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Basic Question 16 of 16
Which statement is true?
II. Under a capital lease, the asset turnover ratio is higher.
I. A firm might wish to use a capital lease if it has a high level of debt.
II. Under a capital lease, the asset turnover ratio is higher.
User Contributed Comments 8
| User | Comment |
|---|---|
| lourens | Hope we get the easy ones in exam |
| rocyang | I have to disagree here. For a overleveraged industrial company (a debt-equity ratio over 1) for example. Extra liabilty could make the number look better actually. So for a troubled company like that, they may want to do that. Of course it's not either the prudent or "correct" thing to do, but in real life, a company may have reasons to do that. Anyway, after level 1. I'm done with it. |
| thekobe | the question refers to asset turnover, sales/assets, if you have a CL, the assets increase so the ratio decreases |
| johntan1979 | I love the fact that the CFA exam weeds out the pretenders from those who are serious about it :) |
| philjoe | rocyang is correct, if debt to equity is over 1, adding equal amounts to debt and assets improves your ratios... |
| ascruggs92 | rocyang: This isn't a matter of whether you agree or not, it's a matter of what the notes say. Also, your logic as to why it would benefit an over-leveraged company to use a capital lease is incorrect. Remember that Assets = Liabilities + Equity. When a Capital Lease is initiated, an asset AND a liability of EQUAL value are added to the balance sheet, meaning equity is unaffected. This means that debt (liability) goes up but equity does not, making their debt to equity ratio look worse. Furthermore, if depreciation is accelerated, the asset balance will decline faster than the liability, which again, will make debt to equity look worse. I suggest that if you don't take level 1 if you have no intention of going further. |
| cfastudypl | ascruggs92, you have written like an Accountant. Well done! |
| ashish100 | acscruggs92 taking out his/her exam stress on rocyang great entertainment and wisdom for us. :D |
Your review questions and global ranking system were so helpful.
Lina
Learning Outcome Statements
explain the financial reporting of leases from the perspectives of lessors and lessees
CFA® 2024 Level I Curriculum, Volume 2, Module 8.