Financial Management - MCQs with answers

1. The only feasible purpose of financial management is

a) Wealth Maximization
b) Sales Maximization
c) Profit Maximization
d) Assets maximization

ANSWER: Wealth Maximization

2. Financial management process deals with

a) Investments
b) Financing decisions
c) Both a and b
d) None of the above

ANSWER: b) Financing decisions

3. Agency cost consists of

a) Binding
b) Monitoring
c) Opportunity and structure cost
d) All of the above

ANSWER: d) All of the above

4. Finance Function comprises

a) Safe custody of funds only

b) Expenditure of funds only
c) Procurement of finance only
d) Procurement & effective use of funds

ANSWER: d) Procurement & effective use of funds

5. The objective of wealth maximization takes into account

a) Amount of returns expected

b) Timing of anticipated returns
c) Risk associated with uncertainty of returns
d) All of the above

ANSWER: d) All of the above

6. Financial management mainly focuses on

a) Efficient management of every business

b) Brand dimension
c) Arrangement of funds
d) All elements of acquiring and using means of financial resources for financial
activities

ANSWER: d) All elements of acquiring and using means of financial resources for
financial activities

1. Time value of money indicates that

a) A unit of money obtained today is worth more than a unit of money obtained in future

b) A unit of money obtained today is worth less than a unit of money obtained in future
c) There is no difference in the value of money obtained today and tomorrow

d) None of the above

ANSWER: a) A unit of money obtained today is worth more than a unit of money
obtained in future

2. Time value of money supports the comparison of cash flows recorded at

different time period by

a) Discounting all cash flows to a common point of time

b) Compounding all cash flows to a common point of time
c) Using either a or b
d) None of the above.

ANSWER: c) Using either a or b

3. If the nominal rate of interest is 10% per annum and there is quarterly
compounding, the effective rate of interest will be:

a) 10% per annum

b) 10.10 per annum
c) 10.25%per annum
d) 10.38% per annum

ANSWER: d) 10.38% per annum

4. Relationship between annual nominal rate of interest and annual effective rate
of interest, if frequency of compounding is greater than one:

a) Effective rate > Nominal rate

b) Effective rate < Nominal rate
c) Effective rate = Nominal rate
d) None of the above

ANSWER: a) Effective rate > Nominal rate

5. Mr. X takes a loan of Rs 50,000 from HDFC Bank. The rate of interest is 10% per
annum. The first installment will be paid at the end of year 5. Determine the
amount of equal annual installments if Mr. X wishes to repay the amount in five
installments.

a) Rs 19500
b) Rs 19400
c) Rs 19310
d) None of the above

ANSWER: c) Rs 19310

6. If nominal rate of return is 10% per annum and annual effective rate of interest
is 10.25% per annum, determine the frequency of compounding:

a) 1
b) 2
c) 3
d) None of the above

ANSWER: b) 2

7. Present value tables for annuity cannot be straight away applied to varied
stream of cash flows.

a) True
b) False

.
ANSWER: a) True

8. Heterogeneous cash flows can be made comparable by

a) Discounting technique
b) Compounding technique
c) Either a or b
d) None of the above

ANSWER: c) Either a or b

1. Risk of two securities with different expected return can be compared with:

a) Coefficient of variation
b) Standard deviation of securities
c) Variance of Securities
d) None of the above

ANSWER: a) Coefficient of variation

2. A portfolio having two risky securities can be turned risk less if

a) The securities are completely positively correlated

b) If the correlation ranges between zero and one
c) The securities are completely negatively correlated
d) None of the above.

ANSWER: c) The securities are completely negatively correlated

3. Efficient frontier comprises of

a) Portfolios that have negatively correlated securities
b) Portfolios that have positively correlated securities
c) Inefficient portfolios
d) Efficient portfolios

ANSWER: d) Efficient portfolios

4. Efficient portfolios can be defined as those portfolios which for a given level of
risk provides

a) Maximum return
b) Average return
c) Minimum return
d) None of the above

ANSWER: a) Maximum return

5. Capital market line is:

a) Capital allocation line of a market portfolio

b) Capital allocation line of a risk free asset
c) Both a and b
d) None of the above

ANSWER: c) Both a and b

6. CAPM accounts for:

a) Unsystematic risk
b) Systematic risk
c) Both a and b
d) None of the above
.

