The following information comes from the financial statements of Marci Sinclair Company.

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300,000

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,000

Property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290,000

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400,000

In addition, Marci Sinclair has a large number of operating leases. The payments on these operating leases total $55,000 per year for the next 10 years. All of these lease payments occur at the end of the year. The incremental borrowing rate of Marci Sinclair Company is 11%. This is also the rate implicit in all of the leases that Marci Sinclair signs.

Instructions:

1. Compute the following ratio values:

(a) Debt ratio (total liabilities/total assets).

(b) Debt ratio, assuming that Marci Sinclair’s operating leases are accounted for as capital leases.

(c) Asset turnover (sales/total assets).

(d) Asset turnover, assuming that Marci Sinclair’s operating leases are accounted for as capital leases.

2. Briefly describe how the accounting for assets used under operating leases distorts the values of financial ratios.