1215

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.

1215

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.