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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 |
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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.