3. Effects of leasing on financial statements Leasing is often referred to as off-balance-sheet financing because of the way that the transaction is treated and reported in financial statement According to the FASB-issued Statement 13, which of the following statements is true? The present value of all past lease payments should be reported as a liability on the balance sheet. The present value of all future lease payments should be reported as assets on the balance sheet. Leased assets should be reported as current assets on the balance sheet. Assets leased under financial or capital leases should be reported as fixed assets on the 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 Mitata Company Mitata Company needs equipment that will cost the company $80. Mitata Company is considering to either purchase the equipment by $80 from a local bank or leasing the equipment. Assume that the lease will be structured as an operating lease. Some data from Mitata Company's current balance sheet prior to the lease or purchase of the equipment are: 1. The company's current debt ratio is 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