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🇬🇧 Institute of Financial Accountants (IFA) Qualifications · flashcards
Institute of Financial Accountants (IFA) Qualifications Financial Management for SMEs Flashcards
72 question-and-answer cards covering Financial Management for SMEs as it is examined in Institute of Financial Accountants (IFA) Qualifications. 24 of them are printed below, taken from across the deck — no signup, no paywall on the preview.
24 sample cards from the Financial Management for SMEs deck
Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.
Define Net Present Value (NPV) and its decision rule.
NPV is the sum of the present values of all project cash inflows and outflows: $$NPV = \sum_{t=0}^{n} \frac{C_t}{(1+r)^{t}}$$ Accept a project if $NPV > 0$ (it increases shareholder wealth).
Define the Internal Rate of Return (IRR) and its decision rule.
The IRR is the discount rate at which a project's NPV equals zero. Accept the project if $\text{IRR} >$ the cost of capital (required return).
State the linear interpolation formula used to estimate IRR.
$$\text{IRR} \approx L + \frac{N_L}{N_L - N_H} \times (H - L)$$ where $L$, $H$ are the lower and higher discount rates and $N_L$, $N_H$ are the NPVs at those rates.
What are the two main DCF appraisal techniques and why are they preferred?
NPV and IRR. They are preferred because they account for the time value of money and consider all relevant cash flows over the project's life.
Define the payback period and its decision rule.
The payback period is the time taken for a project's cumulative cash inflows to recover the initial investment. Projects with a payback shorter than a target are accepted; among options, the shortest payback is preferred.
State two limitations of the payback period method.
It ignores the time value of money (unless discounted), ignores cash flows after the payback point, and ignores overall project profitability.
Define the Accounting Rate of Return (ARR).
$$\text{ARR} = \frac{\text{Average annual accounting profit}}{\text{Average (or initial) investment}} \times 100\%$$ It is compared against a target rate; higher is better.
State one key weakness of ARR compared with DCF methods.
ARR uses accounting profits rather than cash flows and ignores the time value of money.
Distinguish risk from uncertainty in investment appraisal.
Risk exists when the range of outcomes and their probabilities can be quantified/estimated; uncertainty exists when outcomes are unknown and probabilities cannot be reliably assigned.
What is sensitivity analysis in investment appraisal?
A technique that examines how much a key variable (e.g. selling price, volume, cost, discount rate) can change before the project's NPV becomes zero, identifying the variables to which the decision is most sensitive.
What is expected value (EV) and how is it calculated?
A weighted average of possible outcomes using their probabilities: $$EV = \sum p_i x_i$$ where $p_i$ is the probability and $x_i$ the outcome value.
Name two techniques (other than sensitivity analysis) for incorporating risk into appraisal.
Expected values/probability analysis, simulation (e.g. Monte Carlo), risk-adjusted discount rates, certainty equivalents, and decision trees.
State the asset-based (net assets) method of business valuation.
Value the business as the value of its net assets: $$\text{Value} = \text{Total assets} - \text{Total liabilities}$$ using book, realisable (break-up) or replacement values; it ignores goodwill/future earnings.
What is the P/E ratio (earnings) method of business valuation?
$$\text{Value} = \text{P/E ratio} \times \text{Earnings}$$ A suitable (often industry/comparable) P/E multiple is applied to the company's maintainable earnings.
Describe the dividend valuation (dividend growth) method of business valuation.
It values shares as the present value of expected future dividends: $$P_0 = \frac{D_0(1+g)}{K_e - g}$$ assuming dividends grow at a constant rate $g < K_e$; it suits valuing minority shareholdings.
What is the discounted cash flow (DCF) method of business valuation?
Valuing the business as the present value of its expected future free cash flows discounted at an appropriate cost of capital; theoretically the most sound method but reliant on forecast accuracy.
Why is valuing an unquoted SME more difficult than valuing a listed company?
There is no readily available market price, shares are less marketable/liquid, financial information may be limited, and reliance on the owner-manager creates additional risk.
Distinguish business (operating) risk from financial risk.
Business risk is the variability in operating profits arising from the nature of operations and fixed operating costs. Financial risk is the additional variability in returns to shareholders caused by the use of fixed-cost debt finance (gearing).
What is interest rate risk and one way to hedge it?
The risk that changes in interest rates adversely affect a company's cash flows or value (e.g. on variable-rate debt). It can be hedged using fixed-rate borrowing, interest rate swaps, forward rate agreements, or interest rate options.
Define foreign exchange (currency) risk for an SME.
The risk that movements in exchange rates adversely affect the value of a firm's foreign-currency transactions, assets, liabilities or competitive position.
Name the three types of foreign exchange risk exposure.
Transaction exposure (on specific foreign-currency transactions), translation exposure (on consolidating foreign assets/liabilities), and economic exposure (on the long-term value/competitiveness of the business).
What is a forward exchange contract and how does it manage transaction risk?
A binding agreement to buy or sell a fixed amount of foreign currency at a fixed (forward) rate on a specified future date, fixing the home-currency value of a future foreign-currency cash flow and eliminating exchange-rate uncertainty.
Describe a money market hedge for a foreign currency payable.
Borrow domestic currency now, convert at the spot rate into the foreign currency, deposit it to earn interest so it grows to the amount payable at settlement, thereby fixing the cost in domestic currency and removing exchange risk.
Name two internal (non-derivative) techniques an SME can use to reduce foreign exchange risk.
Invoicing in the home currency, matching foreign-currency receipts and payments, netting, leading and lagging payments, and using foreign-currency bank accounts.
What this deck covers
The Financial Management for SMEs deck follows the Institute of Financial Accountants (IFA) Qualifications Financial Management for SMEs syllabus — 5 chapters and 18 topics — so questions land on material that is genuinely examinable rather than trivia around it. That works out to roughly 14.4 cards per chapter.
Answers are written to be recallable, not just readable — averaging about 182 characters, which is long enough to carry the reasoning and short enough to say out loud.
A deck like this earns its keep on the second and third pass. Read the syllabus first so you know the shape of the subject, then use the cards to find the specific facts that have not stuck.
Financial Management for SMEs flashcards FAQ
How many Financial Management for SMEs flashcards are in this Institute of Financial Accountants (IFA) Qualifications deck?
72 cards. This page previews 24 of them, sampled evenly across the deck so you can judge the difficulty before installing anything.
Are these Institute of Financial Accountants (IFA) Qualifications flashcards free?
Yes. The preview here is free to read with no signup, and the full 72-card deck is free inside the Examius app.
What do the Financial Management for SMEs cards cover?
They follow the Institute of Financial Accountants (IFA) Qualifications Financial Management for SMEs syllabus — 5 chapters and 18 topics — so the questions track what is actually examinable.
How should I use these flashcards?
Read the syllabus first so you know the shape of the subject, then drill the deck. Examius schedules each card with spaced repetition, so cards you keep missing come back sooner and ones you know drift further apart.