...Lease versus Purchase Andrew Senkus, Brent Farmer, Clinton Eubanks, Cynthia Albert, Evan McMurray, & Shante Howard Finance for Business / FIN370 December 8, 2014 Su-Yi Lien Lease versus Purchase When it comes time for a company to make a larger investment, they are faced with the question of purchasing versus leasing. In making this decision a few things must be kept in mind. Leasing assets require a much smaller cash outlay than purchasing the assets. Many times when leasing, a maintenance contract will be included to help with the cost of maintenance. When certain assets are leased, it is possible to deduct the interest of the lease from the company’s tax return. On the other hand buying assets allows the company to take advantage of certain tax depreciation benefits. Once the assets are purchased and paid in full, the company will own these assets free and clear. Therefore, if and when the company decides to sell the assets all of the funds received in the selling of the assets will be profit for the company. A problem from our text will be used to illustrate how a firm might solve this dilemma. The Problem The problem in the text explains that management is looking to acquire assets that have a total cost of $200,000.00. The firm only needs the assets for a total of three years while the assets have an economic life of five years. The firm plans to sell the asset for $50,000.00 at the end of the three years of use. The firm must choose...
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...Lease versus Purchase Paper FIN/370 Lease versus Purchase Paper There are many factors to when one is considering buying or leasing equipment, building or automobile. And the most important primary factor is, should one lease or buy? Lease means to rent the equipment, building or automobile with the option to own the property. While purchasing is to own the equipment, automobile or building. One has to consider how long one is keeping the asset of property, and which option fits one’s needs. There are advantages and disadvantages with both options, and it depends on one’s business or life situation and making the right choice to buy or lease in that given situation. Factors Involved According to BizFilings (2012), when an organization is deciding to lease or purchase assets then there are factors to consider. One way to compare the two would be to do a cash-flow analysis. When doing the analysis one should take into consideration the following factors: 1. Terms of the lease 2. The cost of capital 3. Federal income tax rate 4. State income tax rate 5. Purchasing and financing terms 6. The value of the asset as well as the span it is useful 7. Any other expenditures associated with the lease or purchase During the decision making process, it is also important to consider cash flows and the net advantage of leasing or “NAV”. NAV is defined as, “The money that would be saved by leasing an asset instead of buying it, not taking into...
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...challenging decision facing managers who require capital to fund their business operations (Schroeder, Clark, & Cathey, 2005). Debt and equity are the two main sources of capital available to businesses, and each offers both advantages and disadvantages. This paper will compare and contrast lease versus purchase options, examine debt and equity financing, provide examples for each source of financing, and identify which alternative capital structure is more advantageous. Lease vs. Purchase Options: Compare and Contrast In business the decision to lease or purchase is a critical element of strategic management. Equally important is the way in which the asset will be used. Operating leases are most often used by organizations looking for fixed payments with no long-term risk, and a limited useful life of the asset. Capital leases are more aligned with the features of a conventional purchase. Purchasing often requires a higher monetary expenditure at the start, in addition to acquiring the financing to purchase through a lender. Leasing usually requires a lesser amount of cash down, and the monthly payments are often smaller. Additionally, leasing offers tax benefits because the full lease payment can be immediately deducted, whereas purchasing only allows the interest portion to be deducted. Debt Financing Debt financing occurs when a business raises money for working capital or capital expenditures by borrowing money from individuals, banks, and financial...
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...MANDATES Piec vs. Caisse d’economie polonaise (p. 59) 01-Jul-92 Date of Bad Boy’s forged mandate 15-May-92 Bad Boy gets mandate from Grandma 03-Jul-92 Grandma dies 11-Aug-92 Bad Boy gives forged mandate to bank Bad Boy comes to Canada 18-Aug-92 Bad Boy withdraws $26k payable too cash Grandma = Stephania Wojcicka Bad Boy = nephew Tadeusz Wojcicki Niece (Margaret Wojcicka) is executor of will Facts | * Three mandates: 1. Gma goes on extended trip, gives power of attorney for banking matters to Bad Boy 2. Niece has mandate as executor of the will (mandate only kicks in when Gma dies) 3. Bank has mandate for Gma’s finances * Grandma’s bank account summary: $5 membership, $1k term deposit, $26k term deposit (can’t take out until 26-Oct-92 or wil receive no interest) * Bank didn’t k6now Gma was dead when Bad Boy removed funds | Question | 1. Was bank guilty of not [2138] exercising prudence and diligence for its [2130] mandate? 2. Does the valid mandate authorize the bank to give the term deposits (no) 3. What effect should be given to the letter of july 1st (none) 4. Did the bank owe obligation to grandma, and not rely on the letter (yes, 2138) | Ratio | 1. Argument: Bank is a special type of agent, v. strong fiduciary duties; if they’ve been defrauded they are 100% liable. Answer: Bank should have been more [2138] prudent and diligent; it wasn’t prudent cash out the account, and the bank wasn’t diligent in its duty...
