Asked by Brandon Ernst on Jul 08, 2024
Verified
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.
Current Ratio
The current ratio is a liquidity metric that evaluates a company's ability to pay off its short-term liabilities with its short-term assets.
Capital Lease
A lease agreement in which the lessee records the leased asset as if it were purchased.
Operating Lease
A contract in which the ownership of the asset remains with the lessor while the lessee has the right to use the asset, without the option to purchase, for a certain period.
- Identify the differences between operating and capital leases and their repercussions on financial statements.
- Acquire a deep understanding of the effects of lease classification on important financial indicators and organizational fiscal reports.
Verified Answer
BM
Bedel MemmedovJul 09, 2024
Final Answer :
True
Explanation :
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.
Learning Objectives
- Identify the differences between operating and capital leases and their repercussions on financial statements.
- Acquire a deep understanding of the effects of lease classification on important financial indicators and organizational fiscal reports.