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Basic Question 4 of 4
Which of the following ratios or group of ratios deteriorate(s) at the inception of the capital lease when a firm structures its leases as capital leases rather than operating leases?
II. Debt-to-equity ratio
III. Return on assets ratio
I. Current ratio
II. Debt-to-equity ratio
III. Return on assets ratio
User Contributed Comments 9
| User | Comment |
|---|---|
| jwp2 | These ratios deteriorate at the inception of the capital lease. They improve throughout the TERM of the lease. |
| antarctica | debt to equity increases meaning the ratio deteriorates |
| quanttrader | capital lease record more asset and more debt/liab |
| johntan1979 | ROA is lower also because of lower initial NI as a result of higher initial total lease expense (depreciation exp + interest exp) |
| gill15 | I was thinking current ratio increases due to the Asset --- not a CURRENY ASSET I'm still laughing at Antihead's username |
| Shaan23 | Current ratio - That is tricky. Remember that. |
| Teeto | I thought current ratio would not deteriorate at CL VS OL since first operating lease payment is a current liability as well, isn't it? |
| forry9er | @johntan1979 OR even easier, ROA is lower because Assets are higher! |
| Konstantis | Net income at the inception is unaffected |
I used your notes and passed ... highly recommended!
Lauren
Learning Outcome Statements
identify financial reporting choices and biases that affect the quality and comparability of companies' financial statements and explain how such biases may affect financial decisions;
evaluate the quality of a company's financial data and recommend appropriate adjustments to improve quality and comparability with similar companies, including adjustments for differences in accounting standards, methods, and assumptions;
evaluate how a given change in accounting standards, methods, or assumptions affects financial statements and ratios;
analyze and interpret how balance sheet modifications, earnings normalization, and cash flow statement related modifications affect a company's financial statements, financial ratios, and overall financial condition.
CFA® 2025 Level II Curriculum, Volume 2, Module 15.