1. Effects of leasing on financial statements Aa Aa Leasing is often referred to as off-balance-sheet financing because of the way that the transaction is treated and reported in financial statements. Which of the following statements best describes the characteristics of off-balance-sheet financing? Neither the leased assets nor the leased liabilities under the lease contract appear directly on the firm's balance sheet. Only the leased asset but not the leased liabilities under the lease contract appears directly on the firm's balance sheet. Both the leased assets and the leased liabilities under the lease contract appear directly on the firm's balance sheet. Only the leased liabilities but not the leased assets under the lease contract appear directly on the firm's balance sheet. Consider the following statement on capital leases: Suppose a firm issues new debt to finance a new fixed asset and enters into a lease agreement instead of buying the asset. The firm's financial leverage increases. Such a financial lease should be treated as a loan and capitalized. Is the preceding statement true or false? False True To consider the financial statement effects of leasing versus purchasing an asset, review the following case of Hack Wellington Company Hack Wellington Company needs equipment that will cost the company $600. Hack Wellington Company is considering to either purchase the equipment by borrowing $600 from a local bank or leasing the equipment. Assume that the lease will be structured as an operating lease. Some data from Hack Wellington Company's current balance sheet prior to the lease or purchase of the equipment are: Current assets Net fixed assets Total assets Balance Sheet Data (Dollars) $1,800 Debt 1,200 Equity $3,000 Total claims $1,500 1,500 $3,000 1. The company's current debt ratio is F 2. If the company purchases the equipment by taking a loan, the total debt in the balance sheet will and the debt ratio will change to 3. If the company leases the equipment, the company's debt ratio will because the lease is not capitalized. 4. In this case, the company's financial risk will be under a lease agreement as compared to the financial risk in purchasing the equipment by taking a loan. 5. However, if the lease is capitalized, the financial risk under the lease agreement will be as compared to the risk in buying the equipment