What is the primary effect of a sale leaseback for Company A?

A sale-leaseback arrangement involves a company selling an asset, typically real estate or equipment, to a buyer and then leasing it back from the buyer. This enables the company to free up cash that was tied up in the asset while still retaining the ability to use the asset in its operations.

The primary effect of a sale-leaseback for Company A includes increased rent expense because the company will now have to pay rent for the asset it previously owned, which adds to its operational costs. At the same time, the depreciation expense on that asset will be eliminated because the company no longer owns the asset, which means it won’t book depreciation on its balance sheet.

This transition results in a net increase in operating expenses as rent replaces the depreciation expense. This change can impact financial statements and ratios, but the key takeaway is that the company incurs higher ongoing expenses from rent compared to the previous depreciation it recorded when it owned the asset.

The other options do not accurately describe the primary effects of a sale-leaseback. For instance, it does not inherently change the debt/equity ratio in a straightforward manner; while it can provide immediate cash, that cash does come with ongoing rental obligations. Moreover, it does not eliminate all operating expenses,