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CBSE Questions for Class 12 Commerce Accountancy Analysis Of Financial Statements Quiz 1 - MCQExams.com
CBSE
Class 12 Commerce Accountancy
Analysis Of Financial Statements
Quiz 1
Window dressing imples.
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Curtailment of expenses
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Checking of wastages
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Under valuation of assets
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Over valuation of assets
Explanation
The term 'window dressing' means manipulation of accounts so as to present the financial statements in a way to show better position than the actual. e.g., assets may be overstated and liabilities may be understated.
Therefore, D is the correct answer.
Which of the following is not true with reference to capital budgeting?
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Capital budgeting is related to asset replacement decisions
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Cost of capital is equal to minimum required return
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Existing investment in a project is not treated as sunk cost
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Timing of cash flows is relevant
Explanation
Sunk cost is a cost that cannot be recovered and has been incurred already. Existing investment in a project is treated as a sunk cost as it is incurred in the past and cannot be recovered.
Capital Budgeting deals with _______.
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Long-term decisions
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Short-term decisions
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Both A and B
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Neither A nor B
Explanation
Capital budgeting is the planning process used to determine whether an organisation's long term investments such as new machinery, replacement of machinery,new plants, new products etc. are worth the funding of cash through the firms capitalisation structure.
Which of the following is not true for capital budgeting?
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Sunk costs are ignored
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Opportunity costs are excluded
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Incremental cash flows are considered
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Relevant cash flows are considered
Explanation
Capital budgeting decisions involve huge funds and are long term decisions. As they involve huge costs one wrong decision would have a big effect on the business. They include all the potential expenses/costs. It includes opportunity cost, actual cost, incremental and relevant cash flows. It does not include sunk costs.
Assets are held for the purpose of __________.
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Earning revenue
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Resale
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Conversion into cash
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Personal purpose
Explanation
In financial accounting asset is an economic resource. Anything tangible or intangible that can be owned or controlled to produce positive economic value (earning revenue) is an asset.
Which of the following is not incorporated in Capital Budgeting?
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Tax-Effect
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Time Value of Money
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Required Rate of Return
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Rate of Cash Discount
Explanation
Capital budgeting decisions involve huge funds and are long term decisions. As they involve huge costs one wrong decision would have a big effect on the business. The company understands how much tax benefit will the company have after the investment, whether the rate of return is more than the cost of capital and how much is to be paid in terms of present value. All these are taken into account but rate of cash discount is not.
Which of the following is not a capital budgeting decision?
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Expansion program.
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Merger.
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Replacement of an asset.
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Inventory level.
Explanation
Capital Budgeting and investment appraisal, is the planning process used to determine whether an organisation's long term investments such as new machinery, replacement of machinery, new plants, new products, and research development projects are made effectively.
Capital budgeting helps in making the most optimal decisions. It includes expansion programs, merger decisions, replacement decisions but will not comprise of the inventory related decision making.
Majority of Capital Budgeting techniques makes use of __________.
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Cash flows
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Accounting profit
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Interest rate on borrowings
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Last dividend paid
Explanation
Capital Budgeting is the planning process used to determine whether an organisation's long term investments such as new machinery, replacement of machinery, new plants, new products, and research development projects will be able to earn future cash flows as estimated. A number of capital budgeting techniques are used for decision making which are based on cash flows like Payback period, Discounted cash flow, Net present values, Internal rate of return and Profitability Index.
Capital Budgeting Decisions are based on ___________.
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Incremental profit
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Incremental cash flows
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Incremental assets
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Incremental capital
Explanation
Capital budgeting decisions are based
on comparison of a project's initial investment outlay to the future
incremental cash flows
of the project and its terminal
cash flow
.
Which of the following is an irrelevant cost in Capital Budgeting Decisions?
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Sunk Cost
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Opportunity Cost
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Allocated Overheads
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Both A and C
Explanation
Sunk costs are the costs which were incurred in the past. Sunk costs are irrelevant for decisions, because they cannot be changed.
Opportunity Cost is the income foregone by selecting one alternative over another. These are considered as relevant costs for decision making.
