UNIT 1: INTRO TO FINANCIAL ACCOUNTING

1. Which of the following is NOT a characteristic of financial accounting?

a) Historical in nature
b) Mandatory for all businesses c) Focused on external users d) Based on future projections
Answer: d) Based on future projections
2. The basic accounting equation is:
a) Assets = Liabilities + Owner’s Equity b) Assets = Liabilities - Owner’s Equity c) Assets +
Liabilities = Owner’s Equity d) Revenue = Expenses + Liabilities
Answer: a) Assets = Liabilities + Owner’s Equity
3. Which of the following is NOT considered a financial statement?
a) Balance Sheet
b) Income Statement
c) Cash Flow Statement d) Production Budget
Answer: d) Production Budget
4. Which accounting principle states that revenue should be recognized
when it is earned, regardless of when cash is received?
a) Matching Principle
b) Conservatism Principle c) Accrual Principle
d) Consistency Principle
Answer: c) Accrual Principle

5. Depreciation appears in which of the following financial statements?

a) Income Statement
b) Balance Sheet
c) Both Income Statement and Balance Sheet d) Cash Flow Statement
Answer: c) Both Income Statement and Balance Sheet 6. Which of the following is classified as
a current asset?
a) Land
b) Goodwill c) Inventory d) Machinery
Answer: c) Inventory
7. The process of recording financial transactions in chronological order is
known as:
a) Ledger Posting b) Trial Balancing c) Journalizing
d) Summarizing
Answer: c) Journalizing
8. The double-entry accounting system requires that:
a) Every transaction affects at least two accounts b) Assets should always equal liabilities
c) Revenues must always exceed expenses
d) Every debit has no corresponding credit
Answer: a) Every transaction affects at least two accounts

9. A company's financial position on a particular date is shown in which statement?

a) Income Statement
b) Cash Flow Statement
c) Balance Sheet
d) Statement of Retained Earnings
Answer: c) Balance Sheet
10. Which financial statement shows the profitability of a business?
a) Balance Sheet
b) Income Statement
c) Cash Flow Statement
d) Statement of Changes in Equity
Answer: b) Income Statement
11. A company’s total revenue is $500,000, total expenses are $300,000,
and interest paid is $50,000. What is the net profit?
a) $150,000 b) $200,000 c) $100,000 d) $250,000
Answer: c) $100,000
12. Goodwill is an example of:
a) A current asset
b) A tangible asset
c) An intangible asset d) A liability
Answer: c) An intangible asset

13. Which accounting principle suggests that business transactions should be recorded at their
original purchase price?
a) Accrual Principle
b) Historical Cost Principle c) Prudence Principle
d) Matching Principle
Answer: b) Historical Cost Principle
14. Which of the following is an example of an operating activity in a cash
flow statement?
a) Buying machinery b) Issuing shares
c) Paying salaries
d) Selling land
Answer: c) Paying salaries
15. A credit balance in which of the following accounts indicates an error?
a) Revenue
b) Liability
c) Asset
d) Owner’s Equity
Answer: c) Asset

16. The main purpose of financial accounting is to:

a) Provide financial information to external users b) Prepare reports for internal decision-making
c) Help in tax calculation only
d) Track employee performance
Answer: a) Provide financial information to external users
17. What does GAAP stand for?
a) Generally Accepted Accounting Policies
b) Generally Accepted Auditing Principles
c) Generally Accepted Accounting Principles
d) Governmental Accounting and Auditing Practices
Answer: c) Generally Accepted

Accounting Principles
18. Which financial statement reports cash receipts and cash payments
during a period?
a) Balance Sheet
b) Cash Flow Statement c) Income Statement
d) Statement of Equity
Answer: b) Cash Flow Statement
19. Unearned revenue is classified as:
a) An asset
b) A liability
c) Owner’s equity d) Revenue
Answer: b) A liability
20. The closing stock is recorded in which financial statement?
a) Cash Flow Statement
b) Income Statement
c) Balance Sheet
d) Both Income Statement and Balance Sheet
Answer: d) Both Income Statement and Balance Sheet

1. What is the primary purpose of financial accounting?

a) To provide information for internal decision-making
b) To prepare tax returns for the government
c) To provide financial information to external users
d) To manage day-to-day operations of the business
Answer: c) To provide financial information to external users

2. Which of the following is NOT a financial statement?

a) Balance Sheet
b) Income Statement
c) Cash Flow Statement d) Trial Balance
Answer: d) Trial Balance
3. What is the accounting equation?
a) Assets = Liabilities + Equity
b) Revenue - Expenses = Profit
c) Assets + Liabilities = Equity
d) Income - Expenses = Net Profit Answer: a) Assets = Liabilities + Equity
4. Which of the following is a current asset?
a) Land
b) Accounts Payable
c) Inventory
d) Long-term Investments Answer: c) Inventory

5. What is the main purpose of the income statement?

a) To show the financial position of a company at a specific point in time b) To report the
revenues, expenses, and net income over a period of time
c) To summarize the cash inflows and outflows
d) To list all the assets and liabilities of a company
Answer: b) To report the revenues, expenses, and net income over a period of time
6. Which accounting principle requires expenses to be recorded in the same period as the
revenues they help generate?
a) Matching Principle
b) Revenue Recognition Principle c) Cost Principle
d) Conservatism Principle
Answer: a) Matching Principle

7. What is the purpose of the cash flow statement?

a) To show the profitability of a company
b) To provide information about cash inflows and outflows
c) To list all the assets and liabilities of a company
d) To calculate the net worth of a company
Answer: b) To provide information about cash inflows and outflows

8. Which of the following is a liability?

a) Accounts Receivable b) Prepaid Expenses
c) Notes Payable
d) Inventory
Answer: c) Notes Payable

9. What is the role of the balance sheet?

a) To show the financial performance of a company over a period
b) To provide a snapshot of the company’s financial position at a specific point in time
c) To summarize cash flows from operating, investing, and financing activities
d) To calculate the net income of a company
Answer: b) To provide a snapshot of the company’s financial position at a specific point in time

10. Which of the following is an example of an operating activity in the cash flow statement?
a) Purchase of equipment
b) Issuance of shares
c) Payment of salaries
d) Repayment of a loan
Answer: c) Payment of salaries
11. What is the double-entry system in accounting?
a) Recording only debit entries
b) Recording only credit entries
c) Recording both debit and credit entries for every transaction d) Recording transactions in two
different ledgers
Answer: c) Recording both debit and credit entries for every transaction

12. Which of the following is NOT a characteristic of useful financial information?

a) Relevance
b) Reliability
c) Timeliness
d) Complexity
Answer: d) Complexity
13. What is the purpose of the statement of retained earnings?
a) To show changes in retained earnings over a period b) To list all the assets of a company
c) To calculate the net income of a company
d) To summarize cash flows
Answer: a) To show changes in retained earnings over a period
14. Which of the following is an example of a non-current asset?
a) Cash
b) Accounts Receivable c) Machinery
d) Prepaid Expenses
Answer: c) Machinery

15. What is the effect of an increase in liabilities on the accounting equation?

a) Assets increase
b) Equity decreases
c) Assets decrease
d) Equity increases
Answer: b) Equity decreases

16. Which of the following is a revenue recognition principle?

a) Revenue is recognized when cash is received
b) Revenue is recognized when goods or services are delivered c) Revenue is recognized when
an invoice is issued
d) Revenue is recognized when expenses are incurred
Answer: b) Revenue is recognized when goods or services are delivered

17. What is the purpose of the trial balance?

a) To ensure that debits equal credits
b) To calculate net income
c) To prepare financial statements
d) To list all the assets and liabilities
Answer: a) To ensure that debits equal credits
18. Which of the following is an example of a financing activity in the cash flow statement?
a) Purchase of inventory
b) Issuance of bonds
c) Payment of salaries
d) Sale of goods
Answer: b) Issuance of bonds
19. What is the role of the auditor in financial accounting?
a) To prepare financial statements
b) To ensure the accuracy and fairness of financial statements c) To manage the company’s
cash flows
d) To calculate taxes for the company
Answer: b) To ensure the accuracy and fairness of financial statements
20. Which of the following is an example of an expense?
a) Accounts Receivable b) Depreciation
c) Inventory
d) Cash
Answer: b) Depreciation

UNIT 2: ACCOUNTING CYCLE

1. The accounting cycle begins with:
A. Preparing ledger accounts
B. Preparing a trial balance
C. Analyzing business transactions
D. Preparing adjusting entries
Answer: C 3
2. After proper analysis, a business transaction is recorded in the
journal in what order?
A. Chronological order
B. Reverse chronological order
C. Random order
D. None of the above
Answer: A 3
3. In accounting/bookkeeping, "posting" refers to:
A. Transferring information from the ledger to the trial balance
B. Transferring entries from the journal to the ledger
C. Preparing financial statements from the trial balance
D. None of the above
Answer: B 3
4. Fast Company purchases land for $12,000, paying with 1,200 shares of common stock at $10
each. The journal entry is:
A. Land Dr. $12,000, Cash Cr. $12,000
B. Land Dr. $12,000, Accounts Payable Cr. $12,000
C. Common Stock Dr. $12,000, Land Cr. $12,000
D. Land Dr. $12,000, Common Stock Cr. $12,000
Answer: D 3
5. The collection of all accounts in an organization is known as:
A. General journal
B. General ledger
C. Trial balance
D. Balance sheet
Answer: B 3

6. The right-hand side of a T-account is called the:

A. Debit side
B. Credit side
C. Income side
D. Expense side
Answer: B 3
7. How would you post the following journal entry to the ledger? Rent expense $200 Dr., Cash
$200 Cr.
A. Debit Cash $200, Credit Rent Expense $200
B. Debit Rent Expense 200,CreditA/CP.A200,CreditA/CP.A200
C. Debit Cash $200, Credit Loss Account $200
D. Debit Rent Expense $200, Credit Cash $200
Answer: D 3
8. A credit may signify:
A. An increase in a liability account
B. A decrease in a liability account
C. An increase in an asset account
D. An increase in an expense account
Answer: A 3
9. A statement listing the titles and balances of ledger accounts on a specific date is a:
A. Balance sheet
B. Income statement
C. Trial balance
D. Statement of retained earnings
Answer: C 3
10. Cash received from credit customers is recorded by:
A. Debiting Cash, Crediting Accounts Payable
B. Debiting Cash, Crediting Accounts Receivable
C. Debiting Accounts Payable, Crediting Cash
D. Debiting Accounts Receivable, Crediting Cash
Answer: B 3

11. A trial balance where total debits equal total credits proves that:
A. The ledger is in balance
B. Transactions are correctly analyzed and recorded in proper
accounts
C. Correct debit and credit balances have been computed for each
account
D. No transaction has been completely omitted during posting
Answer: A 3
12. Which financial statement computes net income for a specific
period?
A. Balance sheet
B. Statement of retained earnings
C. Income statement
D. Cash account
Answer: C 3
13. Which statement helps determine a business's financial position on a specific date?
A. Statement of cash flows
B. Statement of retained earnings
C. Asset accounts of the business
D. Balance sheet
Answer: D 3
14. A statement showing changes in retained earnings during a
period is the:
A. Statement of financial position
B. Statement of retained earnings
C. Statement of retained assets
D. Statement of retained liabilities
Answer: B 3

15. Retained earnings at the end of a period equals:

A. Beginning Retained Earnings + Dividends Declared – Net Income
B. Net Income + Dividends Declared – Beginning Retained Earnings
C. Beginning Retained Earnings + Net Income – Dividends Declared
D. Beginning Retained Earnings + Net Income – Operating
Expenses
Answer: C 3
16. Which of the following is not a fixed asset?
A. Machinery
B. Plant
C. Equipment
D. Inventory
Answer: D 3
17. Which of the following is not an intangible asset?
A. Goodwill
B. Patent
C. Prepaid expenses
D. Copyright
Answer: C 3
18. Which financial statement is generally prepared first?
A. Balance sheet
B. Statement of cash flows
C. Income statement
D. Statement of retained earnings
Answer: C 3
19. ABC is profitable. Which entry closes its income summary account?
A. Credit Income Summary, Debit Capital Stock
B. Debit Income Summary, Credit Capital Stock
C. Debit Income Summary, Credit Retained Earnings
D. Credit Income Summary, Debit Retained Earnings
Answer: C 3

20. Which account is not closed to the income summary account at the end of the period?
A. Accumulated depreciation
B. Wage expense
C. Depreciation expense
D. Advertising expenses
Answer: A

1. Which of the following is the first step in the accounting cycle?

A) Posting to the ledger
B) Preparing the trial balance
C) Recording transactions in the journal
D) Adjusting the entries
Answer: C) Recording transactions in the journal
2. The purpose of a trial balance is to:
A) Record all transactions
B) Ensure that total debits equal total credits
C) Identify revenue and expenses
D) Close the temporary accounts
Answer: B) Ensure that total debits equal total credits
3. Which of the following is NOT a part of the accounting cycle?
A) Identifying and analyzing transactions B) Preparing a balance sheet
C) Making managerial decisions
D) Posting to the general ledger
Answer: C) Making managerial decisions
4. What is the purpose of adjusting entries in the accounting cycle?
A) To record transactions as they occur
B) To update accounts for accruals and deferrals
C) To post transactions to the general ledger
D) To close the books for the year
Answer: B) To update accounts for accruals and deferrals
5. Which of the following accounts requires an adjusting entry?
A) Cash
B) Accounts Receivable
C) Prepaid Expenses
D) Common Stock
Answer: C) Prepaid Expenses
6. What financial statement is prepared first in the accounting cycle?
A) Balance Sheet
B) Income Statement
C) Cash Flow Statement
D) Statement of Retained Earnings Answer: B) Income Statement
7. The trial balance is prepared to check for:
A) The correctness of journal entries
B) Mathematical accuracy of ledger accounts
C) Business profitability
D) Cash flow projections
Answer: B) Mathematical accuracy of ledger accounts
8. Which of the following accounts is closed at the end of the accounting period?
A) Accounts Payable B) Retained Earnings C) Revenue
D) Fixed Assets Answer: C) Revenue
9. In the accounting cycle, which step follows the preparation of the financial statements?
A) Posting to the general ledger
B) Recording adjusting entries
C) Closing temporary accounts
D) Preparing a trial balance
Answer: C) Closing temporary accounts

10. Which document summarizes all transactions recorded in a company’s general ledger?
A) Trial balance
B) Balance sheet
C) General journal
D) Cash flow statement Answer: A) Trial balance
11. An unadjusted trial balance is prepared before which of the following steps?
A) Closing the accounts
B) Preparing the financial statements C) Recording adjusting entries
D) Recording transactions
Answer: C) Recording adjusting entries
12. Which statement best describes a reversing entry?
A) An entry that corrects an error in a previous transaction
B) An entry made after financial statements are prepared to simplify accounting for the next
period
C) An entry that is recorded only in manual accounting systems
D) An entry that affects only asset accounts
Answer: B) An entry made after financial statements are prepared to simplify accounting for the
next period
13. A worksheet is used to prepare:
A) Journal entries
B) Financial statements
C) Adjusting entries
D) The general ledger
Answer: B) Financial statements
14. The closing entries are made to transfer:
A) Revenues and expenses to retained earnings
B) Assets and liabilities to equity
C) Cash transactions to the bank account
D) Fixed assets to accumulated depreciation
Answer: A) Revenues and expenses to retained earnings

15. When preparing financial statements, which of the following accounts is NOT closed?
A) Rent Expense
B) Sales Revenue
C) Accounts Receivable
D) Dividends
Answer: C) Accounts Receivable
16. What is the purpose of an adjusted trial balance?
A) To record transactions before journalizing
B) To ensure all accounts reflect the correct balances after adjustments C) To close revenue
and expense accounts
D) To prepare cash flow statements
Answer: B) To ensure all accounts reflect the correct balances after adjustments

17. Which of the following best describes a post-closing trial balance?

A) A list of all accounts before closing entries
B) A list of all accounts that still have balances after closing entries C) A report prepared for
external stakeholders
D) A record of all revenue and expense transactions
Answer: B) A list of all accounts that still have balances after closing entries

18. What is the correct order of preparing financial statements?

A) Balance Sheet → Income Statement → Cash Flow Statement
B) Income Statement → Statement of Retained Earnings → Balance Sheet
C) Cash Flow Statement → Balance Sheet → Income Statement
D) Statement of Retained Earnings → Income Statement → Balance Sheet
Answer: B) Income Statement → Statement of Retained Earnings → Balance Sheet

19. The term "accrual" in accounting refers to:

A) Cash received before revenue is earned
B) Expenses paid in advance
C) Recognizing revenue or expenses before cash is exchanged
D) Recording only cash transactions
Answer: C) Recognizing revenue or expenses before cash is exchanged

20. In which step of the accounting cycle are transactions first recorded?
A) Posting to the ledger
B) Preparing financial statements
C) Making journal entries
D) Preparing the trial balance

Answer: C) Making journal entries

UNIT 3: DEPRECIATION

1. What is depreciation?
A) Increase in the value of an asset
B) Decrease in the value of an asset over time C) A type of tax
D) A method to increase revenue
Answer: B) Decrease in the value of an asset over time
2. Which of the following is NOT a method of depreciation?
A) Straight-Line Method
B) Reducing Balance Method C) Revaluation Method
D) Compounding Method
Answer: D) Compounding Method
3. Under the Straight-Line Method, depreciation is calculated as:
A) (Cost of Asset – Salvage Value) / Useful Life B) Cost of Asset × Depreciation Rate
C) Cost of Asset – Accumulated Depreciation D) Cost of Asset × Useful Life
Answer: A) (Cost of Asset – Salvage Value) / Useful Life
4. Which depreciation method results in higher depreciation expense in
earlier years?
A) Straight-Line Method
B) Double Declining Balance Method C) Units of Production Method
D) Sinking Fund Method
Answer: B) Double Declining Balance Method

