you've technically only earned 10% because you're generous and you're taking an options theon shins. Value happens to be whatever it might be. It's not gonna be one K, but let's say it's 100 dollars per share. Something ridiculous like that. You would divide 12 K by $100 exercise price per option and determine how many options they're going to get. And that's how you do it. They would then issue them the options. They have the right to buy shares at $100 a share, and you would put the typical kind of covenants on it. They expire in five years. Um, typically in this situation would make it so they vest immediately. It's not really fair for the people who are taking their interest payment in term a zone option instead to then be held to some vesting schedule. It makes it less attractive than them, and they're probably going to say no, we're not interested in doing that. So that's about it. Just two quick examples in kind of issuing these, I think the fairly I mean, this is a tougher situation to come across but I've seen it. That's why I use it as an example. Um, you can get creative with your options and warrants and how you're going to issue them and , you know, offer this bonus azan incentive to take them, but obviously being issued at kind of the fair value of currently of your stock. Maybe that's so That's how you make up the difference or get people over the hurdle. A lot of times you're just issuing, as I mentioned earlier options to kind of employees, board directors, management, whatever they typically do have a vesting schedule in that case, and sometimes it's tied to employment. So, um, you're being issued 100,000 you know, options at set price. But they've asked 25% each year at the end of the year ended the full year that you've been employed. So that way, if somebody quits after one year, if they only get 25% of those options or if they quit in their first year, they get no options, so they shouldn't have the right to, um, you know, enjoying the benefits of the company growing. So say that the company takes off in a couple of years, they shouldn't be able to execute those options when they only stuck around for nine months . They didn't really contribute to the growth of the company. And that's kind of the reasoning behind setting that. Cliffs where options become vested for employees comes to warrants, and investors typically just kind of have one kind of cut off period or investing scheduled period, if you will, not too far out. Maybe it's a year, maybe two years. Or maybe it's none. It depends on your specific situation. So, um, if I were, you know, view, maybe it's a start up or an entrepreneur, I would think of those few examples is what's mostly going apply to your business. Things like this. You might get into wacky situations, you know, again, be flexible, maybe create your own situation where you can issue warrants and options. But I think the employees board directors, such are or investors is gonna be your primary target. Eso With that, we're going to go into some of the accounting in the next video 18. Options and Warrants Accounting: Okay, so now we're gonna talk a little bit about counting. We will get to some debits and credits and the next light I think it is. But I'm going to talk more about kind of the mechanics behind warrants and options and mechanics behind the accounting than the actual accounting accounting itself isn't necessarily difficult as it is, it's more understanding what it is your accounting for. That's the trouble. So some general information warrants and options are valued. You can pretty much really. Warrants and options are interchangeable here are valued using the Black Scholes pricing model so many years ago, a long time ago Black Scholes model came into existence, and it's a way to fairly value your options. So if you think about it, if we have a reason need to do this is we issue a $5 option list of states and option and vests over two years. Um and then, um, so what's the value of that option right now and say our stock prices, currently at $7 well, they can execute it right now. It's not the wreck ability to do anything with it for two years. Presumably it's gonna be worth money if the stairs stock price stayed the same. You also have what's you know, you have the vesting period that has to be factored into your black Scholes valuation. So the black shows you basically plug in about 20 different variables and it spits out and says each option is worth $3.57 and we're not gonna get into a detailed discussion on the Black Scholes model. There's templates out there. Or you can hire valuation experts, which is usually what companies do that if you're going public. And the reason you hire 1/3 party to kind of crank out this model is that it adds validity to it. Otherwise, you're auditors are gonna have to double check all of your work. It's almost very just a higher third party. They do the calculation, sign off on it. Daughters could look at that. Go OK, cool that the valuation is correct. If you do it internally, you save yourself some costs. You also then have to go through with your orders and show them all the 20 inputs where you came up with them because it has to do things with the current interest rate risk trades. How the expected timeframe. How many people you expect won't actually make it past the two years They're not gonna have keep those options, especially when it comes like employee options. You know, what's your The rate at which people are quitting, especially a startup company might have 40% turnover each year. So you cheer 40% of people that have options. They're gonna leave before the options, even vest that needs to be factored in. Um, so all these variables go into the Black Scholes model. You can certainly look up the Black Scholes model. Learn more about it. The reason that it's kind of the standard is just because it does take into consideration all these different factors. It's not just $5.7 dollars, two years. It's plenty of other variables that said, public companies will typically hire third party valuations. So we talked about that eso warrant here than expected or expense over the expected life. So say we have all kinds of options out there, and this is where it does get messy. You have $5 options and maybe you issued some $4 options to sort of senior management. So, too are 50 cent options to board directors and some early investors who were in really, really early. You issued $1 options and maybe to somebody else he did issue, like, $10 options. Some investors or somebody else or $10 warrants, whatever it might be, have all these different price points, some vested immediately. Some don't best for two years. Some vests on a cliff. Um, you know, some of those people are gonna fall off and not execute them. There's some volatility and your stock price. All these things get factored in. Well, what's the value of those options? Like right now, if you were to just say, you know, I have to put some number on it. What do you use? Do you just use the strike price? Well, that doesn't seem fair. Some people are gonna leave. That's where you start factoring. Well, some people are gonna leave. Um, some people might just not do it. Some distract price might change itself. So you come up with a value you would pretty much do it by option. Kind of pool, different, like levels and different expiration dates. And you say, Well, these options. Let's just calm. Options A, B and C. You had three different rounds of options that you issued these air worth 100 k These air worth 200 k And these were worth whatever another 100 k you would then spread expense those on. I'm gonna talk a bit about that. And secondly, it would expensive over the period in which you think they're going to be valid. So, um, expected life, if you will. So even those these might be five year options. Um, that's the expiration expire in five years. We know they vest into, we figure they're only gonna last about 3.5 years after 3.5 years. Either people have either left or the price isn't gonna be attractive anymore or just those extra ones. They're just gonna be people who lost them, etcetera. All that's calculated into both the value and then how, like how long until people start to execute these? We decided something 3.5 years, so you would expense those over 3.5 years and spread evenly each quarter a period each month. Same thing would go for these and these and you might have different, uh, terms that these air going to spread over, and he would just do that mass. So, you know, 200 divided by 24 months. Um, the reason you expense options is back in the kind of dot com days. His company's tech startups did a lot of inflating of their profits by the. Instead of paying employees with cash, they would pay them with options, and they still do on. That's completely legitimate. But the problem is, is that you wouldn't expense anything for the option part of that. So in kind of a dire example, just a high level example. You pay an executive 10 grand a year in cash and give him $2 million worth of stock options in theory, when they can execute them. In all of that, they were only recognizing 10 grand and expense. So you would look at these income statements and say, Wow, this company sold all this stuff on. The minimal salary is terrific. They're great business model project forward all that, then roll forward a few years. All those options they passed the resting schedule. The stock price has taken off because you know this company was performing so well, and now we have all these options come in and are executed, and it just kind of blows. The stock price could Now all of a sudden you have all these people executing, say, $5 options there than immediately selling those shares because they're worth $100 or $200 it creates a lot of turmoil. The market. So essentially the financial statements were misleading, and that created kind of this increase in volume and share price. The company's looked like they're performing terrifically when really they were just kind of skirting around compensating people by giving them something that was of value in the future. Now, in accounting rules gap, you have to expense the value of those options. That's why we go through this whole exercise place a value on those options. We have to recognize that expense over the period that we think they're going to be valid. That creates then that you know, you only pay them 10 grand, but they have $2 million worth of shares and say the two million is the actual valuation of the shares. You're gonna be expensive, big chunk of that. It's not gonna be a cash payment out, but it is something that you're giving a value to employees. So, um, that's where why you have to expense them. This is how you come up with the valuations of what to expense. So an example. I probably just walk through this very similar one. But company A issues warrants to board directors, members, payment for services. And I've seen this where board directors, members, typically in a company, will be paid some gear lee fee for being on the board. They also get paid for each meeting. They also get Maybe, you know, other expenses reimbursed all that type of stuff. Um, so a lot of times, companies will say, Well, instead of paying you a yearly fee of 40,000 or 100,000 whatever it might be, well, just give you stock options worth some set amount. It's worth the you know. We'll set the exercise price to the price at the day of 12 31. They'll be five years with no vesting schedule. Their best immediately eso they issue all these have been determined by our evaluation experts that these warrants or options whatever are worth 50 grand, uh, during the value. Morris, this 50,000 having expected life of five years. So they might be good for 10 years. But for whatever reason, we know board members aren't going to youth. Um, there's risk in the stock. A stock price might go down. All that shakes out to a five year span that we want to expenses over eso. $10,000 would be expensed each year as board of directors expense. Kind of, you know, as you would the same the payments to them if it had been cash. The board of director expense. 