Capital Budgeting

2489 words 10 pages
CAPITAL BUDGETING PROCESS
HSM 340
3/30/12

Organizations that decide to issue bonds generally have six steps to go through. Let’s discuss them. The first step is for the issuer to select bond counsel and the underwriter or financial advisor. The issuer and the solicitor work with these participants to structure the financing. Some basic questions need to be answered: (1) what is the purpose of the issue -- to fund a capital project, to refund prior debt, or a combination of both (2) what are the legal parameters involved -- does the capital project serve a proper legal purpose, can the debt be refunded under the federal tax rules (3) how should the bonds be sold -- through negotiation with one underwriter or through a bidding
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The accounting for operating leases is quite simple. Because an organization does not own the asset, it is not recorded on the firm’s balance sheet. The only effect that an operating lease has on organization’s financial statements is the lease payments will appear as an operating expense on the entity’s income statement. Since an operating lease is not recorded on the balance sheet, it is sometimes referred to as off balance sheet financing. The main advantage of an operating lease is that the organization can use the asset without the usual attributes of ownership (i.e. the liability that would come with financing an asset and the depreciation expense that would come with an owned asset). Another advantage of an operating lease is that since it is not treated as a liability the organization will maintain their current access to capital. That is because the lease payments are not treated as debt and this helps the organization to maintain their current debt capacity. Thus the organization is able to use the asset to produce revenue, and is able to maintain its current access to the capital markets through debt. (2)
When leasing an asset, most originations would like to keep any leases off their balance sheet, and not show an asset or a liability for the financing of assets (with would occur in ownership of an asset that is traditionally financed). With this in mind the Financial Accounting Standards Board (FASB) in 1976 issued Statement of Financial Accounting

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