I’m not an accounting major, but I know that for every entry there is an offset such that A = L + SE at all times so if L increases for an operating lease, what’s the other side to balancing? Thanks.
L shouldn’t increase in an operating lease, only a Capital Lease. There should be no balance sheet effects for an operating lease, only income statement effects.
that’s what I thought at first… so the reason why there would be adjustment to the debt ratio is because it *should* have increased debt and interest expense, even though it didn’t?
It would help tp see the question. My guess is that what the question may be asking involves the fact that having the full payment go to the income statement causes lower net income and thereby also affects equity, perhaps?
The question was along the lines if an analyst did adjustments to operating lease, what would happen to the D/E and EBIT/I ratios.
Yea, well i guess what the question is asking is, if the firm has reported an operating lease, that should really be a capital lease, what adjustments should you make, so in that case, increase L, increase A
This is what an analyst should be doing. Essentially - all the Operating Leases - does is go to the Income statement as a period expense, and reduces Net Income. By keeping it off the balance sheet, the Lessee has advantages… Now the company can progressively continue to add more and more operating leases. When an analyst sees such a situation, how should he adjust the accounts, so as to be able to compare companies in the same industry --> is the question. So increase A, Increase L by the Operating Lease - compare the D/E ratio. Earlier the D/E would have been higher – now it would reduce and you would be comparing apples to apples. CP