CFA Practice Question

There are 89 practice questions for this study session.

CFA Practice Question

Which of the following is a type of off-balance-sheet financing?

I. operating lease.
II. sale of receivables with recourse recorded as a sale.
III. take-or-pay contracts.
Correct Answer: I, II and III

All are examples of cases where the firm has a liability but does not report it as a liability on the balance sheet.

User Contributed Comments 7

User Comment
Khadria What is II?
nike it's called receivable factoring.
chamad answer in following question : When receivables are sold with recourse, the buyer of the receivables may come back to the seller if the receivables are not paid. Any recourse or interest is defined in the sale contract
prabhur08 From a google search: "Take-or-pay contracts are written agreements between a buyer and seller that obligate the buyer to pay regardless of whether or not the seller delivers the good or service."

We are assuming that the money received by the seller is recorded as revenues. If the buyer decides not to buy, the seller is not required to return the money to the buyer, so the seller still has no liability. So why III?
prabhur08 Or are we looking at it from the point of view of the buyer and the fact that the contingent liability is not recorded (assuming the contract has been executed and the buyer has not yet paid)?
sjurrens take or pay contracts are just agreements between a buyer and supplier. Essentially what is happening is that the buyer is just agreeing to pay a certain price for a certain amount of product. They don't have to pay at agreement, but supplier ends up recording sale. In the future, the buyer may decide not to buy, but they will have to pay a penalty for not purchasing the product. Another issue with this to consider is if inventory prices are rising.
NIKKIZ Take or pay sounds more like an off-balance sheet obligation rather than off-balance sheet financing...
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