IFA IFA Financial Analysis & Decision Making 3

Question 1

What does the return on capital employed (ROCE) ratio measure?

Accepted Answer

The efficiency with which a company generates profit from its total capital

Answer

ROCE (Operating Profit ÷ Capital Employed) measures how efficiently a company uses all its capital — both equity and debt — to generate operating profit.

Question 2

Which analysis technique compares a company's ratios to industry benchmarks?

Accepted Answer

Benchmarking (cross-sectional analysis)

Answer

Benchmarking or cross-sectional analysis compares a company's financial ratios to industry averages or competitor figures to assess relative performance.

Question 3

What is a break-even analysis used for in decision making?

Accepted Answer

Determining the sales level at which total revenue equals total costs

Answer

Break-even analysis identifies the sales volume at which total revenue equals total costs, meaning the company earns zero profit or loss.

Question 4

Sensitivity analysis in financial modeling is used to:

Accepted Answer

Test how changes in key assumptions affect the outcome of a decision

Answer

Sensitivity analysis changes one variable at a time (e.g., sales volume, price) to assess how sensitive a financial outcome like NPV or profit is to that assumption.

Question 5

What is working capital and why is it important?

Accepted Answer

Current assets minus current liabilities; it measures short-term operational liquidity

Answer

Working capital (Current Assets − Current Liabilities) represents the liquid resources available for day-to-day operations, and insufficient working capital can cause insolvency.

(IFA) Institute of Financial Accountants Certification Practice Test

(IFA) Institute of Financial Accountants Certification Practice Test

IFA IFA Financial Analysis & Decision Making 3