Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 178

Which of the following best explains why an organization would enter into a capital lease contract?

Answer options

• A. To increase the ability to borrow additional funds from creditors.
• B. To reduce the organization's free cash flow from operations.
• C. To improve the organization's free cash flow from operations.
• D. To acquire the asset at the end of the lease period at a price lower than the fair market value.

Correct answer: D

Explanation

The correct answer, D, is accurate because a capital lease often allows organizations to purchase the leased asset at a reduced price compared to its market value at the end of the lease term. Options A, B, and C are incorrect as they do not capture the financial benefits and ownership aspect associated with capital leases.