johnnyBuz

Heres a summary dude i hope this helps

CAPITAL LEASE
Balance sheet: Record Asset and Liability. Current Assets are the same but Non Current Assets increase. So does Current Liability and Long Term Debt pending on the lease strructure.

Income Statement: Record interest expense & Depreciationed, Total expenses earlier years is higher thus profits will be lower

Statement of Cashflow: Chashflow is split between operating and finance, Thus CFO is higher because cashflow from operations is lower

OPERATING LEASE
Balance Sheet: NO ENTRY Thus assets and liabilities are lower relative to capital lease

Income Statement: Record Rent Expense

Statement of Cashflows: Entire lease payment is under CFO thus CFO will be lower relative to capital lease

RATIOS ANLYSIS FOR CAPITAL VS OPERATING (Early Years)
Net Profit Margin : Net Income/Sale thus under capital lease Net income will be lower so operating lease will show a higher Net Profit margin (In the earlier years)

Return On Equity: Net Income/Equity, Net income goes down thus capital lease will be lower realtive to operating (In earlier Years)

Asset Turnover: Sales/Assets, Assets up this ratio will be lower under a capital lease

Interest Coverage: Ebit/Int expense, Interest expense up therefore Interest coverage will be lower for a capital lease.

sdada

Chung - based on your explanation do you agree that answer C is least accurate and schweiser is wrong - you wrote "Return On Equity: Net Income/Equity, Net income goes down thus capital lease will be lower realtive to operating (In earlier Years)" which contradicts C and B is actually an accurate explanation.