3. Effects of leasing on financial statements Leasing is often referred to as off-baiance-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? Both the leased assets and the leased liabilities under the lease contract appear directly on the firm's balance sheet. Neither the leased assets nor the leased liabilies under the lease contract appear difectly on the firm's bstance shect: Only the leased assets but not the leased liabilities under the lease contract appears directly on the firm's balance sheet. Onily the leased thabitilies but not the feased assets under the lease contract appear directly on the firm's balance sheet. Consider the foliowing 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 leveroge 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 financtal statement effects of leasing versus purctiasing an asset, review the following case of Hack Wellington Company Hack Wellington Company needs equipment that will cost the company $800. Hack Wellington Company is considering to either purchase the equipment by borrowing $900 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: 1. The company's current debt ratio is 2. If the company purchases the eauipment by taking a loan, the total debt in the balonce sheet will , and the dett ratio will change to 3. If the company leases the oquipment, the company's debt ratio will because the lesse is not capitalized. 4. In this case, the companv's financlal risk will be under a lease acjreement 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