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Basic Question 3 of 4
Which of the following statements is true concerning the effect on the lessee immediately after erroneously recording a leased asset as an operating lease rather than a capital lease?
B. The return on equity (ROE) ratio is understated.
C. The debt-to-equity ratio is understated.
A. The return on equity (ROE) ratio is overstated.
B. The return on equity (ROE) ratio is understated.
C. The debt-to-equity ratio is understated.
User Contributed Comments 9
| User | Comment |
|---|---|
| kuan | Does not affect Equity but Asset |
| danlan | Does not affect income neither, so ROE is not changed. |
| danlan | Previous comment may be wrong, it affects income. I think it makes income lower in early stage (because of interest expense), so ROE is understated? |
| Done | C is correct because no entry is made at the inception of the lease. The leasehold asset and leasehold liability equal the PV of the lease payments. I think? |
| mtcfa | I thnk the important factor in this question is the word immediately... the actual lease payment would not be recorded until it actually took place, thereby not immediately affecting net income. The balance sheet items, however, would be affected immediately. |
| malawyer | I support mtcfa - it depends on the timing, just like dividends being declared or paid... |
| antihead | It does affect income and hence the return on equity. however, the question asks what is happening immediately after....at this point the annual depreciation is yet to be made. |
| quanttrader | capital lease - take on debt, op lease - take on no debt |
| gill15 | That is tricky --- to realize that we havent taken depreciation expense into account...good pickup antihead... antihead....haha...best name ever....i needed that cfa break.. |
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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.