• Because of diversification in operation, it is challenging for firms to develop meaningful industry averages for comparing purposes.
• Different operating and accounting practices misrepresent comparisons. Different firms employ operating leases to different extents, and this could distort comparisons of profitability ratios, asset turnovers, leverage levels, etc. Similarly, differing practices regarding inventory values, depreciation methods, and provisions for doubtful accounts receivable could also invalidate comparisons. For example, Garden State’s debt ratio in 1992 is almost 60 percent. However, if the firm has obtained significant amounts of equipment through the use of operating leases, or if it had factored all of its receivables, then its true debt ratio would have been substantially higher.
• Firms comprising the industry average might have different financial year-ends. The industry average might not, therefore, be representative for the specific period under review.
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Profits can also be affected because inflation impacts depreciation and inventories. For example, one reason that Garden State’s level of current assets is growing so fast is that the buildup in accounts receivable and inventories is taking place in "current" dollars. On the other hand, the majority of the firm’s fixed assets may have been acquired several years ago, so the balance sheet values would not reflect the true value of these assets today. This would cause the value of current assets to be overstated relative to that of the fixed
Off balance sheet financing, for instance, operating and synthetic leases, not only overstates corporate earnings and perjures their financial positions, it also allows them to preserve the ratios needed to assure debt contracts. This decreases the authority of such contracts, because the companies are not in reality keeping their debt ratios low; they're lying about the amount of debt they actually have (Edman, 2011).
Certain balance sheet accounts like accounts receivable and inventories are going to be very significant for the computer manufacturer, but relatively immaterial for the hotel. The computer company is also likely to have a higher ratio of sales to fixed assets, or sale to total assets, than the hotel.
Leases are classified into two main types; finance lease and operating lease. The impact of each type of lease on the company’s annual report is different. When accounting for finance leases, for example, the concerned lessee makes recognition of the asset that has been leased in the statement of financial position or balance sheet and consequently charges all other finance charges including the depreciation charges relating to the leased asset on to the statement of income or profit and loss
Cotton, B., McCarthy, M.G., & Schneider, D.K. (2012). A METHODOLOGICAL FRAMEWORK FOR EXAMINING INFORMATION CONTENT OF PROPOSED LEASE ACCOUNTING RULE. Journal of Theoretical Accounting Research, Fall 2012, Vol. 8 Issue 1, 113-127.
Property, plant and equipment are the major source of future service potential to companies. The major objectives of property, plant and equipment accounting is to provide information about companies’ stewardship, accounting for the use and deterioration of property, plant and equipment, plan for project costing and budgeting, provide information for tax authorities, and provide rate-making information for regulated industries (Schroeder, Clark & Cathey, 2010). To help determine how effective and efficient companies utilize their property, plant and equipment, the asset utilization ratios are being calculated. Asset utilization ratio is a measure that determines whether the company is efficiently utilizing its assets to generate income or just wasting it (Hartman, 2015).
Throughout the entirety of the paper I will discuss the purposes of the income statement and the balance sheet; while also identifying the major types of expenses shown on the income statement, and listing major types of assets inside the typical balance sheet. I will also discuss the three different accounts that comprise the owner’s equity on a corporate balance sheet and the three categories of ratios that a business may use in an analysis of its financial statements. Lastly I will explain a statement of cash flows and describe the three standard sections contained in cash flow statements. Since I will be discussing multiple categories, I want to clearly state each one by dividing them into separate sections. Each topic holds dominant relevance to finance and the ability to fully understand a business by comprehending how they work. Having the ability to understand the data projected from a business, is the bone structure for seeing how it grows or regresses. To aid in this understanding I would like to first start off with the income statement.
CHAPTER 21 Accounting for Leases ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis *1. Rationale for leasing. 1, 2, 4 1, 2 *2. Lessees; classification of leases; accounting by lessees. 3, 5, 7, 8, 14 1, 2, 3, 4, 5 1, 2, 3, 5, 7, 8, 11, 12, 13, 14 1, 2, 3, 4, 6, 7, 8, 9, 11, 12, 14, 15, 16 1, 2, 3, 4, 5, 6 *3.