10 grand additional paid in capital 10,000. So the expense or the credit side of this, I should say, goes against additional paid in capital. You're not giving cash, but you're giving capital or access to capital through these options or warrants. Your BOT expense line might fall in your salary section. You might also break this out from you might have board directors, you know, cash expense of board directors warrants expense. You might just have a warrants expense line that includes everything. However you feel you need to set up your accounting. I find people want to kind of break it out. So, you know, board of directors may be separate from salaries that are through war inter option expense versus warrants also that are issued to investors, etcetera. Just so you have some visibility into that. So several things can change year to year. So any warrants exercise or no longer included in this calculation. So a lot of times you go and revisit these warrant expense calculations year to year. So one thing is some of these warrants get exercise. Well, they're no longer out there to be executed. So that reduced the amount that you need to be expensing each year weren't should be revalued annually. And also note that the expected life doesn't mean actual life. So that might be a bit of the confusing part. I kind of tried to run through it, but you might have an expiration of five years. That's your actual life of the warrant. After five years, that warrant has no value. They can no longer exercise it. Expected life is what you're part of the exercise. Your black Scholes experts are gonna calculate. The black Scholes model doesn't come up with the expected life. Expect the life calculation is separate and then plugged into your black Scholes model. Expected Life has a lot to do with past history. So think I think the music's example is thinking of employees and giving stock options, and they have a vesting period. While we know that there's turnover and 40% of our employees, they're gonna leave that type of stuff. So the expected life of the options might only be three years, because we know that about the 34 year mark people start to leave. So anything that's not vested at that point, it doesn't matter, cause those employees, they're gonna forfeit thumb. And it's not to say everybody's going to do that. But you might have some ploys that leave after six months. Some stay for their entire lives. It all shakes out to an expected life of options of whatever it is three years or four years. So hopefully that as a bit of clarity again, that's, you know, done through kind of history. You look at experience. If you don't have that, you kind of have to go with industry standards wherever you get the information again. That's why a lot of this is left best to the experts to calculate. Otherwise, your external auditors could say, Well, you know, where did you come up with this? And is that really a fair evaluation? Because obviously your incentive would be to reduce your annual expense up. That's again. Why, using third parties would probably be best eso with that that are, uh, some examples and the accounting for stock options and stock warrants. 19. Derivatives Introduction: So in this next section, we're going to talk about derivatives well read through all the information on the sides here, but in general driven ofhis some type of instrument financial instrument, which derives its value from some underlying financial instrument. In the last section, we talked a lot about options warrants. Those are derivatives as well. They derive their value from the stock. You know their value. If you remember, part of the Black Scholes calculation was going to be the current price of the stock. That's cause that helps drive, whether the option or warrant is worth anything at the current price. Same thing goes for the derivatives we're gonna be talking about in this section. So ah, lot of writing here. Let's just gonna read through and talk through it. Eso a derivative is an instrument whose value is derived from the value of one arm or underlying in sprints, which could be commodities, precious metals, currency, bonds, stocks, stock indices, etcetera. The four most common types of derivative instruments are forwards, futures, options and swaps, and we've already talked a bit about options. There are two groups of driven of contracts, primarily traded over the counter OTC derivatives. Such a swaps that not go through an exchange or other intermediary and exchange traded derivatives, which are E. T DS that are traded through specialized derivatives exchanges and other exchanges. So keep in mind, I mean, the big picture is that derivatives derive their value from some underlying security something of value on then. Those derivatives themselves are worse, something inherently thinking back to our options. You hold a $5 option. The current stock price is $10. That option is worth something because you could take that execute for five and sell immediately for 10 um, derivatives, maybe broadly categorised as locker option products locked products, which are swaps, futures and forwards obligate the contractual parties to the terms over the life of the contract. Options. Products such as interest rate swaps or caps provide the buyer with the right but not the obligation to enter the contract. So again, you're not going to see this too much in day to day kind of entrepreneur situations. If you are in businesses, though, that lend themselves to this where you are trading futures, etcetera. This, you know, obviously eyes a lot to absorb. Let's move on though just kind of. I think the biggest things are to keep in mind that there are deriving their value from some underlying thing. Depending on what you hold on, how the contract is written, you have different rights and obligations. Depending on which side of the contract you're on. You might have to execute this derivative. You might depend on whether you want to execute it or not. It's more of like a insurance policy. Maybe so why Derivatives are dangerous. So although derivatives can help make the economy function by reducing the risks safer farmers, uh, oil companies start up employees etcetera, Uh, and MAWR left unchecked, that can introduce systematic risk. So again, that mentioned Sears startup employees. Think of your options contract. Think of farmers Think of futures futures on wheat, corn. Um, systematic wrist. So only a handful of firms represent a massive portion of the total dread of traded in the world, meaning that if one of them went bankrupt, it would lead to a daisy chain effect and cause all the others to fail, wiping out the entire financial system. So, on a dramatic sense level, if you want to, um, there's again as it mentions. There's kind of a small portion. So think of oil companies or your start up companies that have all these options out there . But started companies as a whole don't represent a huge portion of the market, a large. But if all start up companies failed because of options, that would be a problem. For example dot com bust. All options were being counted for in kind of a wonky way, and it created a lot of companies to go out of business and people will lose their investments. Kind of an upset in the market. The failure of Lehman Brothers nearly caused this to happen during the credit crisis. They would have succeeded had it not been for external intervention from the Federal Reserve Treasury. F D I C. Other government agencies. Eso potential pitfalls. So again, we're talking about advantages and disadvantages of derivatives, volatile investments, overpriced options, time restrictions, potential for scams. So you know I'm not going to go through each of those, but obviously, if you have options that are executed ble at $10 a share in the current price is $5. And if you're able to keep issuing these $10 options. They're essentially not worth anything currently. And if the company knows in its heart of hearts that the prices really never gonna exceed $10 they're just making money by selling these options or they're using them. Maybe as a kicker say, it's the warrant situation you're selling shares that $5 a share in giving people $10 warrants. And you're like, Oh, definitely stock prices going to go out. But it never does. And you know that it won't. It's creating this again. That's kind of one of potential for scam and to your overpricing your options or warrants the time restriction as well. Um, you know, these expire and to you. I mean, we've been saying five years, but you can have options and warrants that expire in one year. Two years So and I've seen a lot of companies that did that, where the issue options warrants and they did believe that the company was gonna perform well on the prices were going to go up, but unfortunately they didn't. And so all those people had options warrants. They just expire there now worth nothing. So those are some pitfalls, advantages to derivative contracts there. Nonbinding. They leverage returns and advanced investment strategies. So kind of working from the bottom up here. Advanced investment strategies again, you know, you say, Hey, I give you a share of common stock and warrant for just the price of a share of common stock. That's a terrific investment strategy for both the seller and for the buyer. Assuming everything else equal in the company's actually going to grow, they leverage returns. So think again about our person who got their $5 share stock for $5. But they also got this right this option to buy an additional shared $5. So without actually having the fork out that $5 originally, they only have to do that. If they want to execute that option or the warrant, there's no risk on their part in that. It's kind of a bonus. So that option takes off in price, and this sort of the stock takes off in price and goes to $100 a share. Well, now they can say, Hey, I'll pay $5 sell it for $100 you know, So they have that right, but not the obligation to do so, so that's just kind of an introduction to derivative contracts. I'm gonna try to stick to as much as possible. Using kind of options. Warrants continued. Just I think that's what applies to most businesses. Derivatives are. And I mean part of the reason why I want to cover this is because I have seen on and I've worked with in the past kind of oil and gas companies is one that comes to mind who do use a lot of futures contracts, and there's certain ways to account for those. So even if you are a company which doesn't necessarily, you know, you don't sell oil and gas. Perhaps you're taking this course and you're gonna work for a company that it's some type of natural resource, your specific accounting that relates to that. So we're gonna talk about that more in the next two videos as well what that relates to, but as a whole just think of derivatives again, derived their value from something else. 20. Derivatives Examples: So in the sex video, we're gonna talk about different types of derivatives more specifically, so we'll focus on three. But let's dive into them here and just talk more about them and kind of where they would be used. In the purpose of that eso options first discussed in the previous section, as I mentioned, probably most applicable to growth stage. Early stage companies again, options warrants. You know, we know how they operate and you know the purposes, but pretty much from an accounting perspective work. The same options are contracts between two parties to buy or sell a security at a given price. So I issue options to my employees. We now have a contractual agreement. I say I will sell you additional shares at that strike price once you pass the vesting period. They're most often used to trade stock options but may be used for other investments as well. So often investor purchases the right to buy an asset, a particular price within a given timeframe. He has purchased a call option. So an example where you're an employer, give your employees a stock option. You're giving them a call option given them the right to call the stock at a set price, so this gets more into more the market dynamics. Um, conversely, if he purchases the rights to sell an asset at a given price, is purchased a put option. I think I drew that up here a little bit again. You wouldn't necessarily issue put options to employees. That would be a bad signal. You're saying, Hey, here's the right to sell your stock at $5 a share when the price tanks to a dollar, you wouldn't do that on the open market, though. You can buy and sell, call and put options, and