Reading 39: Long-Term Liabilities and Leases LOSg习题精选 criteria, following, statements, 2010

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LOS g: Determine the effects of finance and operating leases on the financial statements and ratios of the lessees and lessors.

Which of the following is least likely one of the criteria under U.S. GAAP for classifying a lease as a finance lease? The:

A) lease contains a bargain purchase option.

B) term of the lease is 75% or more of the estimated economic life of the leased property.

C) lessor retains ownership of the property at the end of the lease term.

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If the lease transfers ownership of the property to the lessee at the end of the lease term, the lessee will classify the lease as a finance lease.

 

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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.

C) Assets.

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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.

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Under a finance lease (versus an operating lease) which of the lessee's financial ratios will be higher?

A) Asset turnover.

B) Debt/equity.

C) Return on equity.

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The debt/equity ratio will be higher because the finance lease requires the creation of a long-term liability on the balance sheet.

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Compared to an operating lease, a lessee using a finance lease is least likely to have:

A) higher cash flow from financing during the lease period.

B) a lower current ratio.

C) lower net income in the earlier years of the lease.

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Since a portion of the lease payment is treated as repayment of principal under a finance lease, cash flow from financing will be lower.

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Classifying a lease as an operating lease for a lessee, as opposed to a finance lease, will result in:

Current Ratio

Debt/Equity Ratio

Asset Turnover Ratio

A) Higher Lower Lower

B) Higher Lower Higher

C) Lower Lower Higher

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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.

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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:

A) lower.

B) the same.

C) higher.

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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.

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On the lessee's cash flow statement, the principal portion of a finance lease payment is a:

A) operating cash flow.

B) financing cash flow.

C) investing cash flow.

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The principal portion of a finance lease payment is a financing cash outflow for the lessee. The interest portion is an operating cash outflow.

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Which of the following statements about the impact of leases on the financial statements of the lessee is least accurate?

A) Cash flow from investing is higher for a finance lease than an operating lease.

B) Net income is lower in the early years of a finance lease than an operating lease.

C) A finance lease results in higher liabilities compared to an operating lease.

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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.

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Which of the following statements regarding the effect of a finance lease on the lessee's statement of cash flows is least accurate?

A) The change in the finance lease liability on the balance sheet is a cash flow from financing.

B) The interest expense portion of the lease payments reduces cash flow from operations.

C) The rental expense serves to reduce the cash flow for financing because it is an investment expense.

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In finance leases, there is only interest expense and principal repayment. Rental expense is only charged when the lease is an operating lease.

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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?

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.

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The lessee's current ratio will be lower because the current portion of the finance lease increases current liabilities, hence reducing the current ratio.