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CBSE Questions for Class 12 Commerce Business Studies Financial Management Quiz 2 - MCQExams.com
CBSE
Class 12 Commerce Business Studies
Financial Management
Quiz 2
Property dividends are distributed under ___________.
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normal conditions
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exceptional conditions
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Both (a) and (b)
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None of the above
When a dividend is paid at the usual rate, it is designated as a ________.
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regular dividend payment
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stable dividend policy
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extra dividend policy
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irregular dividend
The dividend policy affects __________.
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the financial structure of corporation
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the flow of funds, corporate liquidity and stock prices
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the investor satisfaction with the return on his investment
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All the above
________ is known as fixed capital.
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Furniture and fixtures
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Land and building
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Plant and machinery
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All of the above
Explanation
Fixed capital refers to the investment of a business into long term assets. Management of fixed
capital involves allocation
of firm’s capital to different projects
or assets with long-term implications for
the business. Some of the long term assets that a business invests in are furniture and fixtures, land and buildings, plant and machinery.
The most suitable coverage ratio for deciding the debt capacity of a firm is _________.
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interest coverage ratio
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cash flow coverage ratio
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debt service coverage ratio
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fixed assets coverage ratio
Explanation
Generally, cash flow coverage ratio measures the ability of company's operating cash flow to meet it's current obligations (short term borrowings, long term debt).
Larger the operating cash flow coverage, greater the company's ability to meet it's obligations.
Cash Flow Coverage Ratio = Operating cash flow / Short term debt coverage
The working capital requirement of a business is not likely to be low when
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When the rate of inflation is low.
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When the raw material is easily available.
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When the growth prospects of the business are high.
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The scale of the business operation is small.
Explanation
If the growth potential of concern is perceived to be higher, it will require a larger amount of working capital so that it is able to meet higher production and sales target whenever required. Working Capital facilitates smooth day-to-day
operations of the business.
Hence, C is the correct option.
_________ is used for investment in current assets.
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Fixed Capital
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Working Capital
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Both of above
0%
None of the above
Explanation
Working capital is used to invest in current assets, pay off short-term debt, and cover day-to-day costs. The difference between a company's current assets and current liabilities is known as working capital.
A true and usual method of paying dividend is _______.
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stock dividend
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cash dividend
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profit dividend
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property dividend
Short-term financial instruments in the descending order if their liquidity
(i) Call loans
(ii) Cash loans
(iii) Treasury bills
(iv) Commercial bills
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i, iii, iv ,ii
0%
ii, i, iii, iv
0%
iv, i iii, ii
0%
iii, ii, iv, iii
0%
ii, i, iv, iii
Degree of total leverage can be applied in measuring change in ______________________,
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EBIT to a percentage change in quantity
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EPS to a percentage change in EBIT
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EPS to a percentage change in quantity
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DFL to a percentage change in DOL
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Quantity to a percentage change in EBIT
Explanation
The degree of total leverage is a combination of the operating and financial leverages. Thus it is a measure of the output and EPS of the company.
DOL = percentage change in EBIT/percentage change in output.
DFL = percentage change in EPS/percentage change in EBIT
Thus, DTL = DOL X DFL = Change in EPS / change in output.
Hence, option (C) is the correct answer.
Any firm that goes bankrupt gradually will face one or more of the following symptoms _______________.
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Persistent cash loses
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Failure of pay taxes
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Cost overruns
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All of the above
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Both (A) and (C) above
Explanation
Persistent cash losses, failure to pay taxes, cost overruns, low capacity utilization, accumulation of finished goods, etc. are the symptoms of bankruptcy.
Hence, option (D) is the correct answer.
For a weak unit which of the following should hold good _____________.
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Accumulated losses greater or equal to $$50\%$$ of its peak net worth during immediately preceding our accounting years
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A current ratio of less than 1:1
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Suffering losses in the previous accounting year
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All of the above
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Both (A) and (C) above
Explanation
A non-small scale industrial unit is defined as weak if the accumulated losses at the end of any accounting year, resulting in the erosion of fifty percent or more of its peak net worth during the immediately preceding four accounting years.
Which of the following methods does a firm adopt to avoid dividend payments?
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Share splitting
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Declaring bonus shares
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Rights issue
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All of the above
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Both (A) and (B) above
________ funding is almost as bad as inadequate funding.
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Limited
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Short
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Excess
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Long
Explanation
Excess funding is almost as bad as inadequate funding. Funding involves cost like interest on loans which is a burden on the company.
Excess funding will result in excess interest on capital which is a negative impact on the company's financial position.
Higher amount of debt means __________ interest rate in future.
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Higher
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Lower
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Similar
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Equal
Explanation
More the debt will increase more will be interest rate in future.
Hence, option (A) is the correct answer.
The difference between current assets and current liabilities is:
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Gross working capital
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Net working capital
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Permanent working capital
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Temporary working capital
________ is a person or association of persons in whose favor the letter of credit is opened.
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Applicant
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Issuing bank
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Beneficiary
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Advising bank
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None of the above
Explanation
A letter of credit is defined as an arrangement by means of which a bank acting at the request of a customer, undertakes to pay a third party a predetermined amount by a given date, according to agreed stipulations and against presentation of stipulated documents. A beneficiary is an exporter in whose favor the letter of credit is opened.