that's what people do. It's very much considered a zero sum game. Somebody's gonna win and somebody's gonna lose. You know, I think the stock price is going to plummet, so I sell put options on the market. I say, Hey, I'll sell. You are sorry and sell call options. I say, Hey, you have the right to buy the shares at $10. Even though the price is currently at five, I think the price is going to stay well below $10. I'm never gonna have to make good on that contract, and I collect some price. So, you know, in our in our evaluation last time, we put kind of a fair value on those options. A similar thing happens in the market, so you have a call option for $10 a share. Well, that's that call option isn't necessarily worth just $10. It's not gonna sell for $10 on the market because you have to factor in things like the time value. It expires after a certain amount of time. Um, and what the current stock prices. If the current stock price is $10 you have a call option for $10 you know why buy it. If the stock price is currently you know, $12 you would certainly not. You are certainly will certainly be willing to buy a call option for 10 because you could buy for 10 cell for 12 immediately. Other way, though, if it's underwater and you have a call option that you want to buy, and it's to call the share for, um, say $10. But the current prices only eight. Why would you want to call it for $10 when you get a spying on the market open for open market for eight. So running through all that their ads different. The whole point is that there's different value of options relative to where the stock price currently is relative. How much time is laughed, etcetera and supply and demand. So swaps. So swaps give investors the opportunity to exchange the benefit of their securities with another type of security. So these air and he won't see these too much again. I put this in for the benefit of people who do get involved in industries where they might have swaps or futures trip. Traded privately, not on the swaps market, often traded on the OTC markets. The swaps. I mean, you probably don't run in swamps much in your day to day life. And the reason I'm not, that's why are the reason why they're traded. Moreland OTC, which is over the counter market, is you know, they're more kind of a select group of people who are involved in these on their seldom individuals trading these, it's usually firms buying swaps, with other firms, buying and selling. So, for example, at least, if anything, so you know what a swap is? One party might have a bond with a fixed interest rate. Ah, but it is in a line of business where they have a reason to prefer varying interest rate. Whatever those reasons might be, they may in turn, to a swap contract with another party to exchange their interest rates. So even though I have a bond and I'm receiving fixed interest rates payments every month, they have a bond there receiving variable interest rates. I don't like what I have. They don't like what they have. So we enter into a contract to say, Hey, I'll, I'll take your payments. You take my payments. We don't actually switch the necessarily the underlying bonds. We just swapped the rights to those interest payments, and that's what. And then I start getting the variable once they start getting the fix once we both benefit because we both get what we want it to be determined to. Actually, you know, wins in that situation monetarily. So next we'll talk about future so futures work in the same premises options, although the underlying security is different. So futures were traditionally used for purchasing the rights to buy or sell a commodity, but they're also used to purchase financial securities as well. So again think of things like you buy futures on like weeds and corn. Those would be commodities gold, silver futures possible to purchase an S and P 500 index future. So kind of a basket if you will, um, or a future associate with particular interest rates. So interest rate futures again. Futures. You're buying this right to kind of lock in a price. So thinking of corn farmers buy futures on corn because they say, Hey, I have this huge crop of corn. You know, I don't want to be subject next year to how my crop, you know, there how the market does right now. Corn trading at $5. I have no idea how corn trades. Honestly, Um, whatever metric they use $5 a pound. I'm going to say next year might only trade for $2 my trade for $10 I don't know, but I want to lock in a certain price. So you buy futures and future might say, Hey, you know, this future gives the farmer the right to sell, you know, £10,000 at $5 a pound so they know what they're going to get for their crop. Um, you could see the benefit to this. Obviously, if the price then and they're gonna have to pay for that right, you're gonna pay for a future. So it's like an insurance policy. Obviously, if the price ends up being $12 a pound, they won't execute that future. They'll just sell it at $12 a pound. Likewise, if the price is only $2 at the time, they'll say, Hey, I have this contract and right to sell it at five instead of two, and that's where they kind of protect themselves. But again, they paid for that, right? It's kind of like an insurance policy. So with that, that's, you know, different types of derivatives. Next, we'll get into a little bit of the accounting for them as well. 21. Derivatives Accounting: So now we're gonna talk about accounting for derivatives. I'll just mention up for from that drew His accounting a specific to the type of derivative , could be semi complex or overly complex. It's it's not easy accounting. Most common accounting term use will be mark to market or fair value accounting again. This entire section, I would say, is very specific. Hopefully, I mean, if you're taking for informational persons Terrific. If you're taking it because you actually are gonna be involved in some type of industry like, say, an oil and gas and working with futures, there's obviously a lot more to it than this. I'm just trying to give you a sense of what's involved. Kind of some of the terminology in the high level 10,000 foot level, um, of what these derivatives are So mark to market fast. 1 15 Accounting for certain investments in debt and equity securities and fast 1 57 statements of financial coming measures number one from seven for value measurements. What are these? Um, Financial Accounting Standards Board creates fast, different, fast rules that you should then go read these and they will tell you what mark to market is , um, essentially, what mark to market is, I'll kind of give you the overview, and then we're gonna go into a lot of detail on that slide mark to market basically says you have to adjust your financial statements to reflect the fair value of whatever derivatives you have. So if you hold some futures contracts, I'm going to use oil and gas. Just cause that was an industry that I was involved in at one point on day would buy futures contracts on oil prices. Um, so what would happen is you pay for this futures contract. It was had a set price and all that. You would figure out fair value record on your books, while each month you had to mark to market. So depending on what current oil prices were, oil and gas prices, how much time was left on that future? You know, the probability that you would actually execute it, etcetera? You would adjust your evaluation to the market. So that's Newmark, the current value on your books to the market value of your, um, driven of contract that you hold. So at any given point, when a shareholder or anyone reading your financial statements. Looks at this and against was a publicly traded company in the United States. Um, they could look at your financial statements and pretty be assured that that was the fair value of those futures at the given reporting date. A lot of times previous to kind of mark to market and fair values. It was kind of like the option example where you would just you would set some price, put it on your books, and it didn't matter. You didn't follow the market. You weren't adjusting it, um, that could work against your it could work for you and depending on which way it was, companies would obviously kind of make it work. That's kind of gray area of accounting. Well, eventually, you know, fast, be caught up and said, No, you need toe. Make the fair value adjusted each period toe what it is worth currently to give your readers of your financial statements, you know, a fair and objective and conservative picture of how you stand so fast. 1 57 which will dive into a little bit more here defines fair value or the market price, if you will. The price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. Again, this is the fair value of your your futures contract. The market value fast Damon 1 57 includes the following points. So clarity of the definition of fair value, fair value hierarchy used to classify the sources of information used in the fair value measurements. So it was a market based, non market based. Expanded disclosure requirements for assets and liabilities measured a fair value. So just aside from here, when you are public company and honestly follow your your 10 cues and your 10 K's, you don't just do your mark to market and, you know, just change the number on your financial statements. You actually have to. And then in your discussions on your notes, the financials right, what those changes were and kind of why the value change, whether it's good or bad, you know what the inputs were, etcetera. So there has to be some visibility to an outside party to look and see why your numbers are changing. Um, back to fast one for seven, a modification of the longstanding accounting presumption that the measurement dated, specific transaction price of an asset or liability equals. It's measurement, date, specific, fair value and clarification that changes in credit risk boasts of that of the counter party in the company's own credit ratings must be included in the valuation. So this kind of bulleted checklist basically says, You know, fast 1 57 really spells out in detail how you evaluate these, you know, futures contracts or whatever it might be, how you go about the mark to market process and what you then have to disclose to your readers of your financial statements. Again, all of this falls under principles of conservatism. Um, matching somewhat matching policy, you know? Not totally. But you have to kind of fairly reflect your expenses in the period in which things change. So obviously, the value changed in the current month for the current quarter. That's when you make the adjustment, not at your end. But the biggest thing is about being conservative and fairly presenting the reader. Severe financial statements, soups, um, you know, an accurate picture of where your company stands. So, um, hopefully through all the section you're not just dissuaded about derivatives again, taking a step back. You know, whatever your industry might be within, dive in and find out more specifics about that. If you're in oil and gas would learn more about the futures, royal and gas read up on the fast 1 57 and how to account for that. That's why did get into many accounting examples because the mark to market adjustment itself just for your your own interest. It's a fairly simple entry. You just, you know, either created an expense, or you don't want to say a revenue. But you make some type of adjustment, which typically falls in your expense section. A lot of times it's reported down and other income and expenses, and it may be positive or negative, depending on how the valuation changed. And then you would also have enough standing entry on your balance sheet so you would kind of show what the original value was. And then there mark to market changes and what the current valuation is of that asset that you hold, which is the futures contracts. The accounting entries air fairly simple. The determining the value is where all the complex of the lies again if you are involved in certain industry, I encourage you to read up more on that cause I think it'll definitely an area where people can get tricked up and they really have to wrap their heads around how to account for this stuff. And why are you changing the values, especially if you try to then explain this stuff to non accounting people? It really is can create a kind of a dilemma because they don't understand why you're having to change the value when you paid a certain amount. Set yourself all that said, that is derivatives and we will move on to the next section. 