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Module 11: adjusting accounting information Company: chipotle

Module 11: adjusting accounting information Company: chipotle

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Module 11: adjusting accounting information Company: chipotle

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  1. Module 11: adjusting accounting informationCompany: chipotle Matt Ramirez

  2. Inventory method adjustment

  3. No adjustment needed • Chipotle already uses FIFO: no adjustment needed/not enough information given in footnote to make any other adjustments

  4. Comments on inventory adjustment • Companies need comparability in their inventory costing methods to determine accurate EPAT and NEA and therefore EPM and EATO: adjusting to FIFO increases this comparability • All companies are required to disclose LIFO adjustment under GAAP, making it possible to adjust to FIFO • Adjustments help gain a better understanding of the industry and its environment due to more accurate comparisons

  5. Operating leases adjustment

  6. Future minimum lease payments

  7. Capitalizing the operating leases

  8. Addition to nea

  9. Addition to nfl *178,289 - (2,082,115 x .0425)

  10. Rent expense 2013 Total: 178,395 + 2,719 – 1,726 = 179,388

  11. Epat adjustment

  12. Operating lease adjustment concerns • Virtually no debt = difficulty determining long-term pre-tax interest rate for debt: used credit facility borrowing rate of 4.25% • Incorporating operating leases into NEA & EPAT has significant effect: Net Financial Assets becoming Net Financial Liabilities • Might have significant effect on valuation moving forward

  13. Special-purpose entities

  14. No spe’s • Chipotle does not currently have any SPE’s • The potential benefits of SPE’s (lower cost of debt, better liquidity, mitigation of risks, off-balance sheet transactions, etc.) are not a concern as of now

  15. Share-based compensation adjustment

  16. No adjustment needed

  17. Continued…

  18. Continued… • Chipotle’s “Stock Based Compensation” does not included “Employee Stock Options” (ESO’s): No adjustment necessary • The “Incentive Plan” and “SOSARs” are a means of compensating employees with stock, but do not necessarily add excess compensation (exercise price matches fair value) • No ESO’s means that employees do not necessarily “directly” benefit or can create possible future gains

  19. Final comments • Only adjustment: operating leases to “as if” capital leases • Although only this adjustment was made, it will provide a more accurate forecast and valuation going forward • There is now greater comparability to the rest of the industry which will result in a “better picture” of Chipotle’s progress, productivity, and performance compared to other Specialty Eateries