5. Depreciation is recorded as:

A) An asset
B) A liability
C) An expense D) A revenue
Answer: C) An expense
6. What does the Reducing Balance Method of depreciation assume?
A) Depreciation is constant each year
B) Depreciation is calculated on the book value C) Depreciation is calculated on the original cost
D) Depreciation is only charged in the final year
Answer: B) Depreciation is calculated on the book value
7. Which of the following assets is NOT subject to depreciation?
A) Machinery B) Land
C) Buildings D) Vehicles
Answer: B) Land
8. In which financial statement is accumulated depreciation reported?
A) Income Statement
B) Cash Flow Statement
C) Balance Sheet
D) Statement of Retained Earnings
Answer: C) Balance Sheet

9. If an asset is fully depreciated, its net book value is equal to:

A) Cost Price
B) Salvage Value C) Market Value D) Zero
Answer: B) Salvage Value
10. The useful life of an asset is:
A) The time period an asset is expected to be used B) The time period before an asset is
purchased C) The time period an asset remains new
D) The time period until the asset is scrapped
Answer: A) The time period an asset is expected to be used
11. Which of the following factors affect depreciation calculation?
A) Cost of the asset
B) Salvage value
C) Estimated useful life D) All of the above
Answer: D) All of the above
12. Depreciation is classified as what type of cost?
A) Fixed cost
B) Variable cost
C) Sunk cost
D) Opportunity cost
Answer: A) Fixed cost

13. When using the Units of Production method, depreciation is based on:
A) The passage of time
B) The asset’s cost and salvage value C) The actual usage of the asset
D) The asset’s book value
Answer: C) The actual usage of the asset
14. Which method of depreciation is used for tax purposes to accelerate
depreciation deductions?
A) Straight-Line Method
B) Double Declining Balance Method C) Revaluation Method
D) Inventory Method
Answer: B) Double Declining Balance Method
15. Which depreciation method charges an equal amount of depreciation
every year?
A) Reducing Balance Method
B) Straight-Line Method
C) Sum of the Years' Digits Method D) Depletion Method
Answer: B) Straight-Line Method
16. Depreciation is a non-cash expense because:
A) It does not involve actual cash outflow B) It is recorded under current liabilities C) It is added
to net profit
D) It reduces total revenue
Answer: A) It does not involve actual cash outflow

17. What is the primary purpose of depreciation?

A) To increase profits
B) To allocate the cost of an asset over its useful life C) To record an increase in asset value
D) To reduce liabilities
Answer: B) To allocate the cost of an asset over its useful life
18. Which of the following methods is MOST suitable for assets that lose
more value in the early years?
A) Straight-Line Method
B) Reducing Balance Method C) Units of Production Method D) Revaluation Method
Answer: B) Reducing Balance Method 19. In accounting, salvage value refers to:
A) The original cost of the asset
B) The amount an asset is worth at the end of its useful life C) The accumulated depreciation of
an asset
D) The insurance value of an asset
Answer: B) The amount an asset is worth at the end of its useful life 20. Which of the following
assets is typically depreciated over a longer
period?
A) Office Equipment B) Machinery
C) Land Improvements D) Buildings
Answer: D) Buildings

1. What is depreciation?
a) The increase in the value of an asset over time
b) The allocation of the cost of an asset over its useful life
c) The repair and maintenance cost of an asset
d) The sale of an asset at a profit
Answer: b) The allocation of the cost of an asset over its useful life
2. Which of the following is NOT a method of calculating depreciation?
a) Straight-line method
b) Double-declining balance method
c) Units of production method d) FIFO method
Answer: d) FIFO method
3. What is the formula for straight-line depreciation? a) (Cost - Salvage Value) / Useful Life
b) (Cost + Salvage Value) / Useful Life
c) (Cost - Salvage Value) × Useful Life
d) (Cost + Salvage Value) × Useful Life
Answer: a) (Cost - Salvage Value) / Useful Life
4. Which depreciation method results in higher expenses in the
early years of an asset's life?
a) Straight-line method
b) Units of production method
c) Double-declining balance method
d) Sum-of-the-years'-digits method
Answer: c) Double-declining balance method
5. What is the salvage value of an asset?
a) The original cost of the asset
b) The estimated residual value at the end of its useful life
c) The market value of the asset at the time of purchase
d) The total depreciation expense over the asset's life
Answer: b) The estimated residual value at the end of its useful life
6. Which of the following is true about the double-declining balance method?
a) It applies a constant depreciation rate to the book value each year b) It ignores the salvage
value of the asset
c) It results in equal depreciation expenses each year
d) It is the simplest method of depreciation

Answer: a) It applies a constant depreciation rate to the book

value each year
7. What is accumulated depreciation?
a) The total depreciation expense recorded for an asset over its life b) The current year's
depreciation expense
c) The salvage value of the asset
d) The cost of the asset minus its salvage value
Answer: a) The total depreciation expense recorded for an
asset over its life
8. Which of the following is a non-cash expense?
a) Depreciation
b) Salaries
c) Rent
d) Utilities
Answer: a) Depreciation
9. What is the book value of an asset?
a) The original cost of the asset
b) The cost of the asset minus accumulated depreciation c) The salvage value of the asset
d) The market value of the asset
Answer: b) The cost of the asset minus accumulated depreciation
10. Which depreciation method is based on the actual usage of the asset?
a) Straight-line method
b) Double-declining balance method
c) Units of production method
d) Sum-of-the-years'-digits method Answer: c) Units of production method
11. What is the impact of depreciation on the income statement?
a) It increases net income
b) It decreases net income
c) It has no effect on net income
d) It increases revenue
Answer: b) It decreases net income

12. Which of the following is NOT a factor in calculating depreciation?

a) Cost of the asset
b) Salvage value
c) Useful life
d) Market value of the asset
Answer: d) Market value of the asset
13. What is the purpose of charging depreciation? a) To reflect the wear and tear of an asset
over time
b) To increase the book value of an asset
c) To reduce the salvage value of an asset
d) To record the market value of an asset
Answer: a) To reflect the wear and tear of an asset over time 14. Which of the following is true
about the sum-of-the-years'-
digits method?
a) It results in equal depreciation expenses each year b) It is an accelerated depreciation
method
c) It ignores the salvage value of the asset
d) It is based on the actual usage of the asset
Answer: b) It is an accelerated depreciation method
15. What happens to depreciation expense if the useful life of an asset is increased?
a) It increases
b) It decreases
c) It remains the same
d) It becomes zero Answer: b) It decreases
16. Which of the following is an example of an intangible asset that is amortized, not
depreciated?
a) Machinery
b) Buildings
c) Patents
d) Vehicles Answer: c) Patents
17. What is the journal entry to record depreciation expense? a) Debit Depreciation Expense,
Credit Accumulated Depreciation b) Debit Accumulated Depreciation, Credit Depreciation
Expense c) Debit Depreciation Expense, Credit Cash
d) Debit Cash, Credit Depreciation Expense
Answer: a) Debit Depreciation Expense, Credit Accumulated Depreciation

18. Which of the following is true about the units of production method?
a) It is based on the passage of time
b) It is an accelerated depreciation method
c) It is based on the actual usage or output of the asset
d) It ignores the salvage value of the asset
Answer: c) It is based on the actual usage or output of the asset
19. What is the impact of depreciation on cash flow? a) It reduces cash flow
b) It increases cash flow
c) It has no direct impact on cash flow
d) It increases revenue
Answer: c) It has no direct impact on cash flow
20. Which of the following is a limitation of the straight-line
method?
a) It does not reflect the actual usage of the asset
b) It is too complex to calculate
c) It results in higher depreciation expenses in the early years d) It ignores the salvage value of
the asset
Answer: a) It does not reflect the actual usage of the asset

UNIT 4: PREPARATION OF FINANCIAL STATEMENTS

1. Which of the following is NOT a financial statement?
A) Income Statement
B) Balance Sheet
C) Statement of Cash Flows D) Statement of Taxation
Answer: D) Statement of Taxation
2. The Balance Sheet shows a company’s financial position at:
A) The beginning of the year B) A specific point in time
C) The end of the month
D) Over a period of time
Answer: B) A specific point in time
3. What is the primary purpose of the Income Statement?
A) To show the company’s financial position
B) To record cash inflows and outflows
C) To report revenues and expenses over a period D) To summarize shareholders’ equity
Answer: C) To report revenues and expenses over a period
4. Which of the following is NOT a component of the Balance Sheet?
A) Assets
B) Liabilities
C) Shareholders’ Equity D) Revenue
Answer: D) Revenue

5. The Statement of Cash Flows is divided into how many main sections?
A) 2 B) 3 C) 4 D) 5
Answer: B) 3 (Operating, Investing, and Financing activities)
6. Which accounting principle ensures that financial statements provide a
true and fair view of a company’s finances?
A) Conservatism
B) Accrual Accounting
C) Matching Principle
D) GAAP (Generally Accepted Accounting Principles)
Answer: D) GAAP (Generally Accepted Accounting Principles) 7. Which of the following is
classified as a non-current asset?
A) Accounts Receivable B) Inventory
C) Land and Buildings D) Cash
Answer: C) Land and Buildings
8. Which financial statement explains the changes in retained earnings?
A) Income Statement
B) Balance Sheet
C) Statement of Changes in Equity D) Cash Flow Statement
Answer: C) Statement of Changes in Equity

9. Which of the following transactions will not affect the Income Statement?
A) Purchase of machinery B) Sale of goods
C) Payment of salary
D) Interest expense
Answer: A) Purchase of machinery 10. What does EBITDA stand for?
A) Earnings Before Interest, Tax, Depreciation, and Amortization B) Earnings Before
Investments, Taxes, and Dividend Allocation C) Earnings Before Income, Tax, and Dividend
Accrual
D) Earnings Before Internal Trading and Business Adjustments
Answer: A) Earnings Before Interest, Tax, Depreciation, and Amortization
11. Which method of accounting recognizes revenues when earned and expenses when
incurred?
A) Cash Basis Accounting B) Accrual Basis Accounting C) Tax Basis Accounting
D) Hybrid Accounting
Answer: B) Accrual Basis Accounting
12. The quick ratio (acid-test ratio) is calculated as:
A) (Current Assets – Inventory) / Current Liabilities B) Total Assets / Total Liabilities
C) Current Liabilities / Current Assets
D) Net Income / Revenue
Answer: A) (Current Assets – Inventory) / Current Liabilities
 13. Depreciation is classified under which section in the Cash Flow Statement?
A) Operating Activities B) Investing Activities C) Financing Activities D) Equity Activities
Answer: A) Operating Activities
14. Which of the following is NOT considered a current liability?
A) Accounts Payable
B) Short-term Loans Payable
C) Bonds Payable (maturing in 10 years) D) Accrued Expenses
Answer: C) Bonds Payable (maturing in 10 years)
15. What does the term “liquidity” refer to in financial statements?
A) The ability to generate profits
B) The ability to pay short-term obligations C) The total value of fixed assets
D) The amount of equity in a company
Answer: B) The ability to pay short-term obligations
16. Which of the following financial ratios measures profitability?
A) Current Ratio
B) Debt-to-Equity Ratio C) Gross Profit Margin D) Quick Ratio
Answer: C) Gross Profit Margin

17. Which of the following transactions would appear in the investing activities section of the
Cash Flow Statement?
A) Issuance of shares
B) Purchase of new equipment C) Payment of dividends
D) Payment of rent
Answer: B) Purchase of new equipment
18. A company reports net income of $200,000 but shows a cash outflow
in the Cash Flow Statement. What could be a reason for this?
A) Depreciation was too high
B) The company invested heavily in new assets
C) The company received cash payments in advance D) The company reduced its liabilities
Answer: B) The company invested heavily in new assets
19. If total assets increase while total liabilities remain the same, what
happens to shareholders’ equity?
A) Increases
B) Decreases
C) Remains unchanged D) Cannot be determined
Answer: A) Increases
20. What does the Matching Principle in accounting require?
A) Expenses should be recognized in the same period as related revenues
B) Revenues should be recorded when cash is received
C) Assets and liabilities should always be equal
D) Financial statements should be prepared annually

Answer: A) Expenses should be recognized in the same period as related revenues

1. Which of the following is NOT one of the primary financial statements?
a) Income Statement
b) Balance Sheet
c) Statement of Cash Flows
d) Statement of Retained Earnings
Answer: d) Statement of Retained Earnings
(Note: The primary financial statements are the Income Statement, Balance Sheet, and
Statement of Cash Flows.)
2. What does the income statement primarily report? a) Assets, liabilities, and equity
b) Revenues, expenses, and net income
c) Cash inflows and outflows
d) Changes in equity
Answer: b) Revenues, expenses, and net income
3. Which financial statement provides a snapshot of a company's
financial position at a specific point in time?
a) Income Statement
b) Balance Sheet
c) Statement of Cash Flows
d) Statement of Retained Earnings Answer: b) Balance Sheet
4. What is the formula for the Balance Sheet?
a) Assets = Liabilities + Equity
b) Revenues - Expenses = Net Income
c) Cash Inflows - Cash Outflows = Net Cash Flow d) Equity = Assets - Liabilities
Answer: a) Assets = Liabilities + Equity
5. Which financial statement shows the cash inflows and outflows
from operating, investing, and financing activities?
a) Income Statement
b) Balance Sheet
c) Statement of Cash Flows
d) Statement of Retained Earnings Answer: c) Statement of Cash Flows

6. What is the purpose of the Statement of Retained Earnings? a) To show changes in equity
over a period
b) To report cash flows from operating activities
c) To list all assets and liabilities
d) To calculate net income
Answer: a) To show changes in equity over a period
7. Which of the following is a current asset?
a) Land
b) Accounts Payable c) Inventory
d) Long-term Debt Answer: c) Inventory
8. Which of the following is a liability? a) Accounts Receivable
b) Cash
c) Accounts Payable
d) Retained Earnings
Answer: c) Accounts Payable
9. What is the main purpose of financial statements?
a) To calculate taxes
b) To provide information for decision-making
c) To record daily transactions
d) To manage cash flows
Answer: b) To provide information for decision-making
10. Which financial statement is prepared first? a) Balance Sheet
b) Income Statement
c) Statement of Cash Flows
d) Statement of Retained Earnings
Answer: b) Income Statement
11. What is the formula for Net Income on the Income
Statement?
a) Revenues - Expenses
b) Assets - Liabilities
c) Cash Inflows - Cash Outflows
d) Equity - Liabilities
Answer: a) Revenues – Expenses

12. Which of the following is an example of an operating activity on the Statement of Cash
Flows?
a) Purchase of equipment
b) Issuance of stock
c) Payment of salaries
d) Repayment of long-term debt Answer: c) Payment of salaries
13. What is the difference between gross profit and net income?
a) Gross profit includes operating expenses, while net income does not
b) Gross profit is revenue minus cost of goods sold, while net income includes all expenses
c) Gross profit is calculated after taxes, while net income is calculated before taxes
d) There is no difference between gross profit and net income Answer: b) Gross profit is
revenue minus cost of goods sold, while net income includes all expenses
14. Which of the following is a non-current liability? a) Accounts Payable
b) Short-term Debt
c) Long-term Debt
d) Inventory
Answer: c) Long-term Debt
15. What does the Statement of Cash Flows reconcile?
a) Net income to cash flows from operating activities b) Assets to liabilities and equity
c) Revenues to expenses
d) Equity to retained earnings
Answer: a) Net income to cash flows from operating activities 16. Which of the following is true
about the Balance Sheet?
a) It shows financial performance over a period
b) It is based on the accounting equation: Assets = Liabilities + Equity
c) It includes revenues and expenses
d) It is prepared after the Statement of Cash Flows
Answer: b) It is based on the accounting equation: Assets = Liabilities + Equity

17. What is the purpose of the notes to the financial statements?

a) To provide additional details and disclosures
b) To summarize the financial statements
c) To calculate net income
d) To list all transactions
Answer: a) To provide additional details and disclosures
18. Which of the following is an example of a financing activity on the Statement of Cash Flows?
a) Purchase of inventory
b) Issuance of bonds
c) Sale of goods
d) Payment of utilities
Answer: b) Issuance of bonds
19. What is the relationship between the Income Statement and the Balance Sheet?
a) The Income Statement explains changes in the Balance Sheet b) The Balance Sheet
explains changes in the Income Statement c) They are unrelated
d) The Income Statement is a subset of the Balance Sheet
Answer: a) The Income Statement explains changes in the
Balance Sheet
20. Which of the following is a limitation of financial
statements?
a) They are based on historical data
b) They provide too much detail
c) They are not used for decision-making
d) They are prepared only for tax purposes Answer: a) They are based on historical data

1. Which of the following is the correct accounting equation?

a) Assets = Liabilities - Owner's Equity
b) Assets - Liabilities = Owner's Equity 3
c) Assets + Owner's Equity = Liabilities
d) Liabilities = Assets + Owner's Equity
Answer: b) Assets - Liabilities = Owner's Equity 3
2. The income statement is also known as: 3 a) Balance Sheet
b) Statement of Cash Flows
c) Profit and Loss Statement 3
d) Statement of Retained Earnings
Answer: c) Profit and Loss Statement 3
3. Which financial statement shows the financial position of a company at a specific point in
time?
a) Income Statement
b) Balance Sheet 3
c) Statement of Cash Flows
d) Statement of Retained Earnings
Answer: b) Balance Sheet 3
4. The statement of cash flows reports a company's cash flows activities, which are:
a) Operating, investing, and financing 3
b) Revenue, expenses, and net income
c) Assets, liabilities, and equity
d) Sales, cost of goods sold, and gross profit
Answer: a) Operating, investing, and financing 3
5. Which of the following is NOT a current asset?
a) Cash
b) Accounts Receivable
c) Inventory
d) Buildings 3
Answer: d) Buildings 3

