Effects of Leases on Selected Financial Reporting Items for Lessees

The table below summarizes the effects of operating and capital leases on selected financial reporting items for lessees.

ITEM	OPERATING LEASE	CAPITAL LEASE
Balance Sheet	No impact.	Leased asset and lease liability are created.
Income Statement	Rent expense occurs over the life of the least; this may be a constant value.	Interest and depreciation expenses are recognized. In the initial years expenses will be higher than an operating lease, but over the full lease term the two lease types have the name total effect.
Cash Flows	Total change in cash is the same, but the full rent expense is treated as an operating cash flow.	Total change in cash is the same, but the lease payment is divided between an interest component (an operating cash flow) and a principal repayment (a financing cash flow). The amount assigned to deprecation is a non-cash charge.
Profit Margin	Higher in the early years, but lower in the later years, as compared to a capital lease.	Lower in the early years because the total expense associated with the lease is higher than the actual payment, but profit margin will climb in later years of the capital lease.
Asset Turnover Ratios	Higher because the operating lease records no balance sheet assets.	Lower because a balance sheet asset is recorded, but the ratio will rise over time as the asset is depreciated.
Debt-to-Equity Ratio