标题: Reading 22: Long-lived Assets: Implications for Financial Sta [打印本页]
作者: 土豆妮 时间: 2011-3-7 15:52 标题: [2011]Session 5-Reading 22: Long-lived Assets: Implications for Financial Sta
Session 5: Financial Reporting and Analysis: Inventories and Long-lived Assets
Reading 22: Long-lived Assets: Implications for Financial Statements and Ratios
LOS f: Discuss the implications for financial statements and ratios of finance leases and operating leases from the perspective of both the lessor and the lessee.
Which of the following statements that classify a lease as a finance lease under U.S. GAAP is least accurate?
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A) |
Title is transferred at the end of the lease period. | |
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B) |
The present value of the lease payments is at least 80% of the fair market value of the asset. | |
|
C) |
A bargain purchase option exists. | |
For a lease to be classified as a finance (capital) lease the present value of the lease payments must be at least 90% of the fair market value of the asset.
作者: 土豆妮 时间: 2011-3-7 15:52
The Mader Corporation leases an asset for five years with lease payments of $10,000 per year. If Mader classifies the lease as a finance lease, which financial statements are affected at the end of the first year?
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A) |
Statement of cash flows, income statement, and balance sheet. | |
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B) |
Income statement and balance sheet only. | |
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C) |
Income statement only. | |
The classification of a lease as a finance lease creates an asset, a debt obligation, financing cash flows (amortization of the loan), and operating cash flows (interest expense).
作者: 土豆妮 时间: 2011-3-7 15:53
For a finance lease, the amount recorded initially by the lessee as a liability will:
|
A) |
be less than the total of the minimum lease payments. | |
|
B) |
equal the total of the minimum lease payments. | |
|
C) |
equal the present value of the minimum lease payments at the beginning of the lease. | |
With a finance lease, both an asset and liability are reported on the lessee's balance sheet, with lease payments divided between interest and principal components. The future payments on principal and interest must be discounted to present value at the beginning of the lease.
作者: 土豆妮 时间: 2011-3-7 15:53
Which of the following statements regarding finance and operating leases is least accurate?
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A) |
During the life of an operating lease, the rent expense equals the lease payment. | |
|
B) |
Asset turnover is higher for the lessee with an operating lease than a finance lease. | |
|
C) |
For financial reporting of finance and operating leases, no entry is required on the lessee's balance sheet at the inception of the lease. | |
If the lease is an operating lease there is no entry made on the balance sheet for the lessee. For finance leases, the leased asset and liability are recognized on the balance sheet by the amount equal to the present value of the minimum lease payments using as the discount rate the lower of the lessor's implicit rate or the lessee's incremental borrowing rate.
作者: 土豆妮 时间: 2011-3-7 15:53
Which of the following statements about leases is least accurate?
|
A) |
In the first years of a finance lease, the lessee's current ratio is greater than it would have been had the firm used an operating lease. | |
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B) |
In the first years of a finance lease, the lessee's debt to equity ratio is greater than it would have been if the firm had used an operating lease. | |
|
C) |
All else equal, when a lease is capitalized the lessee's income will rise over the term of the lease. | |
From the lessee's perspective, if a lease is considered to be a finance lease instead of an operating lease, then the lessee's current liabilities will be greater until the lease has expired. This will result in a lower current ratio (larger denominator).
In the early years, the capitalized lease expense (interest plus depreciation) is greater than in the later years because interest expense decreases over time. Less expenses = more income.
In the first years of a finance lease the lessee's debt to equity ratio will be greater than if the firm had used an operating lease because in the case of the finance lease, the numerator is comprised of (debt + lease), while the numerator in the case of the operating lease is (debt) only. In addition, the greater capitalized lease expense flows through to decrease shareholder's equity (the denominator).
作者: 土豆妮 时间: 2011-3-7 15:53
Which of the following statements about the impact of leases on the financial statements of the lessee is least accurate?
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A) |
Net income is lower in the early years of a finance lease than an operating lease. | |
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B) |
Cash flow from investing is higher for a finance lease than an operating lease. | |
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C) |
A finance lease results in higher liabilities compared to an operating lease. | |
Cash flow from investing is not affected by a lease being either a finance or an operating lease. Finance leases reduce cash flow from operations by only the portion of the lease payment attributed to interest expense. Cash flow from financing is reduced by the rest of the finance lease payment which is the principal part of the payment.
作者: 土豆妮 时间: 2011-3-7 15:54
Which of the following statements regarding the effect of a finance lease on the lessee's statement of cash flows is least accurate?
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A) |
The rental expense serves to reduce the cash flow for financing because it is an investment expense. | |
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B) |
The change in the finance lease liability on the balance sheet is a cash flow from financing. | |
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C) |
The interest expense portion of the lease payments reduces cash flow from operations. | |
In finance leases, there is only interest expense and principal repayment. Rental expense is only charged when the lease is an operating lease.
作者: 土豆妮 时间: 2011-3-7 15:54
Under a finance lease (versus an operating lease) which of the lessee's financial ratios will be higher?
The debt/equity ratio will be higher because the finance lease requires the creation of a long-term liability on the balance sheet.
作者: 土豆妮 时间: 2011-3-7 15:54
Which of the following statements about leasing is least accurate?
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A) |
Firms that capitalize their leases will have lower current ratios and higher debt to equity ratios than firms that structure their leases as operating leases. | |
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B) |
If the lessor is only financing the purchase of an asset, the lease is considered to be a direct financing lease and gross profits are recognized at the inception of the lease. | |
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C) |
The interest rate implicit in a lease is the discount rate that the lessor used to determine the lease payments. | |
With a direct financing lease, the lessor recognizes profit as interest revenue over the life of the lease. A sales-type lease allows the lessor to recognize profits at the lease inception.
