implicit rate in the lease is the discount rate that the lessor used to determine the lease payments. It is the discount rate that equates the present value of the lease payments to the fair value of the leased asset. By using the minimum of the two discount rates, the lessee increases the present value of the lease payments and increases the amount of the asset and liability that must be recognized under the capital lease.
A lease not meeting any of these criteria is classified as an operating lease and payments made by the lessee are reported as rent expense.
b: Calculate the effects of capital and operating leases on financial statements and ratios.
       
Ratios:
Capital lease
Operating lease
Current ratio (CA/CL)
Lower
Higher
Working capital (CA-CL)
Lower
Higher
Asset turnover (Sales/TA)
Lower
Higher
Return on Assets (EAT/TA)
Lower
Higher
Return on Equity (EAT/E)
Lower
Higher
Debt to Equity (D/E)
Higher
Lower
Statement Totals:
Assets
Higher
Lower
Liabilities
Higher
Lower
Net income (in the early years)
Lower
Higher
Cash flow operations
Higher
Lower
Cash flow financing
Lower
Higher
Total cash flow
Same
Same