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...This paper will outline the differences in accounting treatment of and criteria for determining whether leases should be accounted for as either a capital lease or an operating lease. I will be limiting my discussion to the accounting treatment of leases by the lessee. This paper will discuss the current accounting treatment for the two types of leases according to Canadian GAAP and will tie in elements of the conceptual framework to the treatment of leases from CICA handbook section 1000, followed by a discussion on accounting theories related to lease treatment, and finally current issues outlined in academic research concerning lease treatment by the lessee. Capital and Operating Leases There are two major classifications of leases. Capital leases and operational leases. A Capital lease is defined in the CICA handbook as “a lease that, from the point of view of the lessee, transfers substantially all the benefits and risks incident to ownership of property to the lessee” (CICA, 2010, Section 3065, ¶3). In order for a lease to be classified as a capital lease, the life of the lease must exceed 75% of the life of the leased item, there must be a transfer of ownership at the end of the lease or a bargain purchase option, and the present value of the lease payments must exceed 90% of the fair market value of the asset (Grossman, A., & Grossman, S., 2010). An operational lease is described by the CICA handbook as “a lease in which the lessor does not transfer substantially...
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...STUDIA UNIVERSITATIS BABEŞ-BOLYAI, NEGOTIA, L, 1, 2005 LEASING, CAPITAL STRUCTURE AND DEBT DISPLACEMENT MARIA – ANDRADA GEORGESCU1 ABSTRACT. Brealy and Young (1980, p. 1249) remind us: “…the use of any lease valuation model involves a general theory of capital structure”. If a user purchase an asset with a given combination of cash and borrowing, there is a clear impact on corporate capital. The impact is not so clear if the user leases the asset. A brief review of the evolution of theories on corporate capital structure – presented by Myers (1984) will assist in our discussion of how leasing analysis “involves a general theory of capital structure”. The work of Modigliani and Miller (1958) concluded that the debt-equity mix made no difference. In 1963, Modigliani and Miller corrected their earlier work by including the effect of taxes and the era of “borrow all you can” began. By the mid 1970’s, “borrow all you can” was being slowly modified by the consideration of agency costs by Jensen and Meckling (1976) and bankruptcy costs. Myers (1977, p. 174) concluded his paper “Determinants of Corporate Borrowing” with “The firm should not attempt to borrow as much as possible”. Turnbull (1979, p. 939) proved “…that for a firm maximizing market value, the optimal capital stucture always occurs before the firm’s debt capacity”2. In other words, if you “borrow all you can” the resulting debt level will be greater than the debt level that maximizes stockholders’ market...
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...CPA REVIEW® NINJA Notes 2015 Financial Accounting & Reporting Table of Contents The N.I.N.J.A. Framework I. IFRS 8 II. Accounting Changes 19 III. Financial Reporting 20 IV. Bonds & Debt Restructure 38 V. Consolidations 47 VI. Deferred Taxes 50 VII. Derivatives, Hedging, & Translation 52 VIII. Fixed Assets 56 IX. Governmental Accounting 62 X. Personal Financial Statements, Segments, & Interim Reporting 73 XI. Partnership Accounting 76 XII. Inventory 79 XIII. Investments 85 XIV. Leases 87 XV. Current Assets & Liabilities 91 XVI. Not-For-Profit Accounting 93 XVII. Pensions 99 XVIII. Statement of Cash Flows 101 XIX. Stockholders’ Equity 103 2 The N.I.N.J.A. Framework NAIL THE CONCEPTS Watch your CPA Review videos first – before working any assigned homework questions. The CPA Review industry says to watch a section of CPA Review video and then work the accompanying MCQs. This perspective stems from the old-school approach to the paper and pencil exam where you had to sit in a live classroom and learn from an instructor on weekends. Today, there is a smarter way to study. You don’t have to go to a weekend live course. You can fire up the laptop on a Tuesday morning and knock out two hours of material before you even brush your teeth. If you work MCQs in week one over your week one topic, guess what? You will work them again in week 5 or 6 when you review because you will forget what you learned. If you watch a video in...
