If a company that leases equipment from another company records these leases as operating leases rather than capital leases, its:

I. recorded liabilities will be lower.
II. recorded assets will be higher.
III. total cash flows will be higher.
IV. leverage ratios will be higher.

A)I and III
B)II and IV
C)I only
D)II, III, and IV

Question

If a company that leases equipment from another company records these leases as operating leases rather than capital leases, its:

I. recorded liabilities will be lower.
II. recorded assets will be higher.
III. total cash flows will be higher.
IV. leverage ratios will be higher.

A)I and III
B)II and IV
C)I only
D)II, III, and IV

Quizplus · Accepted Answer

If a company records leases as operating leases rather than capital leases, it means that the company is not recognizing the leased equipment as an asset or liability on its balance sheet. Therefore, the recorded liabilities will be lower (Choice I), but the recorded assets will not be higher (Choice II) as they are not recognized on the balance sheet. Additionally, the total cash flows will not be higher (Choice III) as the lease payments will still be recorded as outflows of cash. Lastly, the leverage ratios will not be higher (Choice IV) as the debt-to-equity ratio will not be affected by the lease accounting treatment.

If a Company That Leases Equipment from Another Company Records