CFA Practice Question

CFA Practice Question

If a company engages in off-balance sheet financing generally the effect is to ______

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

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?
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