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Incorrectly classing a finance lease as an operating lease is likely to have what impact on ratios?
For this qn, the asset turnover will be overstated right ?
Retained earnings will have been reduced by the operating lease payment so shareholders’ funds will be understated
Revenue figure won’t change so asset turnover will be, as you say, overstated
However, if the asset had been correctly treated as a finance lease, there would have been two charges against retained earnings – depreciation and finance lease interest – so, again, retained earnings would be reduced
The difference made by the incorrect treatment is the difference between the combined total of depreciation plus finance lease interest compared with the operating lease payments
i suggest that this difference is likely to be materially insignificant – probably!
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