AFP Practice Exam 2026 – Complete Prep Guide

An organization may choose off-balance-sheet financing for several reasons, all of which relate to strategic financial management and presentation.

Off-balance-sheet financing allows a company to keep certain liabilities or assets off its balance sheet, which can lead to a simpler, cleaner financial statement. This simplification in reporting can make it easier for stakeholders such as investors, analysts, and regulators to assess the company's financial position without the complication of certain obligations that may not be directly indicative of future cash flows.

Additionally, by using off-balance-sheet financing, an organization can enhance reported profitability. When companies exclude certain debts from their balance sheets, their net income and overall financial health may look better, as this financing method can reduce the appearance of leverage and related expenses. This can improve key metrics, such as return on equity or earnings before interest and taxes (EBIT), ultimately making the organization appear more profitable to investors and analysts.

Improving liquidity ratios is another motivation behind off-balance-sheet financing. By removing liabilities from the balance sheet, a company can show a stronger liquidity position. This is important for meeting short-term obligations and managing operations, as liquidity ratios like the current ratio or quick ratio may be less affected by these liabilities, creating a more favorable standing in the