Another 'wording' question - adjustment for operating lease

something, specified, question

I’m a bit cracked out right now so perhaps I’m missing something that is totally clear to everyone, but, wouldn’t it be clear if they specified what you are adjusting from and to? What throws me off here is that the operating lease, for the lessee, means an outflow in CFO due to the rent expense. That is it. No depreciation. Unfortunately the more I read this answer the more confused I get. If anyone has some pointers, that would be appreciated.
10. XYZ corporation is the lessee in a non-cancelable operating lease. which of
the following best describes the effect of adjusting XYZ’s financial statements
for analytical purposes?
A. the current ratio would increase.
B. the debt-to-equity ratio would decrease.
c. operating profit would increase.
10. C
when adjusting the income statement for an operating lease, the rent expense is added
back to operating income and depreciation expense on the lease asset is subtracted.
the rental payment will likely exceed the implied depreciation expense; thus, operating
income will increase. Interest expense will also be increased by interest on the lease
liability, but this will not affect operating income. the D/e ratio will increase. the
current ratio will decrease because the current portion of the lease liability will increase
current liabilities.

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发表于 2013-4-10 17:40 | 只看该作者

all we are doing is capitalizing a lease. Current ratio goes down, as they say, because you are adding a liability to the denominator. D/E goes up, as they say, because we are adding debt to the numerator.
Capital leases have lower NI in the early years, because you pay more depreciation & interest expense in the early years than you would be paying in an operating lease with just a straight rental payment.
But they are asking about EBIT/Operating Profit, which is pre-interest, so with this capital lease, we don’t subtract interest, we only subtract depreciation to get to operating profit, so therefore operating profit will be higher.
Said differently, with an operating lease, operating profit will be LOWER because you subtract the ENTIRE rental payment to get down to operating profit.
Hope that helps, let me know.

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Another 'wording' question - adjustment for operating lease

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