Capital Lease Discussion
Hi, I have read through the capital explanations but am still somewhat confused. Why do we not include capital leases as a form of debt? From what I read, you said "Capital leases are capital leases b/c the accountants said so. Else they would be operating leases and off-balance sheet." By this, do ... Hi, I have read through the capital explanations but am still somewhat confused. Why do we not include capital leases as a form of debt? From what I read, you said "Capital leases are capital leases b/c the accountants said so. Else they would be operating leases and off-balance sheet." By this, do you mean that you are trying to get an apples to apples comparison of companies. Because there might be inconsistency between whether firm's capitalize their leases (some might classify their leases as capital leases while others might not), we should simply not include them as debt? If this is the case, then in order to make a comparison apples to apples, why don't we take the opposite approach and simply capitalize the leases of the company that chooses not to? Isn't the whole point of capitalizing leases to make it possible to compare companies apples to apples (one company might issue debt in order to purchase an asset while another might simply lease the asset; by capitalizing the 2nd firm's leases, we can compare them to the other firm in an apples to apples manner because now the decision of whether to lease or purchase does not affect their value)?

Thank you, I greatly appreciate it. Read More

Capitalization of interest
Hi- referring back to accounting bootcamp lectures, can you explain capitalization of interest, how it impacts the financial statements and how it ties in with deferred taxes? Also, if there are any additional videos on this topic, please let me know. Thank you.

Capital and Operating Leases
I am curious if you guys have an opinion on leases and there role in valuation: Do you make adjustments for op leases in EV for multiples? Do they make an impact on your comparison to other similar companies that use cap leases instead? Do you count them in EV in general? Thank you.

RE: Capital leases revisited x2
Capital leases are capital leases b/c the accountants said so. Else they would be operating leases and off-balance sheet. Operating leases are generally not added back to debt for valuation purposes as they are considered operating in nature and not capital structure in nature. See above question on... Capital leases are capital leases b/c the accountants said so. Else they would be operating leases and off-balance sheet. Operating leases are generally not added back to debt for valuation purposes as they are considered operating in nature and not capital structure in nature. See above question on operating leases for more information. Follow-up Question:
I'm in the natural resources group and the analysts in my group and I got in a discussion today about capital leases and total debt. I think from the ratio exercise (where we inputed everything by hand), we excluded capital leases. However, some analysts say that capital leases are added to total debt (in D/E beta calculations), and that capital leases are added back to total debt in credit calculations. Which is correct? Read More

Capitalizing vs Expensing Interest
I am working through the accounting boot camp and have a question regarding the effect on cash flow when interest is capitalized versus expensed. I understand in theory that cash flow is supposedly unchanged in either scenario and that the difference is merely the allocation of the interest (if cap... I am working through the accounting boot camp and have a question regarding the effect on cash flow when interest is capitalized versus expensed.
I understand in theory that cash flow is supposedly unchanged in either scenario and that the difference is merely the allocation of the interest (if capitalized, the interest comes out of CFI, whereas if it is expensed the interest comes out of CFO).
However, I cannot reconcile the two scenarios to have the same cash flow if I go from assuming the expense method to capitalization method. For instance, if I expensed $20 of interest, let’s say my pre-tax income is $100. However, if I instead elect to capitalize that interest and depreciate, say, $8 of it instead, my pre-tax income is now $112. Since the taxes paid in the two scenarios would not be the same, how can the cash flow difference be “negligible”, as Dean Fred Choi would say?
The indirect method of calculating CF points this out immediately, since it begins with net income. For a hard example of this, see Question #3 on slide 265 of the Accounting Bootcamp package. Thanks! Read More