The most likely impact on a lessee’s financial sta

Ans: A.
Although the annual lease expense in any given year is different between an operating and a finance lease, over the life of the lease (lease term) both methods will result in the same total lease expense.
B is incorrect. Under a finance lease, only the interest payments are outflows from operating activities, while the principal payments are outflows from financing activities. All operating lease payments are outflows from operating activities, resulting in lower operating cash flows during the lease term if the lease is an operating lease.
C is incorrect. Operating profit margins are higher (rather than lower) during the entire term of a finance lease because only the related depreciation expense, rather than the entire lease payment is included in operating expenses. However, the interest portion of the payment is reflected in pretax earnings and net profit margins, both of which will be lower in the early years of a fiancé lease as the combined deprecation and interest expense will be in excess of the lease payment.