5. Analysis of lessce] The Tolrem Company has decided to lease an airplane on January 1, 2002. The firm and its lessor have not yet decided the terms of the lease. Assume that the terms canbe adjusted to permit Tolrem to either capitalize the lease or record it as an operating lease.

a. State the effect (higher, lower, or equal) of the choice of capi- talizing the lease on the following for 2002 (the initial year of the lease) (i) Cash flow from operations (li) Financing cash flow (iii) Investing cash flow (iv) Net cash flow (v) Debt-to-equity ratio (vi) Interest coverage ratio (vii) Operating income (viii) Net income (ix) Deferred tax asset or liability (x) Taxes paid (xi) Pre- and posttax return on assets (xii) Pre- and posttax return on equity

b. Recall that the difference between net income under the two methods changes direction at some point during the lease term. State which answers to part a will change in the year after the switch occurs and describe the change

c. Assume that Toirem enters into new aircraft leases at a con- stant annual rate. Describe the effect of the choice of account- ing method on the items in part a