operating lease

(noun)

An operating lease is usually short compared to the life of the asset being leased, and does not result in a change of ownership at the end of the lease.

Related Terms

Examples of operating lease in the following topics:

  • Capital Leases vs. Operating Leases

    • Capital leases and operating leases are two types of leases with different criteria.
    • An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment (an airliner, a ship, etc.) being leased.
    • An operating lease is commonly used to acquire equipment on a relatively short-term basis.
    • Thus, for example, an aircraft which has an economic life of 25 years may be leased to an airline for 5 years on an operating lease.
    • Accordingly, at the end of an operating lease, the lessee has several possibilities:

  • Impact of Leasing on the Income Statement

    • In accounting, leases can be considered either operating leases or capital leases (also called financial leases).
    • When determining whether a lease is capital or operating, the following criteria are useful considerations:
    • Otherwise, it is seen as an expense and filed as an operating lease on the income statement.
    • The lessee records rent expense (debit) over the lease term, and a credit to either cash or rent payable when on an operating lease.
    • For an operating lease - the ownership of the asset is maintained by the lessor and must be represented on the balance sheet as an asset.

  • Advantages of Leasing

    • The main advantage of leasing lies in a business' ability to attain assets without outlaying essential cash.
    • For businesses, leasing property may have significant financial benefits, which are outlined below:
    • Leasing is less capital-intensive than purchasing, so if a business has constraints on its capital, it can grow more rapidly by leasing property than by purchasing property.
    • Leasing shifts risks to the lessor, but if the property market has shown steady growth over time, a business that depends on leased property is sacrificing capital gains.
    • Leasing may provide more flexibility to a business which expects to grow or move in the relatively short term, because a lessee is not usually obliged to renew a lease at the end of its term.

  • Components of the Statement of Cash Flows

    • The cash flow statement has 3 parts: operating, investing, and financing activities.
    • The statement captures both the current operating results and the accompanying changes in the balance sheet and income statement.
    • Non-cash financing activities may include leasing to purchase an asset, converting debt to equity, exchanging non-cash assets or liabilities for other non-cash assets or liabilities, and issuing shares in exchange for assets.
    • Statement of cash flows includes cash flows from operating, financing and investing activities.
    • Recognize how operating, investing and financing activities influence the statement of cash flows

  • Individual Taxes

    • In the United States, there are an assortment of federal, state, local, and special purpose taxes that are imposed by such jurisdictions on individuals in order to finance government operations.
    • Sales tax is an indirect tax levied on the state level, including taxes on retail sale, lease and rental of goods, as well as some services.

  • Political, Country, and Global Specific Risks

    • A restaurant chain leases its space and competes with numerous local businesses, whereas an electronics manufacturing facility requires billions of U.S. dollars for investment.
    • A government could prevent international investment or stop foreign companies from entering and operating within the country.
    • Consequently, a government bargains for control by threatening to shut down operations.
    • Then OPEC operates as a cartel that imposes production quotas on its members.
    • Consequently, corporations claim they do more than earn profits; they benefit the communities where they operate.

  • Operating Margin

    • The operating margin is a ratio that determines how much money a company is actually making in profit and equals operating income divided by revenue.
    • It is found by dividing operating income by revenue, where operating income is revenue minus operating expenses .
    • However, the operating margin is not a perfect measurement.
    • Furthermore, the operating margin is simply revenue.
    • The operating margin is found by dividing net operating income by total revenue.

  • Reporting Financing Activities

  • Uses of the Financial Statement

    • Whether to acquire or to rent/lease certain equipment in the production of goods.

  • Times-Interest-Earned Ratio

    • EBIT = Earnings Before Interest and Taxes, also called operating profit or operating income.
    • It is the difference between operating revenues and operating expenses.
    • When a firm does not have non-operating income, then operating income is sometimes used as a synonym for EBIT and operating profit.
    • The EBITDA of a company provides insight on the operational profitability of the business.
    • When the interest coverage ratio is smaller than 1, the company is not generating enough cash from its operations EBIT to meet its interest obligations.