22. Consolidating Subs Introduction: so welcome back in this section, we're going to talk about consulting subsidiaries, and we've already touched on this a little bit when we talked about intercompany eliminations. A lot of that's directly tied to consolidating your subsidiary companies. So in this section, we're going to get more into the informational side of it. Andi, I'll give you a little demonstration, but always let's just start with some general information subsidiary is a company that is controlled by another company. So way back, we talked about our parent, and then our subs will use P. And s control is exercised by virtue of ownership of a large portion of the subsidiaries are afraid of the most subs outstanding stock. So Company P, the parent, owns 50% of the subsidiary. They can control that company. Other people have the other 50%. Maybe some of it's the, you know, the people that work in that company other outside investors. But the parent owns primarily most of that company. These types of parent subsidiary relationships emerge as results of acquisitions or heavy investment by a large corporation. Another company. So you see, especially these days, a lot off consolidated industries and you see a lot of acquisitions and mergers, so think of I'm gonna use Google's a great example. Google grows primarily by acquiring other companies that do great stuff, and Google says, Hey, we want to be able to do that So they buy those companies, then they integrate them into their technology so they would obviously own those companies . Now, in Google's case, a lot of times they're acquiring them and kind of merging them into Google. They become Google. But think if Google didn't do that, they just kind of bought them and let them operate on the Rome. Then Google would be the parent, and all those companies would be the subsidiaries. One example actually saw firsthand, was a company I met with up in Seattle. They forget their original name, but they did traveled flight data and they flight predicted the costs. Let's say you were going to do a flight in two months somewhere you could enter when you were gonna take your flight in. The site would predict how flight prices would increase or decrease based on projection on oil prices and, you know, historical data, etcetera. Microsoft bought this company, and so now that information is integrated into being, which is Microsoft's search engine. If you work through bang to do kind of travel arrangements, they have flight prediction kind of estimates there. And that's because being slash Microsoft acquired this company, which is completely independent before accounting treatment employed to recognize this relationship. The parent sub varies according to the degree of influence exercised by the parents, so whether they own 20% or 100% has an impact on the accounting. So identification of a subsidiary company. So control is presumed when the parent acquires more than half of the voting rights of the entity, even when more than half the voting rights has not acquired control may be evidence by power. So again, company owns 40% of a subsidiary. Well, if all the other parties individually they make up 60%. But it's so fragmented that one company that owns 40% exercise is a lot of control over the company, so you could demon a subsidiary over more than 1/2 of the voting rights. By virtue of an agreement with the other investors, some of the other investors kind of gave up their voting rights to the company that owns 40% to govern the financial operating policies of the entity under the statute or an agreement? Well, it's kind of read through these to appoint or remove the majority of the members of the board. Directors order to cast the majority of votes out of meeting a board directors. So you can't just look at the ownership percentage you can't say, Well, 40%. That's not a majority, so that's not apparent. Well, if these other kind of arrangements exist where the parent where the company that owns 40% has a lot of rights, they can influence that subsidiary company pretty heavily. So when it comes to accounting, you would say Yes, that's the parents of surgery relationship, and you account for it as such, S I C 12 which can look out, provides other indicators of control based on risk and reward for special purpose entities . Etcetera. And I could read through that. That's a very specific thing. If you believe you're in a special purpose energy, I would encourage you to look at this. So that's just a little introduction. We're gonna talk mawr bit about subs in the different levels of ownership. I'll show you theirs in the download and as well, I think on the screen here and one of the next sections there. Sorry. One. The next lectures in this section. We're gonna look at how you go about the consulting of sub and how it looks financially. 23. Consolidating Subs Examples: So now let's look at an example of consolidating a subsidiary into a parent s are going to use the same example used in the download for the intercompany transactions section. So if you downloaded their company transactions, feel free to open that are open up the download for this section and there's example, I'm gonna bring it up here on the slide. In a second, three things have happened in there were consulting a subsidiary. There's some exchange rate problems and there's some eliminate intercompany eliminations. So all three of these air very closely tied together. If you have an international subsidiary, if you have the international aspect, you get rid of the exchange rate problem. Obviously, you'll probably if you're consulting a subsidiary, always have eliminations. And then the inner company there Sorry, the intercompany eliminations and then the consolidation. So just looking at the example have it up here. And now, Um, we have our subsidiary and we have our parent and hopefully have seen this before in the Inter company section. Um, so this covers all things as we mentioned No, we have the intercompany receivable investment in subsidiary. We need to eliminate those. So if you look over to the elimination that entries, you eliminate some of those and then I encourage you to look further down the third last line or fourth last line foreign currency gains. So there we have a game because of different transactions were not gonna go into the specifics of those, but there was a gain on transactions of 200 euros. There's an exchange rate applied if you look at the exchange rate column so depending on this company happened to have several different currencies and operated in, so they have to apply the exchange rate toe, get everything in USD. Then they, um have their parents the adjusted amount and then all that gets added across so that as I mentioned, there's a lot happening here. I think the organized presentation is what you should really take away from this. If you can put it all together, show the unadjusted than adjusted, show the exchange rate effects, convert everything the USD, and then say OK, everything is us, Dino. For the parent and subsidiary. Now we need to do our eliminations for loans and transactions between the parents sub eliminate those when you add all across now It's the consolidated financial statements, and that's ultimately what you're after. So if you were to just can't start at the right hand side, there's your end result. Consolidated UST financial statement. Then you kind of look across to all your subsidiaries and your parents. If that's all the information you had and you didn't have the consolidated statement, it would be really hard to decipher this company and how it performed and it would look very misleading. They'd be different currencies so you can see where the consolidated financial statement really comes. Ah, value here, and that's why it's presented in this way for financial reporting purposes. Eso without. There's so much else to it. That's the example. I don't want to go through every single transaction that happened there you can look through, and I think again, the main point of that sample that we just looked at is to show you that there can be a lot that's happening. But when you organize it in a nice fashion, take it step by step, you know, doing the currency conversions, consulting some etcetera, the eliminations. It makes sense and somebody can follow that, like we could follow that fairly easily. We see what's happening knowing nothing about this company or what business they're in. Esso. I'd encourage you to do a similar thing if you're involved, especially when you have the international subsidiaries and have the exchange rate and what not. 24. Consolidating Subs Accounting: So next we're gonna talk about the accounting for consulting subsidiaries, and we're not gonna talk about the specific accounting entries in this section. You know, we've kind of already looked at you know, when you have intercompany transactions and how you move those along in the elimination entries, that's really the accounting side of it. Aspires, debits and credits. Now we're going to talk more about the theory behind the accounting and how you go about determining subs and whatnot. So there's a lot of more information on this one, so bear with me as we read through it, and then we'll talk through it. Also just general information accounting aspect of assaulting a service primarily covered. So he said that the actual consolidation simply evolved, adding numbers across. So we looked at our example where it's that chart and we have, you know, the different subsidiaries we do the exchange rate conversion. We do the eliminations and then we just come up with are consulted numbers. So presented a presentation of consolidated subs parents required to present consolidated financial statements in which it consolidates its investments in subsidiaries, which is international accounting standards, or I S to 7.9 with the following exceptions. So a lot of heavy accounting talk here. I don't want people to get too overwhelmed. I think people start reading through this. They see lots of numbers and standards to go. I don't know where to start. You would kind of choose your situation. Then go research that and how all these standards apply to your your situation. So this is kind of a broad based information I'm giving you. You would then figure out the specifics for yourself. Um, so with the following exceptions, parents not required but may present consolidated financial statements if and only if all the following for conditions are met under 27 points. 