Timu Ltd runs a successful chain of fashion boutiques, but has been experiencing significant cash flow problems. The directors are examining a proposal made by an accounting consultant that all the shops currently owned by the company be sold and either leased back or the businesses moved to alternative leased shops. The directors are keen on the plan by are puzzling by the consultants insistence that all lease agreements for the shops be operating rather than finance lease.

Explain the difference between finance and operating lease.

Explain by reference to the requirements of accounting standard why the consultant prefers operating to finance lease.

Describe three disadvantages to the company of entering into finance lease agreements.