ANSWER: b) Systematic risk

7. The point of tangency between risk return indifferences curves and efficient
frontier highlights:

a) Optimal portfolio
b) Efficient portfolio
c) Sub-optimal portfolio
d) None of the above

ANSWER: a) Optimal portfolio

8. A portfolio comprises two securities and the expected return on them is 12%
and 16% respectively. Determine return of portfolio if first security constitutes
40% of total portfolio.

a) 12.4%
b) 13.4%
c) 14.4%
d) 15.4%

ANSWER: c) 14.4%

9. A risk free security has zero variance.

a) True
b) False

ANSWER:
10. Return on any financial asset consists of capital yield and current yield.

a) True
b) False

ANSWER: a) True

11. There is no difference between the capital market line and security market line
as both the terms are same.

a) True
b) False

ANSWER: b) False

1. The value of a bond and debenture is

a) Present value of interest payments it gets

b) Present value of contractual payments it gets till maturity
c) Present value of redemption amount
d) None of the above

ANSWER: b) Present value of contractual payments it gets till maturity

2. Required rate of return>Coupon rate, the bond will be valued at

a) Premium
b) Par value
c) Discount
d) None of the above.

.
ANSWER: c) Discount

3. If the coupon rate is constant, the value of bond when close to maturity will be

a) Issued value
b) Par value
c) Redemption value
d) All of the above

ANSWER: c) Redemption value

4. A bond is said to be issued at premium when

a) Coupon rate>Required returns

b) Coupon rate=Required returns
c) Coupon rate
d) None of the above

ANSWER: a) Coupon rate>Required returns

5. Value of a bond just depends on the interest payment is offers.

a) True
b) False

ANSWER: b) False

6. In a variable growth model, the dividend is believed to grow at a constant pace forever
after an initial growth period.

a) True
b) False

ANSWER: a) True

7. For a bond YTM is always equal to coupon rate.

a) True
b) False

ANSWER: b) False

1. When the concept of ratio is defined in respected to the items shown in the
financial statements, it is termed as

a) Accounting ratio
b) Financial ratio
c) Costing ratio
d) None of the above

ANSWER: a) Accounting ratio

2. The definition, “The term accounting ratio is used to describe significant

relationship which exist between figures shown in a balance sheet, in a profit and
loss account, in a budgetary control system or in a any part of the accounting
organization” is given by

a) Biramn and Dribin

b) Lord Keynes
c) J. Betty
d) None of the above.

.
ANSWER: c) J. Betty

3. The relationship between two financial variables can be expressed in:

a) Pure ratio
b) Percentage
c) Rate or time
d) Either of the above

ANSWER: d) Either of the above

4. Liquidity ratios are expressed in

a) Pure ratio form

b) Percentage
c) Rate or time
d) None of the above

ANSWER: a) Pure ratio form

5. Which of the following statements are true about Ratio Analysis?

A) Ratio analysis is useful in financial analysis.

B) Ratio analysis is helpful in communication and coordination
C) Ratio Analysis is not helpful in identifying weak spots of the business.
D) Ratio Analysis is helpful in financial planning and forecasting.

a) A, B and D
b) A, C and D
c) A, B and C
d) A, B , C, D

.
ANSWER: a) A, B and D

6. The ratio analysis is helpful to management in taking several decisions, but as

a mechanical substitute for judgment and thinking, it is worse than useless.

a) True
b) False

ANSWER: a) True

7. Profit for the objective of calculating a ratio may be taken as

a) Profit before tax but after interest

b) Profit before interest and tax
c) Profit after interest and tax
d) All of the above

ANSWER: d) All of the above

8. Which of the following are limitations of ratio analysis?

A) Ratio analysis may result in false results if variations in price levels are not
considered.

