Interview Question

HOLT Sector Specialist Co-op Interview(Student Candidate) Chicago, IL

2 firms w/ the same financial results save for the fact

  that one uses operating leases and the other financing leases - does this impact the integrity of the financial reporting? How, if at all?
Answer

Interview Answer

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Firm 1 (op lease): will have arbitrarily increased ROA, distorting the return generated from the operating asset base because the expenditure is an "off-B/S" item per US GAAP; it needs to be capitalized to rectify the distortion.

Firm 2 (financing lease): will have a more accurate ROA but is disadvantaged from the perspective of prospective investors in comparison to Firm 1, due solely to arbitrary GAAP acct method selected my management.

Interview Candidate on Dec 5, 2013

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