Module 11 adjusting enterprise operations andrew depalma
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Module 11: Adjusting Enterprise Operations Andrew DePalma. Adjusting Enterprise Operations. Inventory method A &F does not use LIFO, therefore no adjustment is necessary Operating leases A&F has significant operating leases Special-Purpose Entities

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Module 11: Adjusting Enterprise Operations Andrew DePalma

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Module 11 adjusting enterprise operations andrew depalma

Module 11: Adjusting Enterprise Operations

Andrew DePalma


Adjusting enterprise operations

Adjusting Enterprise Operations

  • Inventory method

    • A&F does not use LIFO, therefore no adjustment is necessary

  • Operating leases

    • A&F has significant operating leases

  • Special-Purpose Entities

    • A&F does not have any special purpose entities

  • Share based Compensation

    • A&F issues stock options, although the company has not issued new options in 3 years


Operating leases

Operating Leases


Operating leases1

Operating Leases

  • Consequences of classifying a lease as operating

    • EATO is higher because reporter NEA is lower

    • Financial leverage ratios are improved

    • RNEA is higher (improves perceived quality of ROE)

    • Rent expense is les that the depreciation and interest expense reported for a capital lease (income is higher in early years)

    • The required NEA composition by the industry play a roll in determining the extent of operating lease utilization.


Operating leases2

Operating Leases

  • A&F leases property for its stores under operating leases


Operating leases3

Operating Leases

  • Discount rate

    • A&F does not disclose capital leases

    • A&F does not have any debt (no recent borrowings involving intermediate-term secured obligations)

    • Estimated discount rate using AA 10-year bond yield 3.34%


Balance sheet adjustment

Balance Sheet Adjustment

  • NEA will be increases by $2,073,412

    • Add to plant, property, and equipment

  • Increase financing liabilities by the same amount

    • This amount is not an enterprise liability

    • $350,546 will be shown as current

    • $1,722,865 will be show as noncurrent


Income statement adjustment

Income Statement Adjustment

  • Rent expense of $432,649 needs to be removed from operating expenses

  • Add depreciation expense of $363,397 to operating expenses

  • Classify interest expense of $69,252 as a non operating expense


Journal entry

Journal Entry


Share based compensation

Share-Based Compensation


Share based comp

Share-Based Comp.

  • Additional liability needs to be recognized as employee stock options represent a contingent liability

  • Additional compensation must be recognized

  • Adjustments have an impact of NFL, FEAT, and EPAT


A f eso

A&F ESO


A f eso1

A&F ESO


A f eso2

A&F ESO

  • Due to the poor performance of A&F’s stock, only two adjustments are necessary

    • Decrease EPAT by $84937.5

    • Decrease FEAT by the same amount


Questions

Questions???


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