10 of international accounting standards. The parent itself is a wholly owned subsidiary or is a partially owned subsidiary of another entity. And the owners, including those not otherwise entitled to vote, have been formed about and do not object to the parent not presenting consolidated financial statements. So a lot happening there. The parents, debt or equity instruments are not traded in public markets or private companies. The parent did not file or is not in the process of filing financial statements with a securities commission like the SEC or other regulatory organisation, etcetera, Uh, the ultimate, um, or any intermediate parents, the ultimate or any Intermedia, parent of the of the parent produces consolidated financial statements available to the public for public use that comply with international financial reporting standards. If you meet all four of these requirements, remember, you have to meet all four hair Sana, Annie or it's all four. Then you might not. You're given the option that not consulted your financial statements. I think realistically most companies do It depends, I think, for me honestly, if a company is not public, that's when they start to think, Well, why are we doing all this work? If you're a public company, obviously you're kicked out of this, you know, exclusion automatically. So some things think about. But if you do manage to meet all four of those requirements, congratulations. You might not have Teoh present consolidated financial statements. So a little bit more about accounting treatment. Again, let's just kind of read through this. A lot of information the accounting treatment used will very based on the percentage of control. So here we talk about how to account for this stuff. There are two thresholds, 20% ownership and 50% ownership. Based on these thresholds of parent company can fall into one or 31 of three Strada in terms of ownership in the sub. So if you owned 0 to 20% as a parent, um, if you own 21 to 50% or 51 or greater percent, these percentages air determined by the amount of stock owned by the parent company. So you're looking at the parents relative ownership in the subsidiary. You know, if you own 50% of their stock, then you fall in the the 20 to 50% category. For example, if a parent owns more than 20% or less, or sorry for the current parent owns 20% or less of subsidiary stock. The invested is counted for using the cost method, so this is where it's a bit more about the specific accounting. Investments are held on the balance sheet it costs and the dividends air reported as income . So rather than showing that you own equity, um, well, I shouldn't say that you do show that you have an investment in this company, but it's slightly different than how you account for it. In the other examples, if the paranoids between 2150% of the subsidiary formally called an associate company, the equity method is used. So now we have the cost method in the equity method. Investments are held on the balance sheet and adjusted according to the substance, Juries, profits and losses kind of like the mark to market if we think back completely unrelated to this topic. But now we're adjusting. What are relative investment is in this company, period, whereas with the cost method, we don't we just show what we paid and then with Lastly, when the parent company owns more than 50% of the subsidiary stock, the parent company must prepare consolidated financial statements. This means that all financial statements income stable. She's etcetera. I should show account balances that aggregate the balances for both companies. So thinking back, that's where we do have the you know, the subsidiaries we exchange, do the exchange rates and games, the losses and eliminations. That's when it gets more complex, up till that 50% pointer when you're just tip over 50%. Until then, you can account for them a little bit easier as it mentions the cost method and then the equity method. Some, um, again, a lot of information, and I want you to go and research what would apply to your actual business and how you should account for them and different options. And it's not to say that because you only own 20% you can only have this choice. You might be able to consolidate your balance sheets nonetheless, that such especially if you have transactions between your companies with that, that's the different types of accounting for them. Again. Go do research, encourage everyone. I mean, if you want to learn more about any specific of those types of accounting, you can further research those as well. So that's a little bit about accounting for consolidating your subsidiaries. 25. Intangibles Introduction: So in this next section, we're gonna be talking about intangible assets. So first will just start off with an introduction. As usual. Um, intangible assets don't have the obvious physical value of, like, a hard assets like factory or equipment, but they can provide a very valuable that can provide very valuable for the firm on be critical to its long term success or failure. And we'll get into more types of intangibles, obviously reputation, name recognition, intellectual property such, um, such as knowledge and know how tangible assets with long term resource is oven any but have no physical existence, another way of thinking of them. You can't touch a intangible asset that what makes tangible versus intangible tangible means you can touch it. So characteristics of an intangible asset Intangible assets are generally classified into two broad categories. So limited life intangible assets such as patents, cooperates and Goodwill's. And I think that's going to be a lot of what companies at your stage will deal with and then unlimited life intangibles such as trademarks. Intangible assets cannot be destroyed by fire hurricane, other accidents, disasters. Um, that's a trap. So another feature of intangible assets is they cannot be used as collateral to raise loans typically on some intangible assets such as good will can be destroyed by carelessness or is a side effect of the failure business, so you can destroy their value. But you're not physically destroying an intangible. And I think we've driven home the point. That intangible asset isn't something that you can touch. It's just a right or some type of value for your business. Just a quick list of some types of intangibles. And again, I think the main ones cos deal with our things, such as patents, trademarks, copyrights. But there's lots of other types of intangibles. Computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing, rights licenses, quota import quotas, franchises, customers, player relationships, marketing right. So it's something of value. So let's, for example, say customer and supplier relationships. You might be able to say there's some value to the relationships we built over a 20 year business relationship. So if you were to go and sell that business, you could say, Well, yeah, we only have a $1,000,000 in cash, but we want two million. It's because there's certain, you know, sales that we can pretty much count on because we built these relationships etcetera, so there's some value built into those will get toe. How do you account for that value and how you advertise the value as well for intangibles. But the main take away, obviously, is just intangibles are assets, but they don't have any hard value when they come in many different shapes and sizes. 26. Intangibles Examples: So next let's get into some examples. I'm intangibles. I'm gonna focus more on goodwill, but we'll get to that eso first. Just some information. Most prevalent intangible assets are trademarks, patents, copyrights. That's probably what you're going to run into most as kind of, ah growing business. Uh, goodwill is the accounting treatment has changed over the last few decades. We're talking about more about what good will is and how do you account for it then. And now let's get into that We've already covered or you watch the video or we do the accounting for intangibles and again, just going back to that. Accounting for intangibles is pretty much exactly the same as accounting for any type of asset where you depreciate it over a certain period of time. Um, nothing changes because it's in the tangible asset, the more complex nature of intangibles that's determining. What's the fair value that you start with with that intangible? Once you have it, what's its useful life, and and subsequently what do you advertise it over what you have all that figured out? The mechanics of the intangible are pretty much the same as a hard asset, so getting to goodwill, which is slightly different. Eso goodwill represents the delta between what paid for business, and the actual value of all is that that sets. So, for example, a computer company has bought for $1 million. They have 500 k intangible assets. So cash, computers, equipment, all the stuff you can see and has a value. Um, and that's it, though. But you paid one million, so you have 500 k extra that you paid, and that would be considered goodwill. So Goodwill's typically paid for the value of the potential of future business contracts. The company has brand loyalty, you know, and buying this business, even though you're giving them 100 men are one million for 500 K Worst of hard assets. There's a lot of potential there. They have clients, they have customers, have a sales history. So you know you're getting all that. But when it comes to the accounting side event, since you did pay 1,000,080 to account for it somehow, and that extra 500 K would be considered goodwill. So in the olden days, goodwill was previously booked as an intangible asset, amortized. Now goodwill is still booked, but then it's tested annually for impairment. So rather than just say we have 500 k worth of good will put it on the books that will advertise it over 20 years, we think thes contracts and everything is good for now. We need to be a little bit more conservative and tested each year for impairments rather than just take it at face value. I assume that it provides some equal value. You know, the county is a little bit more stricter. We need to kind of prove each year. Well, what's that extra value really worth these days? If the value of goodwill is less than it's on the books that needs to be written down? So you go through the impairment testing, which we don't get into, could be fairly complex interment, while Goodwill's really only worth 400,000 now that goodwill needs to be written down. So typically, what you don't do is advertising anymore. So you don't advertise that you just put on your books at 500 K You sure you test it? You never write it up. You never say, Oh, guess what? It's worth 600,000 now Unfortunately, it doesn't go that way. It only comes down in value and expensive as it gets impaired. Uh, goodwill on already on the books that seldom recognize when you sell your company's. So we buy this company, we book 500 K and goodwill. We go through a few years, say there's no impairment, We get lucky, and we determined down the road, we want to sell the book or sell the company. Well, when the new buyer looks at the books, they're going to say, Well, you paid one million, but you only got 500 k worth of assets. And I realize that you know, you paid for goodwill, but I'm not gonna pay for your good Will will determine our own new value. So it's not like they're gonna look at your books and say, Well, let's just draw a little example. So you paid one million of which, you know, 500 k was hard assets and 500 k was good will, they're not gonna look at this and go Well, we're starting at one million will give you 1.5 million because we want to give you, you know, the value of your company plus 500 k for goodwill. They're going to say, Well, no, there's already 500 k of goodwill built in blue This so we're just going ignore that the starting value of your company is 500 K Let's determine what kind of current goodwill is worth, and we'll give you that. And maybe it is still another 500 K but they wouldn't say you're built. You're companies only worth one million again. Or they would probably might look at it and say, Well, no, you know, times got on and we don't think your goodwill is actually sorry, Not your goodwill, but the new goodwill is worth 500 K We only want to give you 300 k for that. There's a reason you're selling your business after three years. You know, you assumed these were going to be good for 20 years originally. Now you're trying to sell your business after three years, What's going on? So they become sort of a negotiation process. But the point being is that they're not gonna look at your books ago. Hey, 500 k Goodwill. We're gonna pay for that. Not at all. They're going to start with your actual hard value of your assets and then go from there. Um, so that's where goodwill can get kind of tricky, cause if you pay a lot for goodwill and then you get in a situation we need to sell your business, you're not gonna recoup any of that value of the goodwill, especially if you overpaid for it. So say this was highly overstated. You know, they paid one million in total. Really, that business was only worth 750,000 including goodwill and everything else. They just they really wanted this business, you know, reasons for it that you know, synergize well with other companies. They own whatever the case might be, if they do get stuck in a situation where they need to sell it that over paying is now going to come back to bite them. So keep that in mind. That's where companies get into a lot of trouble with goodwill because they assume they could just put it on their books and, you know, magically their company is worth $1 million now. And that's not gonna be the case when somebody else looks at your books. Maybe on paper. It's worth one million, but it's not worth one million to somebody else looking to buy it. Um, so that's it. That's a little bit just about intangibles. Examples. I didn't get into things like patents and stuff, just cause they're fairly straightforward. As far as the accounting you know, you buy a patent for $1 million. There's no goodwill built into that. There's nothing related to other intangible. So you recognize that you advertise it over its useful life. Um, and once it's advertised the book value be zero, or you could then go sell that Patton um, it would be treated the same as a hard asset, so that's it for intangible examples. 