If a firm has substantial capital or financing leases disclosed in the notes but not capitalized in the financial statements,then:

Question

Quizplus · Accepted Answer

Capital or financing leases should be capitalized on the balance sheet as a liability, which increases the firm's total debt. If these leases are not capitalized, then the debt ratio will be understated, as the firm's total debt is not being properly reflected on the financial statements. Therefore, choice C is the correct answer. Choices A and B are incorrect because the times interest earned and fixed charge ratios are based on the firm's earnings and cash flow, not its debt. Choice D is incorrect because working capital is calculated using current assets and current liabilities, and capital or financing leases are typically long-term liabilities that would not affect working capital.

If a Firm Has Substantial Capital or Financing Leases Disclosed