CFA Practice Question

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CFA Practice Question

An analyst makes the appropriate adjustments to the financial statements of retail companies that are lessees using a substantial number of operating leases. Compared to ratios computed from the unadjusted statements, the ones computed from the adjusted statements would most likely be higher for ______.
A. both the debt-equity ratio and the interest coverage ratio
B. the interest coverage ratio but not the debt-equity ratio
C. the debt-equity ratio but not the interest coverage ratio
Explanation: The adjustments to convert operating leases into capital leases would increase the amount of total debt in the debt-equity ratio, thus increasing the ratio; the portion of the lease payment estimated to be lease interest expense would lower the interest coverage ratio.

User Contributed Comments 1

User Comment
Max-Peter Why do we just increase the amount of debt? Shouldn´t we also increase the amount of assets? If we would have a (real) finance lease, we would Show an asset an a liability on our Balance sheet. Why don´t we do that when adjusting to convert operating lease into finance (capital) lease?
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