Final exam Coursework Example | Topics and Well Written Essays - 1000 words

Final exam - Coursework Example Financial leases are referred to as long-term debts and are included in the balance sheet while operating leases are referred as operating expenses and can be excluded from the balance sheet (Needles & Powers, 2012). II). Capitalizing of leases and related assets have several benefits. Use of long-term leases ensures that payment is paid in full as agreed since there is no cancelation of the agreement. In addition, the payment period is almost the same with the useful life of the asset. It also provides the lessee with the option of buying the asset at a nominal value at end period due to the agreement (Needles, & Powers, 2012). A long-term lease costs less than a short-term lease and does not require immediate payment as rental payment is deducted in full for tax purposes. Use of short-term lease however allows the risk of ownership to remain with the lesser and the lease period is shorter than the useful life of the asset (Needles, & Powers, 2012). Leases however have various disadvantages which include the following. There must be payment of interest regardless of the economic position of the company. Secondly the interest rates are fixed and do not consider the economic condition of the firm. However, excessive lease increase the risk of shareholders hence reducing the share prices (Needles, & Powers, 2012). 3). Interest expense should be deducted from the operating cash flows. The University of Le Verne M.B.A is right. According to Brigham & Earnhardt (2013), interests should not be included in calculating cash flows of a project. This is because the project cash flows are discounted by risk involved in the cost of capital interest being expenditure. The cost of financing a project may either be in the form of interest expense, debt financing, or dividends from shareholders. Excluding cost such as interest expense in the calculation of cash flows may seem to be illogical but it is