Q. An oil drilling company has decided to lease an airplane on Jan 1, 2012. The firm and its lessor have not yet decided the terms of the lease. Assume that the terms can be adjusted to permit to either capitalise the lease or record it as an operating lease a. State the effect (higher, lower or equal) of the choice of capitalizing the lease on the following for 2012 (the initial year of the lease). i. Cash flow from operations. ii. Financing cash flow. iii. Investing cash flow. iv. Net cash flow. v. Debt: Equity ratio. vi. Interest coverage ratio. vii. Deferred tax liability. viii. Taxes paid. ix. Pre- and post- tax return on assets. x. Pre and post-tax return on equity. b. Recall the difference between net income under the two methods change direction at some point during the lease term. State which answers to part (a) above will change in the year after the switch occurs and describe the change. c. Assume that the oil company enters into new aircraft leases at a constant annual rate. Describe the effect of the choice of accounting methods on the items in part (a) Q. An oil drilling company has decided to lease an airplane on Jan 1, 2012. The firm and its lessor have not yet decided the terms of the lease. Assume that the terms can be adjusted to permit to either capitalise the lease or record it as an operating lease a. State the effect (higher, lower or equal) of the choice of capitalizing the lease on the following for 2012 (the initial year of the lease). i. Cash flow from operations. ii. Financing cash flow. iii. Investing cash flow. iv. Net cash flow. v. Debt: Equity ratio. vi. Interest coverage ratio. vii. Deferred tax liability. viii. Taxes paid. ix. Pre- and post- tax return on assets. x. Pre and post-tax return on equity. b. Recall the difference between net income under the two methods change direction at some point during the lease term. State which answers to part (a) above will change in the year after the switch occurs and describe the change. c. Assume that the oil company enters into new aircraft leases at a constant annual rate. Describe the effect of the choice of accounting methods on the items in part (a)