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Journal of Applied Research in Accounting and Finance

Vol 2 (2) December 2007



The Effects of Lease Capitalization on Various Financial Measures: An Analysis of the Retail Industry by Charles W. Mulford and Mark Gram

The FASB, in conjunction with the International Accounting Standards Board, is currently in the planning stages of a project that would revise SFAS 13, Accounting for Leases. What is proposed is that leases that are presently accounted for as operating leases, that is, those leases that do not meet the current requirements for on-balance-sheet treatment, would be accounted for as capital leases and brought onto the financial statements. For companies that use a significant amount of operating leases to finance operations, the financial statement impact could be far-reaching, including material effects on various measures of profitability, financial leverage, debt coverage and cash flow.

In this article, we look at the retail industry, an industry that uses operating leases extensively, to evaluate how certain key measures of financial performance and position might be affected by the capitalization of operating leases. Among the findings are an increase in EBITDA, through reductions in income from continuing operations and earnings per share. Financial leverage is increased and debt coverage measures are reduced. Measures of profitability, such as return on assets and return on equity are reduced. Finally, we find an increase in operating cash flow and free cash flow.


An Empirical Evaluation of Sampling Controversies in Ratio-Based Modelling of Corporate Collapse by Gus Hossari, Sheikh F. Rahman & Janek Ratnatunga

Empirical investigations regarding ratio-based modelling of corporate collapse have been on going for decades. With any study of an empirical nature, a data sample is a necessary prerequisite. It allows testing the performance of the prediction model, thereby establishing its practical relevance. However, it is necessary to first ensure that the data sample used satisfies certain conditions, and these have lead to some choice controversies. This paper considers the controversial issues that arise in data sampling, provides a critical evaluation of these issues, and makes choice recommendations on the controversial aspects, by empirically examining the literature.


New Challenges for Performance Management: Exploratory Evidence on Organisational Responses to Identity Fraud by Suresh Cuganesan & David Lacey

Available evidence indicates that identity fraud is a significant risk to organisations. Despite this, a lack of research exists on the role of performance measurement and costing systems in supporting organisational responses to this problem. This paper presents exploratory evidence on the challenges for performance measurement and costing systems if organisational responses to the identity fraud problem are to prove effective.