The CFO of Alberta Country Record Company has decided to use operating leases because this will result in the firm reporting higher net income and lower debt ratios.He feels this will reduce the cost of debt for the firm thereby increasing the value of the firm.If the market is efficient then his statement
A) is a valid reason to use operating leases.
B) is not a valid reason to use operating leases.
C) is incorrect as operating leases result in firms reporting lower net income.
D) is incorrect as lowering the cost of debt will not increase the value of the firm.

Question

Quizplus · Accepted Answer

The CFO's reasoning is flawed, as using operating leases to improve financial ratios without actually decreasing debt is considered a form of creative accounting, which is unethical and may be misleading to investors. The market is not likely to view this favorably, and it may hurt the company's reputation in the long run. As a result, the CFO's logic is not a valid reason to use operating leases.

The CFO of Alberta Country Record Company Has Decided to Use