6. Which of the following is a current liability?

a) Accounts Payable 3
b) Bonds Payable
c) Mortgage Payable
d) Common Stock
Answer: a) Accounts Payable 3
7. What is the purpose of the statement of retained earnings? a) To report a company's
revenues and expenses
b) To show the changes in retained earnings during a period 2
c) To present a company's assets, liabilities, and equity
d) To detail a company's cash inflows and outflows
Answer: b) To show the changes in retained earnings during a
period 2
8. Gross profit is calculated as:
a) Revenue - Operating Expenses
b) Revenue - Cost of Goods Sold 3
c) Net Income - Taxes
d) Revenue - All Expenses
Answer: b) Revenue - Cost of Goods Sold 3
9. Operating income is calculated as:
a) Gross Profit - Operating Expenses 3
b) Revenue - Cost of Goods Sold
c) Net Income - Taxes
d) Revenue - All Expenses
Answer: a) Gross Profit - Operating Expenses 3
10. Net income is calculated as:
a) Operating Income - Interest - Taxes 3
b) Gross Profit - Operating Expenses
c) Revenue - Cost of Goods Sold
d) Revenue - All Expenses
Answer: a) Operating Income - Interest - Taxes 3

11. Which of the following is an example of an investing activity on the statement of cash
flows?
a) Purchasing equipment 3
b) Issuing bonds
c) Paying dividends
d) Collecting cash from customers
Answer: a) Purchasing equipment 3
12. Which of the following is an example of a financing activity on
the statement of cash flows?
a) Selling goods
b) Purchasing land
c) Issuing stock 3
d) Paying salaries
Answer: c) Issuing stock 3
13. Which of the following is an example of an operating activity on the statement of cash flows?
a) Buying equipment
b) Selling bonds
c) Paying dividends
d) Collecting cash from customers 3
Answer: d) Collecting cash from customers 3
14. What is depreciation?
a) The process of allocating the cost of an asset over its useful life 4
b) The increase in the value of an asset
c) The cash outflow for purchasing an asset
d) The resale value of an asset
Answer: a) The process of allocating the cost of an asset over its useful life 4
15. What is amortization?
a) The process of allocating the cost of a tangible asset over its useful life
b) The process of allocating the cost of an intangible asset over its useful life
c) The decrease in the value of an asset due to wear and tear

d) The increase in the value of an asset

Answer: b) The process of allocating the cost of an intangible asset
over its useful life
16. Which of the following is NOT a limitation of financial statements?
a) They are based on historical costs
 b) They are subject to management's estimates and judgments
c) They provide detailed information about a company's future
performance
d) They may not reflect current market values
Answer: c) They provide detailed information about a company's
future performance

17. What does the term "window dressing" refer to in the context of financial statements?
a) Improving the appearance of financial statements to mislead users
b) Presenting financial statements in a clear and concise manner
c) Complying with all accounting standards and regulations
d) Providing additional disclosures to enhance transparency
Answer: a) Improving the appearance of financial statements to
mislead users

18. Which of the following is a tool used for analyzing financial statements?
a) Ratio analysis 3
b) Trend analysis 3
c) Common-size statements 3
d) All of the above 3
Answer: d) All of the above 3
19. What does the current ratio measure?
a) A company's profitability
b) A company's liquidity 1
c) A company's solvency
d) A company's efficiency
Answer: b) A company's liquidity 1

20. What does the debt-to-equity ratio measure?

a) A company's ability to generate profits
b) A company's ability to pay its short-term debts
c) A company's financial leverage 1
d) A company's operating efficiency
Answer: c) A company's financial leverage

UNIT 5: Financial Statement Analysis

1. What is the primary purpose of financial statement analysis?

a) To prepare financial statements
b) To make investment and business decisions c) To determine employee salaries
d) To calculate tax liability
Answer: b) To make investment and business decisions 2. Which of the following is NOT a key
financial statement?
a) Balance Sheet
b) Income Statement
c) Statement of Retained Earnings d) Tax Return Statement
Answer: d) Tax Return Statement
3. What does the Current Ratio measure?
a) Liquidity
b) Profitability c) Solvency
d) Market Value
Answer: a) Liquidity
4. Which ratio indicates how efficiently a company uses its assets to
generate revenue?
a) Gross Profit Margin
b) Return on Assets (ROA) c) Debt-to-Equity Ratio
d) Quick Ratio
Answer: b) Return on Assets (ROA)

5. The Debt-to-Equity ratio is used to evaluate a company's:

a) Liquidity
b) Solvency
c) Profitability
d) Market Performance
Answer: b) Solvency
6. What does a high Price-to-Earnings (P/E) ratio indicate?
a) The stock is undervalued
b) The stock is overvalued
c) Investors expect high growth
d) The company has a high debt level
Answer: c) Investors expect high growth
7. Which financial statement shows a company's financial position at a
specific point in time?
a) Income Statement
b) Balance Sheet
c) Cash Flow Statement
d) Statement of Changes in Equity
Answer: b) Balance Sheet

8. The Gross Profit Margin is calculated as:

a) Net Sales ÷ Total Assets
b) Gross Profit ÷ Net Sales
c) Operating Profit ÷ Net Sales d) Net Profit ÷ Net Sales
Answer: b) Gross Profit ÷ Net Sales

9. What does the Quick Ratio exclude from current assets?

a) Inventory
b) Cash
c) Accounts Receivable d) Marketable Securities
Answer: a) Inventory

10. A company's Return on Equity (ROE) is calculated as:

a) Net Income ÷ Shareholder’s Equity b) Operating Income ÷ Total Assets c) Net Sales ÷
Shareholder’s Equity d) Gross Profit ÷ Total Equity
Answer: a) Net Income ÷ Shareholder’s Equity

11. Which financial statement provides information about a company's

cash inflows and outflows?
a) Income Statement
b) Balance Sheet
c) Statement of Cash Flows
d) Statement of Changes in Equity
Answer: c) Statement of Cash Flows

12. The working capital of a company is calculated as:

a) Total Assets - Total Liabilities
b) Current Assets - Current Liabilities c) Net Profit - Taxes
d) Cash + Accounts Receivable
Answer: b) Current Assets - Current Liabilities

13. If a company has a high inventory turnover ratio, it means:

a) The company is struggling to sell inventory b) The company has slow-moving stock
c) The company sells inventory quickly
d) The company is facing liquidity issues
Answer: c) The company sells inventory quickly
14. What does Earnings Per Share (EPS) measure?
a) Revenue per share b) Profitability per share c) Liquidity per share
d) Debt per share
Answer: b) Profitability per share

15. Which of the following is NOT a component of the DuPont Analysis?

a) Profit Margin
b) Asset Turnover
c) Financial Leverage d) Current Ratio
Answer: d) Current Ratio

16. If a company's operating cash flow is negative, what does it indicate?

a) The company is generating sufficient cash
b) The company is spending more than it earns from operations c) The company has a high
profit margin
d) The company is highly liquid
Answer: b) The company is spending more than it earns from operations
17. Which financial metric is most commonly used to measure a company’s ability to pay short-
term liabilities?
a) Debt-to-Equity Ratio
b) Quick Ratio
c) Return on Assets
d) Price-to-Earnings Ratio
Answer: b) Quick Ratio

18. What does an increasing Accounts Receivable Turnover Ratio

indicate?
a) Customers are taking longer to pay
b) The company is collecting payments more quickly c) The company is losing customers
d) The company has high inventory levels
Answer: b) The company is collecting payments more quickly

19. Which statement is TRUE about Cash Flow from Investing Activities?
a) It includes revenue from product sales
b) It includes cash spent on purchasing assets c) It shows changes in working capital
d) It includes dividends paid
Answer: b) It includes cash spent on purchasing assets

20. A company with a Debt-to-Equity Ratio of 3:1 means:

a) The company has three times more debt than equity b) The company has three times more
equity than debt c) The company has low financial risk
d) The company has a high net income
Answer: a) The company has three times more debt than equity

1. Which of the following is NOT one of the primary financial statements?

a) Income Statement
b) Balance Sheet
c) Cash Flow Statement d) Trial Balance
Answer: d) Trial Balance

2. The Balance Sheet provides information about a company's: a) Financial performance over a
period.
b) Financial position at a specific point in time.
c) Cash inflows and outflows.
d) Changes in equity.
Answer: b) Financial position at a specific point in time.

3. The Income Statement is also known as:

a) Statement of Financial Position
b) Profit and Loss Statement
c) Cash Flow Statement
d) Statement of Changes in Equity Answer: b) Profit and Loss Statement

4. Gross Profit is calculated as:

a) Sales Revenue - Cost of Goods Sold
b) Sales Revenue - Operating Expenses
c) Net Income - Taxes
d) Operating Income - Interest Expense
Answer: a) Sales Revenue - Cost of Goods Sold

5. Which of the following is an example of an operating expense? a) Cost of Goods Sold

b) Interest Expense
c) Selling and Administrative Expenses
d) Dividends Paid
Answer: c) Selling and Administrative Expenses

6. Net Income is calculated as:

a) Gross Profit - Operating Expenses
b) Operating Income - Interest Expense - Taxes
c) Sales Revenue - Cost of Goods Sold - Operating Expenses d) All of the above
Answer: d) All of the above

7. Which of the following is a current asset? a) Machinery

b) Accounts Receivable
c) Land
d) Patents
Answer: b) Accounts Receivable

8. The difference between Total Assets and Total Liabilities is

known as:
a) Net Income
b) Shareholder's Equity
c) Working Capital
d) Retained Earnings
Answer: b) Shareholder's Equity

9. Which of the following is a long-term liability? a) Accounts Payable

b) Short-Term Debt
c) Bonds Payable
d) Accrued Expenses
Answer: c) Bonds Payable

10. The Cash Flow Statement is divided into which three sections?
a) Operating, Investing, and Financing Activities
b) Revenue, Expenses, and Profit
c) Assets, Liabilities, and Equity
d) Current, Non-Current, and Contingent Liabilities
Answer: a) Operating, Investing, and Financing Activities
11. Which of the following is a cash inflow from operating activities?
a) Purchase of Equipment
b) Issuance of Shares
c) Collection of Accounts Receivable
d) Payment of Dividends
Answer: c) Collection of Accounts Receivable

12. Depreciation is added back to net income in the cash flow statement because it is:
a) A cash expense.
b) A non-cash expense.
c) A financing activity.
d) An investing activity.
Answer: b) A non-cash expense.

13. Which of the following ratios measures liquidity? a) Debt-to-Equity Ratio

b) Current Ratio
c) Return on Equity
d) Gross Profit Margin
Answer: b) Current Ratio

14. The Debt-to-Equity Ratio is calculated as:

a) Total Liabilities / Shareholder's Equity
b) Total Assets / Total Liabilities
c) Net Income / Shareholder's Equity
d) Total Liabilities / Total Assets
Answer: a) Total Liabilities / Shareholder's Equity
15. Return on Assets (ROA) measures: a) Profitability relative to sales.
b) Profitability relative to equity.
c) Profitability relative to total assets.
d) Liquidity of the company.
Answer: c) Profitability relative to total assets.

16. Trend Analysis involves:

a) Comparing financial data over multiple periods.
b) Comparing financial data with industry averages.
c) Expressing financial statement items as percentages of a base figure.
d) Analyzing cash flows only.
Answer: a) Comparing financial data over multiple periods.
17. In Common-Size Analysis, the Balance Sheet items are expressed as a percentage of:
a) Total Assets
b) Total Liabilities
c) Shareholder's Equity d) Sales Revenue Answer: a) Total Assets

18. In Common-Size Income Statement analysis, all items are expressed as a percentage of:
a) Net Income
b) Gross Profit
c) Sales Revenue
d) Operating Income Answer: c) Sales Revenue

19. Which of the following is a limitation of financial statement analysis?

a) It relies on historical data.
b) It ignores non-financial factors.
c) It is affected by accounting policies. d) All of the above.
Answer: d) All of the above.

20. Financial statement analysis may be misleading if: a) The company uses aggressive
accounting policies.
b) The financial statements are audited.
c) The company has high profitability.
d) The company has low debt.
Answer: a) The company uses aggressive accounting policies.

UNIT 6: Ratio Analysis

1. Which of the following ratios is a measure of liquidity?

a) Debt-to-Equity Ratio b) Current Ratio
c) Return on Equity
d) Earnings Per Share
✅ Answer: b) Current Ratio
2. The Quick Ratio is also known as:
a) Solvency Ratio b) Acid-Test Ratio c) Leverage Ratio d) Coverage Ratio
✅ Answer: b) Acid-Test Ratio

3. The formula for the Current Ratio is:

a) (Current Assets - Inventory) / Current Liabilities b) Current Assets / Current Liabilities
c) Total Assets / Total Liabilities
d) Net Income / Shareholders' Equity
✅ Answer: b) Current Assets / Current Liabilities
4. Which of the following ratios measures a company's profitability?
a) Interest Coverage Ratio b) Return on Assets
c) Quick Ratio
d) Debt-Equity Ratio
✅ Answer: b) Return on Assets

5. A high Inventory Turnover Ratio indicates that:

a) The company has high levels of unsold inventory b) Inventory is being sold quickly
c) The company has liquidity problems
d) The company is heavily dependent on debt
✅ Answer: b) Inventory is being sold quickly

6. Debt-to-Equity Ratio is used to measure:

a) Profitability b) Liquidity
c) Leverage d) Efficiency
✅ Answer: c) Leverage

7. Which financial ratio measures a company’s ability to cover its interest

expenses?
a) Gross Profit Margin
b) Interest Coverage Ratio c) Operating Margin
d) Debt Ratio
✅ Answer: b) Interest Coverage Ratio

8. The formula for Earnings Per Share (EPS) is:

a) Net Income / Total Assets
b) Net Income / Number of Outstanding Shares c) Total Liabilities / Shareholders’ Equity
d) Total Revenue / Total Expenses
✅ Answer: b) Net Income / Number of Outstanding Shares

9. The Return on Equity (ROE) ratio indicates:

a) The percentage of net profit retained by the company b) The return earned on shareholders’
investment
c) The efficiency of inventory management
d) The company’s liquidity position
✅ Answer: b) The return earned on shareholders’ investment

10. Which of the following ratios is considered a measure of operational

efficiency?
a) Gross Profit Margin
b) Accounts Receivable Turnover c) Debt-to-Equity Ratio
d) Return on Equity
✅ Answer: b) Accounts Receivable Turnover

11. A low Gross Profit Margin may indicate:

a) High production costs
b) High liquidity
c) Efficient asset management d) High leverage
✅ Answer: a) High production costs

12. The Price-to-Earnings (P/E) Ratio is used by investors to measure:

a) Liquidity
b) Market valuation c) Profitability
d) Leverage
✅ Answer: b) Market valuation

13. The formula for Net Profit Margin is:

a) Net Income / Total Revenue b) Total Revenue / Net Income c) Gross Profit / Net Sales
d) Net Sales / Total Liabilities
✅ Answer: a) Net Income / Total Revenue

14. A high Debt Ratio means:

a) The company is financed more by debt than equity b) The company has strong liquidity
c) The company is generating higher net profits
d) The company has a low level of leverage
✅ Answer: a) The company is financed more by debt than equity

15. The Working Capital Ratio is another name for:

a) Debt-to-Equity Ratio
b) Return on Equity
c) Current Ratio
d) Price-to-Earnings Ratio
✅ Answer: c) Current Ratio

16. The DuPont Analysis helps in breaking down which financial ratio?
a) Quick Ratio
b) Return on Equity
c) Earnings Per Share d) Price-to-Book Ratio
✅ Answer: b) Return on Equity

17. Which of the following ratios measures how efficiently a company uses its assets to
generate sales?
a) Asset Turnover Ratio b) Return on Assets
c) Quick Ratio
d) Debt Ratio
✅ Answer: a) Asset Turnover Ratio
18. The formula for Operating Profit Margin is:
a) Operating Income / Net Sales b) Net Income / Total Assets
c) Gross Profit / Total Revenue d) Total Liabilities / Total Assets
✅ Answer: a) Operating Income / Net Sales
19. Which of the following is NOT considered a solvency ratio?
a) Debt-to-Equity Ratio
b) Interest Coverage Ratio c) Return on Assets
d) Debt Ratio
✅ Answer: c) Return on Assets
20. A high Accounts Receivable Turnover Ratio suggests that:
a) The company is struggling with debt payments b) The company has a slow collection process
c) The company is collecting payments efficiently d) The company has a high level of bad debts
✅ Answer: c) The company is collecting payments efficiently

1. Liquidity Ratios
1. Which of the following ratios measures a company's ability to meet its short-term obligations?
a) Debt-to-Equity Ratio
b) Current Ratio
c) Return on Equity
d) Gross Profit Margin Answer: b) Current Ratio
2. The Quick Ratio excludes which of the following from current assets?
a) Accounts Receivable b) Inventory
c) Cash
d) Marketable Securities Answer: b) Inventory
3. A current ratio of 1.5 indicates that:
a) The company
has 1.50incurrentassetsforevery1.50incurrentassetsforevery1 of current liabilities.
b) The company
has 1.50incurrentliabilitiesforevery1.50incurrentliabilitiesforevery1 of current assets.
c) The company is highly leveraged.
d) The company has no short-term obligations.
Answer: a) The company
has 1.50incurrentassetsforevery1.50incurrentassetsforevery1 of current liabilities.
2. Profitability Ratios
4. Which ratio measures the profitability of a company relative to its sales?
a) Return on Assets (ROA)
b) Net Profit Margin
c) Earnings Per Share (EPS) d) Debt-to-Equity Ratio Answer: b) Net Profit Margin
5. Return on Equity (ROE) is calculated as: a) Net Income / Total Assets
b) Net Income / Shareholder's Equity
c) Gross Profit / Sales

d) Operating Income / Total Assets

Answer: b) Net Income / Shareholder's Equity 6. A high Gross Profit Margin indicates:
a) Efficient cost management in production. b) High operating expenses.
c) Low sales revenue.
d) High interest expenses.
Answer: a) Efficient cost management in production.
3. Solvency Ratios
7. The Debt-to-Equity Ratio is used to measure:
a) A company's liquidity position.
b) A company's ability to meet short-term obligations. c) A company's financial leverage.
d) A company's profitability.
Answer: c) A company's financial leverage.
8. A lower Debt-to-Equity Ratio is generally preferred because it indicates:
a) Higher financial risk.
b) Lower financial risk.
c) Higher profitability.
d) Lower liquidity.
Answer: b) Lower financial risk.
9. Which of the following is a solvency ratio? a) Current Ratio
b) Interest Coverage Ratio
c) Quick Ratio
d) Inventory Turnover Ratio
Answer: b) Interest Coverage Ratio
4. Efficiency Ratios
10. The Inventory Turnover Ratio measures:
a) How quickly a company sells its inventory.
b) How efficiently a company uses its assets to generate sales. c) How well a company
manages its receivables.
d) How much profit a company makes per unit of inventory. Answer: a) How quickly a company
sells its inventory.

