Cisco
CompTIA
ISC
EC-Council
EXIN
Fortinet
ITIL
Juniper
Microsoft
VMware
Avaya
SAP
Google
NVIDIA
Salesforce
Amazon
Palo Alto Networks
ISC2
Splunk
ServiceNow
All Vendors
  2. Home
  3. Exams
  4. IIA
  5. CIA

IIA CIA Exam
Certified Internal Auditor Exam (Page 43 )

Updated On: 12-Jan-2026
Page 43 of 342
PDF with 1702 Questions

An entity experienced sales of US $5 billion, profit before interest and taxes of US $200 million, profit before taxes of US $100 million, and profit of US $70 million. Based on this information and the entity's balance sheet information in Exhibit A. the return on equity ROE) is:

  1. 4.67%
  2. 6.67%
  3. 13.33%
  4. 14%

Answer(s): A

Explanation:

The return on equity equals profit US $70, 000, 000) divided by equity $500, 000, 000) ordinary shares ÷ $1, 000, 000, 000 retained earnings).



The following ratios relate to an entity's financial situation compared with that of its

What conclusion could a financial analyst validly draw from these ratios?

  1. The entity's product has a high market share, leading to higher profitability.
  2. The entity uses more debt than does the average entity in the industry.
  3. The entity's profits are increasing over time.
  4. The entity's shares have a higher market value to carrying amount than does the rest of the industry.

Answer(s): B

Explanation:

The use of financial leverage has a multiplier effect on the return on assets. The extended
Du Pont formula illustrates this point by showing that the return on equity equals the return on assets times the grace factor, also called the equity multiplier total assets - ordinary equity). Thus, greater use of debt increases the equity multiplier and the return on equity. In this example, the equity multiplier is 1:12 15.2% ROE ÷ 7.9% ROA), and the industry average is 1.40 12.9% ROE ÷ 9.2% ROA). The higher quality multiplier Indicates that the entity uses more debt than the industry average.



An investor has been given several financial ratios for an entity but none of the financial reports. Which combination of ratios can be used to derive return on equity?

  1. Market-to-book-value ratio and total-debt-to-total-assets ratio.
  2. Price-to-earnings ratio, earnings per share, and profit margin.
  3. Price-to-earnings ratio and return-on-assets ratio.
  4. Profit margin, total assets turnover, and equity multiplier.

Answer(s): D

Explanation:

The profit margin equals the profit available to ordinary shareholders divided by sales, the total assets turnover equals sales divided by total assets, and the product of these two ratios is the return on assets. This result is the basic Du Pont equation. In the extended Du Pont equation, the return on assets is multiplied by the leverage factor, also called the equity multiplier total assets + ordinary equity at carrying amount). The extended Du Pont equation gives the return on ordinary equity. This result is obtained because the total assets and sales factors cancel in the multiplication of the three ratios.



In calculating diluted earnings per share when an entity has convertible bonds outstanding, the weighted- average number of ordinary shares outstanding must be <List Ax to adjust for the conversion feature of the bonds, and the profit attributable to ordinary shareholders must be <List Be by the amount of interest expense on the bonds, net of tax.
List A List B

  1. Increased Increased
  2. Increased Decreased
  3. Decreased Increased
  4. Decreased Decreased

Answer(s): A

Explanation:

The weighted-average number of ordinary shares outstanding must be increased to7
reflect the shares into which the bonds could be converted. Also, the effect of the bond interest on profit attributable to ordinary shareholders profit after subtracting preference dividends) must be eliminated. In this way, diluted earnings per share is calculated as if the bonds had been converted into ordinary shares as of the start of the year.



The purchase of treasury shares with an entity's surplus cash

  1. Increases an entity's financial leverage.
  2. Increases an entity's equity.
  3. Increases an entity's interest coverage ratio.
  4. Dilutes an entity's earnings per share.

Answer(s): A

Explanation:

A purchase of treasury share involves a decrease in assets usually cash) and a corresponding decrease in shareholders' equity. Thus, equity is reduced and the debt-to- equity ratio and financial leverage increase.



Viewing page 43 of 342
Viewing questions 211 - 215 out of 1702 questions



Post your Comments and Discuss IIA CIA exam prep with other Community members:

Join the CIA Discussion