- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 8. Topics in Long-Term Liabilities and Equity
- Subject 3. Accounting and Reporting by the Lessee
CFA Practice Question
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
Correct Answer: All of the above
Short-term liabilities increase for the current principal portion of the lease payment, so the current ratio deteriorates. Long-term liabilities increase, so the debt-to-equity ratio increases, which is unfavorable. The return on asset (ROA) ratio declines because total assets increase.
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 |