11. A high Accounts Receivable Turnover Ratio indicates: a) Slow collection of receivables.
b) Efficient collection of receivables.
c) High credit sales.
d) Low sales revenue.
Answer: b) Efficient collection of receivables. 12. The Asset Turnover Ratio is calculated as:
a) Net Income / Total Assets
b) Sales / Total Assets
c) Gross Profit / Total Assets
d) Operating Income / Total Assets Answer: b) Sales / Total Assets
5. Market Ratios
13. Earnings Per Share (EPS) is calculated as: a) Net Income / Total Shares Outstanding
b) Gross Profit / Total Shares Outstanding
c) Operating Income / Total Shares Outstanding
d) Sales / Total Shares Outstanding
Answer: a) Net Income / Total Shares Outstanding 14. The Price-to-Earnings (P/E) Ratio is
used to:
a) Measure a company's liquidity.
b) Evaluate a company's stock price relative to its earnings.
c) Assess a company's debt levels.
d) Determine a company's profitability.
Answer: b) Evaluate a company's stock price relative to its earnings.
15. A high Dividend Payout Ratio indicates:
a) The company retains most of its earnings.
b) The company pays a large portion of its earnings as dividends.
c) The company has low profitability.
d) The company has high debt.
Answer: b) The company pays a large portion of its earnings as dividends.

6. Comprehensive Ratios
16. The DuPont Analysis breaks down Return on Equity (ROE) into which of the following
components?
a) Net Profit Margin, Asset Turnover, and Equity Multiplier
b) Gross Profit Margin, Operating Margin, and Net Margin
c) Current Ratio, Quick Ratio, and Debt-to-Equity Ratio
d) Inventory Turnover, Receivables Turnover, and Asset Turnover Answer: a) Net Profit Margin,
Asset Turnover, and Equity Multiplier

17. Which of the following ratios is NOT part of the DuPont Analysis?
a) Net Profit Margin
b) Asset Turnover
c) Equity Multiplier
d) Current Ratio
Answer: d) Current Ratio

18. A company with a high Equity Multiplier is likely to have: a) Low financial leverage.
b) High financial leverage.
c) Low profitability.
d) High liquidity.
Answer: b) High financial leverage.

19. If a company's Quick Ratio is significantly lower than its Current Ratio, it suggests that:
a) The company has a large amount of inventory.
b) The company has a large amount of cash.
c) The company has low debt.
d) The company has high profitability.
Answer: a) The company has a large amount of inventory.

20. A company with a high Return on Assets (ROA) is likely to be:

a) Efficient in using its assets to generate profits. b) Highly leveraged.
c) Facing liquidity issues.
d) Struggling to manage its inventory.
Answer: a) Efficient in using its assets to generate profits.

1. Ratio analysis is mainly used to assess which of the following?

a) Profitability 1
 b) Solvency 1
c) Efficiency 1
d) All of the above 1
Answer: d) All of the above 1
2. Which ratio is used to assess a company's ability to meet its short- term obligations?
a) Debt-to-equity ratio
b) Current ratio 1
c) Return on assets
d) Net profit margin
Answer: b) Current ratio 1
3. What does a high current ratio indicate?
a) The company has difficulty paying its current liabilities.
b) The company has a strong ability to pay its current liabilities 3.
c) The company is highly leveraged.
d) The company is very profitable.
Answer: b) The company has a strong ability to pay its current
liabilities 3.
4. The quick ratio is also known as: a) Activity ratio
b) Acid-test ratio 1
c) Solvency ratio
d) Profitability ratio
Answer: b) Acid-test ratio 1
5. Which of the following is NOT included in the calculation of the quick ratio?
a) Cash
b) Accounts receivable
c) Inventory
d) Marketable securities
Answer: c) Inventory

6. What does the debt-to-equity ratio measure?

a) A company's short-term liquidity
b) A company's financial leverage 1
c) A company's operating efficiency
d) A company's profitability
Answer: b) A company's financial leverage 1
7. A high debt-to-equity ratio indicates: a) Lower financial risk
b) Higher financial risk 1
c) Efficient asset management
d) Strong profitability
Answer: b) Higher financial risk 1
8. Which ratio measures how efficiently a company uses its assets to generate sales?
a) Current ratio
b) Debt-to-equity ratio
c) Asset turnover ratio 1
d) Profit margin
Answer: c) Asset turnover ratio 1
9. The inventory turnover ratio indicates:
a) How quickly a company collects its receivables
b) How efficiently a company manages its inventory 1
c) A company's ability to pay its debts
d) A company's profitability
Answer: b) How efficiently a company manages its inventory 1

10. Which ratio is used to evaluate a company's ability to generate profit from its revenue?
a) Current ratio
b) Debt-to-equity ratio
c) Asset turnover ratio
d) Profit margin 1
Answer: d) Profit margin 1

11. What does a higher profit margin indicate?

a) The company is less profitable.
b) The company is more profitable 1.
c) The company is highly leveraged.
d) The company is not managing its assets efficiently.
Answer: b) The company is more profitable 1.

12. Which of the following is NOT a profitability ratio? a) Gross profit margin
b) Operating profit margin
c) Net profit margin
d) Debt-to-assets ratio 1
Answer: d) Debt-to-assets ratio 1

13. Return on Equity (ROE) measures:

a) A company’s ability to generate profit from its assets
b) A company’s ability to generate profit from shareholders’ equity 1
c) A company’s ability to pay off its short-term liabilities
d) A company’s operational efficiency
Answer: b) A company’s ability to generate profit from shareholders’
equity 1

14. A low turnover of stock ratio indicates:

a) Strong solvency position
b) Weak sales and over investment in stock 1
c) Low profit
d) Monopoly in business
Answer: b) Weak sales and over investment in stock 1
15. Which ratio is used to analyse the capital structure of a company?
a) Debt equity ratio 1
b) Proprietary ratio
c) Total asset to debt ratio
d) All of the above 1
Answer: d) All of the above 1

16. Which of the following statements is true about ratio analysis?

a) Ratio analysis may result in false results if variations in price levels are not considered 1.
b) Ratio analysis ignores qualitative factors 1
c) Ratio analysis ignores quantitative factors
d) Ratio analysis is historical analysis
Answer: a) Ratio analysis may result in false results if variations in
price levels are not considered 1.

17. Based on sales, the following ratio can be considered important

in judging the profitability of an enterprise:
a) Gross profit ratio 1
b) Operating profit ratio 1
c) Either (a) or (b)
d) Both (a) & (b) 1
Answer: d) Both (a) & (b) 1

18. Which among the following is the ratio of net profit to net sales?
a) Current ratio
b) Gross profit ratio
c) Net profit ratio 1
d) Stock turnover ratio
Answer: c) Net profit ratio 1

19. Activity ratio is calculated to check:

a) Profitability of the business
b) Efficiency of the business 1
c) Solvency of the business
d) None of the above
Answer: b) Efficiency of the business 1

20. Which of the following is not a limitation of ratio analysis?

a) False and Misleading results
b) It ignores qualitative factors
c) It is affected by personal judgement of the analyst
d) It cannot be used in forecasting 1
Answer: d) It cannot be used in forecasting
Unit 7: Budgeting and Management Control

1.A budget is primarily used for:

a) Increasing employee salaries

b) Planning and controlling business operations

c) Reducing company profits

d) Expanding workforce

Correct Answer: b) Planning and controlling business operations

2.Which of the following is NOT a type of budget?

a) Capital budget

b) Cash budget

c) Workforce budget

d) Operating budget

Correct Answer: c) Workforce budget

3.The main objective of budgetary control is to:

a) Compare actual performance with budgeted performance

b) Increase organizational hierarchy

c) Assign blame for poor performance

d) Reduce operational expenses

Correct Answer: a) Compare actual performance with budgeted performance

4.Variance analysis helps managers in:

a) Ignoring financial discrepancies

b) Identifying deviations from the budget

c) Setting random financial targets

d) Avoiding budget preparation

Correct Answer: b) Identifying deviations from the budget

5. The role of budgeting in decision-making includes:

a) Resource allocation and performance evaluation

b) Creating unnecessary constraints

c) Limiting investment opportunities

d) Reducing transparency

Correct Answer: a) Resource allocation and performance evaluation

6. Which type of budget focuses on future investments in fixed assets?

a) Operating budget

b) Capital budget

c) Cash budget

d) Zero-based budget

Correct Answer: b) Capital budget

7. A flexible budget:

a) Remains constant regardless of actual activity levels

b) Adjusts according to changes in business activity

c) Is prepared only for large organizations

d) Eliminates the need for variance analysis

Correct Answer: b) Adjusts according to changes in business activity

8. The cash budget helps in:

a) Managing short-term financial needs

b) Evaluating employee performance

c) Measuring annual profits

d) Reducing tax liabilities

Correct Answer: a) Managing short-term financial needs

9. Zero-based budgeting requires:

a) Justifying expenses from scratch for each period

b) Using previous budgets as a base

c) Increasing all budgeted expenses

d) Ignoring budget variances

Correct Answer: a) Justifying expenses from scratch for each period

10. A key benefit of budgeting is:

a) Enhancing business efficiency

b) Reducing accountability

c) Eliminating financial risks

d) Avoiding decision-making

Correct Answer: a) Enhancing business efficiency

11. The master budget consists of:

a) Only the sales budget

b) Multiple interrelated budgets

c) Random financial statements

d) A budget prepared only for government organizations

Correct Answer: b) Multiple interrelated budgets

12. The first step in the budgeting process is:

a) Estimating revenues

b) Setting financial policies

c) Preparing the cash budget

d) Hiring financial consultants

Correct Answer: a) Estimating revenues

13. The sales budget is prepared based on:

a) Past financial statements

b) Future sales forecasts

c) Cash flow statements

d) Government tax policies

Correct Answer: b) Future sales forecasts

14. The operating budget includes:

a) Revenue and expense forecasts

b) Capital investments

c) Debt repayment schedules

d) Employee hiring plans

Correct Answer: a) Revenue and expense forecasts

15. The capital expenditure budget is mainly concerned with:

a) Short-term financial needs

b) Long-term asset investments

c) Daily operational costs

d) Advertising expenses

Correct Answer: b) Long-term asset investments

16. A static budget remains:

a) Fixed regardless of activity levels

b) Flexible based on actual performance

c) Updated daily

d) Prepared only for small businesses

Correct Answer: a) Fixed regardless of activity levels

17. Which technique is used to measure budget performance?

a) Ratio analysis

b) Variance analysis

c) Competitor benchmarking

d) Stock market trends

Correct Answer: b) Variance analysis

18. The process of continuous budgeting involves:

a) Preparing budgets for a fixed period only

b) Regularly updating budgets

c) Eliminating budgeting activities

d) Focusing only on expenses

Correct Answer: b) Regularly updating budgets

19. An incremental budget is based on:

a) Previous budgets with slight modifications

b) Zero-based calculations

c) Future tax policies

d) Employee salaries

Correct Answer: a) Previous budgets with slight modifications

20. The main limitation of budgeting is:

a) It is time-consuming and requires effort

b) It guarantees business success

c) It eliminates financial risks

d) It does not require any forecasting

Correct Answer: a) It is time-consuming and requires effort

Unit 8: Emerging Trends (20 Questions)

1. Which of the following is an emerging trend in accounting?

a) Traditional bookkeeping

b) Green accounting

c) Manual accounting systems

d) Ignoring financial statements

Correct Answer: b) Green accounting

2. IFRS primarily aims to:

a) Increase financial fraud

b) Improve global financial reporting standards

c) Make financial statements complex

d) Reduce business transparency

Correct Answer: b) Improve global financial reporting standards

3. ESG in accounting refers to:

a) Employee Salary Growth

b) Environmental, Social, and Governance factors

c) Economic Sales Growth

d) Enterprise Security Guidelines

Correct Answer: b) Environmental, Social, and Governance factors

4. Forensic accounting is mainly used for:

a) Detecting financial fraud

b) Tax evasion

c) Increasing sales

d) Preparing marketing strategies

Correct Answer: a) Detecting financial fraud

5. Green accounting focuses on:

a) Evaluating environmental costs and impacts

b) Managing foreign exchange

c) Increasing financial fraud

d) Reducing company revenue

Correct Answer: a) Evaluating environmental costs and impacts

6. The adoption of new accounting standards presents challenges such as:

a) Resistance to change and compliance complexity

b) Lack of internet access

c) No impact on businesses
d) Decreasing financial security

Correct Answer: a) Resistance to change and compliance complexity

7. Convergence of IFRS means:

a) Completely replacing local accounting standards

b) Gradually aligning local accounting standards with IFRS

c) Eliminating financial reporting

d) Restricting global businesses

Correct Answer: b) Gradually aligning local accounting standards with IFRS

8. Which accounting trend helps companies track sustainability?

a) ESG reporting

b) Traditional accounting

c) Tax evasion techniques

d) Cash flow management

Correct Answer: a) ESG reporting

9. Financial instruments accounting deals with:

a) Managing physical assets

b) Handling cash only

c) Recognizing, measuring, and disclosing financial assets and liabilities

d) Ignoring market trends

Correct Answer: c) Recognizing, measuring, and disclosing financial assets and liabilitie

11. Which accounting standard focuses on lease accounting?

a) IFRS 16

b) IFRS 9

c) IFRS 15

d) IFRS 10

Correct Answer: a) IFRS 16

 12. Revenue recognition is governed under which IFRS standard?

a) IFRS 17

b) IFRS 15

c) IFRS 9

d) IFRS 13

Correct Answer: b) IFRS 15

13. A key challenge in forensic accounting is:

a) Detecting financial frauds

b) Avoiding audits

c) Reducing accounting transparency

d) Ignoring financial statements

Correct Answer: a) Detecting financial frauds

14. Which of the following is a major consideration for companies adopting new
accounting standards?

a) Compliance costs

b) Avoiding financial reporting

c) Increasing tax burden

d) Ignoring regulatory bodies

Correct Answer: a) Compliance costs

15. Blockchain technology in accounting helps in:

a) Improving transparency and security

b) Eliminating financial statements

c) Avoiding audits

d) Reducing financial control

Correct Answer: a) Improving transparency and security

16. Artificial Intelligence (AI) in accounting is primarily used for:

a) Automating financial reporting and fraud detection

b) Replacing human accountants completely

c) Avoiding financial disclosures

d) Increasing manual workload

Correct Answer: a) Automating financial reporting and fraud detection

17. Which technology is being increasingly used for auditing and risk assessment?

a) Data analytics and AI

b) Manual calculations

c) Paper-based accounting

d) Traditional bookkeeping

Correct Answer: a) Data analytics and AI

18. The key objective of Integrated Reporting (IR) is to:

a) Provide a comprehensive view of financial and non-financial information

b) Replace traditional accounting systems

c) Reduce corporate transparency

d) Eliminate annual reports

Correct Answer: a) Provide a comprehensive view of financial and non-financial information

19. One of the primary benefits of adopting ESG reporting is:

a) Attracting socially responsible investors

b) Hiding financial data

c) Avoiding compliance requirements

d) Reducing financial disclosure

Correct Answer: a) Attracting socially responsible investors

20. The main advantage of cloud accounting is:

a) Real-time access to financial data

b) Increased manual work

c) Limited scalability
d) Higher data loss risks

Correct Answer: a) Real-time access to financial data

UNIT 9 - Introduction to Corporate Finance

1. What is the primary goal of corporate finance?

A) Maximizing sales revenue

B) Maximizing shareholder wealth C) Maximizing employee benefits D) Minimizing costs

✅ Answer: B) Maximizing shareholder wealth

2. Which of the following is NOT a major decision area in corporate

finance?

A) Capital budgeting

B) Capital structure

C) Working capital management D) Personal financial planning

✅ Answer: D) Personal financial planning

3. The weighted average cost of capital (WACC) is used to evaluate:

A) Investment projects

B) Depreciation schedules

C) Dividend payments

D) Short-term financing needs

✅ Answer: A) Investment projects

4. Which of the following is an example of a capital budgeting decision?

A) Deciding how to finance a new project B) Choosing suppliers for raw materials C) Investing in
new machinery

D) Managing accounts receivable

✅ Answer: C) Investing in new machinery

5. The capital structure of a company refers to:

A) The mix of debt and equity financing

B) The company's organizational hierarchy C) The allocation of retained earnings

D) The management of working capital

✅ Answer: A) The mix of debt and equity financing

6. Which of the following best describes the time value of money?

A) Money today is worth more than the same amount in the future B) Future money is always
worth more than present money

C) Money loses value over time due to inflation

D) Money retains its value over time

✅ Answer: A) Money today is worth more than the same amount in the future

7. What is the formula for Net Present Value (NPV)?

A) Total Revenue – Total Costs

B) Present Value of Cash Inflows – Present Value of Cash Outflows C) (Ending Value - Initial
Investment) / Initial Investment

D) Future Value / (1 + r)^n

✅ Answer: B) Present Value of Cash Inflows – Present Value of Cash Outflows

8. A company with high financial leverage means it:

A) Uses more debt financing B) Uses more equity financing C) Has no liabilities

D) Has excess cash reserves

✅ Answer: A) Uses more debt financing

9. The dividend payout ratio is calculated as:

A) Earnings per Share / Net Income

B) Dividends per Share / Earnings per Share

C) Dividends per Share / Market Price per Share D) Retained Earnings / Net Income

✅ Answer: B) Dividends per Share / Earnings per Share

10. Which of the following is an example of a short-term financial

decision?
A) Expanding into a new market B) Issuing long-term bonds

C) Managing inventory levels D) Acquiring another company

✅ Answer: C) Managing inventory levels

11. Which financial statement shows a company’s financial position at a

specific point in time?

