Magnet Beauty Case Study Example | Topics and Well Written Essays - 750 words

Magnet Beauty - Case Study Example The proprietor behind Magnet Beauty Products Inc. is an entrepreneur called by the name Janette Clark. Her plans for the company collide with the new leasing laws. With a shift in the laws regarding leasing, changes in the lease contracts will have an implication to the income statement, balance sheet and the cash flow statement of the company. The two lease options that are available include a long term lease which will decrease the net income of the company but will reduce expenditure and improve the companies leverage level in case it wanted to sell out. However ,a short term lease will increase the net income of the company but costs will increase annually and the leverage of the company will stagnate. The leasing options provided by the recently reviewed FASB and IASB will ensure that a lease is considered an as an asset in the company’s balance sheet(Epstein et al., p.866) .According to Brigham, Eugene and Joel (p. 630),the capitalization of leases will mean that the benefits of the lease and the rights to use are transferred to the lease holder. This, according to Delaney, Patrick and Ray (p. 442) is capital expensive in the first year, but the expense of the lease declines gradually annually as the lease term expires due to amortization.. As an asset, the valuation of the company will include the leased property. This creates a higher valuation for the company which translates negatively on the profitability and efficiency of the company because the returns on assets will be much less. According to Epstein(p.826) ,for the short term leases under the current proposed leasing laws, the renewable clauses and the leasebacks normally attract an increased percentage in interest for the property value. After five years, with the current interest of property rates at 5%,the cost of property will be 25% more expensive. For Magnet Beauty Products Inc., I would advice that they go