In plain English, what exactly is being asked when a question says “operational leases in year ABC is likely to cause”
A) Net Income to be understated
B) Operating Income to be overstated
C) Tax payable to be overstated.
Is understated/overstated merely referring to lower/higher compared to other years, or does understated/overstated imply relative to what the figure should have been if that event had not occured?
NI to be overstated and so C.
Operating lease = decreased cost in the early years=> lower operating income+ higher NI+higher taxes
Just compared to having a finance lease instead really. Since operating leases are lower quality they misstate for analytical purposes. (Just an opinion)
Ah! Thanks guys.
I guess where I am coming from is not really clear. I am not really after the differences between operational and financial lease, but more on how the term “Understated” or “Overstated” is being used without a subject to compare it with. for instance, if i say “Operational Leases in XYZ year will cause Net income to be overstated” does that automatically compare it with say 5 years ago…or does that imply comparison to No leases at all…or does that imply comparision to Financial Leases?
i guess I am just having problems with using relative terms without having a subject of comparision. It’s like saying that “That car will be faster” - can someone please help me understand how that should even make any sense?
That is what I was trying to say. And, again, my reasoning was that since we generally prefer finance leases it is implied that thats what the comparison is being done against when nothing more specific is given.
great, thanks for your help guys.