A) Income Statement

B) Cash Flow Statement

C) Balance Sheet

D) Statement of Retained Earnings

✅ Answer: C) Balance Sheet

12. If a company’s current ratio is 2:1, what does this indicate?

A) The company has twice the amount of liabilities than assets

B) The company has twice the amount of current assets than current liabilities

C) The company is in financial distress

D) The company has negative working capital

✅ Answer: B) The company has twice the amount of current assets than current
liabilities

13. The risk-return tradeoff principle states that:

A) Higher risk investments always lead to higher returns B) Lower risk investments yield lower
expected returns C) Risk and return are not related

D) Investors should always minimize risk

✅ Answer: B) Lower risk investments yield lower expected returns 14. Which of the
following is NOT a source of long-term financing?

A) Bonds

B) Retained earnings

C) Commercial paper D) Equity shares

✅ Answer: C) Commercial paper

15. The internal rate of return (IRR) is the discount rate that makes:

A) NPV equal to zero

B) Cash inflows equal to cash outflows

C) Return on investment equal to cost of capital D) Future value equal to present value

✅ Answer: A) NPV equal to zero

16. A high accounts receivable turnover ratio indicates:

A) Customers are taking too long to payB) The company efficiently collects payments from
customers C) The company has too much cash on handD) The company has high inventory
levels

✅ Answer: B) The company efficiently collects payments from customers 17. What is
the primary purpose of financial leverage?

A) Increase equity financing

B) Increase earnings per share C) Reduce tax liabilities

D) Improve liquidity

✅ Answer: B) Increase earnings per share

18. Which type of risk cannot be eliminated through diversification?

A) Business risk

B) Financial risk

C) Systematic risk D) Unsystematic risk

✅ Answer: C) Systematic risk

19. The Modigliani-Miller theorem suggests that in a perfect market:

A) Capital structure affects firm value

B) Dividend policy affects stock price

C) Financing decisions do not impact firm value D) More debt increases firm value

✅ Answer: C) Financing decisions do not impact firm value

20. Which of the following ratios is used to measure a company’s

profitability?
A) Current ratio

B) Debt-to-equity ratio

C) Return on equity (ROE) D) Quick ratio

✅ Answer: C) Return on equity (ROE)

1. What is the primary goal of corporate finance? a) Maximize shareholder wealth

b) Maximize employee satisfaction

c) Maximize market share

d) Minimize taxes

Answer: a) Maximize shareholder wealth

2. Which of the following is a key decision area in corporate

finance?

a) Investment decisions

b) Financing decisions

c) Dividend decisions

d) All of the above

Answer: d) All of the above

3. The time value of money concept states that:

a) Money today is worth more than money in the future.

b) Money in the future is worth more than money today.

c) Money has the same value over time.

d) Inflation has no impact on the value of money.

Answer: a) Money today is worth more than money in the future.

2. Financial Markets and Instruments

4. Which of the following is a primary market transaction? a) Buying shares of a company on the
stock exchange.

b) A company issuing new shares to the public.

c) Selling shares of a company to another investor.

d) Trading bonds between investors.

Answer: b) A company issuing new shares to the public.

5. Which of the following is a debt instrument?

a) Common stock

b) Preferred stock

c) Corporate bonds

d) Equity shares

Answer: c) Corporate bonds

6. The stock market is an example of: a) A money market

b) A capital market

c) A derivatives market

d) A foreign exchange market

Answer: b) A capital market

3. Risk and Return

7. Which of the following best describes systematic risk? a) Risk that can be eliminated through
diversification.

b) Risk that affects the entire market.

c) Risk specific to a company or industry.

d) Risk related to management decisions.

Answer: b) Risk that affects the entire market.

8. The Capital Asset Pricing Model (CAPM) is used to determine:

a) The expected return on an asset based on its systematic risk. b) The risk-free rate of return.

c) The market risk premium.

d) The total risk of an asset.

Answer: a) The expected return on an asset based on its systematic risk.

9. Which of the following is a measure of risk in finance? a) Standard deviation

b) Mean return

c) Median return

d) Mode return

Answer: a) Standard deviation

4. Capital Budgeting

10. Which of the following is a capital budgeting technique? a) Net Present Value (NPV)

b) Return on Investment (ROI)

c) Earnings Per Share (EPS)

d) Debt-to-Equity Ratio

Answer: a) Net Present Value (NPV)

11. The Net Present Value (NPV) rule states that a project

should be accepted if:

a) NPV is positive.

b) NPV is negative.

c) NPV is zero.

d) NPV is equal to the initial investment. Answer: a) NPV is positive.

12. Which of the following is a disadvantage of the Payback Period method?

a) It ignores the time value of money.

b) It is difficult to calculate.

c) It considers cash flows beyond the payback period. d) It is not useful for comparing projects.

Answer: a) It ignores the time value of money.

5. Cost of Capital

13. The Weighted Average Cost of Capital (WACC) is used to: a) Measure the cost of debt only.

b) Measure the cost of equity only.

c) Measure the overall cost of capital for a firm.

d) Measure the risk-free rate of return.

Answer: c) Measure the overall cost of capital for a firm. 14. Which of the following is a
component of WACC?

a) Cost of debt

b) Cost of equity

c) Cost of preferred stock

d) All of the above

Answer: d) All of the above

15. The cost of equity can be estimated using: a) The Capital Asset Pricing Model (CAPM)

b) The Dividend Discount Model (DDM)

c) Both a) and b)

d) Neither a) nor b)

Answer: c) Both a) and b)

6. Capital Structure

16. Capital structure refers to:

a) The mix of debt and equity used to finance a firm's operations. b) The total assets of a firm.

c) The total liabilities of a firm.

d) The total equity of a firm.

Answer: a) The mix of debt and equity used to finance a firm's operations.

17. According to the Modigliani-Miller Theorem, in a world without taxes, bankruptcy costs, or
asymmetric information: a) The value of a firm is affected by its capital structure.

b) The value of a firm is unaffected by its capital structure.

c) Debt is always better than equity.

d) Equity is always better than debt.

Answer: b) The value of a firm is unaffected by its capital structure.

18. Which of the following is a benefit of using debt financing? a) Tax shield on interest
payments
b) Increased financial risk

c) Higher cost of capital

d) Dilution of ownership

Answer: a) Tax shield on interest payments

7. Dividend Policy

19. Which of the following is a type of dividend policy? a) Stable dividend policy

b) Residual dividend policy

c) No dividend policy

d) All of the above

Answer: d) All of the above

20. The Residual Dividend Policy states that dividends should be paid:

a) Only if there are no profitable investment opportunities. b) Only if the company has excess
cash after funding all investments.

c) Only if the company has high earnings.

d) Only if the company has low debt.

Answer: b) Only if the company has excess cash after funding all investments.

1. What is the primary goal of corporate finance?

a) Maximizing accounting profits

b) Maximizing shareholder wealth

c) Minimizing costs

d) Maintaining ethical standards

Answer: b) Maximizing shareholder wealth

2. Which of the following decisions is NOT a key area of corporate finance?

a) Investment decisions (Capital Budgeting)

b) Financing decisions (Capital Structure)

c) Dividend decisions
d) Marketing decisions

Answer: d) Marketing decisions

3. What is capital budgeting?

a) The process of determining the optimal mix of debt and equity

b) The process of planning and managing a firm's long-terminvestments

c) The process of managing a firm's short-term assets and liabilities

d) The process of distributing profits to shareholders

Answer: b) The process of planning and managing a firm's long-terminvestments

4. What is capital structure?

a) The mix of a firm's current assets and current liabilities

b) The mix of a firm's long-term assets and long-term liabilities

c) The mix of debt and equity used to finance a firm's assets

d) The process of raising capital for a firm

Answer: c) The mix of debt and equity used to finance a firm'sassets

5. What is working capital management?

a) The process of determining the optimal mix of debt and equity

b) The process of planning and managing a firm's long-term

investments

c) The process of managing a firm's short-term assets and

liabilities

d) The process of distributing profits to shareholders

Answer: c) The process of managing a firm's short-term assets and

liabilities

6. Which of the following is a primary goal of working capital management?

a) Maximizing long-term profits

b) Ensuring the firm has enough liquidity to meet its short-termobligations

c) Minimizing the cost of capital

d) Maximizing shareholder dividends

Answer: b) Ensuring the firm has enough liquidity to meet its short term obligations

7. What is the agency problem?

a) The conflict of interest between shareholders and creditors

b) The conflict of interest between managers and shareholders

c) The conflict of interest between employees and management

d) The conflict of interest between customers and suppliers

Answer: b) The conflict of interest between managers andshareholders

8. Which of the following mechanisms can help mitigate the agency problem?

a) Increasing managerial salaries

b) Tying managerial compensation to firm performance

c) Reducing the firm's debt levels

d) Decreasing shareholder involvement

Answer: b) Tying managerial compensation to firm performance

9. What is the time value of money?

a) The concept that a dollar today is worth less than a dollar in the future

b) The concept that a dollar today is worth more than a dollar in the future

c) The concept that money has no value over time

d) The concept that inflation always erodes the value of money

Answer: b) The concept that a dollar today is worth more than adollar in the future

10. What is the discount rate?

a) The rate used to calculate the future value of an investment

b) The rate used to calculate the present value of an investment

c) The interest rate charged by banks

d) The dividend payout ratio

Answer: b) The rate used to calculate the present value of aninvestment

11. What is risk?

a) The certainty of an investment's return

b) The uncertainty of an investment's return

c) The potential for profit

d) The time value of money

Answer: b) The uncertainty of an investment's return

12. Which of the following is a measure of risk?

a) Net present value (NPV)

b) Internal rate of return (IRR)

c) Standard deviation

d) Payback period

Answer: c) Standard deviation

13. What is diversification?

a) Investing in a single asset to maximize returns

b) Investing in a variety of assets to reduce risk

c) Borrowing money to increase investment returns

d) Investing only in low-risk assets

Answer: b) Investing in a variety of assets to reduce risk

14. What is the cost of capital?

a) The cost of a firm's assets

b) The return required by investors for providing capital to the firm

c) The interest rate paid on debt

d) The dividend payout ratio

Answer: b) The return required by investors for providing capital to

the firm

15. Which of the following is a component of the cost of capital?

a) Cost of debt

b) Cost of equity

c) Cost of preferred stock

d) All of the above

Answer: d) All of the above

16. What is the weighted average cost of capital (WACC)? a) The average cost of a firm's
assets

b) The average cost of a firm's liabilities

c) The weighted average of the costs of debt, equity, and preferredstock

d) The sum of the costs of debt, equity, and preferred stock

Answer: c) The weighted average of the costs of debt, equity, andpreferred stock

17. What is the efficient market hypothesis (EMH)?

a) The theory that markets are inefficient and prices do not reflect available information

b) The theory that markets are efficient and prices fully reflect available information

c) The theory that markets are only efficient during certain periods

d) The theory that government intervention is necessary for market

efficiency

Answer: b) The theory that markets are efficient and prices fullyreflect available information

18. Which form of the EMH states that prices reflect all public and private information?

a) Weak form

b) Semi-strong form

c) Strong form

d) All forms

Answer: c) Strong form

19. Which of the following is a major function of the financial manager?

a) Financial accounting

b) Projecting profits

c) Managing the firm’s cash flows

d) All of the above

Answer: c) Managing the firm’s cash flows

20. What is a key difference between accounting and finance?

a) Accounting focuses on historical data, while finance focuses on future decisions

b) Finance focuses on historical data, while accounting focuses on future decisions

c) Accounting is more concerned with maximizing shareholder value

d) There is no real difference between accounting and finance

Answer: a) Accounting focuses on historical data, while finance focuses on future decisions

UNIT 10 - Time Value of Money

1. What does the time value of money (TVM) principle state?

a) Money loses value over time due to inflation

b) A dollar today is worth more than a dollar in the future c) Interest rates have no effect on
future cash flows

d) Money’s value remains constant over time

✅ Answer: b) A dollar today is worth more than a dollar in the future

2. Which of the following best explains why money has a time value?

a) Inflation reduces purchasing power

b) Money can be invested to earn returns

c) Government policies affect currency value d) Depreciation reduces money’s worth

✅ Answer: b) Money can be invested to earn returns

3. The formula for future value (FV) of a lump sum is:

a) FV = PV / (1 + r)^n

b) FV = PV × (1 + r)^n
c) FV = PV × (1 - r)^n

d) FV = PV / (1 - r)^n

✅ Answer: b) FV = PV × (1 + r)^n

4. The present value (PV) of a future sum of money is determined by:

a) Discounting it at an appropriate interest rate b) Multiplying it by the inflation rate

c) Adding the interest earned over time

d) Adjusting for risk alone

✅ Answer: a) Discounting it at an appropriate interest rate

5. What does the discount rate represent in TVM calculations?

a) The rate at which money loses value

b) The expected rate of return on investment c) The percentage of inflation in an economy d)

The rate at which a company repays loans

✅ Answer: b) The expected rate of return on investment

6. What is the Net Present Value (NPV) rule in capital budgeting?

a) Accept a project if NPV is negative

b) Accept a project if NPV is zero

c) Accept a project if NPV is positive

d) Accept a project if it has the highest initial cost

✅ Answer: c) Accept a project if NPV is positive

7. If the interest rate increases, the present value of future cash flows will:

a) Increase

b) Decrease

c) Stay the same

d) Cannot be determined

✅ Answer: b) Decrease 8. What is an annuity?

a) A single lump sum received in the future

b) A series of equal cash flows received or paid at regular intervals c) A one-time investment
made today

d) A loan that accrues no interest

✅ Answer: b) A series of equal cash flows received or paid at regular intervals

9. Which of the following is an example of a perpetuity?

a) Monthly mortgage payments

b) Dividends paid on preferred stock

c) Lottery payments over 20 years

d) Car loan repayment

✅ Answer: b) Dividends paid on preferred stock

10. What is the formula for the present value of a perpetuity?

a) PV = C / (r - g)

b) PV = C × (1 + r)^n c) PV = C / r

d) PV = C × r

✅ Answer: c) PV = C / r

11. If the compounding frequency increases, the future value of an

investment will:

a) Increase

b) Decrease

c) Remain constant

d) Cannot be determined

✅ Answer: a) Increase

12. Which of the following is NOT a factor affecting the time value of

money?

a) Interest rates

b) Inflation
c) Risk

d) Market share of the company

✅ Answer: d) Market share of the company

13. What is the formula for the effective annual rate (EAR)?

a) EAR = (1 + r/n)^n - 1

b) EAR = (1 + r)^n - 1

c) EAR = (1 - r/n)^n - 1

d) EAR = (1 + r)^-n

✅ Answer: a) EAR = (1 + r/n)^n - 1

14. Which statement about compounding and discounting is correct?

a) Compounding determines present value, discounting determines future value

b) Compounding determines future value, discounting determines present value

c) Both compounding and discounting calculate present value d) Both compounding and
discounting calculate future value

✅ Answer: b) Compounding determines future value, discounting determines

present value

15. If an investor requires a higher return, what happens to the present value of future cash
flows?

a) Increases

b) Decreases

c) Remains unchanged

d) Becomes zero

✅ Answer: b) Decreases

16. What is the term for the process of determining how much a future sum of money is worth
today?

a) Compounding

b) Discounting
c) Indexing

d) Hedging

✅ Answer: b) Discounting

17. If interest is compounded quarterly, how many compounding periods are there in a year?

a) 1 b) 2 c) 4 d) 12

✅ Answer: c) 4

18. Which of the following investments would have the highest future

value, assuming the same interest rate and time period?

a) Annual compounding

b) Semi-annual compounding c) Quarterly compounding

d) Daily compounding

✅ Answer: d) Daily compounding

19. The real rate of return is calculated as:

a) Nominal return + Inflation rate

b) Nominal return - Inflation rate

c) Nominal return × Inflation rate

d) Nominal return / Inflation rate

✅ Answer: b) Nominal return - Inflation rate

20. If you invest $1,000 today at an annual interest rate of 5%

compounded annually, how much will you have in 5 years?

a) $1,250

b) $1,276

c) $1,500

d) $1,563

✅ Answer: d) $1,563 (Using FV = 1000 × (1.05)^5)

1. The time value of money concept states that:

a) Money today is worth more than money in the future.

b) Money in the future is worth more than money today.

c) Money has the same value over time.

d) Inflation has no impact on the value of money.

Answer: a) Money today is worth more than money in the future.

2. Which of the following is NOT a reason for the time value of money?

a) Inflation

b) Opportunity cost

c) Risk

d) Fixed interest rates

Answer: d) Fixed interest rates

3. The process of calculating the present value of a future cash flow is called:

a) Compounding

b) Discounting

c) Annuitizing

d) Amortizing

Answer: b) Discounting

6. If the interest rate increases, the present value of a future cash flow will:

a) Increase

b) Decrease

c) Remain the same d) Become zero Answer: b) Decrease

7. An annuity is a series of:

a) Unequal cash flows over time.

b) Equal cash flows at regular intervals.

c) Cash flows that grow at a constant rate.

d) Cash flows that are unpredictable.

Answer: b) Equal cash flows at regular intervals.

10. A perpetuity is a series of:

a) Equal cash flows that continue forever.

b) Unequal cash flows over time.

c) Cash flows that grow at a constant rate.

d) Cash flows that are unpredictable.

Answer: a) Equal cash flows that continue forever.

