CFA Practice Question
If a company engages in off-balance sheet financing generally the effect is to ______
II. increase leverage ratios.
III. increase cash flows.
IV. cause liabilities to be understated.
I. cause assets to be understated.
II. increase leverage ratios.
III. increase cash flows.
IV. cause liabilities to be understated.
A. I, III and IV
B. I, II, III and IV
C. I and IV
Explanation: The non-recording of certain financing obligations will understate assets and liabilities.
User Contributed Comments 8
| User | Comment |
|---|---|
| eddeb | CFOs might be higher with some OBS operations; Sale of receivables : reduces receivables, thus increases CFO Correct? |
| Carol1 | reduce liability as well thus no influence on CFO |
| sagania | Balance sheet shows the Assets and Liab., so as the name says OBS, A and L will be understated, since not included. |
| jackwez | key word "generally"... cash flows could happen (thats what I picked as well).. but generally that wont happen |
| grezavi | III: What about the increase in Cash Flows due to Capital Leases? |
| u0302638 | II) Leverage ratio = A/E With off balance sheet wasnt it Income higher --> E higher -> Leverage Lower so II is wrong can anyone explain III? |
| meghanchloe | u0302638, In this case your assets would be lower for operating lease for it is off balance sheet; therefore, the asset/equity ratio would be lower |
| acemaj | Wouldn't CFs be included since they OBS affects taxing? |