作者: 土豆妮 时间: 2011-3-7 15:54
Which of the following statements regarding a direct financing lease is least accurate?
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A) |
The principal portion of the lease payment is a cash inflow from investing on the lessor's cash flow statement. | |
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B) |
Interest revenue on the lessor's income statement equals the implicit interest rate times the lease payment. | |
|
C) |
The lessor recognizes no gross profit at the inception of the lease. | |
Interest revenues are calculated by multiplying the implicit interest rate by net receivables at the beginning of the period.
作者: 土豆妮 时间: 2011-3-7 15:55
If a lessee enters into a finance lease rather than an operating lease, it can expect to have a:
|
A) |
higher return on assets. | |
|
B) |
higher debt-to-equity ratio. | |
|
C) |
lower debt-to-equity ratio. | |
Leasing the asset with an operating lease avoids recognition of the debt on the lessee’s balance sheet. Having fewer assets and liabilities on the balance sheet than would exist if the assets were purchased increases profitability ratios (e.g., return on assets) and decreases leverage ratios (e.g., debt-to-equity ratio). In the case of a finance lease, the assets are reported on the balance sheet and are depreciated.
作者: 土豆妮 时间: 2011-3-7 15:55
For a given lease payment and term, which of the following is least accurate regarding the effects of the classification of the lease as a finance lease as compared to an operating lease?
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A) |
The lessee's asset turnover will be lower for a finance lease. | |
|
B) |
The lessee's current ratio will be higher for a finance lease. | |
|
C) |
The lessee's debt-to-equity ratio will be higher for a finance lease. | |
The lessee's current ratio will be lower because the current portion of the finance lease increases current liabilities, hence reducing the current ratio.
作者: 土豆妮 时间: 2011-3-7 15:55
If a lease is treated as a finance lease, as compared to being treated as an operating lease, the effect on the lessee's current ratio and the debt/equity ratio will be an:
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Current Ratio |
Debt/Equity Ratio |
With finance leases the lessee's assets, current liabilities, and long-term liabilities will be greater than if the lease was an operating lease. With the debt to equity ratio, the liability is in the numerator, which results in an increase in the ratio. With the current ratio, current liabilities are increased and are in the denominator which results in a decrease in the ratio.
作者: 土豆妮 时间: 2011-3-7 15:55
On the lessee's cash flow statement, the principal portion of a finance lease payment is a:
The principal portion of a finance lease payment is a financing cash outflow for the lessee. The interest portion is an operating cash outflow.
作者: 土豆妮 时间: 2011-3-7 15:56
Under an operating lease (versus a finance lease) which of the following is higher for the lessee?
|
A) |
Cash flow from financing. | |
|
B) |
Cash flow from operations. | |
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|
The lessee's cash flows from financing will be higher for an operating lease because the payments made for an operating lease are operating cash outflows, not financing cash outflows. The payments made under a finance lease are split between interest paid and principal. The latter is charged to cash flow from financing.
作者: 土豆妮 时间: 2011-3-7 15:56
Compared to an operating lease, a lessee using a finance lease is least likely to have:
|
A) |
a lower current ratio. | |
|
B) |
higher cash flow from financing during the lease period. | |
|
C) |
lower net income in the earlier years of the lease. | |
Since a portion of the lease payment is treated as repayment of principal under a finance lease, cash flow from financing will be lower.
作者: 土豆妮 时间: 2011-3-7 15:56
Classifying a lease as an operating lease for a lessee, as opposed to a finance lease, will result in:
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Current Ratio
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Debt/Equity Ratio
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Asset Turnover Ratio
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For a lessee using operating leases, the current ratio will be higher, the debt/equity ratio will be lower, and the asset turnover will be higher than they would be with finance leases. With operating leases, assets and liabilities are lower.
作者: 土豆妮 时间: 2011-3-7 15:57
An analyst compares two companies that are identical except that Company X uses finance leases and Company Y uses operating leases. The analyst would expect Company X’s debt-to-equity ratio, relative to Company Y’s, to be:
Lease capitalization adds both current and noncurrent liabilities to debt, resulting in a corresponding increase in the debt-to-equity and other leverage ratios. Thus, Company X’s (Debt + Lease)/Equity is greater than Company Y’s Debt/Equity.
作者: 土豆妮 时间: 2011-3-7 15:57
In a sales-type lease, a lessor recognizes a gross profit at the inception of the lease equaling the:
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A) |
sale price of the leased asset plus the present value of the minimum lease payments. | |
|
B) |
present value of the minimum lease payments less the cost of the leased asset. | |
|
C) |
sale price of the leased asset less the present value of the minimum lease payments. | |
In a sales-type lease, the implicit interest rate is such that the present value of MLP is the selling price of the asset. At the time of the lease inception, the lessor will recognize a gain equaling the present value of the MLPs, less the cost of the leased asset.
作者: 土豆妮 时间: 2011-3-7 15:57
In a direct-financing lease, the implicit rate is such that the present value of the minimum lease payments:
|
A) |
equals the sale price of the leased asset. | |
|
B) |
is lower than the cost of the leased asset. | |
|
C) |
equals the cost of the leased asset. | |
In a direct-financing lease, the implicit rate is such that the present value of the MLPs equals the cost of the leased asset. Thus, at lease inception the total assets do not change and no gain is recognized.
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