Financial Analysis

Financial Analysis

Part A

(a)

This case is an example of Operating Lease rather than Finance lease. The operating lease is a form of lease very similar to rent, but includes many more services. Main features include:

* No fixed lease term, and therefore any right of termination within the timely notice period or

* Very short lease term, within which contract termination is not permitted

* The lessor shall bear the full investment risk and enabled the leased (depreciation over useful life)

* The lessee and the lease payments recognized as an expense

* Additional services such as maintenance and repair borne by the lessor

The balance sheet allocation and activation is the lessor. This depreciates the leased objects over their useful life (depreciation). The lessee may offset the leasing installments paid as an expense (Kevin, 2006).

On the other hand, Finance Lease is a little different as it presents different characterestics. For finance leases, the lessor passed on the investment risk on the lessee. The encoder transmits only the credit risk and any agreed services. The lessee during the lease term does not own the real property asset, when the matter is economically is attributed on its own, as the lessor has no interest in obtaining a return of the property has the goods. After expiration of the lease term, the lessee is usually a contractual purchase option granted to the matter at the price of the residual value. It is, therefore, the financial leasing according to the case for a non-standard lease (installment payment to use the goods) with pass-through of property and price risk on the lessee in connection with a later option to purchase the lower residual value or the purchase price.

Leases are characterized by a fixed basic lease period within which a notice is precluded by the lessee. The main criteria of the finance lease under international accounting standards is that the contract covers the major part of the life of the asset (according to U.S. GAAP / IFRS > 75%) or that the majority of the present value of the leased item is financed through the installment payments ( U.S. GAAP / IFRS > 90%).

These characteristics differ from the finance lease operating lease :

Fixed basic lease term with no right of termination for a material period of useful life

The investment risk is borne by the lessee

In principle, applicable to all goods

Capital and credit risk borne by the lessor

Variety of options after the base lease term (purchase, redemption etc., especially when the transition takes place at special rates)

Action contributes to maintaining the value of the lessee (maintenance, insurance)

Leasing object is a custom-made for the lessee and can not be used by third parties.

Full pay

Due to the diverse possibilities of contracts, it is a clear statement about the balance of the leased property, which is not possible.

(b)

Total Finance Charge

Total Rentals

£40,000 *6

240,000

Total Cost

152,000

Finance Cost

88,000

Annual Allocation

Year 1

(6/21)*88000

25,142.86

Year 2

(5/21)*88000

20,952.38

Year 3

(4/21)*88000

16,761.90

Year 4

(3/21)*88000

12,571.43

Year 5

(2/21)*88000

8,380.95

Year 6

(1/21)*88000

4,190.48

88,000.00

(c)

We used straight line depreciation method to calculate ...