B) Ratio analysis ignores qualitative factors

C) Ratio Analysis ignores quantitative factors

D) Ratio Analysis is historical analysis.

a) A, B and D
b) A, C and D
c) A, B and C
d) A, B , C, D

.
ANSWER: a) A, B and D

1. Which of the following falls under Profitability ratios?

A) General Profitability ratios

B) Overall Profitability ratios
C) Comprehensive Profitability ratios

a) A and B
b) A and C
c) B and C
d) None of the above

ANSWER:a) A and B

2. General Profitability ratios are based on

a) Investments
b) Sales
c) a & B
d) None of the above

ANSWER: b) Sales

3. Gross Profit ratio is also termed as

a) Gross Profit Margin

b) Gross Margin to net sales
c) Both a and b
d) All of the above

.
ANSWER: c) Both a and b

4. While calculating Gross Profit ratio,

a) Closing stock is deducted from cost of goods sold

b) Closing stock is added to cost of goods sold
c) Closing stock is ignored
d) None of the above

ANSWER: a) Closing stock is deducted from cost of goods sold

5. While calculating Gross Profit, if net profit is given,

a) It can be converted into gross profit by adding interest to it

b) It can be converted into Gross profit by adding indirect expenses to it
c) Both a and b
d) None of the above

ANSWER: a) It can be converted into gross profit by adding interest to it

6. Gross profit ratio is calculated by

a) (Gross Profit/Gross sales)*100

b) (Gross Profit/Net sales)*100
c) (Net Profit/Gross sales)*100
d) None of the above

ANSWER: b) (Gross Profit/Net sales)*100

7. Given Sales is 1, 20,000 and Gross Profit is 30,000, the gross profit ratio is
a) 24%
b) 25%
c) 40%
d) 44%%

ANSWER: b) 25%

8. What will be the Gross Profit if, total sales is Rs 2,60,000 Cost of net goods
sold is Rs 2,00,000 and Sales return is Rs 10,000?

a) 13%
b) 28%
c) 26%
d) 20%

9. If selling price is fixed 25% above the cost, the Gross Profit ratio is

a) 13%
b) 28%
c) 26%
d) 20%

ANSWER: d) 20%

10. Gross Profit ratio should be adequate to cover

a) Selling expenses
b) Administrative expenses
c) Dividends
d) All of the above

ANSWER:d) All of the above

1. Net Profit ratio is calculated by

a) (Gross Profit/Gross sales)*100

b) (Gross Profit/Net sales)*100
c) (Net Profit/Net sales)*100
d) None of the above

ANSWER: c) (Net Profit/Net sales)*100

2. If sales is Rs 5, 00,000 and net profit is Rs 1, 20,000 Net Profit ratio is

a) 24%
b) 416%
c) 60%
d) None of the above

ANSWER: a) 24%

3. If sales is Rs 10,00,000, sales returns is Rs 50,000, Profit Before Tax is Rs

2,00,000, Income tax is 40%, Net profit ratio is

a) 12.63%
b) 20%
c) 10%
d) 50%

ANSWER: a) 12.63%

4. Net operating profit ratio determines ___________ while net profit ratio
determines

a) Overall efficiency of the business, working efficiency of the management

b) Working efficiency of the management, overll efficiency of the business

c) Overall efficiency of the external market, working efficiency of the internal

management

d) None of the above

ANSWER:b) Working efficiency of the management, overll efficiency of the business

5. Operating ratio is calculated by

a) (Operating Cost/Gross sales)*100

b) (Operating Cost/Gross sales)*100
c) (Operating cost/Net sales)*100
d) None of the above

ANSWER: c) (Operating cost/Net sales)*100

6. Determine Operating ratio, if operating expenses is Rs 60,000, Sales is Rs

9,40,000, Sales Return is Rs 40,000 and Cost of net goods sold is Rs 6,60,000.

