Schweser Study Notes, Book 3, page 253, says current ratio and working capital are always higher for an operating lease than for a capital lease, and that debt / assets and debt / equity ratios are always lower for an operating lease than for a capital lease. If both assets and liabilities are increased by a capital lease, then how can one be so sure that the current ratio and working capital will be higher for the operating lease, and that the debt: assets and debt: equity ratios will be higher for the capital lease?
op lease = higher net income net income flows into retained earings and then ito “book value” aka shareholders equity. so no debt on the top, more E in the bottom = lower debt/equity. man, you are taking me back to maY!!! i had arrows all over my books indicating what flowed into what. : ) -
daj – how does higher income on operating lease signifies higher current ratio and working capital?
op lease has no interest liability, so CR is higher. CR = CA/CL
i think largely it is bcoz of current portion of finance lease that is absent in operating lease… interest is rather small as compared to current potion of installment…