It is important to understand the nature of leases and how companies account for them, because the accounting choices related to leases can dramatically change the amounts of their long-term assets and long-term liabilities. For instance, Whole Foods Market, Inc. (ticker WFM), a retailer of natural and organic food, has substantial leases that are not included on its Balance Sheet. Had these leases been included on its Balance Sheet, the firm’s total assets would almost double and thereby dramatically lower the firm’s return on assets. It would also more than double the firm’s apparent financing from debt and make the firm appear much riskier.1 The different types of leases and how the accounting for them affects financial statements ...
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