Hence, option (C) is the correct answer.
Financial Management is concerned with
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Investment decisions
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Financing decisions
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Dividend decisions
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All of above
Explanation
Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions.
Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby.
Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two:
Dividend for shareholders- Dividend and the rate of it has to be decided.
Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.
_________ plan of action prepared under financial planning reduces waste, duplication of efforts, and gaps in planning.
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Detailed
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Short
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General
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Basic
Explanation
Financial plan is a comprehensive evaluation of an individual's current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans.
Therefore detailed plan of action is prepared under financial planning reduce waste, duplication of efforts, and gaps in planning.
Financial planning tries to link the ______ with the ______.
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Future, present
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Present, past
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Present, future
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Past, future
Explanation
Financial Planning is the process of estimating the capital required and determining it’s competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise. Financial planning relates present financial requirement with future requirement by anticipating the sales and growth plans of the company.
Which of the following factors affect requirement of working capital?
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Scale of Operations
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Credit Allowed
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Production Cycle
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All of the above
Explanation
Main factors affecting the working capital are as follows:
(1) Nature of Business:
(2) Scale of Operations:
(3) Business Cycle:
(4) Seasonal Factors:
(5) Production Cycle:
(6) Credit Allowed:
(7) Credit Availed:
(8) Operating Efficiency
Plans made for a period of _____ year or less is termed as budget.
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0%
one
0%
two
0%
three
0%
four
Explanation
A budget is a financial plan for a defined period of time, usually a year.
A budget is the sum of money allocated for a particular purpose and the summary of intended expenditures along with proposals for how to meet them. It may include a budget surplus, providing money for use at a future time, or a deficit in which expenses exceed income.
If the raw materials and other required materials are available freely and continuously, ____ stock levels may suffice.
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lower
0%
higher
0%
constant
0%
fluctuating
Explanation
Keeping lots of stock.
This might suit your business if sales are difficult to predict (and it is hard to pin down how much stock you need and when), if firm can store plenty of stock at less cost, the components or materials you buy are unlikely to go through rapid developments or they take a long time to re-order.
The efficient stock control allows you to have the right amount of stock in the right place at the right time. It ensures that capital is not tied up unnecessarily, and protects production if problems arise with the supply chain.
Advantages
Disadvantages
Easy to manage
Higher storage and insurance costs
Low management costs
Certain goods might perish
You never run out of stock
Stock may become obsolete before it is used
Buying in bulk may be cheaper
Your capital is tied up
A better debtors turnover ratio may be achieved reducing the amount tied up in receivable.
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0%
True
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False
Explanation
Higher debtor’s turnover ratio and lower collection period are what a company would want. A lower collection period would mean faster conversion of credit sales to cash. One can say that lower the average collection period higher the efficiency of the company in managing its credit sales and vice versa. Higher debtor’s turnover ratio indicates faster turnaround and reflects positively on the liquidity of the company. The faster collection would keep the company having cash to pay off its creditors and thereby reduce the working capital cycle for a better
Financial planning helps in coordinating _________ business functions.
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0%
one
0%
two
0%
various
0%
three
Explanation
Financial planning is an important part
of overall planning of any business
enterprise. It aims at enabling the
company to tackle the uncertainty in
respect of the availability and timing of
the funds and helps in smooth
functioning of an organisation.
Which of the following refers to those industries which require huge infrastructure, man power and have influx of capital assets?
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Large scale industries
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Small scale industries
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Both (A) and (B)
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(A) or (B)
Explanation
Large scale industries operate on a huge quantity of products and services. Therefore large scale industries require huge infrastructure like plants and machinery, human resource for daily working of these activities and huge amount of capital assets for the smooth flow of business activities.
Higher level of competitiveness _____ the working capital requirement.
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increases
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decreases
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does not influence
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none of the above
Explanation
If the industry is competitive, quick response to customer needs is compulsory and therefore a higher level of inventory is maintained. Liberal credit terms are also mandatory with good service to survive in the market. So, higher the competition, higher would be the requirement of working capital.
Working capital requirement is _______ in firms with longer processing cycle and ______ in firms with shorter
processing cycle.
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0%
lower; lower
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lower; higher
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higher; lower
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higher; higher
Explanation
The production cycle time refers to the time required for converting the raw materials into finished goods. Higher, this time, higher would be the time of blocking funds in the working capital.
In inflation, ______ amount of capital is required than before in order to maintain the previous scale of production and sales.
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0%
fixed
0%
less
0%
no
0%
more
Explanation
Inflation means rise in prices. In such a situation more capital is required than before in order to maintain the previous scale of production and sales. Therefore, with the increasing rate of inflation, there is a corresponding increase in the working capital
In case of trading concern or retail shop the requirement of working capital is less because length of operating cycle is small.
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True
0%
False
Explanation
In case of trading concern or retail shop the requirement of working capital is less because length of operating cycle is small. The wholesalers as compared to retail shop require more working capital as they have to maintain large stock and generally sell goods on credit which increases the length of operating cycle.
Therefore in case of retail shop, generally prompt payment is done so don't have to maintain high level of stock hence small operating cycle.
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