Advance payments in a lease have what primary effect?

• A. Do not affect cash flow
• B. Increase total financed amount
• C. Reduce total financed amount and affect cash flow
• D. Cancel the lease

Answer: (A)

Advance payments are upfront amounts paid at lease inception and applied toward future rent obligations. The key idea is that they don’t change the negotiated financing terms of the lease or the overall cost when viewed in present value terms; they simply shift some of the cash collection from later periods to the start. In other words, while cash moves earlier, the economics of the lease—the financed amount and the total rent to be paid over the term when discounted at the contract rate—remain effectively the same. That’s why the primary effect is described as having no net impact on cash flow over the life of the lease.