1、Earlier this year, Barracuda Company issued 5,000 employee stock options.
Recently, 2,000 options were exercised at a price of $10 per share. To avoid
dilution, Barracuda purchased 2,000 shares at an average price of $12 per share.
Barracuda reported both transactions as financing activities in its cash flow
statement. For analytical purposes, what adjustment is necessary to better
reflect the substance of the stock repurchase?
Operating cash flow Financing cash flow
A. Decrease $4,000 No adjustment
B. No adjustment Increase $4,000
C. Decrease $4,000 Increase $4,000
2、If a lessee enters into a finance lease rather than an operating lease, it
can expect to have a:
A. higher return on assets.
B. higher debt-to-equity ratio.
C. lower debt-to-equity ratio.
3、Which of the following statements regarding a direct financing lease is
A. The principal portion of the lease payment is a cash inflow from investing
on the lessor';s cash flow statement.
B. Interest revenue on the lessor';s income statement equals the implicit
interest rate times the lease payment.
C. The lessor recognizes no gross profit at the inception of the lease.
4、Which of the following statements about the impact of leases on the
financial statements of the lessee is least accurate?
A. Net income is lower in the early years of a finance lease than an
B. A finance lease results in higher liabilities compared to an operating
C. Cash flow from investing is higher for a finance lease than an operating
5、Interest expense is reported on the income statement as a function of:
A. the market rate.
B. the coupon payment.
C. the unamortized bond discount.
answer：Barracuda reported a $4,000 net outflow from financing activities
[2,000 options* ($12 average market price-$10 exercise price)]. However, since
the options are a form of compensation, the $4,000 outflow should be
reclassified as an operating activity for analytical purposes. This is
accomplished by increasing financing cash flow $4,000 and decreasing operating
cash flow $4,000.
answer：Leasing the asset with an operating lease avoids recognition of the
debt on the lessee’s balance sheet. Having fewer assets and liabilities on the
balance sheet than would exist if the assets were purchased increases
profitability ratios (e.g., return on assets) and decreases leverage ratios
(e.g., debt-to-equity ratio). In the case of a finance lease, the assets are
reported on the balance sheet and are depreciated.
answer：Interest revenues are calculated by multiplying the implicit interest
rate by net receivables at the beginning of the period.
answer：Cash flow from investing is not affected by a lease being either a
finance or an operating lease. Finance leases reduce cash flow from operations
by only the portion of the lease payment attributed to interest expense. Cash
flow from financing is reduced by the rest of the finance lease payment which is
the principal part of the payment.
answer：Interest expense is always equal to the book value of the bond at the
beginning of the period multiplied by the market rate at issuance.