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Question:

Recognition of a lease as a finance lease as opposed to an operating lease by the lessee will most likely result in a higher:

A Debt‐to‐assets ratio.
Explaination

• Under a finance lease, the lessee recognizes an asset and an equal‐in‐value liability on its books at inception of the lease. The percentage increase in debt is greater than the percentage increase in assets (for any company debt < assets). Therefore, the numerator effect dominates and the ratio increases upon recognition of a finance lease.
• Because assets increase upon recognition of a finance lease, ROA falls.
• Because current liabilities also increase upon recognition of a finance lease (current portion of lease obligation), the current ratio falls.