Reading 22: Long-lived Assets: Implications for Financial Sta assets, instead, leasing, statements, 2011

土豆妮

Session 5: Financial Reporting and Analysis: Inventories and Long-lived Assets
Reading 22: Long-lived Assets: Implications for Financial Statements and Ratios

LOS e: Discuss the implications for financial statements and ratios of leasing assets instead of purchasing assets.

 

 

The lessee has an incentive to classify a lease as an operating lease, rather than as a finance lease, because an operating lease:

A) has no risk involved because the lessor assumes all risk.

B) does not appear on the balance sheet.

C) has payments that are less than a capital lease's payments.

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Having less assets and liabilities on the balance sheet than would exist if the asset were purchased increases profitability ratios (e.g., return on assets) and decreases leverage ratios (e.g., the debt to equity ratio).

土豆妮

Compared to a finance lease, an operating lease is most likely to be favored when:

A) management compensation is not based on returns on invested capital.

B) the lessee has bond covenants relating to financial policies.

C) at the end of the lease, the lessee may be better able to sell the asset than the lessor.

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If the lessee has bond covenants (e.g., debt-to-equity ratio) relating to its financial policies that it must follow, it is best to have an operating lease due to the fact that the operating lease will keep the asset off of the balance sheet resulting in less liabilities.

土豆妮

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

B) lease contains a bargain purchase option.

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

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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.