27. Intangibles Examples V2: So next let's get into some examples. I'm intangibles. I'm gonna focus more on goodwill, but we'll get to that eso first. Just some information. Most prevalent intangible assets are trademarks, patents, copyrights. That's probably what you're going to run into most as kind of, ah growing business. Uh, goodwill is the accounting treatment has changed over the last few decades. We're talking about more about what good will is and how do you account for it then. And now let's get into that We've already covered or you watch the video or we do the accounting for intangibles and again, just going back to that. Accounting for intangibles is pretty much exactly the same as accounting for any type of asset where you depreciate it over a certain period of time. Um, nothing changes because it's in the tangible asset, the more complex nature of intangibles that's determining. What's the fair value that you start with with that intangible? Once you have it, what's its useful life, and and subsequently what do you advertise it over what you have all that figured out? The mechanics of the intangible are pretty much the same as a hard asset, so getting to goodwill, which is slightly different. Eso goodwill represents the delta between what paid for business, and the actual value of all is that that sets. So, for example, a computer company has bought for $1 million. They have 500 k intangible assets. So cash, computers, equipment, all the stuff you can see and has a value. Um, and that's it, though. But you paid one million, so you have 500 k extra that you paid, and that would be considered goodwill. So Goodwill's typically paid for the value of the potential of future business contracts. The company has brand loyalty, you know, and buying this business, even though you're giving them 100 men are one million for 500 K Worst of hard assets. There's a lot of potential there. They have clients, they have customers, have a sales history. So you know you're getting all that. But when it comes to the accounting side event, since you did pay 1,000,080 to account for it somehow, and that extra 500 K would be considered goodwill. So in the olden days, goodwill was previously booked as an intangible asset, amortized. Now goodwill is still booked, but then it's tested annually for impairment. So rather than just say we have 500 k worth of good will put it on the books that will advertise it over 20 years, we think thes contracts and everything is good for now. We need to be a little bit more conservative and tested each year for impairments rather than just take it at face value. I assume that it provides some equal value. You know, the county is a little bit more stricter. We need to kind of prove each year. Well, what's that extra value really worth these days? If the value of goodwill is less than it's on the books that needs to be written down? So you go through the impairment testing, which we don't get into, could be fairly complex interment, while Goodwill's really only worth 400,000 now that goodwill needs to be written down. So typically, what you don't do is advertising anymore. So you don't advertise that you just put on your books at 500 K You sure you test it? You never write it up. You never say, Oh, guess what? It's worth 600,000 now Unfortunately, it doesn't go that way. It only comes down in value and expensive as it gets impaired. Uh, goodwill on already on the books that seldom recognize when you sell your company's. So we buy this company, we book 500 K and goodwill. We go through a few years, say there's no impairment, We get lucky, and we determined down the road, we want to sell the book or sell the company. Well, when the new buyer looks at the books, they're going to say, Well, you paid one million, but you only got 500 k worth of assets. And I realize that you know, you paid for goodwill, but I'm not gonna pay for your good Will will determine our own new value. So it's not like they're gonna look at your books and say, Well, let's just draw a little example. So you paid one million of which, you know, 500 k was hard assets and 500 k was good will, they're not gonna look at this and go Well, we're starting at one million will give you 1.5 million because we want to give you, you know, the value of your company plus 500 k for goodwill. They're going to say, Well, no, there's already 500 k of goodwill built in blue This so we're just going ignore that the starting value of your company is 500 K Let's determine what kind of current goodwill is worth, and we'll give you that. And maybe it is still another 500 K but they wouldn't say you're built. You're companies only worth one million again. Or they would probably might look at it and say, Well, no, you know, times got on and we don't think your goodwill is actually sorry, Not your goodwill, but the new goodwill is worth 500 K We only want to give you 300 k for that. There's a reason you're selling your business after three years. You know, you assumed these were going to be good for 20 years originally. Now you're trying to sell your business after three years, What's going on? So they become sort of a negotiation process. But the point being is that they're not gonna look at your books ago. Hey, 500 k Goodwill. We're gonna pay for that. Not at all. They're going to start with your actual hard value of your assets and then go from there. Um, so that's where goodwill can get kind of tricky, cause if you pay a lot for goodwill and then you get in a situation we need to sell your business, you're not gonna recoup any of that value of the goodwill, especially if you overpaid for it. So say this was highly overstated. You know, they paid one million in total. Really, that business was only worth 750,000 including goodwill and everything else. They just they really wanted this business, you know, reasons for it that you know, synergize well with other companies. They own whatever the case might be, if they do get stuck in a situation where they need to sell it that over paying is now going to come back to bite them. So keep that in mind. That's where companies get into a lot of trouble with goodwill because they assume they could just put it on their books and, you know, magically their company is worth $1 million now. And that's not gonna be the case when somebody else looks at your books. Maybe on paper. It's worth one million, but it's not worth one million to somebody else looking to buy it. Um, so that's it. That's a little bit just about intangibles. Examples. I didn't get into things like patents and stuff, just cause they're fairly straightforward. As far as the accounting you know, you buy a patent for $1 million. There's no goodwill built into that. There's nothing related to other intangible. So you recognize that you advertise it over its useful life. Um, and once it's advertised the book value be zero, or you could then go sell that Patton um, it would be treated the same as a hard asset, so that's it for intangible examples. 28. Intangibles Accounting: So next let's talk about the accounting for intangible. So just some quick information. First intangibles air initially measured, it costs what you paid to acquire this asset, which is your intangible what it pay what you paid to build this intangible asset. You know, maybe the patent. You know, you didn't buy the patent. You you got the patent issued yourself or what costs went into that. They're classified as indefinite life, no foreseeable end to the value of all provided your company or a finite life, which is a period a limited period of expected value. That's probably were most intangible assets fall into intangible assets are treated the same as fixed assets for accounting purposes. Should they show as a long term asset, we advertise them. They have an initial book value of X amount 100,000 for example. Their amour ties each period over their useful life. So when we have this asset and we put on the books, we have to determine how long we're gonna advertise the sore. They're also tested for impairment. So if the market value is less than the book value, we need to write it down so impairment, you know, maybe you have a patent, and then a year later, this pattern doesn't hold much value because it's just outdated technology. Whatever it might be, it's no longer is valuable. Second, generate as much revenue as you thought. Now we need to write that. I asked it down. That's testing for impairment. So now some of the debits and credits. So we buy a patent from another party, which you can do. Another party has a patent issued to them. You then buy it from them because maybe you want to use it in your business and they no longer in business or they just they aren't in the business that they got a patent for anymore. Whatever the case may be, pay $50,000 expected to add value for 10 years, and expected revenues from the patent exceed the costs so greater in the 50,000. So we pay 50,000 for this Patton, and we're gonna make a lot more money off of it in the long run. So when we acquire the patent we debit patent, which is an asset account long term asset for the widget or whatever, it might be $50,000 credit cash accounts payable each amortization periods that you book it annually and we determine this is gonna be good for 10 years, and we're gonna spread it evenly over 10 years. The amortization expense will be 5000 and then accumulated amortization on the patent, which isn't contra account on your balance sheet. Samos depreciating a truck, computers, death, Any of that, that accounting part of it just the same. So continuing on, say, after four years, we, you know, we've been using this patent been generate gravity. We decided to sell the patent for whatever reason. Maybe it's gone up in value. Maybe we're changing our business. Model 20 k has been advertised already over the four years. How the book value is now 30 case. So you know, the book value is the original cost, which is 50 k less what we've advertised already, which is 20 than that is 30 left over. We sell the patent for 40 case. We have a book value of 30 with Sell it for 40. Uh, some debits and credits. Obviously we debit are cash for 40 grand. We're getting $40,000. We debit are accumulated amortization for 20,000 so we're wiping off that accumulated amortization. We credit our patent for 50,000 again. We're taking that offer balance sheet and what's left over. We have this game that's $10,000 that we made off of. Between the book value and the sale price is gain on sale a patent now. Presumably, you're not in the business of buying and selling patents. That's why it's a game. And if kind of falls below the line, it's down that other income and other loss of section. It's not a primary revenue source for you. That's why it's considered a gain or loss on sale of patent. So that's the simple accounting, as you can see exactly the same as fixed assets. Again, the biggest difference is just the intangible nature. And then I think the biggest factor, even bigger factor, is just determining that value. I mean, if you just buy it from someone else, then it's pretty clear cut. But if you build this patent, you, you, this patent issued yourself, what do you factory and the factory in all the costs that you used to get the patent issue , like the legal costs and different form filing costs etcetera. Maybe had a lot of R and D work which went into this to get the pat, the the patent to where it needed to be. So all those costs of a factor it in and then you have to determine the usable life, and that's where there's obviously some, you know, level of flexibility. But you have to be able to justify it to outside investors and outside auditors and say, Hey, this is going to get for 10 years. Well, show us why you think that and really put a value on it. A lot of companies hire outside valuation firms, which I've seen, especially if they buy a lot of patents. I had one client who bought a suite of patents, some they were gonna use. Some were just kind of thrown in, like dead, basically just bought somebody else's entire, you know, portfolio patents. They only really wanted a few of them. Well, how do you advertise those? I mean, you have this whole patent portfolio you bought after now signed values to each one and advertise him over their useful life and something not even gonna use. So you can see how it gets a little bit trickier there. But in general, that's the nuts and bolts of accounting for patents 29. Leases Introduction: so welcome to the next section. We're going to talk about leases, and I think this is an area that a lot of companies do get involved in. Whether you're just leasing on office space, you leased equipment. Maybe you just lease a fancy printer, photocopier, etcetera. That's kind of an all in one. Or maybe you're in a bigger business. Ulisse airplanes. That's always an example, I think of you know, I'm the airlines, oftentimes least airplanes. Well, how they do the accounting for that. So first, just some general information introduction. As usual, Alisa's a contract calling for the lessee the user to pay, the less or the person who owns that asset for the use of the asset for a specified period of time, I think of, you know, leasing a car. A rental agreement is the least in which the asset is the tangible property, as there are many ways to view how these contracts affect the balance sheet and your bottom line, um, the balance sheet and a bomb. I have both here less the end a lesser FAA SB so fast be Financial Accounting Standards Board's craze, a standard for US accounts of businesses so specifically fast financial counting standards . 