The paper is to discuss some of the major types of statements that are typically used within business firms to keep track of finances. To further explore these statements, the major components will be identified. Different accounts that make up an owner’s equity section on a corporate balance sheet will also be analyzed. Furthermore three categories of ratios that firms use in analysis and their benefits will be examined.
Firm managers, owners, and lenders, keep track of the firm’s performance by reviewing financial statements, income statement, balance sheet, and statement of cash flows. This portfolio will explain the purpose of income statements and the types of expenses that are shown on an income statement. Also, clarify types of assets and claims of creditors and owners shown on a balance sheet. As well as define the three different accounts that comprise the owners’ equity section on a corporate balance sheet. Furthermore, describe a statement of cash flows and the three standard sections contained within it. Finally, identify the three categories of ratios that a business may use in an analysis of its financial statements and the benefits of calculating these ratios.
We can distinguish leases either financial or operational. In existing lease accounting practices, we treat financial leases similar to purchase with cash or on account. On the other hand operational leases do not recognised as an asset in the books of the business but we do deduct lease payments as an expense and it showed up in the income statement. Over the time, the use of operating income increased so much that the academician, regulators and practitioners raised concerns to potential opportunistic use of it by businesses (Altamuro, Johnston, Pandit and Zhang, 2014). In general companies who use operating lease ends up with improved return on assets and debt to equity ratio and therefore better solidity comparing to the companies who do not use operating leases, instead they use
Prior to SFAS No. 13, guidance came from APB No. 5 (Accounting Principles Board 1964), ASR No. 147
Sweeping transformation of current lease accounting rules will have widespread impacts for nearly all companies. Will companies reduce the lease period for a term of less than one year due to the complexity of the new regulation? The globe is dynamics and also the accounting profession has to be dynamic to respond to changes that occur (Dirksen, 31). On that note, the Financial Accounting Standard Board (FASB) has introduced a new regulation on how to account for leases (codes 842-10-15-3). Based on FASB rules, leases are classified as either operating lease or capital lease. The operating lease is usually less than a year and can be canceled at any time; however, the capital lease is completely the opposite. Any rental is considered
Profitability provided a negative relationship with financial leverage while Ratio of Tangibility provided a positive relationship. These both agree with our theory however they were again statistically insignificant and therefore we reject the null hypothesis.
The current FASB accounting standard for leases, based on an ownership model, is noted as one of the clearest examples of a “dysfunctional accounting standard” (Biondi, Bloomfield, Glover, Jamal, Ohlson, Penman, Tsujiyama, & Wilks, 2011). The current standard uses a rules-based approach which has led to widespread nonconformity with standard creators’ intent to have lease contracts reported on the balance sheet. There is even evidence that suggests the lessees classify their leases as operating with the sole purpose of avoiding showing them as an asset and liability on their balance sheet (Ong, 2011). The proposed changes to lease accounting would require companies to recognize assets and liabilities for most leases and has the potential to improve the quality and comparability of the financial statements. Aside from the improvement for financial statement users, this change to lease accounting will greatly impact the financial positions and financial
Leasing is important in an organization whether it a private, public or not-for-profit organization. A lease is said to be a contract in which the customer has the right to use the asset for a period. The international accounting standards board (IASB) and the US financial Accounting Standards Board (FASB) publishes a proposal to improve the reporting of lease contracts. This paper is written base on the analysis of comment letter for the second exposure draft on leases (Topic 842). The organization name Lyles & McCarthy, LLP is an accounting firm and the auditor Larry L Lyles is the editor of the comment letter # 6 .The exposure drafts outlines an approach to lease accounting that would require a lessee to recognize assets and liability for the rights and obligations created by leases. The main objective of this paper is to present the right of use assets and liabilities to make lease payment in a lessee’s statement of financial position for leases in agreement with the revenue recognition and conceptual framework in accounting.