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8 Cards in this Set
- Front
- Back
Criteria for Capital Lease
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1. Title of leased asset is transferred at end of lease
2. Bargain purchase option exists 3. Lease period is 75% of asset life 4. PV of lease payments greater than 90% of assets economic value |
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Criteria for Operating Lease
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Doesnt meet any of the 4 criteria for capital lease
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Capital lease characteristics
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Capital leases recognize both asset and liability on balance sheet. Leased asset is then depreciated on the income statement. Lease payment is separated into interest expense and principal payment and CFO is reduced by interest expense and CFF is reduced by principal payment
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Operating lease characterisics
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At inception of lease, no entry is made. Only rent expense (lease payment) is charged to income and CFO during life of lease
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Financial statement impact of Capital lease (compared to operating lease)
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Assets = Higher
Liabilities (current and long term) = Higher NI (early years) = Lower NI (later years) = Higher Total NI = same EBIT = Higher CFO = Higher CFF = Lower Total CF = same |
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Financial statement impact of operating lease (compared to capital lease)
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Assets = lower
Liabilities (current and long term) = lower NI (early years) = Higher NI (later years) = lower Total NI = Same EBIT = lower CFO = Lower CFF = Higher Total CF = same |
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Ratio impact of Capital lease (compared to operating lease)
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Current ratio = lower
working capital = lower Asset turnover = lower ROA = lower ROE = lower Debt/assets = higher Debt/equity = higher |
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Ratio impact of operating lease (compared to capital lease)
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Current ratio = higher
working capital = higher Asset turnover = higher ROA = higher ROE = higher Debt/assets = lower Debt/equity = lower |