Capital Leases, n.d.).
These two have significant impacts on the balance sheet and income statement of the firm. In the balance sheet, the operating lease has no effect while the capital lease shows interest receivable and capital asset with depreciation on the asset side and debt on the liability. In the income statement, both the operating lease and capital lease records an operating expense; the latter also shows interest as revenue. (Operating vs. Capital Leases, n.d.).
Furthermore, capital lease provides more benefits than buying an asset. First, and probably the most important, is cash flow. Capital lease offers a great alternative in preserving the cash flow. It allows the company to have a working asset like equipment by leasing than making an outright purchase. Usually a minimum down payment is required. With a monthly payment of lease, the company has now machinery that can be utilized to increase production and quality of a product while some costs like labor is decreased. Then in the end of the lease, there is an option to return the equipment to the lessor or to buy it. Opting to buy could be beneficial because the company now clearly owns the machinery. Another benefit of leasing is the mitigation of technology risk. When there is growth or change in the business, it may need to add or upgrade its equipment. This allows the company to update the equipment through a favorable strategy;...
Leasing may also provide favorable tax implications. Lease payments are accounted as expenses to offset revenue when the taxable profit is computed in the fiscal or calendar year.
Although leasing presents several advantages, the question whether to buy rather than lease exists. There are yet several factors to that should be taken into consideration. One of which is the fairness of the lease fees. Payments to lease are almost always lower than payments to buy. But a lower lease payment does not always mean a good deal. Lease payments should always be lower than buy payments proportional to the lease residual. The condition of the asset is another factor. Newer and nicer equipments are preferred. But can than company afford the cost of buying a new one?
A lease or a buy that would be made has an impact on the capital budgeting decision of the company. On either decision that will be made, it will entail an outflow of cash. Whatever will be chosen, the main goal is still for the corporation to achieve financial growth and success in the years ahead.
Bibliography
Dictionary. (n.d.). Retrieved November 22, 2006, at http://www.investopedia.com/dictionary/
Operating vs. Capital Leases. (n.d.). Retrieved November 22, 2006, at http://pages.stern.nyu.edu/~adamodar/New_Home_Page/AccPrimer/lease.htm
