I know that the current ratio is lower under a finance lease when compared to an operating lease due to higher current liabilities.
But why under a finance lease do current liabilities increase by more than current assets increase. I would have thought that current liabilities would increase by the same amount as current assets have increased resulting in no change to the current ratio?
Thanks in advance!
Long-term assets increase by the value of the asset leased (the present value of the minimum lease payments). Long-term liabilities initially increase by the same amount. However, every year the current year’s lease payment is moved from long-term liabilities to current liabilities. Thus, current liabilities increase, but current assets do not.
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nice explanation as always by S2000magician. I was a little confused about this too for some reason