Failure to capitalize leased assets and liabilities when they should be capitalized results in a number of distortions in the ROE disaggregation analysis.
Which of the following is not a distortion?
A) Reported expense is lower in the early years of a capital lease relative to an operating lease, but is higher in later years.
B) Net operating asset turnover is overstated due to the non-reporting of leased assets.
C) Financial leverage is understated.
D) All of the above are distortions.

Question

Quizplus · Accepted Answer

Reported expense is higher in the early years of a capital lease relative to an operating lease, but is lower in later years. Capital leases report depreciation (operating) expense and interest (nonoperating) expense; whereas, operating leases report rent (operating) expense only.

Failure to Capitalize Leased Assets and Liabilities When They Should