What Is the Effect of Classifying a Lease as an Operating

question 98

Multiple Choice

What is the effect of classifying a lease as an operating lease, as opposed to as a finance lease, on the debt to equity ratio and the times-interest-earned ratio?
$\begin{array} { l l l } & \text { Debt to equity ratio } & \text { Times-interest-earned ratio } \\\end{array}$
a) $\begin{array} { l l l } && \text { Overstated } &&&&&& \text { Overstated } \\\end{array}$
b) $\begin{array} { l l l } && \text { Overstated } &&&&&& \text { Understated } \\\end{array}$
c) $\begin{array} { l l l } && \text { Understated } &&&&& \text { Overstated } \\\end{array}$
d) $\begin{array} { l l l } && \text { Understated } &&&&& \text { Understated } \\\end{array}$

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Definitions:

Stockholders' Equity

The residual interest in the assets of a corporation that remains after deducting its liabilities.

Journal Entry

A record in the accounting books of a business that represents a single transaction and its impact on the company's finances.

Journal Entry

A recorded transaction in the accounting records of a company, marking the financial events of a business.

Common Stock

Equity ownership in a corporation, with voting rights and the potential to receive dividends.