Case Study: Addison Company

The main purpose of off-balance sheet is to reduce the company’s debt that is below a certain level thus allowing its debt-to-equity ratio to drop significantly. When a company has a favorable ratio, it indicates that company may have a good credit risk. A company that has other debt such as bank loans, the company is required to a maintain a debt-to-equity-ratio commonly known as a debt covenants (Wright, n.d.)
An example of an off-balance sheet financing are operating leases. When a company has operating leases, the lessor will only keep the asset on the company’s balance sheet, whereas, the company leasing the asset is only responsible for reporting the rental expense (Wright, n.d). On the other hand, if a company had a capital lease, this
As part of agreement, the line of credit comes with a financial covenant that requires Addison Company to stay below a 0.5 debt-to-equity ratio. A few years later, Addison Company is interested in buying a new piece of machinery to help speed up the process of making shoes. This new piece of machinery costs around $2,000,000. Since Addison Company does not have enough funds to purchase the new machinery, the company must find another away to obtain this piece of equipment.
For the company to solve this problem, Addison Company must create a separate entity that will purchase the equipment and let Addison Company lease it through an operating lease. Since Addison company is only recording the monthly lease expense on their income statement, the company does not have to record any additional debt on the balance sheet as it does not own the equipment. Therefore, Addison Company will use the concept of off-balance sheeting financing to acquire the asset without having to record the transaction on the company’s balance sheet (Wright, n.d.)
Management Discussion and Analysis:
Although, Home Depot is committed to putting customers first, they want to provide their customers with a seamless shopping experience whether it be online or in their stores (The Home Depot, 2016). Home Depot will update and redesign their company website to provide customers with a better search capability and faster checkout experience (The Home Depot, 2016). To improve their product authority, Home Depot will introduce a variety of new products to their customers such as do-it yourself, do-it-for me, and professional customers, while focusing on the everyday values in their nationwide and online stores across the country (The Home Depot,