andytrader

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.

andytrader

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.

andytrader

According to U.S. GAAP, which of the following would least likely require a lessee to capitalize a lease?

A) The lease term is 75% or more of the estimated life of the leased asset.

B) The present value of the minimum lease payments is 90% or more of the fair value of the leased asset.

C) The lessee has an option to purchase the asset for its fair market value at the end of the lease.

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Under U.S. GAAP, a lease must be capitalized if it contains a bargain purchase option, not just a purchase option.

andytrader

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.

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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.

andytrader

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.

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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.

andytrader

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

A) a lower current ratio.

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

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

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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.

andytrader

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

A) Debt/equity.

B) Asset turnover.

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.

andytrader

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

A) financing cash flow.

B) operating 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.

andytrader

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:

Current Ratio

Debt/Equity Ratio

A) Increase Increase

B) Increase Decrease

C) Decrease Increase

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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.

andytrader

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 debt-to-equity ratio will be higher for a finance lease.

C) The lessee's current 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.