If a company made extensive use of operating leases to finance assets, what would be the effect on the debt-to-equity ratio?
A)The debt-to-equity ratio would be understated.
B)The debt-to-equity ratio would be overstated.
C)The debt-to-equity ratio would not be affected.
D)The effect depends on whether the ratio is above 1 or not.

Question

Quizplus · Accepted Answer

Operating leases are not recorded on the balance sheet as a liability, but only as an expense on the income statement. Therefore, the use of operating leases would result in understating the company's liabilities and the debt-to-equity ratio.

If a Company Made Extensive Use of Operating Leases to Finance