a) 80%
b) 15%
c) 25%
d) 11%

ANSWER: a) 80%

7. Which of the following is expenses ratio?

A) Administrative expenses ratio

B) Selling and Distribution expenses ratio
C) Factory expenses ratio
D) Finance Expenses ratio
a) A, B and D
b) A, C and D
c) A, B and C
d) A, B , C, D

ANSWER: d) A, B , C, D

1. Overall Profitability ratios are based on

a) Investments
b) Sales
c) a & B
d) None of the above

ANSWER: a) Investments

2. Return on Proprietors’ funds is also known as:

a) Return on net worth

b) Return on Shareholders’ fund
c) Return on Shareholders’ Investment
d) All of the above

ANSWER: d) All of the above

3. Return on equity capital is calculated on basis of:

a) Funds of equity shareholders

b) Equity capital only
c) Either a or b
d) None of the above

.
ANSWER: c) Either a or b

4. While calculating Earnings per share, if both equity and preference share
capitals are there, then

a) Preference share is deducted from the net profit

b) Equity share capital is deducted from the net profit
c) Both a and b
d) None of the above

ANSWER: a) Preference share is deducted from the net profit

1. Turnover ratios are also known as

a) Activity ratios
b) Performance ratios
c) Both a and b
d) None of the above

ANSWER: c) Both a and b

2. The lower turnover ratio highlights the under utilizations of the resources
accessible at the disposal of the firm.

a) True
b) False

ANSWER: a) True

3. Stock velocity established a relationship between

a) Cost of goods sold in a given period and the average amount of inventory held during
that period.

b) Cost of goods sold in a given period and the average amount of stock held during
that period.

c) Both a and b

d) None of the above

ANSWER: c) Both a and b

4. Determine stock turnover ratio if, Opening stock is Rs 31,000, Closing stock is
Rs 29,000, Sales is Rs 3,20,000 and Gross profit ratio is 25% on sales.

a) 31 times
b) 11 times
c) 8 times
d) 32 times

ANSWER: c) 8 times

5. Debtors Turnover ratio is also known as

A) Receivables turnover ratio

B) Debtors velocity
C) Stock velocity
D) Payable turnover ratio

a) A and B
b) A and C
c) B and C
d) C and D

ANSWER: a) A and B
6. Determine Debtors turnover ratio if, closing debtors is Rs 40,000, Cash sales is
25% of credit sales and excess of closing debtors over opening debtors is Rs
20,000.

a) 4 times
b) 2 times
c) 6 times
d) 8 times

ANSWER:a) 4 times

7. Working capital turnover ratio can be determined by:

a) (Gross Profit/Working capital)

b) (Cost of goods sold/Net sales)
c) (Cost of goods sold/Working capital)
d) None of the above

ANSWER: c) (Cost of goods sold/Working capital)

8. Determine Working capital turnover ratio if, Current assets is Rs 1,50,000,

current liabilities is Rs 1,00,000 and Cost of goods sold is Rs 3,00,000.

a) 5 times
b) 6 times
c) 3 times
d) 1.5 times

ANSWER: b) 6 times

1. Which of the following statement is true about Funds Flow Statement?

A) It highlights change in funds of a firm at different point

B) It highlights change in funds of different firms at a single point
C) It highlights change in funds of different firms at different point
D) It doesn’t highlights change in funds

a) Only A
b) Only B
c) Only D
d) A, B , C, D

ANSWER: d) A, B , C, D

2. In the context of Funds Flow Analysis, the word “funds” is used to define

a) Net Working capital

b) Total current assets-Total current liabilities
c) Both a and b
d) None of the above.

ANSWER: c) Both a and b

3. Which of the following is/are examples of Funds Flow Statement?

A) Collection of debtors
B) Shares issued for cash
C) Shares issued against the purchase of machinery
D) Shares issued for property

a) A and B
b) A and C
c) A and D
d) A, B, C and D

ANSWER: a) A and B

4. Which of the following statement/s are true about movement of funds?

A) Funds flow in a transaction between current assets and fixed assets.