Allocation of overheads means charging a cost center with such overheads which can be identified and measured. Such allocated overheads are irrelevant as already charged to cost center.
Capital Budgeting Decisions are __________.
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Reversible
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Irreversible
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Unimportant
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All of the above
Explanation
Capital budgeting decisions involve huge funds and are long term decisions. As they involve huge costs one wrong decision would have a big effect on the business. Hence, capital budgeting decisions are irreversible as its difficult to take back the decision.
Which of the following is not followed while taking Capital budgeting decisions?
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Cash flows be calculated on incremental terms
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All costs and benefits are measured on cash basis
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All accrued costs and revenues be incorporated
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All benefits are measured on after-tax basis
Explanation
Capital budgeting is evaluating all the big expenses and cost that the business will incur on a project. They only take into consideration all the cash expenses and revenues and not accrued cost and revenues.
In capital budgeting cash is more important than profit. All benefits are measured on cash basis, tax is taken into consideration to understand the tax benefit.
What factors increase the riskiness of a Capital budgeting Project?
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Industry specific risk factors
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Competition risk factors
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Project specific risk factors
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All of the above
Explanation
The factors that increase riskiness of a capital budgeting project are industry specific risk, competition risk and project risk. Industry specific risk/market risk are the risks that might occur due to change in the industry, competition risks are the risk that can occur because of the competitors strategy and lastlyt project risk are the risk that are associated with the project as whether or not the project will be profitable or not.
Two mutually exclusive projects with different economic lives can be compared on the basis of ______________.
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Internal Rate of Return
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Profitability Index
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Net Present Value
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Equivalent Annuity Value
Explanation
The Equivalent Annual Cost (EAC) is the annual cost of owning, operating and maintaining an asset over its entire life. EAC is often used by firms for capital budgeting decision.The equivalent annual cost methodology allows a company to compare the cost effectiveness of various assets that have unequal lifespan.
Evaluation of capital budgeting proposals is based on cash flows because_____________.
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Cash rows are easy to calculate
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Cash flows are suggested by SEBI
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Cash is more important than profit
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None of the above
Explanation
Capital budgeting is based on cash flows because there is discounting and other factors used which can be done only on cash. Moreover, cash can be spent and not profit. Cash is more important than profit as the company has to focus on many costs. As in the long run the company will succeed if it focuses mote on cash flow statement.
Risk in Capital budgeting implies _____________.
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Uncertainty of Cash flows
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Probability of Cash flows
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Certainty of Cash flows
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Variability of Cash flows
Explanation
Risk is the probability of damage, loss or threat. Risk in capital budgeting implies that the decision maker knows the probability of cash flows. Therefore, risk in
capital budgeting means uncertainty of cash flows.
In case of the indivisible projects, which of the following may not give the optimum result?
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Internal Rate of Return
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Profitability Index
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Feasibility Set Approach
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All of the above
Explanation
Feasibility Set Approach to capital Rationing can be applied in divisible projects. Indivisible projects are the one which can be accepted or rejected wholly. So conducting a feasibility test would ensure if the project is suitable or not for the company.
Profitability Index, when applied to Divisible Projects, impliedly assumes that_____________.
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Project cannot be taken in parts
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NPV is linearly proportionate to part of the project taken up
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NPV is additive in nature
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Both B and C
Explanation
Profitability index is an index that identifies the relationship between cost and profitability of a project. Profitability Index. when applied to divisible projects impliedly assumes that project cannot be taken in parts has to be accepted fully, NPV is linearly proportionate to part of the project taken up and NPV is additive in nature.
A proposal is not a capital budgeting proposal if it____________.
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Is related to fixed assets
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Brings long-term benefits
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Brings short-term benefits Only
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Has very large investment
Explanation
A proposal is not a capital budgeting proposal if it brings short-term benefits only.
Capital budgeting decisions involve huge funds and are long term decisions, it benefits the firm in long term. As they involve huge costs one wrong decision would have a big effect on the business.
Risk in capital budgeting implies that the decision-maker knows _______ of the cash flows.