11. The present value of a perpetuity of 1,000peryearatadiscountrateof5a)1,000p years at

discounts rate of 5

A)10,000

b) 15,000

c)20,000

d)25,000

Answer:c)20,000

(Calculation: PV = 1,000/0.05=1,000/0.05=20,000)

12. If the discount rate increases, the present value of a perpetuity will:

a) Increase

b) Decrease

c) Remain the same d) Become zero Answer: b) Decrease

5. Compounding and Discounting

13. Compounding refers to:

a) Calculating the present value of future cash flows.

b) Calculating the future value of present cash flows.

c) Calculating the interest on a loan.

d) Calculating the annuity payments.

Answer: b) Calculating the future value of present cash flows.

14. If interest is compounded quarterly, the number of compounding periods per year is:

a) 1

b) 2

c) 4

d) 12 Answer: c) 4

15. The effective annual rate (EAR) for a nominal rate of 12% compounded quarterly is:

a) 12.00%

b) 12.55%

c) 12.68%

d) 13.00%

Answer: b) 12.55%

(Calculation: EAR = (1 + 0.12/4)^4 - 1 = 12.55%)

6. Applications of TVM

16. A loan

of 10,000istoberepaidin5yearswithannualpaymentsof10,000isto
berepaidin5yearswithannualpaymentsof2,500. The interest rate on the loan is:

a) 5%

b) 7%

c) 8%

d) 10%

Answer: c) 8%

(Calculation: Solve for r in 10,000=10,000=2,500 × [1 - (1 + r)^-5] / r)

17. The future value of 5,000 invested today at 6% a) 8,000

b) 8,954.24
c)9,500

d) 10,000

Answer: b) 8,954.24

(Calculation: FV = 5,000×(1+0.06)10=5,000×(1+0.06)10=8,954.24)

18. The present value of 10,000 to be received in 7 years at a discount rate of 8%

a) 5,000

b) 5,834.90

c)6,000

d) 7,000

Answer: b) 5,834.90

(Calculation: PV = 10,000/(1+0.08)7=10,000/(1+0.08)7=5,834.90)

7. Advanced TVM Concepts

19. The Rule of 72 is used to estimate:

a) The present value of a cash flow.

b) The future value of a cash flow.

c) The time required to double an investment.

d) The interest rate required to double an investment. Answer: c) The time required to double an
investment.

20. If the interest rate is 6%, how long will it take for an investment to double using the Rule of
72?

a) 6 years

b) 8 years

c) 12 years

d) 18 years

Answer: c) 12 years (Calculation: 72 / 6 = 12 years)

1. What is the basic principle underlying the time value of money?

a) Money decreases in value over time due to inflation.

b) A dollar received today is worth more than a dollar received in the

future 12.

c) Money has the same value regardless of when it is received.

d) The value of money is solely determined by interest rates.

Answer: b) A dollar received today is worth more than a dollar

received in the future 12.

2. What is future value (FV)?

a) The current worth of a future sum of money or stream of cash flows given a specified rate of
return.

b) The value of an asset at a specified date in the future based on an assumed rate of growth
1.

c) The rate of return required for an investment.

d) The periodic payment on a loan.

Answer: b) The value of an asset at a specified date in the future

based on an assumed rate of growth 1.

3. What is present value (PV)?

a) The value of an asset at a specified date in the future based on an assumed rate of growth.

b) The current worth of a future sum of money or stream of cash flows given a specified rate of
return 1.

c) The interest rate earned on an investment.

d) The total amount of payments made on a loan.

Answer: b) The current worth of a future sum of money or stream of cash flows given a
specified rate of return 1.

4. What is compounding?

a) The process of determining the present value of a future sum.

b) The process of earning interest on the original investment only.

c) The process of earning interest on both the original investment

and the accumulated interest 1.

d) The process of decreasing the value of an investment due to

inflation.

Answer: c) The process of earning interest on both the original

investment and the accumulated interest 1.

5. What is discounting?

a) The process of determining the future value of a present sum.

b) The process of calculating the present value of a future sum 1.

c) The process of earning interest on an investment.

d) The process of increasing the value of an investment.

Answer: b) The process of calculating the present value of a future sum 1.

6. What is an annuity?

a) A single payment made at a specific time.

b) A series of equal payments made at regular intervals over a

specified period 1.

c) A lump-sum payment made at the end of an investment period.

d) A variable payment made at irregular intervals.

Answer: b) A series of equal payments made at regular intervals

over a specified period 1.

7. What is the difference between an ordinary annuity and an annuity due?

a) An ordinary annuity has payments made at the beginning of each period, while an annuity
due has payments made at the end.

b) An ordinary annuity has payments made at the end of each period, while an annuity due has
payments made at the beginning 1.

c) An ordinary annuity has variable payments, while an annuity due has fixed payments.

d) There is no difference between an ordinary annuity and an

 annuity due.

Answer: b) An ordinary annuity has payments made at the end of

each period, while an annuity due has payments made at the beginning 1.

8. What is a perpetuity?

a) An annuity with a limited number of payments.

b) An annuity that continues forever 1.

c) A single payment made at a specific time.

d) A loan with a fixed repayment schedule.

Answer: b) An annuity that continues forever 1.

9. How does an increase in the interest rate affect the present value of a future sum?

a) It increases the present value.

b) It decreases the present value 1.

c) It has no effect on the present value.

d) The effect depends on the size of the future sum.

Answer: b) It decreases the present value 1.

10. How does an increase in the interest rate affect the future value of a present sum?

a) It decreases the future value.

b) It increases the future value 1.

c) It has no effect on the future value.

d) The effect depends on the size of the present sum.

Answer: b) It increases the future value

11. If the nominal interest rate 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 12

Answer: d) 10.38% per annum 12

12. 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 12

b) Effective rate < Nominal rate

c) Effective rate = Nominal rate

d) None of the above

Answer: a) Effective rate > Nominal rate

13. Time value of money supports the comparison of cash flowsrecorded 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 12

d) None of the above.

Answer: c) Using either a or b 12

14. Heterogeneous cash flows can be made comparable by:

a) Discounting technique

b) Compounding technique

c) Either a or b 12

d) None of the above

Answer: c) Either a or b 12

15. Interest paid (earned) on only the original principal borrowed(lent) is often referred to as:

a) Compound interest

b) Future value

c) Present value

d) Simple interest 1
Answer: d) Simple interest 1

16. The basic rule of the time value of money is?

(a) Investments will always be worth more tomorrow than they are today

(b) Its always wiser to save a dollar for tomorrow than to spend it today

(c) A dollar in hand today is worth more than a dollar promised at some time in the future 3

(d) All of the above express an aspect of the basic rule of time value of money

Answer: (c) A dollar in hand today is worth more than a dollar promised at some time in the
future 3

17. If the interest rate is greater than 0%, then a dollar today is worth:

(a) Less than a dollar tomorrow

(b) The same as a dollar tomorrow

(c) More than a dollar tomorrow 3

(d) There is not sufficient information to tell

Answer: (c) More than a dollar tomorrow

18. Which of the following is NOT a determinant of market interest rates?

(a) The inflation premium

(b) The maturity risk premium

(c) The volatility risk premium 3

(d) The real rate of interest

Answer: (c) The volatility risk premium 3

19. The risk-free interest rate is composed of:

(a) An inflation premium and a default risk premium

(b) A default risk premium and a maturity risk premium

(c) A real rate of interest and a liquidity premium

(d) A real rate of interest and an inflation premium 3

Answer: (d) A real rate of interest and an inflation premium 3

20. Treasury bills are?

A) Issued on a premium basis and pay a fixed annual interest rate

B) Issued on a discount basis and mature at par 1

C) Issued on a premium basis and mature at par

D) Issued on a discount basis and pay a fixed annual interest rate

Answer: B) Issued on a discount basis and mature at par

UNIT 11 - Long Term Investment Decisions

1. What is the primary objective of long-term investment decisions?

A) Maximizing short-term profits

B) Minimizing tax liabilities

C) Maximizing shareholders' wealth

D) Reducing fixed costs

Answer: C) Maximizing shareholders' wealth

2. Which of the following is NOT a capital budgeting technique?

A) Net Present Value (NPV)

B) Internal Rate of Return (IRR)

C) Payback Period

D) Working Capital Management Answer: D) Working Capital Management

3. The Net Present Value (NPV) method of investment appraisal is based on which principle?

A) Time value of money

B) Accrual accounting

C) Matching principle

D) Historical cost concept Answer: A) Time value of money

4. The Internal Rate of Return (IRR) is the discount rate that makes the NPV of a project:

A) Positive
B) Zero

C) Negative

D) Equal to the initial investment Answer: B) Zero

5. Which of the following factors is most important in capital budgeting decisions?

A) Sunk costs

B) Opportunity costs

C) Fixed costs

D) Depreciation expense Answer: B) Opportunity costs

6. The payback period method primarily measures:

A) Profitability of a project

B) Time taken to recover the initial investment

C) Return on investment

D) Future cash flows

Answer: B) Time taken to recover the initial investment

7. A project with a positive NPV should be:

A) Rejected

B) Accepted

C) Re-evaluated

D) Postponed Answer: B) Accepted

8. A major drawback of the Payback Period method is:

A) It ignores risk

B) It ignores time value of money

C) It requires extensive calculations

D) It is difficult to understand

Answer: B) It ignores time value of money

9. Which capital budgeting technique considers the profitability index (PI)?

A) Net Present Value (NPV)

B) Internal Rate of Return (IRR) C) Payback Period

D) Profitability Index (PI) Answer: D) Profitability Index (PI)

10. The Weighted Average Cost of Capital (WACC) is used in capital budgeting to:

A) Determine the break-even point B) Evaluate short-term investments C) Discount future cash
flows

D) Increase tax liabilities

Answer: C) Discount future cash flows

11. Which of the following is an example of an incremental cash flow?

A) Depreciation expense

B) Sunk costs

C) Future operating revenues from a project

D) Historical costs

Answer: C) Future operating revenues from a project

12. When mutually exclusive projects are considered, which capital budgeting technique is
preferred?

A) Payback Period

B) Profitability Index (PI)

C) Net Present Value (NPV)

D) Accounting Rate of Return (ARR) Answer: C) Net Present Value (NPV)

13. The IRR rule states that a project should be accepted if:

A) IRR > Cost of Capital B) IRR < Cost of Capital C) IRR = 0

D) IRR < NPV

Answer: A) IRR > Cost of Capital

14. What happens if the cost of capital increases?

A) NPV decreases

B) IRR increases

C) NPV remains the same

D) The project becomes more profitable Answer: A) NPV decreases

15. Capital Rationing refers to:

A) Allocating unlimited funds to investments

B) Selecting the most profitable projects due to limited funds

C) Ignoring capital constraints

D) Reducing capital expenses for tax purposes

Answer: B) Selecting the most profitable projects due to limited funds

16. If a project has an NPV of zero, it means:

A) The project is highly profitable

B) The project is earning exactly the required rate of return

C) The project should be rejected

D) The project has a negative IRR

Answer: B) The project is earning exactly the required rate of return

17. Which cash flows are relevant in capital budgeting decisions?

A) Sunk costs

B) Opportunity costs

C) Fixed costs

D) Past revenues

Answer: B) Opportunity costs

18. What is the effect of an increase in corporate tax rates on a firm's capital budgeting
decisions?

A) Increase in cash flows

B) Decrease in after-tax cash flows

C) No impact on NPV

D) Increase in project IRR

Answer: B) Decrease in after-tax cash flows

19. Which of the following projects is an example of a long-term investment decision?

A) Purchasing inventory

B) Expanding production capacity

C) Paying utility bills

D) Hiring temporary workers

Answer: B) Expanding production capacity

20. The main disadvantage of using IRR is:

A) It considers the time value of money B) It assumes reinvestment at the IRR C) It is more
accurate than NPV

D) It ignores cash flows

Answer: B) It assumes reinvestment at the IRR

1. Basics of Capital Budgeting

1. Capital budgeting is the process of:

a) Managing short-term cash flows.

b) Evaluating long-term investment projects.

c) Calculating working capital requirements.

d) Determining dividend policies.

Answer: b) Evaluating long-term investment projects.

2. Which of the following is NOT a capital budgeting decision? a) Purchasing new machinery.

b) Launching a new product line.

c) Investing in research and development.

d) Paying monthly salaries to employees.

Answer: d) Paying monthly salaries to employees.

3. The primary goal of capital budgeting is to: a) Maximize short-term profits.

b) Maximize shareholder wealth.

c) Minimize taxes.

d) Minimize risk.

Answer: b) Maximize shareholder wealth.

2. Capital Budgeting Techniques

4. Which of the following is a discounted cash flow (DCF) method?

a) Payback Period

b) Accounting Rate of Return (ARR) c) Net Present Value (NPV)

d) Internal Rate of Return (IRR) Answer: c) Net Present Value (NPV)

5. The Net Present Value (NPV) rule states that a project should be accepted if:

a) NPV is positive.

b) NPV is negative.

c) NPV is zero.

d) NPV is equal to the initial investment. Answer: a) NPV is positive.

6. The Internal Rate of Return (IRR) is the discount rate that makes the NPV of a project:

a) Positive.

b) Negative.

c) Zero.

d) Equal to the payback period. Answer: c) Zero.

3. Payback Period and ARR

7. The Payback Period method measures:

a) The time required to recover the initial investment.

b) The profitability of a project.

c) The risk of a project.

d) The present value of future cash flows.

Answer: a) The time required to recover the initial investment.

8. Which of the following is a disadvantage of the Payback Period method?

a) It ignores the time value of money.

b) It is difficult to calculate.

c) It considers cash flows beyond the payback period. d) It is not useful for comparing projects.

Answer: a) It ignores the time value of money.

9. The Accounting Rate of Return (ARR) is calculated as: a) Average Annual Profit / Initial
Investment

b) Total Cash Flows / Initial Investment

c) Net Present Value / Initial Investment

d) Payback Period / Initial Investment

Answer: a) Average Annual Profit / Initial Investment

4. NPV and IRR

10. If the NPV of a project

is 10,000andtheinitialinvestmentis10,000andtheinitialinvestment is50,000, the project should be:

a) Accepted.

b) Rejected.

c) Ignored.

d) Re-evaluated.

Answer: a) Accepted.

11. A project with an IRR of 15% and a cost of capital of 10% should be:

a) Accepted.

b) Rejected.

c) Ignored.

d) Re-evaluated. Answer: a) Accepted.

12. If two projects are mutually exclusive, the decision rule is to choose the project with the:

a) Higher NPV.

b) Lower NPV.

c) Higher IRR.

d) Lower IRR.

Answer: a) Higher NPV.

5. Risk and Uncertainty

13. Sensitivity analysis in capital budgeting is used to: a) Measure the impact of changes in key
variables on project outcomes.

b) Calculate the payback period.

c) Determine the accounting rate of return.

d) Estimate the cost of capital.

Answer: a) Measure the impact of changes in key variables on project outcomes.

14. Scenario analysis involves:

a) Evaluating the best-case, worst-case, and most likely outcomes of a project.

b) Calculating the NPV of a project.

c) Determining the IRR of a project.

d) Estimating the payback period.

Answer: a) Evaluating the best-case, worst-case, and most likely outcomes of a project.

15. The risk-adjusted discount rate method adjusts the discount rate to reflect:

a) The time value of money.

b) The riskiness of the project.

c) The payback period.

d) The accounting rate of return.

Answer: b) The riskiness of the project.

6. Capital Rationing and Project Selection

16. Capital rationing refers to:

a) The process of allocating limited funds among competing projects.

b) The process of calculating the NPV of a project.

c) The process of determining the IRR of a project.

d) The process of estimating the payback period.

Answer: a) The process of allocating limited funds among competing projects.

17. In capital rationing, projects are ranked based on their: a) Payback period.

b) Accounting rate of return.

c) Profitability Index (PI).

d) Internal Rate of Return (IRR).

Answer: c) Profitability Index (PI).

18. The Profitability Index (PI) is calculated as: a) NPV / Initial Investment

b) Initial Investment / NPV

c) Total Cash Flows / Initial Investment

d) Payback Period / Initial Investment

Answer: a) NPV / Initial Investment

7. Real Options and Post-Audit

19. Real options in capital budgeting refer to:

a) The flexibility to make future decisions based on changing conditions.

b) The ability to calculate the NPV of a project.

c) The process of determining the IRR of a project.

d) The process of estimating the payback period.

Answer: a) The flexibility to make future decisions based on changing conditions.

20. A post-audit of a capital budgeting project is conducted to: a) Compare actual results with
projected results.

b) Calculate the NPV of the project.

c) Determine the IRR of the project.

d) Estimate the payback period.

Answer: a) Compare actual results with projected results.

1. What is the primary goal of long-term investment decisions? a) Maximizing short-term

profits

b) Increasing market share

c) Maximizing shareholder wealth

d) Minimizing risk

Answer: c) Maximizing shareholder wealth 1

2. Which of the following is another term for long-term investment decisions?

a) Working capital management

b) Capital budgeting

c) Dividend policy

d) Capital structure

Answer: b) Capital budgeting

3. Which of the following is NOT a capital budgeting method?

a) Net Present Value (NPV)

b) Internal Rate of Return (IRR)

c) Payback Period

d) Economic Order Quantity (EOQ)

Answer: d) Economic Order Quantity (EOQ)

4. What is the net present value (NPV)?

a) The initial investment cost of a project

b) The sum of the present values of all expected cash flows from a project, minus the initial
investment

c) The rate of return that makes the NPV equal to zero

d) The time it takes for a project to recover its initial investment

Answer: b) The sum of the present values of all expected cash flows

from a project, minus the initial investment

5. A project should be accepted if its NPV is:

a) Negative

b) Zero

c) Positive

d) Equal to the initial investment

Answer: c) Positive

6. What is the internal rate of return (IRR)?

a) The discount rate that makes the NPV of a project equal to zero

b) The sum of the present values of all expected cash flows from project

c) The time it takes for a project to recover its initial investment

d) The initial investment cost of a project

Answer: a) The discount rate that makes the NPV of a project equalto zero

7. A project should be accepted if its IRR is:

a) Less than the cost of capital

b) Equal to the cost of capital

c) Greater than the cost of capital

d) Negative

Answer: c) Greater than the cost of capital

8. What is the payback period?

a) The present value of all expected cash flows from a project

b) The rate of return that makes the NPV equal to zero

c) The time it takes for a project to recover its initial investment

d) The initial investment cost of a project

Answer: c) The time it takes for a project to recover its initial

investment

9. Which of the following is a disadvantage of the payback period

method?

a) It is difficult to calculate.

b) It considers the time value of money.

c) It ignores cash flows that occur after the payback period

d) It is not useful for small projects.

