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:

Linear

Pertaining to a relationship or an equation that can be represented by a straight line in a graphical representation, illustrating a constant rate of change.

Downward-Sloping

A characteristic of a graph or curve that shows a decrease in one variable in response to an increase in another, commonly seen in demand curves.

Constant Elasticity

A condition in economics where the elasticity of one variable with respect to another is consistent across different levels of those variables.

Linear

Pertaining to something that is straight or sequential, often used to describe processes or relationships that have a constant rate of change.