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...Running Head: Choices Buying Vs Renting House English 107-110B-30 Margaret Draper AIU Online ABSTRACT When deciding on buying a house can be confusing. But it if it is a better financial option to move for a family than renting which requires a consideration of cost and options that people often neglect to factor on. Buying Vs. Renting House House is probably the largest purchase that you will have to make in your lifetime, but whether or not, it is very important to make sure you decide which option is better for your family. And making the right decision. Many people prefer the flexibility of renting, and others want to the security of owning their own homes. That is why it is very important to know the advantages and disadvantages of buying versus renting. While deciding to rent or buy housing can be difficult making a decision. This paper will discuss the pros and the cons of each and will have some good research on the personal experience and individual assessment. I believe that buying a house is a much better option. The unemployment rates have increased and therefore there have been a lot of foreclosures on houses. It can be difficult deciding on buying houses. Renting- Advantages * More fixed costs for the term of the house. * Not giving equity but not losing it either * When the lease is up, you can just move. * There is generally less work on maintaining a home or improvement. * Smaller amount of...
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...August 2001 Should I Lease or Buy? Steven W. Martin, Fred Cooke, Jr., David Parvin, and Scott Stiles I NTRODUCTION For many farms, machinery expense is the largest single production expense (Massey). Under current farm financial conditions, producers must search every avenue for opportunities to minimize costs and maximize returns. Producers have three basic options for meeting machinery needs: purchase the needed equipment, lease the needed equipment, or custom hire. Custom hire may work well for certain jobs, but often does not allow the amount of control many operations require. Like purchasing, leasing allows the producer to maintain control of the timeliness and quality of the work conducted on his or her farming operation. Therefore producers should evaluate leasing versus purchasing based on the economic opportunities that each provides. OVERVIEW Most leases consist of four basic components: • Periodic payment • Length of lease • Amount of use (hours, miles, etc.) • Residual Under a standard lease agreement, the lessee (farmer) agrees to pay the lessor (bank, credit corporation, dealer, etc.) a specified amount (payment) at certain intervals over a certain length of time. Three-year leases with annual payments are very common, but any arrangement is possible. The lease will generally specify the amount of annual use permitted under the base contract. Tractor leases often range from 300 to 1200 hours of annual use. The amount needed to purchase the equipment at the...
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...Formal Report Final Draft Jonah Colombo Devry University Author Note This paper is being submitted December 11, 2011 for Instructor Carl Jean’s Technical Writing course at Devry University by Jonah Colombo. December 11, 2011 Tracey Millwood Acquisitions Manager H.D. Heavy Industries 1300 Boss Road Seattle WA 98188 Dear Tracey: Please find enclosed the analysis of buying versus leasing computer and information technology. This is in response to your request that further research be done to find a way to best accommodate our monetary and technological needs. The report will go over several key factors in deciding whether to buy outright or lease our new equipment. I feel this report is as thorough and accurate as I could make it without bias to manufacturer or options. It was a pleasure doing the research into this issue because not only was the information compiled useful in selecting an option, it was educational to me also. I have placed my conclusions and recommendations at the end of the paper for your review. I look forward to hearing from you and how this report has impacted H.D. Heavy Industries transition to a modern age. Please contact me if you have any additional questions or concerns at my office: 678-555-7268 Extension 223. Cordially, Jonah Colombo SUMMARY Our company, H.D. Heavy Industries, is in need of modernizing its communications network and technology. To this end H.D.H.I has asked me to put together a virtual side...
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...NINJA CPA REVIEW® NINJA Notes 2015 Financial Accounting & Reporting (Updated as of July 2015) Table of Contents The N.I.N.J.A. Framework I. IFRS 8 II. Accounting Changes 19 III. Financial Reporting 20 IV. Bonds & Debt Restructure 39 V. Consolidations 48 VI. Deferred Taxes 51 VII. Derivatives, Hedging, & Translation 53 VIII. Fixed Assets 57 IX. Governmental Accounting 63 X. Personal Financial Statements, Segments, & Interim Reporting 74 XI. Partnership Accounting 77 XII. Inventory 80 XIII. Investments 86 XIV. Leases 88 XV. Current Assets & Liabilities 92 XVI. Not-For-Profit Accounting 94 XVII. Pensions 100 XVIII. Statement of Cash Flows 102 XIX. Stockholders’ Equity 104 2 The N.I.N.J.A. Framework NAIL THE CONCEPTS Watch your CPA Review videos first – before working any assigned homework questions. The CPA Review industry says to watch a section of CPA Review video and then work the accompanying MCQs. This perspective stems from the old-school approach to the paper and pencil exam where you had to sit in a live classroom and learn from an instructor on weekends. Today, there is a smarter way to study. You don’t have to go to a weekend live course. You can fire up the laptop on a Tuesday morning and knock out two hours of material before you even brush your teeth. If you work MCQs in week one over your week one topic, guess what? You will work them again in week 5 or 6 when you review because you will forget what you learned. If you watch a video in week one and score...
