From the course: Accounting Foundations: Leases
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Adjusted debt ratio and asset turnover ratio
From the course: Accounting Foundations: Leases
Adjusted debt ratio and asset turnover ratio
- Using Company T's reported numbers, we computed the debt ratio and the asset turnover ratio like this. Turns out, the debt ratio was 40% and the asset turnover ratio was 2.5, but we also know that Company T is using a large number of assets under unreported operating lease contracts. These operating lease contracts are also associated with a large amount of unreported liabilities, the obligation to make those future lease payments. The unreported is about $300,000, $300,000 in unreported assets and $300,000 in unreported liabilities. So, what would Company T's debt ratio and asset turnover ratio be if those unreported assets and liabilities were reported? In other words, what would Company T's debt ratio and asset turnover ratio be if there were no such thing as an operating lease, and instead, the accounting rules required all long-term leases, such as these 10-year leases of Company T, to be reported in the balance sheet? Well, we can easily compute the…
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