Answer: c) It ignores cash flows that occur after the payback

period 1.

10. What is the discounted payback period?

a) The time it takes for a project to recover its initial investment, considering the time value of
money

b) The rate of return that makes the NPV equal to zero

c) The sum of the present values of all expected cash flows from a

project

d) The initial investment cost of a project

Answer: a) The time it takes for a project to recover its initial

investment, considering the time value of money

11. Which of the following methods explicitly considers the time value of money?

a) Payback Period

b) Accounting Rate of Return (ARR)

c) Net Present Value (NPV)

d) Simple Rate of Return

Answer: c) Net Present Value (NPV)

 12. What is the cost of capital?

a) The initial investment cost of a project

b) The minimum required rate of return on an investment

c) The rate of return that makes the NPV equal to zero

d) The time it takes for a project to recover its initial investment

Answer: b) The minimum required rate of return on an investment

13. Which of the following factors should be considered when estimating project cash flows?

a) Incremental cash flows

b) Opportunity costs

c) Sunk costs

d) Financing costs

Answer: a) Incremental cash flows

14. What are sunk costs?

a) Costs that have already been incurred and cannot be recovered

b) Future costs that are expected to increase

c) Costs that can be avoided if a project is not undertaken

d) Costs that are directly attributable to a project

Answer: a) Costs that have already been incurred and cannot be recovered

15. What is sensitivity analysis?

a) A method of calculating the expected rate of return on an investment

b) A technique used to determine how changes in key assumptions affect a project's

NPV or IRR

c) A method of estimating project cash flows

d) A technique used to determine the optimal capital structure

Answer: b) A technique used to determine how changes in key

assumptions affect a project's NPV or IRR 1

16. What is scenario analysis?

a) A method of calculating the expected rate of return on an investment

b) A technique used to evaluate the impact of different possible scenarios on a project's

outcome

c) A method of estimating project cash flows

d) A technique used to determine the optimal capital structure

Answer: b) A technique used to evaluate the impact of different

possible scenarios on a project's outcome

17. Which of the following is a real option in capital budgeting?

a) The option to abandon a project

b) The option to expand a project

c) The option to delay a project

d) All of the above

Answer: d) All of the above

18. What is capital rationing?

a) The process of allocating capital to different divisions within a company

b) The process of limiting the amount of capital available for investment

c) The process of determining the optimal capital structure

d) The process of calculating the cost of capital

Answer: b) The process of limiting the amount of capital available for

investment

19. In the context of capital budgeting, what does "mutually exclusive projects" mean?

a) Projects that must be undertaken together

b) Projects that cannot be undertaken simultaneously

c) Projects that have the same risk profile

d) Projects that have the same initial investment cost

Answer: b) Projects that cannot be undertaken simultaneously

20. When choosing between mutually exclusive projects, which method is generally considered
the most reliable?

a) Payback Period

b) IRR (Internal Rate of Return)

c) NPV (Net Present Value)

d) Discounted Payback Period

Answer: c) NPV (Net Present Value)

UNIT 12 - Cost of Capital

1. What does the cost of capital represent in financial management?

a) The total cost of production

b) The return required by investors for investing in a business c) The cost of fixed assets

d) The cost of goods sold

Answer: b) The return required by investors for investing in a business

2. Which of the following is the most appropriate definition of Weighted Average Cost of Capital
(WACC)?

a) The simple average of the costs of all sources of finance

b) The weighted average of the costs of debt and equity financing c) The total cost of financial
operations

d) The cost of only debt financing

Answer: b) The weighted average of the costs of debt and equity financing

3. Which of the following components is NOT included in the computation of WACC?

a) Cost of equity

b) Cost of retained earnings

c) Cost of long-term debt

d) Cost of fixed assets Answer: d) Cost of fixed assets

4. Which of the following factors affects the cost of capital? a) Interest rates in the market

b) Business risk
c) Tax rates

d) All of the above

Answer: d) All of the above

5. The cost of retained earnings is generally considered to be

equal to:

a) The cost of debt

b) The opportunity cost of shareholders

c) The cost of preference shares

d) Zero, since no new funds are raised

Answer: b) The opportunity cost of shareholders

Cost of Debt and Equity

6. The after-tax cost of debt is calculated as: a) Interest rate × (1 + Tax rate)

b) Interest rate × (1 – Tax rate)

c) Interest rate ÷ (1 – Tax rate)

d) Interest rate + Tax rate

Answer: b) Interest rate × (1 – Tax rate)

7. What is the primary reason for using after-tax cost of debt in

WACC calculations?

a) Because debt is riskier than equity

b) Because interest payments are tax-deductible

c) Because debt has a fixed cost

d) Because equity financing is always preferred

Answer: b) Because interest payments are tax-deductible

8. Which of the following models is used to estimate the cost of equity?

a) Capital Asset Pricing Model (CAPM) b) Gordon Growth Model

c) Both (a) and (b)

d) None of the above

Answer: c) Both (a) and (b)

9. In the Capital Asset Pricing Model (CAPM), the cost of equity is

calculated using the formula:

a) Ke = D1 / P0 + g

b) Ke = Rf + β (Rm – Rf)

c) Ke = D0 / P0 + g

d) Ke = Rm – Rf

Answer: b) Ke = Rf + β (Rm – Rf)

10. Which of the following would generally lead to a higher cost of equity?

a) A decrease in the company’s beta

b) A lower risk-free rate

c) A higher expected market return

d) A lower required return by investors Answer: c) A higher expected market return

WACC and Capital Structure

11. Which of the following is a major assumption of the WACC calculation?

a) The firm maintains a constant debt-equity ratio

b) The cost of capital remains the same regardless of the level of financing

c) The firm has no retained earnings

d) The firm uses only debt financing

Answer: a) The firm maintains a constant debt-equity ratio

12. What impact does an increase in financial leverage have on the cost of equity?

a) It decreases the cost of equity

b) It has no impact on the cost of equity

c) It increases the cost of equity

d) It makes the cost of equity equal to the cost of debt Answer: c) It increases the cost of equity

13. Which of the following financing options generally has the lowest cost of capital?

a) Equity

b) Preference shares

c) Retained earnings d) Debt

Answer: d) Debt

14. If a firm’s WACC is 10% and a new project has an expected return of 12%, what should the
firm do?

a) Reject the project

b) Accept the project

c) Reduce the WACC

d) Increase debt financing Answer: b) Accept the project

15. If the firm's proportion of debt in the capital structure increases, what happens to the WACC
(assuming debt costs less than equity)?

a) WACC increases

b) WACC remains the same

c) WACC decreases

d) WACC becomes equal to the cost of debt Answer: c) WACC decreases

Advanced Concepts

16. Which of the following is true about Modigliani and Miller's Proposition I (without taxes)?

a) Capital structure affects the firm’s value

b) The firm's value is independent of its capital structure

c) The cost of equity remains constant regardless of leverage

d) Debt is always preferred over equity

Answer: b) The firm's value is independent of its capital structure

17. According to the Pecking Order Theory, firms prefer to finance projects in the following
order:

a) Debt → Equity → Retained earnings

b) Retained earnings → Debt → Equity

c) Equity → Debt → Retained earnings

d) Debt → Retained earnings → Equity Answer: b) Retained earnings → Debt →

Equity

18. Which of the following best describes the marginal cost of capital (MCC)?

a) The cost of capital for past investments

b) The cost of obtaining additional capital

c) The cost of capital from only equity financing

d) The cost of capital ignoring debt financing Answer: b) The cost of obtaining additional capital

19. If a firm has a beta greater than 1, it indicates: a) The firm has lower risk than the market

b) The firm has the same risk as the market

c) The firm is more volatile than the market

d) The firm has no systematic risk

Answer: c) The firm is more volatile than the market

20. What happens if the return on a project is lower than the

cost of capital?

a) The project should be accepted

b) The project should be rejected

c) The project’s NPV will be positive

d) The project will increase shareholder value Answer: b) The project should be rejected

1. Basics of Cost of Capital

1. The cost of capital is the:

a) Rate of return required by investors to invest in a project.

b) Rate of return earned by a company on its investments.

c) Interest rate paid on debt.

d) Dividend paid to shareholders.

Answer: a) Rate of return required by investors to invest in a project.

2. The cost of capital is used as a:

a) Discount rate in capital budgeting decisions.

b) Measure of profitability.

c) Measure of liquidity.

d) Measure of risk.

Answer: a) Discount rate in capital budgeting decisions.

3. Which of the following is NOT a component of the cost of capital?

a) Cost of debt

b) Cost of equity

c) Cost of preferred stock

d) Cost of inventory

Answer: d) Cost of inventory

2. Cost of Debt

4. The cost of debt is calculated as:

a) Interest rate × (1 - Tax Rate)

b) Interest rate × Tax Rate

c) Dividend yield × (1 - Tax Rate)

d) Dividend yield × Tax Rate

Answer: a) Interest rate × (1 - Tax Rate)

5. If a company issues bonds with a 7% coupon rate and the tax rate is 30%, the after-tax cost
of debt is:

a) 4.9%

b) 7.0%
c) 9.1%

d) 10.0%

Answer: a) 4.9%

(Calculation: 7% × (1 - 0.30) = 4.9%)

6. The cost of debt is generally lower than the cost of equity because:

a) Debt is less risky for investors.

b) Interest on debt is tax-deductible.

c) Debt has a fixed repayment schedule. d) All of the above.

Answer: d) All of the above.

3. Cost of Equity

7. The cost of equity can be estimated using: a) The Capital Asset Pricing Model (CAPM) b) The
Dividend Discount Model (DDM)

c) Both a) and b)

d) Neither a) nor b)

Answer: c) Both a) and b)

8. The Capital Asset Pricing Model (CAPM) formula is:

a) Cost of Equity = Risk-Free Rate + (Beta × Market Risk Premium) b) Cost of Equity = Risk-
Free Rate + (Beta / Market Risk Premium) c) Cost of Equity = Risk-Free Rate × (Beta + Market
Risk Premium) d) Cost of Equity = Risk-Free Rate / (Beta × Market Risk Premium) Answer: a)
Cost of Equity = Risk-Free Rate + (Beta × Market Risk Premium)

9. If the risk-free rate is 3%, the market risk premium is 6%, and the beta is 1.2, the cost of
equity using CAPM is:

a) 9.0%

b) 10.2%

c) 11.4%

d) 12.6%

Answer: b) 10.2%

(Calculation: 3% + (1.2 × 6%) = 10.2%)

4. Cost of Preferred Stock

10. The cost of preferred stock is calculated as: a) Dividend / Market Price of Preferred Stock

b) Market Price of Preferred Stock / Dividend

c) Dividend × (1 - Tax Rate)

d) Dividend × Tax Rate

Answer: a) Dividend / Market Price of Preferred Stock

11. If a company issues preferred stock with a dividend

of 5andthemarketpriceis5andthemarketpriceis50, the cost of preferred stock is:

a) 5%

b) 10%

c) 15%

d) 20%

Answer: b) 10%

(Calculation: 5/5/50 = 10%)

12. The cost of preferred stock is generally higher than the cost of debt because:

a) Preferred dividends are not tax-deductible.

b) Preferred stock is riskier than debt.

c) Both a) and b)

d) Neither a) nor b) Answer: c) Both a) and b)

5. Weighted Average Cost of Capital (WACC)

13. The Weighted Average Cost of Capital (WACC) is calculated as:

a) (Cost of Debt × Weight of Debt) + (Cost of Equity × Weight of Equity)

b) (Cost of Debt + Cost of Equity) / 2

c) (Cost of Debt × Weight of Equity) + (Cost of Equity × Weight of Debt)

d) (Cost of Debt + Cost of Equity) × (Weight of Debt + Weight of Equity)

Answer: a) (Cost of Debt × Weight of Debt) + (Cost of Equity × Weight of Equity)

14. If a company has a cost of debt of 5%, a cost of equity of 12%, a weight of debt of 40%, and
a weight of equity of 60%, the WACC is:

a) 7.8%

b) 8.8%

c) 9.8%

d) 10.8%

Answer: b) 8.8%

(Calculation: (5% × 0.40) + (12% × 0.60) = 8.8%)

15. WACC is used as a discount rate for: a) Evaluating long-term investment projects. b)
Calculating the cost of debt.

c) Calculating the cost of equity.

d) Determining the payback period.

Answer: a) Evaluating long-term investment projects.

6. Factors Affecting Cost of Capital

16. Which of the following factors increases the cost of capital?

a) Lower risk-free rate

b) Higher market risk premium

c) Lower beta

d) Lower tax rate

Answer: b) Higher market risk premium

17. The cost of capital is influenced by: a) Market conditions.

b) Company-specific risk.

c) Capital structure.

d) All of the above.

Answer: d) All of the above.

18. A company with a higher beta will have a:

a) Lower cost of equity.

b) Higher cost of equity.

c) Lower cost of debt.

d) Higher cost of debt.

Answer: b) Higher cost of equity.

7. Applications of Cost of Capital

19. The cost of capital is used to determine the: a) Minimum required return on an investment.

b) Maximum required return on an investment.

c) Payback period of an investment.

d) Accounting rate of return of an investment.

Answer: a) Minimum required return on an investment.

20. If a project's expected return is higher than the cost of

capital, the project should be:

a) Accepted.

b) Rejected.

c) Ignored.

d) Re-evaluated.

Answer: a) Accepted.

UNIT 13 - Working Capital Management

1. What does Working Capital Management primarily focus on?

A) Long-term asset financing

B) Management of current assets and liabilities C) Determining a company's capital structure D)

Mergers and acquisitions

Answer: B) Management of current assets and liabilities 2. Which of the following is included in
working capital?
A) Fixed assets

B) Accounts receivable C) Long-term loans

D) Equity capital

Answer: B) Accounts receivable

3. Net Working Capital (NWC) is defined as:

A) Fixed Assets - Current Liabilities B) Current Liabilities - Current Assets C) Current Assets -
Current Liabilities D) Total Assets - Total Liabilities

Answer: C) Current Assets - Current Liabilities

4. Which of the following is NOT a component of current assets?

A) Inventory

B) Accounts receivable

C) Cash and cash equivalents D) Land and buildings

Answer: D) Land and buildings

5. A conservative working capital policy leads to:

A) Higher liquidity and lower risk

B) Lower liquidity and higher risk

C) Lower profitability and higher risk D) Higher profitability and higher risk

Answer: A) Higher liquidity and lower risk

6. Which of the following is NOT a current liability?

A) Accounts payable B) Short-term loans C) Bonds payable

D) Accrued expenses

Answer: C) Bonds payable

7. The term "cash conversion cycle" refers to:

A) The time taken to convert inventory into cash B) The time taken to collect receivables

C) The time taken to pay off payables

D) The time taken to convert cash into inventory

Answer: A) The time taken to convert inventory into cash

8. Which strategy is the most aggressive for financing working capital?

A) Financing all working capital needs with equity

B) Using short-term debt to finance both temporary and permanent working capital

C) Relying entirely on retained earnings

D) Matching short-term debt with current assets and long-term debt with fixed assets

Answer: B) Using short-term debt to finance both temporary and permanent working capital

9. A higher inventory turnover ratio indicates:

A) Efficient inventory management

B) Overstocking of inventory

C) Poor sales performance

D) Increasing obsolescence of inventory

Answer: A) Efficient inventory management

10. Which of the following factors influences working capital

requirements?