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Variability
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Probability
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Certainty
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None of the Above
Explanation
Risk is the probability of damage, loss or threat. Risk in capital budgeting implies that the decision maker knows the probability of cash flows. The decision maker after analysing the risk will have of fair idea of the cash flows that might arise from the decision that is made.
In certainty-equivalent approach, adjusted cash flows are discounted at __________.
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Accounting Rate of Return
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Internal Rate of Return
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Hurdle Rate
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Risk-free Rate
Explanation
In Certainty-equivalent approach, adjusted cash flows are discounted at Risk free Rate.
In this approach the investors will analyse the risk free and risky cash flows. They will evaluate the risk and understand , how much money will be received with certainty.
Consider the following statements :.
1. To know about the profitability, ownership, solvency, financial strength, trends, gearing, trends, gearing and cover etc. is the main objective of financial analysis.
2. 'Vertical Financial Analysis' is also known as Dynamic Analysis.
3. Analysis done by CEO of the company is known as 'External Financial Analysis'.
Which of the above statement/s is/are not true?
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$$1$$, $$2$$ and $$3$$
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$$2$$ and $$3$$
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Only $$1$$
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Only $$2$$
Minimum Alternate Tax (MAT) is imposed on
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All companies
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Public Limited Companies only
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Private Limited Companies only
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Partnership Firms and Companies
Explanation
MAT is applicable to all companies, including foreign companies. MAT is calculated under Section 115JB of the Income-tax Act.
Therefore, A is the correct option.
Payment received from Debtor ___________.
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Decreases the total assets
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Increases the total assets
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Results in no change in the total assets
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Increases the total liabilities
Explanation
Accounting is based on dual concept. For every debit there will be a credit and for every credit there will be a debit.
Payment received from debtor will effect two accounts i,e. debtors and cash. Debtors and cash, both are current assets. Accounting entry will be as under:
Cash A/c Dr.
To Debtors A/c
In such case, cash will increase and debtors will decrease, hence no change in assets.
Recording of all business transactions is based on ________.
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Sales journal
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Accounting equation
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Formula
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Policies
Explanation
Accounting equation is the foundation of double entry system of book-keeping. It displays that all the assets are either financed by borrowing money or paying from the shareholder's equity. The balance sheet being the complex version shows explain the equation very clearly and it shows that total assets is equal to total liability plus shareholder's equity. Hence, recording of all business transactions is based on accounting equation.
NPV of a proposal, as calculated under Risk Adjusted Discount Rate(RADR) & Real Certainty Equivalent(CE) Approach will be __________.
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Same
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Unequal
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Both A and B
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None of A and B
Cash purchases _________.
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Increases assets
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Results in no change in the total assets
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Decreases assets
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Increases liability
Explanation
Every business transaction gives two affects because financial accounting is based on double entry system of accounting.
Cash purchases will affect two account i.e. purchases and cash.
Accounting entry will be done as under:
Purchases A/c Dr.
To Cash A/c.
Cash is a current assets which gets reduced. Hence it decreases the assets.
"Dividend is not relevant in determining the value of the company". Who among the following held this opinion?
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J.E. Walter
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Ezra Soloman
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Modigilani-Miller
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M.J. Gordon
Payment received from debtor _____________.
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Decreases the total assets
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Increases the total assets
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Results in no change in total assets
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Increase the total liabilities
Explanation
Every business transaction affects two accounts as accounting is based on double entry system of accounting. For every debit there will be a credit and vice versa.
Accounting entry for payment received from debtors will be:
Cash A/c Dr.
To Debtors
Cash and debtors both are current assets. One is increasing and another is decreasing. There will be no change in total assets.
Risk-aversion of an investor can be measured by______________.
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Market Rate of Return
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Risk-free Rate of Return
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Portfolio Return
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None of the above
Explanation
Risk aversion means the tendency of a person to avoid a decision/investment when there is risk involved. Risk aversion is a personal trait of a person. Risk-aversion of an investor cannot be measured by market rate of return, risk free rate of return or portfolio profit.
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Practice Class 12 Commerce Accountancy Quiz Questions and Answers
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