Question

Using off-balance sheet leases (operating leases) to acquire assets instead of purchasing them (with debt) will tend to:

a. make a company appear more risky than it actually is because its debt ratio will be higher.

b. make a company appear less risky than it actually is because its debt ratio will be lower.

c. affect a company's cash flows but not its degree of risk.

d. have no effect on either cash flows or risk because the cash flows are already in the income statement.

e. affect the lessee’s cash flows but only due to tax

Answer 1

The required answer is option C i.e. affect a company's cash flows but not its degree of risk.

Because in off-balance sheet leases (operating Lease) when assets are acquired then it is not recorded in balance sheet and therefore it does not affect the debt also. it is disclosed in notes to accounts but since payment is goes out therefore it affects cash flow but because it does not affect debt therefore it also does not affect degree of risk.

I hope this clear your doubt.

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