A) Nature of business B) Credit policy

C) Operating cycle

D) All of the above

Answer: D) All of the above

11. The main objective of working capital management is to:

A) Increase long-term investments B) Maximize shareholder wealth C) Minimize short-term

borrowings D) Reduce fixed asset investment

Answer: B) Maximize shareholder wealth

12. Which of the following is a source of short-term financing?

A) Issuance of bonds B) Retained earnings C) Trade credit

D) Equity financing
Answer: C) Trade credit

13. A company with excessive working capital may face:

A) Liquidity problems

B) High profitability

C) Idle funds and reduced returns D) High financial risk

Answer: C) Idle funds and reduced returns

14. The just-in-time (JIT) inventory management system is designed to:

A) Maintain high inventory levels

B) Reduce inventory holding costs

C) Increase lead time for orders

D) Increase capital investment in inventory

Answer: B) Reduce inventory holding costs

15. Which ratio is commonly used to measure a firm's liquidity?

A) Debt-to-equity ratio

B) Current ratio

C) Price-to-earnings ratio D) Return on equity

Answer: B) Current ratio

16. Which of the following would increase a firm's working capital?

A) Declaring dividends

B) Selling fixed assets for cash C) Issuing long-term bonds

D) Increasing accounts payable

Answer: B) Selling fixed assets for cash

17. If a firm has a current ratio of 2:1, what does this imply?

A) The firm has twice the current assets as current liabilities

B) The firm is at risk of insolvency

C) The firm has twice the long-term assets as short-term liabilities D) The firm is highly
leveraged

Answer: A) The firm has twice the current assets as current liabilities 18. A negative working
capital indicates that:

A) The company is in a strong financial position

B) The company may face liquidity problems

C) The company has more current assets than current liabilities D) The company has no short-
term obligations

Answer: B) The company may face liquidity problems

19. An aggressive working capital financing strategy typically results in:

A) Lower profitability and higher risk B) Higher profitability and higher risk C) Higher profitability
and lower risk D) Lower profitability and lower risk

Answer: B) Higher profitability and higher risk 20. The working capital turnover ratio measures:

A) How efficiently a company uses its working capital to generate sales B) The proportion of
working capital to total assets

C) The number of times inventory is replaced in a year

D) The cash flow available for investment

Answer: A) How efficiently a company uses its working capital to generate sales

1. What is working capital?

a) Long-term funds used for investment

b) The funds required for day-to-day operations

c) The total assets of a company

d) The total liabilities of a company

Answer: b) The funds required for day-to-day operations

2. The primary objective of working capital management is to:

a) Maximize shareholder wealth

b) Ensure enough liquidity for day-to-day operations

c) Reduce long-term debt

d) Increase fixed assets

Answer: b) Ensure enough liquidity for day-to-day operations

3. Which of the following is a measure of liquidity?

a) Return on assets (ROA) b) Quick ratio

c) Gross profit margin

d) Return on equity (ROE) Answer: b) Quick ratio

4. Which of the following best represents the operating cycle of a business?

a) Cash conversion cycle

b) Cash to cash cycle

c) Receivables period + inventory period

d) Accounts payable period + inventory period Answer: c) Receivables period + inventory period

5. Which of the following is a component of working capital?

a) Fixed assets b) Goodwill

c) Cash

d) Equity Answer: c) Cash

6. A company with a high inventory turnover ratio is likely to have:

a) A low level of working capital

b) Excess working capital

c) Efficient working capital management

d) A very low cash conversion cycle

Answer: c) Efficient working capital management

7. The cash conversion cycle is calculated as:

a) Inventory period + Accounts payable period

b) Receivables period + Accounts payable period

c) Inventory period + Receivables period - Accounts payable period d) Inventory period +
Accounts receivable period

Answer: c) Inventory period + Receivables period - Accounts payable period

8. Which of the following is true about a company's current ratio?

a) It measures the company’s short-term liquidity position. b) It reflects the company’s long-term
financial health.

c) It shows the relationship between debt and equity.

d) It is useful in evaluating profitability.

Answer: a) It measures the company’s short-term liquidity position.

9. What is the impact of increasing the length of the operating cycle on working capital
requirements?

a) It reduces working capital needs

b) It increases working capital requirements

c) It has no effect on working capital

d) It decreases liquidity

Answer: b) It increases working capital requirements

10. What does the ‘cash conversion cycle’ indicate?

a) The time taken to sell inventory

b) The time taken to convert investments into cash

c) The efficiency of managing working capital

d) The time it takes to pay creditors

Answer: c) The efficiency of managing working capital

11. Which of the following is an example of a short-term asset?

a) Property, plant, and equipment b) Inventory

c) Goodwill

d) Bonds payable

Answer: b) Inventory
12. Which of the following represents the most efficient working capital management strategy?

a) Holding large amounts of inventory to avoid stockouts b) Maintaining a high cash balance to
cover all expenses c) Minimizing the cash conversion cycle

d) Increasing accounts payable period excessively Answer: c) Minimizing the cash conversion
cycle

13. Which of the following is a disadvantage of a high working capital?

a) Excess liquidity

b) High returns

c) Increased inventory and storage costs

d) Lower borrowing costs

Answer: c) Increased inventory and storage costs

14. The primary goal of cash management in working capital is to:

a) Maximize cash on hand

b) Ensure sufficient cash is available to meet short-term obligations

c) Minimize short-term debt

d) Increase working capital

Answer: b) Ensure sufficient cash is available to meet short-term obligations

15. Which of the following is NOT a component of working capital management?

a) Accounts receivable b) Accounts payable c) Long-term debt

d) Inventory

Answer: c) Long-term debt

16. If a company has a current ratio of 1.5, this implies that:

a) The company is facing liquidity problems

b) The company has sufficient assets to cover short-term liabilities

c) The company is overleveraged

d) The company has too much long-term debt

Answer: b) The company has sufficient assets to cover short-term liabilities

17. Which of the following would be classified as a current liability?

a) Mortgage payable

b) Short-term loan

c) Bonds payable after 10 years d) Deferred tax

Answer: b) Short-term loan

18. What is a major disadvantage of holding excess cash as part of working capital?

a) Increased risk of insolvency

b) Opportunity cost due to lack of returns from cash holdings

c) Decreased liquidity

d) Lower ability to pay debts

Answer: b) Opportunity cost due to lack of returns from cash holdings

19. In working capital management, which of the following is true about a company’s
receivables?

a) Shortening the receivables period is a sign of efficient management. b) Longer receivables

period indicates efficient credit management.

c) Lower accounts receivable turnover implies good collection policy. d) Reducing receivables
leads to cash shortages.

Answer: a) Shortening the receivables period is a sign of efficient management.

20. A company's management of its working capital is an important determinant of:

a) Its capital structure

b) Its long-term profitability

c) Its short-term financial health

d) Its market share

Answer: c) Its short-term financial health

1. Basics of Working Capital

1. Working capital refers to:

a) Long-term investments in fixed assets.

b) Short-term assets and liabilities used in day-to-day operations. c) Shareholder's equity.

d) Retained earnings.

Answer: b) Short-term assets and liabilities used in day-to-day operations.

2. Net Working Capital is calculated as: a) Current Assets - Current Liabilities b) Current
Liabilities - Current Assets c) Total Assets - Total Liabilities

d) Fixed Assets - Current Liabilities

Answer: a) Current Assets - Current Liabilities

3. Which of the following is a component of working capital?

a) Accounts Receivable

b) Machinery

c) Long-term Debt

d) Equity Shares

Answer: a) Accounts Receivable

2. Working Capital Cycle

4. The working capital cycle measures:

a) The time taken to convert net working capital into cash.

b) The time taken to convert current assets into cash.

c) The time taken to convert inventory and receivables into cash.

d) The time taken to pay off current liabilities.

Answer: c) The time taken to convert inventory and receivables into cash.

5. Which of the following is NOT part of the working capital cycle? a) Inventory Holding Period

b) Accounts Receivable Collection Period

c) Accounts Payable Deferral Period

d) Depreciation Period

Answer: d) Depreciation Period

6. A shorter working capital cycle indicates:

a) Better liquidity and efficiency. b) Poor liquidity and inefficiency. c) Higher long-term debt.

d) Lower profitability.

Answer: a) Better liquidity and efficiency.

3. Cash Management

7. The primary objective of cash management is to:

a) Maximize cash balances.

b) Minimize cash balances while meeting operational needs.

c) Invest all cash in long-term assets.

d) Avoid paying creditors.

Answer: b) Minimize cash balances while meeting operational needs.

8. Which of the following is a cash management technique? a) Just-in-Time (JIT) Inventory

b) Factoring

c) Cash Budgeting

d) All of the above

Answer: d) All of the above

9. The cash conversion cycle is calculated as:

a) Inventory Holding Period + Accounts Receivable Collection Period - Accounts Payable

Deferral Period

b) Inventory Holding Period - Accounts Receivable Collection Period + Accounts Payable

Deferral Period

c) Accounts Receivable Collection Period + Accounts Payable Deferral Period - Inventory

Holding Period

d) Inventory Holding Period + Accounts Payable Deferral Period - Accounts Receivable

Collection Period

Answer: a) Inventory Holding Period + Accounts Receivable Collection Period - Accounts

Payable Deferral Period

4. Inventory Management

10. The Economic Order Quantity (EOQ) model is used to:

a) Determine the optimal order quantity to minimize inventory costs. b) Calculate the reorder
point.

c) Estimate the safety stock level.

d) Determine the maximum inventory level.

Answer: a) Determine the optimal order quantity to minimize inventory costs.

11. Which of the following is a cost associated with holding inventory?

a) Ordering Cost

b) Carrying Cost

c) Shortage Cost

d) All of the above

Answer: d) All of the above

12. Just-in-Time (JIT) inventory management aims to:

a) Minimize inventory levels by receiving goods only when needed. b) Maximize inventory levels
to avoid stockouts.

c) Increase ordering costs.

d) Reduce accounts payable.

Answer: a) Minimize inventory levels by receiving goods only when needed.

5. Accounts Receivable Management

13. The average collection period is calculated as: a) (Accounts Receivable / Total Sales) × 365

b) (Total Sales / Accounts Receivable) × 365

c) (Accounts Payable / Total Purchases) × 365

d) (Total Purchases / Accounts Payable) × 365

Answer: a) (Accounts Receivable / Total Sales) × 365 14. Factoring is a technique used to:

a) Manage inventory levels.

b) Convert accounts receivable into cash.

c) Delay payments to suppliers.

d) Reduce long-term debt.

Answer: b) Convert accounts receivable into cash.

15. A company with a high average collection period may face: a) Improved liquidity.

b) Cash flow problems.

c) Lower accounts payable.

d) Higher inventory levels.

Answer: b) Cash flow problems.

6. Accounts Payable Management

16. The average payment period is calculated as: a) (Accounts Payable / Total Purchases) ×
365

b) (Total Purchases / Accounts Payable) × 365

c) (Accounts Receivable / Total Sales) × 365

d) (Total Sales / Accounts Receivable) × 365

Answer: a) (Accounts Payable / Total Purchases) × 365 17. Delaying payments to suppliers
can:

a) Improve cash flow in the short term. b) Damage supplier relationships.

c) Both a) and b)

d) Neither a) nor b)

Answer: c) Both a) and b)

18. Which of the following is a benefit of early payment to suppliers?

a) Improved supplier relationships.

b) Discounts for early payment.

c) Both a) and b)

d) Neither a) nor b) Answer: c) Both a) and b)

7. Working Capital Financing

19. Which of the following is a source of short-term financing? a) Trade Credit

b) Bank Loans

c) Commercial Paper

d) All of the above

Answer: d) All of the above

20. A conservative working capital policy involves:

a) Holding higher levels of current assets.

b) Holding lower levels of current assets.

c) Using more short-term financing.

d) Using less long-term financing.

Answer: a) Holding higher levels of current assets.

Unit 14: Financing Decision

1. What is the main focus of financing decisions?

a) Investment allocation

b) Borrowing and allocation of funds

c) Dividend distribution

d) Cost reduction

Correct Answer: b) Borrowing and allocation of funds

2. Which of the following is a source of financing for a company?

a) Retained earnings

b) Debentures

c) Bank overdrafts

d) All of the above

Correct Answer: d) All of the above

3. Which factor influences a firm’s financing decision?

a) Risk exposure
b) Cost of capital

c) Cash flow position

d) All of the above

Correct Answer: d) All of the above

4. Which of the following is an external source of financing?

a) Debentures

b) Retained earnings

c) Reserves

d) None of the above

Correct Answer: a) Debentures

5. Which financing decision is concerned with the mix of debt and equity?

a) Investment decision

b) Capital structure decision

c) Dividend decision

d) Working capital decision

Correct Answer: b) Capital structure decision

6. Debt financing is considered advantageous because:

a) It increases ownership control

b) Interest on debt is tax-deductible

c) It does not have any cost

d) It reduces financial risk

Correct Answer: b) Interest on debt is tax-deductible

7. Which of the following is an example of short-term financing?

a) Equity shares

b) Debentures

c) Trade credit
d) Preference shares

Correct Answer: c) Trade credit

8. The cost of equity is generally _______ than the cost of debt.

a) Lower

b) Higher

c) Equal

d) Unrelated

Correct Answer: b) Higher

9. The debt-equity ratio is used to measure:

a) Liquidity position

b) Profitability

c) Financial leverage

d) Market share

Correct Answer: c) Financial leverage

10. Which of the following is not a source of equity financing?

a) Initial Public Offering (IPO)

b) Venture capital

c) Bank loan

d) Private placement

Correct Answer: c) Bank loan

11. Which type of financing increases financial risk?

a) Debt financing

b) Equity financing

c) Internal financing

d) None of the above

Correct Answer: a) Debt financing

 12. The Modigliani-Miller theorem suggests that under perfect market conditions,
financing decisions:

a) Do not affect firm value

b) Should favor equity over debt

c) Are irrelevant

d) Both a and c

Correct Answer: d) Both a and c

13. The cost of retained earnings is equivalent to:

a) Zero cost

b) The cost of debt

c) The cost of equity

d) The cost of preference shares

Correct Answer: c) The cost of equity

14. Which of the following financing sources does not dilute ownership?

a) Equity shares

b) Retained earnings

c) Convertible debentures

d) Preference shares

Correct Answer: b) Retained earnings

15. Working capital financing is primarily used for:

a) Fixed asset acquisition

b) Day-to-day operations

c) Long-term investments

d) Expansion projects

Correct Answer: b) Day-to-day operations

16. Which of the following is not a factor affecting capital structure?

a) Interest rate
b) Tax benefits

c) Market segmentation

d) Profitability

Correct Answer: c) Market segmentation

17. A high level of debt in a firm’s capital structure:

a) Reduces financial risk

b) Increases financial leverage

c) Reduces return on equity

d) Has no effect on capital structure

Correct Answer: b) Increases financial leverage

18. The Pecking Order Theory suggests firms prefer financing in the following order:

a) Equity, debt, retained earnings

b) Debt, equity, retained earnings

c) Retained earnings, debt, equity

d) Equity, retained earnings, debt

Correct Answer: c) Retained earnings, debt, equity

19. Which of the following is an advantage of equity financing?

a) No repayment obligation

b) Interest is tax-deductible

c) Increases financial risk

d) Reduces ownership control

Correct Answer: a) No repayment obligation

20. Financial leverage measures the extent to which a company uses:

a) Short-term funds

b) Debt financing

c) Equity financing
d) Retained earnings

Correct Answer: b) Debt financing

Unit 15: Dividend Decision

1. What is a dividend?

a) Interest on capital

b) Bonus paid to employees

c) Portion of profits distributed to shareholders

d) Tax paid to the government

Correct Answer: c) Portion of profits distributed to shareholders

2. Which of the following is not a form of dividend?

a) Cash dividend

b) Stock dividend

c) Loan dividend

d) Property dividend

Correct Answer: c) Loan dividend

3. A stock dividend involves issuing:

a) Cash payments to shareholders

b) Shares to existing shareholders without charge

c) New bonds to investors

d) Interest on company loans

Correct Answer: b) Shares to existing shareholders without charge

4. The dividend decision affects:

a) Short-term liquidity only

b) Shareholder wealth and long-term financing

c) Only retained earnings

d) Employee salaries

Correct Answer: b) Shareholder wealth and long-term financing

5. Which of the following is an external factor affecting dividend policy?

a) Company’s liquidity position

b) Tax policies

c) Retained earnings

d) Shareholder preferences

Correct Answer: b) Tax policies

6. A company that retains most of its earnings for expansion follows a:

a) High dividend payout policy

b) Residual dividend policy

c) Fixed dividend policy

d) Regular dividend policy

Correct Answer: b) Residual dividend policy

7. A stable dividend policy is characterized by:

a) Irregular and fluctuating payments

b) Payments based on profit variability

c) Consistent dividend payouts over time

d) No dividend payments at all

Correct Answer: c) Consistent dividend payouts over time

8. Which of the following is a legal constraint in dividend decisions?

a) Company must pay dividends only in cash

b) Dividends can only be paid from current or retained earnings

c) Dividends must always be equal to net profit

d) Dividends are mandatory every quarter

Correct Answer: b) Dividends can only be paid from current or retained earnings

9. The payout ratio refers to:

a) Ratio of debt to equity

b) Ratio of dividend per share to earnings per share

c) Total dividends paid divided by total revenue

d) Company’s tax rate

Correct Answer: b) Ratio of dividend per share to earnings per share

10. Which of the following is a reason for issuing bonus shares?

a) Increase cash reserves

b) Reward employees

c) Convert reserves into share capital

d) Pay off company loans

Correct Answer: c) Convert reserves into share capital

11. Which of the following statements about a stock split is true?

a) It increases the number of shares without changing the total value

b) It decreases shareholder ownership percentage

c) It results in higher dividend payouts

d) It reduces company equity

Correct Answer: a) It increases the number of shares without changing the total value

12. What does a liquidating dividend represent?

a) Regular income to shareholders

b) Return of original investment capital

c) Interest paid on bonds

d) Special dividend paid during high profits

Correct Answer: b) Return of original investment capital

13. Which factor is considered in formulating a dividend policy?

a) Shareholder expectations

b) Legal requirements

c) Company’s financial position

d) All of the above

Correct Answer: d) All of the above

14. A higher dividend payout ratio generally leads to:

a) Higher retained earnings

b) Lower retained earnings

c) No change in company reserves

d) Lower stock prices

Correct Answer: b) Lower retained earnings

15. The ability to pay dividends depends on a firm’s:

a) Profitability

b) Liquidity position

c) Market share

d) Employee turnover

Correct Answer: b) Liquidity position

16. What is a scrip dividend?

a) Cash paid instead of shares

b) Dividend paid in company’s stock

c) Promissory note issued to shareholders

d) Dividend paid in government bonds

Correct Answer: c) Promissory note issued to shareholders

17. Which type of company is most likely to have a high dividend payout?

a) Fast-growing start-ups

b) Established, mature firms

c) High-debt firms

d) New companies with negative earnings

Correct Answer: b) Established, mature firms

18. An increase in inflation usually leads to:

a) Higher cash dividend payments

b) Lower dividend payments

c) No impact on dividends

d) Increase in share buybacks

Correct Answer: b) Lower dividend payments

19. If a company prefers to retain profits for future expansion, it follows:

a) High dividend payout policy

b) Stable dividend policy

c) Low dividend payout policy

d) Irregular dividend policy

Correct Answer: c) Low dividend payout policy

20. Why do companies declare stock dividends instead of cash dividends?

a) To increase their share price

b) To preserve cash while rewarding shareholders

c) To reduce total equity

d) To avoid taxation

Correct Answer: b) To preserve cash while rewarding shareholders