If the firm enters into new leases at the same or increasing rate over time, the reported net income would be Capitalized leases — operating leases a) lower, lower b) higher, higher c) higher, lower d) lower, higher f) same, lower g) same, higher h) lower, same i) higher, same There are so many choices only because i didn’t know if the answer is one from (a-d).
not sure, in general, op leases boost net income in the near term. that is why firms with new, young managers that are eager to beat EPS estimates will pick op leases. Op leases are very prevalent in the retail and airline business. Pull up the 10K footnotes for DKS – Dicks Sporting Goods and you’ll see what I mean : OFF Balance sheet. a good analyst will compute EV + rent/EBITDAR ratios at this pt and see how much debt the stock “really” has
d for early years c for later years same for overall net income
Capital Lease: You capitalize the asset leased. In the income statement you will report both interest expenses and depreciations. In the early years of the lease, they combine to produce a higher expense than it is reported for the operating lease. However, over the life of the lease, total lease expenses is the same for both type of lease. Operating lease: You just “rent” the asset In this case, the lease payment is recorded as rent expense (usually constant over the life of the lease).
“Capital Lease: You capitalize the asset leased. In the income statement you will report both interest expenses and depreciations. In the early years of the lease, they combine to produce a higher expense than it is reported for the operating lease. However, over the life of the lease, total lease expenses is the same for both type of lease. Operating lease: You just “rent” the asset In this case, the lease payment is recorded as rent expense (usually constant over the life of the lease).” PERFECT
If the firm enters into new leases at the same or increasing rate, your net income will be lower under capitalized leases, and it’ll stay lower, and the effect wont reverse unless firms stop entering into new leases. and your net income will be higher so i’d say D.
pepp Wrote: ------------------------------------------------------- > If the firm enters into new leases at the same or > increasing rate, > > your net income will be lower under capitalized > leases, and it’ll stay lower, and the effect wont > reverse unless firms stop entering into new > leases. > > and your net income will be higher > > so i’d say D. Note: At the end of the leasing contract, both capital and operating will have the same cash flow. But only “at the end” and not during the life.
since you are adding more leases, as you reach the end of a previous lease, the new lease effects overwhelms the old lease effect. hence you consistently produce higher net income