DESDES Ventures leased equipment from Varesilicons with a fair market price of $4,000,000. The lease is determined to be a finance lease. Over the first year, DESDES pays Varesilicons $500,000, of which $300,000 is interest on the lease and $200,000 goes towards the value of the equipment. The decrease in DESDES's operating cash flow from this transaction is closest to: $200,000 $300,000 $500,000

For a finance lease, the cash flow considered to be interest ($300,000) is considered operating cash flow. The rest goes in the financing cash flow.

I think the answer should be $300000 as the interest on a finance lease is an operating expense. According to the US GAAP, the interest expense is operating outflow. Though as per IFRS, interest expense can be treated as either operating or financing outflow.

Question Of The Week - Financial Reporting And Analysis (5) - CFA Level 1

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This topic has 2 replies, 2 voices, and was last updated Apr-187:29 pm by AdaptPrep.

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- AdaptPrep
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  28 Apr 2018 at 7:29 pm
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  For a finance lease, the cash flow considered to be interest
  ($300,000) is considered operating
  cash flow. The rest goes in the financing cash flow.
- AKG1593
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  26 Apr 2018 at 3:59 pm
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  I think the answer should be $300000 as the interest on a finance lease is an operating expense. According to the US GAAP, the interest expense is operating outflow. Though as per IFRS, interest expense can be treated as either operating or financing outflow.
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