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

Question

Quizplus · Accepted Answer

Operating leases do not appear as debt on the balance sheet, leading to lower reported debt levels. This results in an understated debt-to-equity ratio because the actual financial obligations (lease payments) are not recognized as debt, making the company's leverage appear lower than it actually is.

If a Company Makes Extensive Use of Operating Leases to ﬁNance