Leases and Changes in Financial Position

Questions - Leases

A. What are the differences between operating and capital leases?
B. Describe the particular leases of your company based on the liability section of your company's balance sheet.
C. What impact have the leases had on the company.s financial statements for the most recent year?
D. Discuss the advantages and disadvantages of leasing a building versus purchasing one.

Questions - Statement of Changes in Financial Position

A. From the perspective of an investor, determine whether or not you would invest in your chosen company based on the company's statement of
changes in financial position (SCFP). Support your opinion.
B. Review the company's SCFP for any concerns that may need to be addressed. As controller of your company, prepare a memo to your CEO, giving a summary report for possible recommendations.

Answers - Leases

Difference between capital and operating leases

On the basis of the lease criteria ownership in the capital lease, the asset ownership may be transferred to the lessee when the lease term comes to an end. In case of the operating lease, the ownership is possessed by the lessor it can be during or after the lease term comes to an end. Secondly, the capital lease includes a bargain purchase option in it and operating lease does not include bargain purchase option (Altamuro and et. al, 2014). Thirdly, the capital lease can be transferred to the lessee and they pay the taxes, maintenance and insurance associated with it and the benefits and risks remain with the lessor in case of the operating leases. Fourthly, in the capital leases the lessee is regarded as the owner of the machinery and so they can claim the depreciation and for the operating lease, the lessee is regarded to be renting the particular machinery so the lease payment is considered as the expense of a rental.

Specific leases of the company with regards to their liability section of balance sheet

It has been observed and witnessed that the balance sheet consists of both non-current liabilities as well as the current liabilities. It is the obligations and debts that are owned by the organization. Throwing light on the above-mentioned statement it can be said that Walmart is engaged in construction with regards to the lease stores.  The payments made by the company are based on some of the structural elements. However, when the project of the lesser is completed then Walmart conducts a sale-leaseback analysis for identifying if the assets and the related financing duty can be again recognized from the consolidated balance sheet of the company (Chan, 2011). If the company has continuous involvement then the related financing duty and the leased assets stay on the consolidated balance sheet of Walmart and it is naturally wiped out over the lease term. Arguably, the biggest liability of the company is identified as the labor costs.

Impact of leases on the financial statement of the company

The leases impact on the financial statement of the company to a large extent. The lessee of the company records the payments with regards to leasing as a part of their rental expense in the income statement. It has been already mentioned that the company is associated with the operating leases hence every lease payment of Walmart goes in their income statement as an expense related to the rent. It is an advantage for the company that they are not associated with the capital leases because they are more complicated and rigid than the operating leases. 

Disadvantages and advantages of leasing a purchasing and leasing a building 

The advantages of purchasing a building are Tax deductions, the increasing rent does not need to be paid, the value of the building will grow in the future, and the business also gets a permanent location (Dhaliwal, Lee, and Neamtiu, 2011). Disadvantages: A lot of responsibilities come after purchasing the building, the insurance cost and property taxes increases, the location value degrades. On the other hand, the advantages associated with leasing a building are: No down payment involved, no maintenance and repairs costs, the tax payments are also lowered, and the time taken is less than the time taken when a building is purchased. Disadvantages: The lease increases from time-to-time, there is little control over the property, there is no equity in the building and also little space for any growth. After observing the advantages and disadvantages associated with buying and leasing a building it is advisable that a company must consider both when they are taking a decision.

Answers - Statement of Changes in Financial Position

Investment in the company on the basis of their financial position

The investment could have been better if the investment is done at Walmart earlier. It has been witnessed that the stock prices of the company struggled a lot from the year 2009 and since then the company is underperforming. Arguably, although the company is underperforming still their shareholder value is increasing day-by-day. On the other hand, observing the statement of changes in financial position of Walmart it can be said it is a good time for the investment. 

Reviewing the statement of changes in financial position and recommendations

From the statement of changes in financial position, it can be concluded that the company needs to give special attention to the current and the non-liabilities section as it has been observed that the above-mentioned liabilities have been decreased at an alarming rate from the year 2015. As a controller of the company it is advised to the CEO of Walmart to give required attention to these segments otherwise their total liabilities are also decreasing.

References

Altamuro, J., Johnston, R., Pandit, S. S., and Zhang, H. H. (2014). Operating leases and credit assessments. Contemporary Accounting Research, 31(2), 551-580. 
Chan, A. (2011). Walmart in China. New York: Cornell University Press. 
Dhaliwal, D., Lee, H. S., and Neamtiu, M. (2011). The impact of operating leases on firm financial and operating risk. Journal of Accounting, Auditing & Finance, 26(2), 151-197.  

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