13 provides the specific rules. So there are obviously, as I've alluded to different accounting rules based on how the leases treated. There's not just one set of standards, but there's. Luckily, there's only basically to set of standards. And there's some ways to tell which way it should be accounted for, which we're gonna talk about. So the requirements for capitalization of elite so they just give you an introduction. There's capital leases and operating leases. First, we'll talk about capital leases requirements for Capital East. Um, any one of these. So any of these four requirements As long as me one of them, you can capitalize the lease, and that's usually how companies would prefer to account for it because it means less expense on their income statement. The life of the lease is 75% of greater of the useful life of the assets. So you leased the car. You know, the useful life might be deemed to be 10 years. If you only leased it for three, that's not 75%. But if you had a 10 year lease, you have a elites for that. As long as the useful life so that assets that would qualify the least contains a purchase agreement for the for less than market value. So if you leased this car for three years at the end of three years, you can buy this car for X amount. The lessee gains ownership of the end of the lease period. If you leased this car for 10 years at the end of 10 years, the car is yours. The present value of the least payments is greater than 90% of the assets market value. So maybe only have a five year lease on a car that's deemed to have 10 years of usable value. But those least payments are big enough that you you're actually paying 90% or more of the actual value of that car. In that case, you would say yes. Why, technically, pretty much buying this car? Um, it's over 90% of the assets market value, so we'll capitalize this least and my capitalized I mean, you treated as you capitalize. You bring it to your balance sheet. It's a capital asset. You deem that you kind of own this asset that you're making payments on, conversely, is an operating lease. Eso felice doesn't meet any of those four requirements. Then it's for a capitalist. Then it's automatically an operating lease. Operating releases basically like renting something. You rent an apartment, rent office space, you rent an airplane. You rent this car because you only have a three year least at the end of the period. You give it back, so you borrow it for some amount of time. You make payments and then you give it back. And with no, you don't have to deal with selling it or anything else. That's essentially what the difference between operating capital Lisa's iron will get more into the accounting for each of the two different types on and somewhere examples in the subsequent videos here in this section. 30. Leases Examples: So now we're gonna talk to some examples of leases and the different types of leases operating capital. And we're also gonna throw in some accounting just because I think the examples are fairly straightforward. I mean, we can already talked a little bit about the two types operating capital, but it won't make sure you understand the counting side of it as well. Eso straightforward. So, first in operating lease. Very straightforward. Essentially, you're renting some asset. Um, straightforward Least example can be more complex. So I mean, a typical least example. You pay least payments each period, Iva suit, like, for your office space or for a car. Since vehicle office equipment. Here we have you least that a plane for five years, your monthly payments. Air 100 k You would. Devon. Again, this is operating lease, debit, plane rental expense or least expense 100 k credit cash. Fairly straightforward. You're just not expensing that, as as you use up your assets. Um, so in this next example, least operating lease continued, so the plane leases for five years to make monthly payments, but now the monthly payments escalated periods. So you have a five year agreement, but the payments are increasing. So this is where the counting could get a little bit more tricky, but not too bad. So the full amount of lease if you calculated out a 7,000,007 0.2 million or 7200 K That's if you took, you know, one year at 100. Kate, one year at 1 10 etcetera. Adel's up. The total payments you're gonna make a 7.2 million. This is the amount that you need to spread evenly over the least. So even though your payments or less in the earlier months and more in the later months, you're getting the same value from that plane each period. So you need to recognize that value evenly over the periods, regardless of what you pay, so there's gonna be some difference. You know, you're paying 100 k a month in the first year. We need to recognize 100 20 k and expense, so the extra expense goes to deferred liability, and it starts building up this liability that you have. So your entry in that first initial year would be debit plane rental expense for 100 20 k the full value divided by the five years Differed liability for 20 K cash for 100 case earlier. Pay 100 k You recognize an expense for 100 20 K The extra 20 k is a deferred liability. It's some liability that you will have to make good on at some point on the way that works . I didn't follow through on here, but as you can, I mean, as you can tell, So you're gonna be building up 20 K But then the next year, your payments or 1 10 on the next year payments or 1 20 So at that point, you're one in your three, you have 120 k payment. Um, your expensing 120 case. Let's awash in your four. You're making payments of 130 k So you have a cash outgoing. 130 k You're still in recognizing 1 20 The 1 20 remains consistent. That's your again. Your 7.2 divided evenly over the five years. So that's when you're different liability switches. So now you're gonna be reducing your liability. Um, so everything that you'd built up through kind of your three, your three kind of even and then you start to reduce that liability so that when all sudden done end of five years, you have zero deferred liability. You've expense 7.2 million over five years. You expensed it evenly. But your cash payments followed that escalating payment thing. And that's the purpose of the accounting and using that differed liability. Okay, so for an example, continuing on with our plane using the same numbers as before that we had in our operating lease. So now we have a capital east for the plane. We get full ownership when it when we're done with our payments. After five years that's written in the agreement. So we meet that requirement eso First, we have to determine the amount to capitalize whole. What's the total amount of payments that we're gonna make, which is 7.2 million irregardless of father spread out. So we Devon, an asset playing 7.2 credit our lease obligation for 7.2. So we're gonna do that up front, like right at the beginning because we meet the requirements were basically buying this plane so we can recognize that asset in this case. But we have an offsetting liability. Are least obligation. So each month our payment reduces our lease obligations. So in this case, you don't have any type of deferred liability. It's just we make our 100 K payments for that first year. Each month we reduced our lease obligation. We also reduce our cash. So obviously in the later years is when we have the bigger payments and we kind of on the tail end of those payments when we get completely rid of that lease obligation. So all things being correct at the end of five years, that final payment there's zero left in your lease obligation liability. We now go on out outright asset and also not on here, but need to be depreciating that asset over the period as well. Because we have this asset, which is ours and all intensive purposes, and we determine that's a capital asset that we get to recognize. Well, unfortunately, with recognizing an asset, we have to depreciate her ass that as well, So you would be appreciating your asset over its useful life. And just because the the leases over five years, that doesn't mean the planes you slice of life is only five years. Um, the least obligation. And the county for that is all related to the lease agreement. The asset itself a plane is obviously gonna last longer than five years. Hopefully, it's gonna be good for 20 years. Well, that's our depreciation period now, So we're depreciating it separately and slower than the amounts that were paying on it. Um, and that's pretty much it for capital and operating leases. Each kind of have their own quirks. And what we didn't really get into is the pros and cons of each type. You know, I want to focus more on just what are the two types and have you account for them? Um, hopefully you can tell. I mean, I think it's fairly obvious if you have an operating lease. It's more just like you're renting something The pro is. It's easy to get rid of, You know, at the end of three years, five years, you can give back that car. You have to worry about it, but it's not yours. They're making rental payments on it, a swell you're having to expense it. You're not getting any type of value on your balance sheet, whereas if it's a capitalise, it's becoming yours. You're buying this asset. You can recognize that as an asset on the flip side, if you needed to get rid of that asset like say, in the case of a plane, pretty difficult to sell. So now you're leasing this plane that use at some 0.1 a cell you haven't recognized on your balance sheet? Well, that's your obligation to get rid of, but at the same time, you don't have any expense aside from your depreciation expense. So some pros and cons there as you enter into agreements, at least agreements don't just look at dollar amounts. Also, think about the accounting and how that's going to impact your financial statements. Um, with that, that's a few examples of capital and operating leases. 