capital lease

Examples of capital lease in the following topics:

• Capital Leases vs. Operating Leases

  • Capital leases and operating leases are two types of leases with different criteria.
  • A capital lease (or finance lease) is a type of lease.
  • Under US accounting standards, a finance (capital) lease is a lease which meets at least one of the following criteria:
  • An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment (an airliner, a ship, etc.) being leased.
  • Unlike a Financial Lease or Finance lease, at the end of the operating lease the title to the asset does not pass to the lessee, but remains with the lessor.

• Impact of Leasing on the Income Statement

  • In accounting, leases can be considered either operating leases or capital leases (also called financial leases).
  • When determining whether a lease is capital or operating, the following criteria are useful considerations:
  • If any one of these criteria are accurate in a given leasing contract, the lease is considered a capital lease and thus will impact the assets and liabilities of the balance sheet.
  • With a capital lease, the lessee does not record rent as an expense.
  • Improvements: If improvements are made, they should be capitalized and depreciated over the lease life.

• Advantages of Leasing

  • Leasing is less capital-intensive than purchasing, so if a business has constraints on its capital, it can grow more rapidly by leasing property than by purchasing property.
  • Capital assets may fluctuate in value.
  • Leasing shifts risks to the lessor, but if the property market has shown steady growth over time, a business that depends on leased property is sacrificing capital gains.
  • Depreciation of capital assets has different tax and financial reporting treatment from ordinary business expenses.
  • Leasing may provide more flexibility to a business which expects to grow or move in the relatively short term, because a lessee is not usually obliged to renew a lease at the end of its term.

• A Bank's Balance Sheet

  • We study the business of banking by examining a bank's assets, liabilities, and capital.
  • Capital equals total assets minus total liabilities.
  • Capital has many names, such as net equity, net worth, or net assets.
  • We labeled this loss - Allowance for loan and lease losses.
  • Bank's net worth or capital becomes the last item on the bank's balance sheet.Capital equals total assets minus total liabilities.All banks organize themselves into corporations.

• Preparation of the Balance Sheet

  • An example of a prepaid expense is the last month of rent on a lease that may have been prepaid as a security deposit.
  • Many small businesses may not own a large amount of fixed assets, because most small businesses are started with a minimum of capital.

• The Marginal Cost of Capital

  • The marginal cost of capital is the cost needed to raise the last dollar of capital, and usually this amount increases with total capital.
  • The marginal cost of capital is calculated as being the cost of the last dollar of capital raised.
  • Generally we see that as more capital is raised, the marginal cost of capital rises .
  • The Marginal Cost of Capital is the cost of the last dollar of capital raised.
  • Describe how the cost of capital influences a company's capital budget

• Decision Criteria

  • The main considerations of working capital management decisions are (1) cash flow/ liquidity and (2) profitability/return on capital.
  • Working capital is the amount of capital which is readily available to an organization.
  • In addition to the time horizon, working capital decisions differ from capital investment decisions in terms of discounting and profitability considerations; they are also "reversible" to some extent.
  • Firm value is enhanced when, and if, the return on capital, which results from working-capital management, exceeds the cost of capital, which results from capital investment decisions as above.
  • Cash conversion cycle is a main criteria for working capital management.

• Cost of Capital Considerations

  • Cost of capital is important in deciding how a company will structure its capital so to receive the highest possible return on investment.
  • One of the major considerations that overseers of firms must take into account when planning out capital structure is the cost of capital.
  • For an investment to be worthwhile, the expected return on capital must be greater than the cost of capital.
  • The weighted average cost of capital multiplies the cost of each security by the percentage of total capital taken up by the particular security, and then adds up the results from each security involved in the total capital of the company.
  • Describe the influence of a company's cost of capital on its capital structure and investment decisions

• Optimal Capital Structure Considerations

  • The optimal capital structure is the mix of debt and equity that maximizes a firm's return on capital, thereby maximizing its value.
  • One of the major considerations that overseers of firms must take into account when planning out capital structure is the cost of capital.
  • For an investment to be worthwhile, the expected return on capital must be greater than the cost of capital.
  • The weighted average cost of capital multiplies the cost of each security by the percentage of total capital taken up by the particular security, and then adds up the results from each security involved in the total capital of the company.
  • Explain the influence of a company's cost of capital on its capital structure and therefore its value

• Long-Term Approach

  • Recognize the broader objectives of working capital, as well as how organizations can consider a long-term perspective when viewing the utilization of working capital.
  • This free working capital can be utilized in a variety of ways.
  • Working capital under-utilized incurs the opportunity costs associated with the time value of money, and organizations must use financial planning to ensure appropriate utilization of this capital over the longer term.
  • From a longer-term perspective, working capital profitability decisions revolve around how much should be available within any short-term time frame in order to maximize the return (on average) of existing working capital.
  • By looking at differences in working capital availability over a long period of historical data, the organization can make rough estimations of the optimal amount of working capital availability that allows optimal growth.