Help needed please.. Reading 23 (page 320)

CFA Level II FRA
#1

Hello. I would very much appreciate your help.

The question #6 of example 2 in Reading 23 for CFA Level 2 book (page 320) seems to have errors. It says in the solution that “Compared to treating the leases as operating leases (see the reading on long-term liabilities), accounting for leases as direct financing leases increases net income in the early years of a lease but the same total net income is recognized over the lease life. Under direct financing lease accounting, operating cash flow is lower, but investing cash flows are higher.” But, the reading 18 on leasing says that “operating lease shows higher net income in the early years and under finance lease operating cash flow is higher because only interest component of the lease payment is realized in income statement.”

I this these conflict each other. Please help me understand what I’m missing. Thank you.

Joe

#2

Definitely your second quotation is right. The first one should be just the opposite.

#3

Compared to an operating lease, a finance lease will result in higher assets, liabilities, leverage ratios, operating cash flow, and operating income.

A finance lease will result in lower net income in the early years of the lease, lower financing cash flows, and lower working capital and current ratio.

I am not sure where you got this “Under direct financing lease accounting, operating cash flow is lower, but investing cash flows are higher.” I haven’t read the impact of leases on lessee’s CFI. Have you?