Financing Activities

Financing Activities Student Name Institution Professor Name Course Date Financing Activities Operating and Capital Leases How Operating and Capital Leases Affect All Three of the Financial Statements Balance Sheet Operating leases affect the balance sheet in the following ways. Firstly, regarding asset and liability recognition, the lease accounting standards require that operating leases be placed on the balance sheet. A right-of-use asset will be recognized, as well as lease liabilities for the lease expenses’ present value (Wahlen et al., 2023). There is an impact on assets- the right-of-use asset increases total assets. There is also an impact on liabilities- a lease liability increases the total liabilities. Capital leases affect the balance sheet in the following ways. On asset and liability recognition, capital leases help lessees in recognizing assets and liabilities in the balance sheet. There is an impact on liabilities- a lease liability is recorded as a long-term liability that represents the future lease payments’ present value (Wahlen et al., 2023). There is also an impact on assets- the leased assets are recorded as fixed assets. Income Statement For operating leases, the lease payment is expensed as an operating expenditure in income statements. It is normally represented as rent or lease expense. With capital leases, firms depreciate assets over their useful lives, and they recognize interest expenditure on the lease liability. Cash Flow Statement Operating activities in operating leases- the lease payment is recorded as an operating activities’ cash outflow. It is included in net income adjustments for operating cash flow (Cheng et al., 2022). Operating activities in capital leases- the lease payment’s interest portion is recorded as a cash outflow from operating activities. How One Method of Accounting might Impact Profitability and Return Measures Profitability Measure Impact Capital leases impact net income- depreciation reduces operating income; interest expense reduces net income. On depreciation and interest, capital leases give rise to the depreciation of leased assets and interest cost on the lease liability. Also, capital leases impact Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). On depreciation and interest, ...