B) Funds flow in a transaction between current asset and capital
C) Funds flow in a transaction between fixed assets and current liabilities
D) Funds flow in a transaction between current liabilities and capital

a) A and B
b) A and C
c) A and D
d) A, B, C and D

ANSWER: d) A, B, C and D

5. Which of the following transactions will result in inflow of funds?

A) Issue of debentures
B) Conversion of debentures into equity shares
C) Redemption of long term loan
D) Creation of General Reserve

a) Only A
b) Only D
c) A and D
d) A, B, C and D

ANSWER: a) Only A

6. During the year, a business was bought by issue of Rs 25,000 debentures and
Rs 25,000 shares. The business bought had machine worth Rs 20,000, Debtors Rs
15,000, Stock Rs 5,000 and Creditors Rs 5,000. Determine the effect of this
transaction on flow of funds.

a) Net outflow of Rs 15,000

b) Net inflow of Rs 15,000
c) Neither inflow nor outflow
d) None of the above

ANSWER: b) Net inflow of Rs 15,000

7. Which of the following are current assets?

A) Fixed investments
B) Trade Payables
C) Short-term loans and advances
D) Furniture

a) Only A
b) Only B
c) Only C
d) A, B, C and D

ANSWER: c) Only C

8. Which of the following are Non-current assets?

a) Land, Building and plant

b) Leasehold property
c) Computer software
d) All of the above

ANSWER: d) All of the above

9. Bond, debentures and term loans falls under:

a) Current assets
b) Non-current assets
c) Non-current liabilities
d) Current liabilities

ANSWER: c) Non-current liabilities

10. Funds flow statements are prepared so as to

a) To identify the changes in working capital

b) To identify reasons behind change in working capital
c) To know the item-wise outflow of funds during given period
d) All of the above

ANSWER: d) All of the above

11. Funds Flow Statement holds significance for

a) Shareholders
b) Financiers
c) Government
d) All of the above

ANSWER: d) All of the above

1. Which statement is prepared in the process of funds flow analysis?

a) Schedule of changes in working capital

b) Funds Flow Statement
c) Both a and b
d) None of the above

ANSWER: a) Schedule of changes in working capital

2. Funds Flow Statement is prepared on the basis of data of P&L statement and
two consecutive balance sheets.

a) True
b) False
c) Value delivery
d) None of the above

ANSWER: a) True
3. Which of the following rules stands true while preparation of Schedule of
changes in working capital?

A) An increase in current assets increases working capital.

B) An increase in current assets decreases working capital.
C) An increase in current liabilities decreases working capital.
D) An increase in current liabilities increases working capital

a) A and C
b) A and D
c) B and D
d) A, B, C and D

ANSWER: a) A and C

4. If reserve for bad and doubtful debts is mentioned in the question of Funds
Flow Statement Preparation, it can be shown as

a) In the schedule by deducting from total debtors under current assets

b) In the schedule separately under the heading of capital liabilities
c) Both a & b
d) None of the above

ANSWER: c) Both a & b

5. Funds Flow Statement is also known as

a) Statement of Funds Flow

b) Statement of Sources and Application of Funds
c) Statement of Sources and Uses of Funds
d) All of the above

ANSWER: d) All of the above

6. Given Net profit for the year Rs 2, 50,000 Transferred to general reserves Rs
40,000 and old machinery bought for Rs 50,000 was sold for Rs 20,000. Calculate
funds from operations.

a) Rs 2, 80,000
b) Rs 2, 20,000
c) Rs 2, 90,000
d) Rs 3, 00,000

ANSWER: a) Rs 2, 80,000

7. Which of the following are sources of funds?

A) Issue of bonus shares

B) Issue of shares against the purchase of fixed assets
C) Conversion of debentures into shares
D) Conversion of loans into shares

a) A and C
b) A and D
c) A, B, C and D
d) None of the above

ANSWER: d) None of the above