When a firm records a lease as a capital lease:
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A. B. C. D.B
A capital lease is recorded as an asset as well as a liability. The next principal payment to be made on the lease is recorded as current liability (since it occurs within an operating cycle), thus decreasing the current ratio and working capital. The remaining portion is recorded as a long-term liability. Since total assets increase, the financial leverage ratio (assets/equity) increases.