CMA Final · Strategic Financial Management · Leasing Decisions
Which statement about a finance lease versus an operating lease from the lessee's decision viewpoint is correct?
In a finance lease, substantially all the risks and rewards incidental to ownership pass to the lessee, even if title is not transferred. Operating leases do not transfer these, are often cancellable, and typically leave obsolescence risk with the lessor.
- AIn a finance lease, substantially all risks and rewards of ownership pass to the lesseeCorrect
- BIn an operating lease, the lessee bears the risk of obsolescence and maintenance in all cases
- CA finance lease is always cancellable at the lessee's option without penalty
- DAn operating lease transfers ownership to the lessee at the end of the term
Explanation
A finance lease transfers substantially all risks and rewards incidental to ownership. Finance leases are generally non-cancellable, and ownership transfer at the end is not a feature of operating leases.
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