Operating vs Finance Lease CFO net, financing, principal, interest

hanvinh

Operating lease - rent expense all CFO payment large outflow
Finance Lease - payment split interest expense CFO (small) principal paid CFF (large)
When asked " recognition of a lease as an operating lease opposed to direct financing lease by the lessor will most likely result in a higher..?

a) net income
b) total debt
c) CFO

answers C . Having hard time in exam questions if its asking is the CFO outflow higher (which c is the answer in this case) or is total remaining CFO larger which it would be for a finance lease bc the CFO outflow is very small. Anyone help me differentiate between the 2?

Thanks

johnnyBuz

beatthecfa you're the man... thx for checking in!

Micholien

if the business existed solely to lease equipment to people would the cash flows be effected?

in operating lease the payment is a CFO inflow. for a finance lease the principal is CFF inflow and then the interest is CFF or CFO inflow depending on whether the firm is us gaap. but if the business solely leased as its operations and reported under us gaap would that change things?



Edited 2 time(s). Last edit at Tuesday, November 30, 2010 at 12:30AM by BayStreet.