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ACCA Applied Skills · Financial Management · Sources of, and raising, business finance

Brandon Co is considering a finance lease for equipment instead of buying it. Which of the following is an advantage of leasing rather than borrowing to buy the asset?

The main advantage is that leasing avoids a large initial cash outlay because the cost is spread over the asset's life through regular rentals. Ownership does not pass automatically, finance leases cannot normally be cancelled, and obsolescence risk stays with the lessee in a finance lease.

  1. AThe lessee obtains ownership of the asset at the end of the primary period as of right
  2. BThe lessee usually has no obligation to pay if it stops using the asset
  3. CThe lessee avoids a large initial cash outlay, as rentals spread the cost over the asset's useCorrect
  4. DThe lessee bears the risk of obsolescence under an operating lease but not under a finance lease

Explanation

Leasing spreads the cost through rentals, avoiding a large upfront payment. Ownership does not pass automatically, finance lease rentals are non-cancellable, and obsolescence risk sits with the lessee in a finance lease, not an operating lease, so the last option is reversed.

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