As above, i got confused, thanks a lot!
No !
Net Income will be lower for finance lease as compared to operating lease in the early years as sum of depreciation and interest expense will be higher than the operating lease payment.
Interest Factor reduces over time and thus net income will grow at later stages under finance lease.
To answer your question… if the question revolves around “will the net income in the current year be higher or lower if operating leases are treated as financing leases”, then the answer would be yes. In aggregrate, the cash flow will be the same. The net income will appear to be higher in later stages as interest expense reduces over time
so in the earlier years, the expense on financing will be depreciation plus interest expense while the expense on operation will be the lease payment (which inclusive of interest expense implicitly), so these two amounts which one is higher absolutely? Assuming a straighline deprecation scheme, I think the 2 amount of expense in each year will be the same since both are inclusive of interest portion and deprecation portion, only implicitly or explicitly? Also, how is total equity affected by the 2 methods?
Re: your first question, yes. In earlier years, depreciation + interest will be higher than lease payment. You’re incorrect in the assumption of the two amounts being the same. Depreciation and principal paydown (with straight line) will not be the same.