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...12-32 Operating Leases: Income Effects of Constructive Capitalization Eugene A. Imhoff, Jr.. Robert C. Lipe and David W. Wright Eugene A. Imhoff, Jr. is Professor at University of Michigan, Robert C. Lipe is Associate Professor at University of Colorado at Boulder and David W. Wright is Associate Professor at University of Michigan. SYNOPSIS: Lease contracts written in 1994 in the U.S. have been estimated at over $140 billion (London Financial Group Ltd. 1996). The amount of leasing activity continues to grow, particularly op erating-type leases which provide a source of off-baiance sheet financing. However, a recent publication by an international group of representatives from the FASB and six other national and international accounting standard setting bodies suggests that iease accounting should require alt lease contracts to be capitalized as assets and liabilities (McGregor 1996). This suggestion has also been made by the Association for Investment Management and Research (AMIR) in a December 1993 white paper. A previous Horizons paper by Imhoff et al. (1991) illustrated how to constructively capitalize operating leases. However, this prior study focused exclusively on the balance sheet effects for a single period, and assumed the income statement effects were negligible. The current study cites evidence that suggests the income statement effects may be material, and illustrates how to estimate the impact of constructive capitalization of operating leases on both operating...
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...including application software, and various accessories, through its online and retail stores. iPhone iPhone is the company’s line of smartphones that combines a phone, music player, and Internet device in one product, and is based on the company’s iOS Multi-Touch operating system. Table of Contents Analysis Annual Report for Apple, Inc...........................................................................................1 Works Cited........................................................................................................................... The position of this research paper is to conduct the financial analysis of the Apple Company. The financial analysis of the Apple is based on the financial statement property and equipment, goodwill, intangible assets, depreciation methods, current liabilities, long-term liabilities, bonds payable, and capital leases. Apple Inc. is a company which is formed with the philosophy of continuous innovation. Unlike any other...
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...US GAAP vs. IFRS The basics March 2010 Table of contents 2 5 7 8 11 13 14 16 18 20 26 28 31 33 35 38 40 42 43 44 46 47 Introduction Financial statement presentation Interim financial reporting Consolidations, joint venture accounting and equity method investees Business combinations Inventory Long-lived assets Intangible assets Impairment of long-lived assets, goodwill and intangible assets Financial instruments Foreign currency matters Leases Income taxes Provisions and contingencies Revenue recognition Share-based payments Employee benefits other than share-based payments Earnings per share Segment reporting Subsequent events Related parties Appendix — The evolution of IFRS Introduction It is not surprising that many people who follow the development of worldwide accounting standards today might be confused. Convergence is a high priority on the agendas of both the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) — and “convergence” is a term that suggests an elimination or coming together of differences. Yet much is still made of the many differences that exist between US GAAP as promulgated by the FASB and International Financial Reporting Standards (IFRS) as promulgated by the IASB, suggesting that the two GAAPs continue to speak languages that are worlds apart. This apparent contradiction has prompted many to ask just how different are the two sets of standards? And where differences exist, why do they exist...
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...FI 575 2011 FINANCIAL STATEMENT ANALYSIS J P MORGAN CHASE Vs. CITIGROUP TO : PROF FRANK OWARISH BY : RAYAN SEQUEIRA ZHOUXIA WANG HOMAR WRIGHT DARA SIU WAN HO TABLE OF CONTENTS EXECUTIVE SUMMARY 3 INDUSTRY BACKGROUND 4 COMPANY PROFILE 6 RATIO ANALYSIS 8 ANALYSIS OF OPERATING ACTIVITIES 9 ANALYSIS OF INVESTING ACTIVITIES 11 ANALYSIS OF FINANCING ACTIVITIES 13 COMMON SIZE ANALYSIS 19 DEBT AND EQUITY FINANCING 20 INDUSTRY STANDARDS 22 FUTURE PROSPECTS 23 CONCLUSION 26 REFERENCES 27 APPENDIX 28 Page 2 of 33 EXECUTIVE SUMMARY The financial statement analysis of JP Morgan Chase and Citigroup has been conducted and compared with each other to understand how one is performing in relation to the other. Further, the two companies are also compared against the industry standards to know their positions. Since the two companies operate in the banking industry, they have similar components in their financial statements, which facilitate better comparison of their financial health. For the purposes of the analysis, we have considered the cash flow statements, balance sheet, income statement and the notes to the 10K. Further, the ratio analysis has also been conducted to assess its financial efficiency. JP Morgan Chase used in approximately $3.752 billion cash in its operating activities while the Citigroup provided for $35.686 billion cash for its operating activities....
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