Perform cash flow sensitivity analyses incorporating alternative assumptions concerning revenues, costs, capital expenditures, and other items
We adjust the financial statements (such as for operating leases, LIFO inventory). The objective is to obtain a more complete impression of the future economic situation.
Home Depot Example page 4-11:
Some firms own their equipment, airplanes, and buildings. Others lease these items. With longer term leases, lessees may effectively obtain the risks and rewards of property ownership. Capital lease accounting is prescribed for these leases. The leased property is included with other plant and equipment at the present value of the lease payments. The leased assets are then depreciated, typically over the lease term. The lessee also records a liability also equal to the PV of the lease payments. This liability is reduced as payments are made.
An alternative is to commit to shorter period leases with the intention of renewing upon maturity. In this case, operating lease accounting applies. The periodic payments are recorded as rent expense. Thus, the method used in accounting for leases significantly impacts the financial statements.
Some analysts believe that meaningful comparisons between firms requires adjustments for the effects of accounting differences. To do this, we convert operating lease financial statements to those that would result from capital lease accounting. This procedure essentially equates firms that purchase their property, lease and use capital lease accounting, and lease and use operating lease accounting.
The PV of Home Depots future lease payments on the balance sheet date is $5,934. (This is a required footnote and nearly always appears in the format used by Home Depot.)
We increase operating assets by $5,934 and at the same time, show a lease payable in the same amount. Since the lease payable is not oper View More »