The budgetary process in today’s business environment requires a dutiful coordination of a business strategic plan carefully supported by a capital budget (primarily a balance-sheet–planning tool) and an operating budget (typically an income-statement–planning tool) (see Exhibit 26.1).
Typically, top management envisions a strategy, and subsequently subordinates are required to project a capital plan (assets, liabilities, and equity) that will enable the company to march toward fulfillment of the strategy vision. Accordingly, a capital budget is prepared, complete with all necessary asset, liability, and equity elements. Frequently, however, the company prefers to avoid balance-sheet implications by electing to lease assets. Thus, off–balance-sheet financing is selected, the balance-sheet impact is minimized, and the operating budget is impacted. To graphically illustrate the financial statement impact, let us examine Exhibit 26.2.
From a budgetary viewpoint, it thus becomes evident that leases must be analyzed carefully, in order that the proper budgets become impacted. Occasionally, leasing ...