Question

Prior to FASB 13, "Accounting for Leases", lease activity was only reported in financial footnotes. This...

Prior to FASB 13, "Accounting for Leases", lease activity was only reported in financial footnotes. This off-balance-sheet-financing made firms with:

capital leases appear financially stronger than firms that used debt to purchase the asset.

operating leases appear financially stronger than firms that used debt to purchase the asset.

leases of any type appear financially stronger than firms that used debt to purchase the asset

All of these.

None of these.

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Answer #1

The first option is right

Due to off balance sheet reporting, the firms which have capital leases do not show the same in the balance sheet. Hence the asset appears while the debt does not. This makes such firms appear financially stronger than firms which have used debt.

Firms using operating leases will not appear financially stronger since the amount will be reported in the income statement as rent paid for use of the asset. Hence other optionsdont hold true.

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