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Module 11: Adjusting Enterprise Operations Andrew DePalma

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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  1. Module 11: Adjusting Enterprise Operations Andrew DePalma

  2. 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

  3. Operating Leases

  4. 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.

  5. Operating Leases • A&F leases property for its stores under operating leases

  6. 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%

  7. 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

  8. 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

  9. Journal Entry

  10. Share-Based Compensation

  11. 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

  12. A&F ESO

  13. A&F ESO

  14. 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

  15. Questions???

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