Ratio Analysis On Market Value

- Favorable lease: costs allocated to the lease are amortized over the remaining lease term. (not subject to the 15-year amortization rule for other intangibles)

The following report is a brief comparative analysis of two of Australia’s largest deposit-taking financial institutions (FI), Australia and New Zealand Banking Group Ltd. (ANZ) and Westpac Banking Corporation (Westpac). This report seeks to identify which of the FIs has a greater aggregate return per dollar of equity and thus establish the highest performer, or most profitable, of the two. The Return on Equity Model (ROE) (Koch & MacDonald,

The type of depreciation method the Target Corporation uses is a straight-line method. Property and equipment is depreciated using the straight-line method over estimated useful lives or lease terms if shorter. “Target amortizes leasehold improvements purchased after the beginning of the initial lease term over the shorter of the assets' useful lives or a term that includes the original lease term, plus any renewals that are reasonably assured at the date the leasehold improvements are acquired” (Stock Analysis, n.d.).

C. In a sales-type lease the carrying value of the asset is charged to cost of the asset leased (expense), and the present value of the minimum lease payment as the amount of the sale. For direct financing leases no sales or expense is recognized because the asset is removed from the books. The difference between its carrying value and the undiscounted minimum lease payments is recorded as unearned interest revenue. The net investment in a sales type lease ia accounted for in a similar manner as a direct financing

Then thirdly, the operating lease is when the lessor depreciates the leased asset according to its depreciation policy. The maintenance costs of the leased asset are charged as an expense, the costs, such as finder’s fees and credit checks, are amortized over the lease term, and the leased equipment and accumulated depreciation are shown as equipment leased to others. Usually any lease that do not fall under the criteria for a direct financing lease or sales-type lease are recorded as an operating lease.

However, the article by Milano (2012) also describes how operating leases can be an efficient and flexible way of leasing to many businesses. Leasing can be an advantage to a lot of successful companies if managed accurately. The lessee has a choice in the portion of the life of the asset they lease, meaning when that contract is up they can refresh the asset with a newer version which can lead to improved performance and reliability (Milano, 2012). These advantages can be received by both financing and operating leases, although the downfall of the operating lease is that the liability of the full cost of the asset is not recorded in their balance sheet, instead only the smaller cost of the annual expense is included. This could mean that an investor or owner taking on a company may not realise the large amount of expense that occurs from leasing an asset as the total liability cannot be seen.

At the lease commencement, finance leases are capitalised at the fair value of the leased property, otherwise the present value of the minimum lease payments if lower (MHI, 2014). Other short term and long term payables include the relevant rental obligations and net of finance charges (MHI, 2014). Every lease payment is apportioned between the liability and finance charges (MHI, 2014). The finance cost is indicated in the comprehensive income statement for the lease period as well as to generate a constant periodic rate of interest on the remaining balance of the liability for each period (MHI, 2014). During the lease term, the depreciation is considered for the useful life of the asset such as the property, plant and equipment assigned under finance leases (MHI, 2014). The portion of the risks and rewards of ownership are persevered by the lessor are categorized as operating leases for leases (MHI, 2014). For the period of the lease, all payments made under operating leases less any incentives from lessor are indicated in the comprehensive income statement on a straight-line basis (MHI,

Each year the number of leasing agreements continues to grow. There are several advantages of leasing property instead of owning. The company is protected against obsolescence and can receive 100% financing with less cost, fixed payments, and more flexibility (Schroeder, Clark, & Cathey, 2011). The new business opportunity for the client will require 20 more trucks than XYZ Trucking Inc. currently owns. The FASB issued SFAS No. 13, “Accounting for Leases” to establish

Topic 842 will require the estimation of lease terms and subsequent lease payments by companies under a criteria that cautiously take into consideration, in addition to written lease arrangements, the “economic incentives for a company to exercise an option to extend a lease term or for an entity not to exercise an option to terminate a lease”. With respect to finance leases only, the lease payments will subsequently be discounted using the company’s incremental borrowing rate to reach the lease obligation. This lease obligation will then be disclosed as a liability with an offsetting disclosure of the right to use asset as an intangible asset on the balance sheet. The amount of the right-to-use asset will also include any direct cost related to the negotiation of the lease and payment by the company. With respect to capital leases, the lessee is required to separate the interest on the lease liability and the amortized right-to-use assets on the statement of comprehensive income. The payment of interest on the lease liability and lease payments are recorded in the operating activities of the statement of cash flows. The principal portion of the lease payment will be recorded within the financing activities section of the statement of cash flows.

From viewing the Fixed, Variable and Marginal Cost video, the several fixed costs associated with operating an automobile is interest on the bank or car notes, payment loans, insurance, taxes, license, registration, and depreciation. Seeing that fixed costs are defined by our textbook as short-run expenses that will remain constant and cannot be avoided or changed in the short run (Amacher & Pate (2013)). In this case, an owner of operating an automobile in effect will become subject to fixed costs anyway to parking its vehicle in their garage or never drives the vehicle. Furthermore, the several variable costs associated with operating an automobile is the gasoline costs, maintenance costs, and depreciation. Given that in our textbook, variable costs are will increase as more output is produced due to additional variable inputs being required as production increases (Amacher & Pate (2013)). In other words, an owner will change the care of operating an automobile based on how much driving or not driving the vehicle over time. Overall, an owner of operating an automobile will be faced with several different fixed costs and variable on a regular.

Adding the estimated 5 year cost of fuel, cost of maintenance, cost of repairs, and the loss of value (depreciation) of the vehicle gives us our estimated ownership costs for a vehicle after a 5 - year period.

There are various issues involved in leases that may affect the interest of the trucking company. The first issue is related to the improvement cost of the leased asset. It is difficult to determine that this cost should be capitalized or should be treated as an expense. The different types of leases can have a significant impact on the financial reporting of the trucking company. “A sales-type lease or direct financing lease is recognized as an asset and liability on the balance sheet, while in an operating lease the rent payment is recognized as an expense”(Lee, 2003). It is also difficult to determine whether a particular arrangement is a lease or a simple business transaction. These issues may affect the profitability of the trucking company.

Also, it is even hard to replace a fully depreciated asset or the lack of capital budget may occur. Sometimes leasing provide several benefits to company such as reducing its cost, provide flexibility to company to avail the opportunity of new technology if needed rather than waiting for getting rid of an old asset in order to buy the new one. Also buying an asset makes companies to be held to a depreciation schedule or the approval of a capital budget for new equipments.

The way that they record depreciation and amortization is by using the straight-line method over the shorter of the estimated useful lives of their assets or the terms of the respective leases. As we have learned, straight-line method is one of the types of ways that a company can depreciate their assets. This method considers depreciation as a “function of time rather than a function of usage.” Because this method is known to be one of the simplest, many companies often use it, including Toys “R” Us. The straight-line procedure is also often considered to be the most conceptually appropriate. The straight-line method often results in a major objection because it rests on two tenuous assumptions. The two include: The asset's economic usefulness is the same each year, and the maintenance and repair expense is essentially the same each period. Another problem that arises from using the straight-line method is that distortions in the rate of return analysis (income/assets)

Before beginning an analysis of a company it is necessary to have a complete set of financial statements, preferably for the pas few years so that historical trends can be obtained. Ratios are a way for anyone to get an idea of the financial performance of a company by using the information contained in the financial statements. Ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage. This document will use a variety of these ratios to analyze the firm, Sample Company, as of December 31,2000.