Analyzing, Interpreting and Cap italizing Operating Leases
The Aeropostale, Inc. 10-K report contains the following footnote relating to leasing activities. This is the only information it discloses relating to its leasing activity.
a. What lease assets and lease liabilities does Aeropostale report on its balance sheet? How do we know?
b. What effect does the lease classification have on Aeropo stale’s balance sheet? Over the life of the lease, what effect does this classification have on the company's net income?
c. Using a 6% discount rate and rounding the remaining lease life to the nearest whole year, estimate the assets and liabilities that Aeropostale fails to report as a result of its off-balance-sheet lease financing.
d. What adjustments would we consider to Aeropostale's income statement corresponding to the adjustments we would make to its balance sheet in part c?
e. Indicate the direction (increase or decrease) of the effect that capitalizing these leases would have profit after tax (NOPAT), net operating assets (NOA), net operating profit margin (NOPM), net operating asset turnover (NOAT), and measures of financial leverage.
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