|Author||Topic: Can anyone answer this question?|
I have the following question
David Smith, CFA, suspects that a particular company's interest coverage ration may be overstated compared to that of other companies in the same industry and therefore requires additional adjustment. If the company is a lessee and meanwhile inventory prices and quantities have been decreasing, the accounting methods used for new lease commitments and inventory valuations respectively that are most likely to have overstated the interest coverage ration are:
A: Capital leases and FIFO
B: Capital leases and LIFO
C: Operating leases and FIFO
D: Operating leases and LIFO
I suspect B is the correct answer but where I got the question states D is the correct one, what do you think?
|interest coverage ratio=EBIT/Interest Expense
As EBIT was Overstated so the lease method which has been used is Operational Lease.
,Also inventory prices and quantities have been decreasing so Lifo is utilized by the company.
The D is correct one.
You should read the question carefully( the Last paragraph).
CFA Level II candidate
|kmpake is right, correct answer is D because opernational lease and LIFO both overstate EBIT of the company resulting overstatement of interest coverage ratio.|