The current ratio will be lower over the lease term when the lessee treats the lease as a capital lease rather than an operating lease.

Question

Quizplus · Accepted Answer

When a lease is treated as a capital lease, the lessee records both an asset (the right to use the leased property) and a liability (the obligation to make lease payments) on their balance sheet. This will decrease the current ratio, as the liability will be classified as a current liability. In contrast, treating a lease as an operating lease means that only the lease payments are recorded as an expense in the income statement, and the current ratio will not be affected.

The Current Ratio Will Be Lower Over the Lease Term