31. Leases Accounting: So next let's talk about some accounting for leases. So just some general information. First of all, ah, fast be financial accounting standards. Board 13 regulates the accounting for leases, so I encourage you to look that up. Google it If you're in a situation where you need to figure out how to properly account for these, there's two types of treatment operating capital, which we covered in the introduction. So Lisa's less than 12 months or considered neither, so you don't have to worry about it in that situation. Um, if you're you know, you have a least for less than 12 months, you're basically just renting something. It doesn't matter if its capital or operating. Hopefully, you know you don't meet those requirements for Capital East if you have less than a 12 month lease. If you're paying ninth grade of 90% of the value of that asset, but you're only renting it for nine months, then there's a problem. Obviously, you know your pain, exorbitant amount, and that's why it's considered than just considered a rental. Um, so the specifics of your least are disclosed in the footnotes, so regardless of which type of lease you have when you do your accounting and put out your financial reports you have to disclose the terms of your lease. Is a zealous future lease obligations for the next five years and thereafter. So no, the readers of your financial statements know what kind of commitments and obligations your company is going to be held to. Um, so the just terminology of the lessee is the party assuming the asset, the lesser party providing the asset which we touched on before. So the less or accounting. So let's focuses on the purpose. So we're not gonna focus on the lesser as much. We're assuming here, the person acquiring the asset you're gonna borrow make payments on the assets. So you're not in the business of actually leasing out assets. I assume eso less focus for purposes of this course. You know where I'm assuming you're smaller business growing company, etcetera. So if you were, though, the less or you have some equipment and let's say lease it out. Um, if it's an operating least you record as rent revenue, you know you rent out. Maybe you sub lease part of your office based Alright. In that case, you're the lesser, she would record your rent. Revenue? Um, capital. Least if it's like a big piece of equipment. Say you did end up buying like a huge copier, and then it turns out you didn't need it. But you want to keep ownership, so you lease it out. Um, you would have a least receivable and credit owned assets as somebody makes payments on this asset. So basically they're buying it from you. Um, you would book when you kind of give it to them, at least receivable for X amount of $1000 as they make payments to reduce the receivable, you're also reducing your owned. Asked that you're reducing amount of ownership you have in this asset, but I doubt most of you will be in this situation. So the lessee now you're the borrower eso for an operating lease. So again, this is where it's more like renting something. Think of an operating leases just renting something, and at the end of the pier rental period, you have no obligations. You give back whatever it is you rent, whether it's office space or a car on, that's it. So the amounts expense, so there's no asset value you're not building up any value, and that's why their expense. So you would debit each period some expense plane leased expense, you know, copier least expense car leased expense. You credit your least payable or a cash. So if you um, established a loose payable upfront, you would be reducing it. Um, our story. No, no, no, that's not true. At least payable if you didn't actually pay. So say, at the end of the period, you haven't paid your least at you have a payable being accounts payable essentially. But you might break it out as least payable. Or you would just credit cash because he did make payment. Um, again, same is renting thing is writing a rain check. So for capitalise, operating leases are fairly straightforward. Capitalise is a little bit more involved, but not too difficult. Eso the amounts are capitalized. You're building up a value in this asset now, and I always like to think of it is like you are buying like a piece of office equipment. I always think of the big fancy No. 10 and one machines that fax and copy and email and do all kinds of stuff and everybody connects to it, etcetera. In the example hero plane, Which is another good example. A big thing of a more of a big, huge asset. Um, so you're building a pass it so each period, you would, you know, debit, your asset, your plane. You know, you make your $20,000 payment towards your plane. Debit, your asset, your plane credit your least payable. So this creates both the asset and the payable on. Then each payment reduces the least payable. So again, um, the least panel side is kind of the same, but now you're building up an asset rather than expensing it. Um And then that's all I have on here for this. You would also then each period be advertising cause now you're building upon asset. See, at some point, you have to start wrecking recognizing amortization expense on this asset that you are in theory, building up and buying. So they're amortisation are depreciation expense would be the same as for any other asset. You know, you you debit your depreciation or amortization expense. You credit your accumulated depreciation slash amortization, which is an offset to your asset, which you know on. Um but as you can tell your asset builds up slowly. You don't recognize $2 million plane asset on your books up front? No, you get it as you making payment. That's when you build up the value in your asset. Um, that's about it. I mean, if you were ever to end this lease agreement, depending on the terms of how was ended, like if you actually took full ownership and then sold that, ask that. That would be one thing. If you just say, couldn't make your payments and needed to give it up, you would have to write off that asset, obviously, because you no longer have a right to it, and that's when you would have to expense things. So there's lots of different specific situations. We're assuming you're actually going to make your payments and overtime buildup value in this asset and essentially acquire it, even though you're using it already, Um, so that's a little bit about leases and accounting for them 32. Course Conclusion: Congratulations. You've made it through the course. We're at the course conclusion now. So you've done all the different sections. Some topics related. Some unrelated. As you can tell, probably some of these topics get pretty complex, just not necessarily in the accounting. Even it's more just in the nature of, of thinking it through and what it means for your business. You know things through international transactions, taxation moving, you know, money between the subsidiaries, etcetera. So there's a lot on your plate. Hopefully, you found everything of value. First thing I want to do here in the conclusion is revisit our goals and make sure that we met all of our goals. So our first goal was to provide you with an understanding of accounting topics beyond the basics. So we moved on from the the introductory course, the finance and accounting for startups. This was advanced. Obviously, we talked about things like options, warns, derivatives, partnerships, all those things. So I think we all agree we moved beyond basic and definitely jumped into some heavier topics. Understand accounting for international companies, multiple run companies. So when you do get an international accounting, lots of things that consider such as the exchange rates than you have eliminating subsidiaries off that have you account for the gains and losses, understanding how warrants and options impact accounting of financial reports. So definitely a huge topic. And I mean, we really just kind of touched on the very kind of surface layer, if you will. Like, I've given you enough information to know that there's some complexity there. You know what warrants are. You know what options are all about? Expiration dates. You're gonna put valuations on those options or warrants, etcetera. So you know enough to be dangerous. But definitely Aziz. You get into kind of a growing company and issuing options and warrants. That's when you'll really be kind of pushed into the fire and have to deal with them and actually getting valuations done and expensing. Those understand intangibles and special accounting related to them. Definitely all different types of intangible assets, especially again, and growing companies. If you do things like patents, all the specific accounting for that and putting evaluation on that, what period expense it over and then, lastly, understand Lisa's types of leases had account for them. So again, we kind of covered that one of the latter sections that we did. So capital versus operating leases. And definitely a lot of startups get involved in that because they do lease equipment or they leased just property or they have leasehold improvements. You rent a property and improvement. How do you account for that? How do you expensive? And what's the counting treatment for that? Um, so that said and bear with me. So next. I just wanted to again congratulate you. We we met all of our goals. Uh, love your feedback, please feel free to contact me. We're gonna get to my contact information here in a 2nd 1st I just want to let you know, Of course, about my other courses are currently up and there will be more. By the time you take this course, there might be more available. Eso There's financing accounting for startups, which many of you may have already taken. If you didn't, you just jump to this course. If this seemed like a bit much for you, maybe you want to jump back to the introductory kind of finance and accounting basics and understanding and online starting in on online business. Um, free course. I have it up there just to kind of introduce people to myself, people, entrepreneurs who just want to learn more. I wanted to get that course out there, so I made that last summer. It's up there completely free. I encourage everyone to take. It has over. It's getting close to 3000 students now. Highly successful. Um, I also have financial modelling in Excel for startups. So if you're really kind of keen on financial modelling, you know, as you talked to investors, if that's the stage you're at or you just wanted internally, generate your own financial forecasts and budgets. I create a whole course. It's a bit different format than this one that you took instead of me talking and working on the white board. It's primarily on the computer. It's just my screen with me talking and showing you how to build a financial for cash. Last budget From A to Z, we start with a completely blank worksheet. By the end, we have a fully functioning working budget. Forecasts course is coming later this year. I have on deck. I've kind of a lot of ambitions to get a lot done this year. I want to do SEC, which is Securities Exchange Commission reporting for smaller companies. That course will be coming out raising capital for start up. So when I kind of passed along a lot of information for you kind of do's and don't I see a lot of misinformation out there and I want to clarify a lot of that and I'm not saying I'm going to tell you do this in this and you'll be funded. But I want the set you on the right path to do those things. And then I'm also planning on doing a few supplementary courses, diving into more specifics like things like already built a financial forecasting course onto something along the lines of the business plan course to showing you what does an investor quality business plan look like? I mean, it's easy enough to go buy software or follow a template. I really want to give you the ins and outs of the business plan, so that's kind of on deck with any my course. Any course you take, you automatically get half off any other course I have up there. Now we're in the future. If you use the coupon code alert with Chris, and it's in the pdf, uh, in the slides there, half of it's automatic half off. Or if you forget what it is, just email me. There's my contact information. Feel free to reach out. Connect on Twitter and LinkedIn. Definitely. Um, always love your feedback. Feel free to leave reviews of the course here on you. Demi, I love you know when When students take the time to do that and let me know how I'm doing encourages me to provide more coarse material. I love doing this stuff, you know, besides being a CFO for all these girls, stage companies all have doing things like this and taking all the knowledge information I have and passing it on to people around the world. There's literally students around the world on every continent taking different courses of mind. So with that, that is the entire course. That's my bit about me. And, you know, we met all of our goals. So thank you for taking this course. I really look forward to having you join some of my other courses