Financial Statement Modeling Practice Test 2026 – Your All-in-One Guide to Exam Success!

Leases are recognized on the balance sheet for lessees, creating a right-of-use asset and a lease liability. Over time, the right-of-use asset is depreciated and the lease liability accrues interest, so the P&L shows depreciation expense and interest expense rather than a single rent expense. The cash flow impact comes from the lease payments themselves, with the portion that reduces the liability treated as a principal payment (financing effect) and the interest portion shown as interest; total cash outflows reflect the lease payments. This combination explains why the asset base grows and then gradually declines as depreciation and payments occur, while the P&L includes depreciation and interest rather than just rent.