Certified Management Accountant Practice Exam 2026 - Free CMA Practice Questions and Study Guide

The purpose of off-balance-sheet financing primarily revolves around avoiding the inclusion of certain liabilities on the balance sheet. This financing method allows companies to keep their financial statements looking stronger by not reflecting these obligations. This can enhance key financial ratios such as the debt-to-equity ratio, providing a more favorable perception to investors and creditors.

Such practices can involve leasing arrangements, joint ventures, or special purpose entities where the company retains control without formally recording the associated liabilities on its balance sheet. This can make a company appear less leveraged than it truly is, which might attract investment or improve borrowing conditions.

Other options, such as increasing financial liabilities or reflecting investments in subsidiaries, do not accurately capture the main intent behind off-balance-sheet financing, which is specifically aimed at reducing the visibility of liabilities. Likewise, while some may think such financing could be related to interest expenses, the primary goal is not about reducing costs but rather about how to present financial strength without adequately depicting the actual financial risks.