IFA IFA Financial Analysis & Decision Making

Question 1

What does a current ratio of less than 1 indicate?

Accepted Answer

The company has more current liabilities than current assets

Answer

A current ratio below 1 means the company's current liabilities exceed its current assets, indicating potential short-term liquidity problems.

Question 2

Which financial ratio measures how efficiently a company uses its assets to generate revenue?

Accepted Answer

Asset turnover ratio

Answer

The asset turnover ratio (Revenue ÷ Total Assets) measures how effectively a company generates sales from its asset base.

Question 3

What does EBITDA stand for and why is it used?

Accepted Answer

Earnings Before Interest, Taxes, Depreciation, and Amortization — approximates operating cash flow

Answer

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is used to approximate operating cash generation, stripping out financing and accounting choices.

Question 4

A company's gross profit margin has fallen from 45% to 32%. This most likely indicates:

Accepted Answer

Rising cost of goods sold or falling selling prices

Answer

A declining gross profit margin typically signals rising production costs, increased cost of goods sold, or pressure on selling prices eroding margin.

Question 5

What is the purpose of horizontal analysis in financial statement analysis?

Accepted Answer

Comparing financial data across multiple periods to identify trends

Answer

Horizontal analysis compares financial data over multiple time periods, identifying trends, growth rates, and changes in absolute values.

(IFA) Institute of Financial Accountants Certification Practice Test

(IFA) Institute of Financial Accountants Certification Practice Test

IFA IFA Financial Analysis & Decision Making