CMA Study Group

Hello Members,

Pls advise on answer for below

Rgds

Harsh

Stanford Company leased some special-purpose equipment from Vincent Inc. under a long-term lease that was treated as an operating lease by Stanford. After the financial statements for the year had been issued, it was discovered that the lease should have been treated as a capital lease by Stanford. All of the following measures relating to Stanford would be affected by this discovery

except the

a. debt/equity ratio.

b. accounts receivable turnover.

c. fixed asset turnover.

d. net income percentage.

It should be b. accounts receivable turnover.

i agree but

why not d ?

Hi, The question is asking " All of the following measures relating to Stanford would be affected by this discovery except the... ", for d. Income % would be definitely affected due to change in accounting from Revenue to Capital. That means the operating lease expense (Rent) which was charged earlier to P&L would be added back to Income and depreciation (due to capitalisation of the asset) will be deducted from Income... So it will impact Net Income hence "d" is not the right answer.