Lease Of Capital Lease Vs. Operating Leases

The lease agreement comes out to be the better option when the lease term is long at about 60 months than a purchase agreement for the same length of time. This is because in the lease agreement, the company is able to break even at about 51 months as compared to the purchase agreement which needs the company to make the payments till the end of the term in order to breakeven. In addition to this,

The reason we want to capitalise the lease commitments is that reporting under operating assets leads to substantial amounts of off-balance-sheet assets and liabilities. Hence, it is difficult to compare financial statements between two similar companies but use different accounting methods for essentially the same transaction.

To determine which of the lease options above is best for your client the benefits such as profit and appropriate write-offs should be evaluated. The sale-type lease would not address the needs of your client because the proposed transaction by your client

In 1994 Jeff Bezos started Amazon.com, one of the first online retailer sites and in 1995 he went live on the internet. Jeff Bezos is still the CEO today and his company is growing yearly with many added subsidiaries. Amazon started selling only in American and today it is in over 11 nations and on the rise. We will glance at some of financial information to come to a conclusion of whether Amazon is a sound investment in the present and the future. Next we will look at the three techniques used to assess the financial statement data: horizontal analysis, vertical analysis, and ratio analysis. We will focus on three financial factors: Liquidity Ratios, Profitability Ratios, and Solvency Ratios of Amazon.com during the 2007 and 2008 years.

Although many variations of lease financing are available, potential lessees should be familiar with two general types of leases: the full payout lease and the fair market value (FMV) lease. The choice of lease is based upon the lessees’ long-term plans for the asset involved. A full payout lease is one in which the present value of the payment stream equals the acquisition cost of the asset. Options at the end of the lease typically include return, renewal, or purchase often for $1. The lessee is able to deploy and utilize the equipment, while the periodic payments of the full payout lease ease the financial burden of making a large IT acquisition. This option is a good choice when future ownership is desired, the dollar value of the equipment is substantial, the expected productive life of the assets is longer than five years, and the flexibility of spreading out payments would

A sales-type lease is defined in ASC 840-10-25-43(a) and states, “A lease is a sales-type lease if it gives rise to manufacturer’s or dealer’s profit (or loss) to the lessor (that is, the fair value of the leased property at lease inception is greater or less than its cost or carrying amount, if different) and meets either of the following conditions,” and the conditions it must meet are the conditions for a capital lease and the payments must be reasonably predictable and no important uncertainties about the payments should be present as stated in ASC 840-10-25-42. The conditions for classifying a capital lease are described in ASC 840-10-25-1. The journal entries would differ from the others as it would include sales revenue in the initial recording.

Leases are contracts between the lessor (owner) and the lessee (client) to use an asset for a specified period of time in exchange for rental payments over the term of the lease.  For many companies leasing an asset verses owning has distinct advantages. Leasing offers companies the option of financing at fixed rates and flexibility giving them financial stability, cheaper rates, and the option of short or long-term leases; it allows the lessee to upgrade the asset so they can remain competitive in the market; it offers tax advantages reducing their taxes and leasing offers off-balance sheet financing which doesn’t increase their debt thus aiding in the potential for future borrowing. (Kieso et al., 2016, P.1198)

The biggest notable difference is the handling of each on the financial statements. An operating lease is similar to a rental agreement so there is no long-term liability on the balance sheet. It allows the lessee to engage in off-balance sheet financing. This provides several benefits for the company to maintain a good financial position. When a company enters a capital lease the asset is reported on the balance sheet. This results in the debt to total equity increasing and the rate of return on total assets to decrease. The ratios can negatively affect financing opportunities, the corporate bond covenants, and management compensation incentives (Schroeder, Clark, & Cathey, 2011). In addition, the depreciation required on the asset in a capital lease will result in a deferred tax. The funds from operations on the cash flow statement will be higher by the deferred tax when a capital lease is used (Ingberman, Ronen, & Sorter, 1979). The cash from the operations section on the cash flow must be reconciled to remove noncash items during the period (Kieso, Weygandt, & Warfield, 2007). The company will receive benefits from both types of leases; the right option for the company will depend on their needs and strategy.

The next segment of this look at the financial condition of Amazon.com involves a horizontal and vertical analysis of Amazon’s income statement and balance sheet. Since both of these statements involve many segments, we will address key and noteworthy figures to gain a broad understanding of Amazon’s progress in the last three years.

Buying vs renting will always have their very own advantages and disadvantages. As being a renter, you may not gain any equity, however, you also do not experience property taxes, plumbing issues or insurance. You only pay your monthly rent and your landlord is obligated to manage that place. However, with buying, you take care of every issues and you will run the chance of bankruptcy through negative equity, natural disaster, foreclosure and scenarios.

The company’s business strategy is as simple as a napkin sketch (Exhibit B) drawn by Bezos 15 years ago. As seen in the diagram, Amazon’s strategy is a closed loop. They are focused on the customer experience, not the profits. This means that what really matters in a company structure like this is cash flow. Amazon’s cash flow numbers are so impressive that they list operating cash flow and free cash flow as the two first figures in their earnings press release. An analysis of Amazon’s free cash flow (Exhibit C) indicates that their operating cash margin (OCM) has been rather stable throughout the decade but free crash flow (FCF) has fallen because of the increase in capital expenditure (Capex). (Evans, 2015) With rapid revenue growth, Amazon has become a business that is capex intensive. From 2011 to 2015, the company has increased its capital expenditures by 250% to 4.59B. For every dollar of revenue more is spent on capex, which goes back into the business to makes investments in

First, based on the vision of the company which is to sell the business and achieving the targeted returns in the long term. Logically, long-term leases allow for long-term financial planning and that depending on the terms of the lease which will also allow the company to calculate the rental expenses over the long-run. Since the interest expenses are increased every year, thus, the company should act towards being highly leveraged. The company forecasted growth rate would

The effectiveness of Amazon’s financial management can be seen in the performance over the last 5 years. Largely investor confidence has been very high throughout the 5 years analyzed. This can be seen in the increase of 4 times the stock price. Stock prices were at an all-time high the end of 2013 at price of $405USD each (Morningstar, 2014). Through analysis of the financial statements and history of stock prices it can be determined that the financial management team at Amazon is doing a great job.

We should capitalise a lease transaction (meaning that the leased asset and lease liability will be placed on the statement of financial position) when substantially all the risks and rewards of ownership pass to the lessee, and the lease payments are deemed to be material. AASB 117 describes the risks and rewards of ownership as follows:

The greatest difference between a finance lease and an operating lease is the effect each has on the balance sheet.