Compared with firms with capital leases, firms with operating leases generally report
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A. B. C. D.A
The lease payment is an outflow in the CFO section.
Firms with capital leases and firms with operating leases account for lease expenses and cash flows differently in their financial statements. Let's break down the options and explain them in detail:
A. Lower cash flow from operations: This option suggests that firms with operating leases generally report lower cash flow from operations compared to firms with capital leases. This is because under operating leases, lease payments are classified as operating expenses rather than debt repayments. Operating expenses reduce a firm's operating income, which in turn lowers the reported cash flow from operations. Therefore, this option suggests that operating leases have a negative impact on reported cash flow from operations.
B. Lower or higher cash flow from operations depending upon market interest rates: This option states that the cash flow from operations for firms with operating leases can be either lower or higher depending on market interest rates. This is an incorrect statement because the cash flow from operations is not directly affected by market interest rates in the context of lease classification. Market interest rates primarily affect the determination of lease liabilities and interest expenses in the financial statements.
C. Higher cash flow from operations: This option implies that firms with operating leases generally report higher cash flow from operations compared to firms with capital leases. However, this is an incorrect statement. As mentioned earlier, lease payments under operating leases are categorized as operating expenses rather than debt repayments. Operating expenses reduce a firm's operating income and therefore lower the reported cash flow from operations. Consequently, firms with operating leases generally report lower, not higher, cash flow from operations.
D. Identical cash flow from operations: This option suggests that firms with capital leases and firms with operating leases report identical cash flow from operations. This is the correct answer. Firms with capital leases report lease payments as a combination of principal repayments and interest expenses. The principal repayments are classified as cash outflows from financing activities, while the interest expenses are reported as cash outflows from operating activities. On the other hand, firms with operating leases report lease payments as operating expenses, which are considered cash outflows from operating activities. Despite the difference in presentation, the total cash flow from operations remains the same for both types of leases.
To summarize, the correct answer is:
D. Identical cash flow from operations.
Firms with capital leases and firms with operating leases may have different classifications and presentations of lease expenses in their financial statements, but the total cash flow from operations is unaffected by the lease type.