CFA Practice Question

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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?

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
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