Accounting and Finance

Continuous Assessment 1
Question 1
Which account should be debited when a customer returns goods?
Correct answer: Sales return account

Question 2
Which of the following expenses is a non cash expense in business?
Correct answer: Depreciation

Question 3
The credit effect for prepaid rent will appear as
Correct answer: Deduction from rent paid

Question 4
A machine costing Rs. 120,000 has accumulated depreciation of Rs. 50,000. What is the book
value of machine?
Correct answer: Rs. 70000

Question 5
What do we refer Trading and Profit and Loss Account and Balance Sheet, all together as?
Correct answer: Final Accounts

Question 6
What to do we refer to those expenses, which have been incurred, but not paid?
Correct answer: Outstanding Expenses

Question 7
Which of the following is not a current asset?
Correct answer: Furniture

Question 8
Which of the following is not the causes of depreciation?
Correct answer: Actual cost of the asset

Question 9
Depreciation is necessary for which category of accounts?
Correct answer: Fixed Assets and Intangible Assets
Question 10
What does Money Measurement Concept as a convention of Financial Accounting refer to ?
Correct answer: accounting only transactions which can be measured in money

Question 11
In Double Entry system of Bookkeeping, every business transaction affects which of these
options?
Correct answer: two accounts

Question 12
What is the amount of closing stock if opening stock is Rs.4500, cost of goods sold is Rs.54500,
purchases are Rs.60000?
Correct answer: Rs. 10000

Question 13
ABC Pvt. Ltd company invests money in shares of another company, PQR Pvt. Ltd. Where is this
investment recorded in the books of ABC ltd.?
Correct answer: Asset side of Balance Sheet

Question 14
Capital is shown under liabilities of the balance sheet. Which principle is followed here?
Correct answer: Business Entity concept

Question 15
Which of the following accounts is a nominal account?

Question 16
Goods returned to supplier should be debited to which account?
Correct answer: Supplier's account

Question 17
Metropol acquired a machine for Rs. 5,40,000 on 1st April 2009. Depreciation was to be charged
at 20%p.a. Calculate Depreciation if the accounting year ends on 31st March
Correct answer: 1,08,000

Question 18
What is the nature of financial accounting?
Correct answer: Historical

Question 19
How to provide depreciation if the fixed asset is purchased in the middle of the year?
Correct answer: Provide for proportionate period of actual utilisation i.e from the day put to use
Question 20
Which of the following is not a Real Account?
Correct answer: Outstanding rent A/c

Question 21
Purchase of furniture will have what effect on total assets?
Correct answer: Increase

Question 22
Which principle requires that the same accounting method should be used from one accounting
period to the next?
Correct answer: Consistency

Question 23
What is the system of recording based on dual aspect concept called?
Correct answer: Double entry system

Question 24
Who are Creditors for supplying goods to the Company?
Correct answer: To whom the Company owes Money

Question 25
Which expense is an appropriation of profit?
Correct answer: Dividend

Question 26
Which term is used to denote the value of the asset at the end of its useful life?
Correct answer: Salvage value

Question 27
The auditor noticed that the financial statements of Alpha Company were missing some
footnotes important for users for decision making. This action of the management is a violation
of which concept?
Correct answer: Full disclosure concept

Question 28
Which of the following assets do not come under "current asset"?
Correct answer: Car
Question 29
Copyrights, Patents and Trademarks are which type of assets?
Correct answer: Intangible assets

Question 30
In which method of Depreciation is the amount of depreciation the same every year?
Correct answer: Straight Line Method

Continuous Assessment - 2

Question 1
The formula to calculate average collection period is
Correct answer: 365/Average receivables turnover ratio

Question 2
Cash Balance Rs. 15,000; Trade Receivables Rs. 35,000; Inventory Rs. 40,000; Machinery Rs.
25000, Trade Payables Rs. 24,000 and Bank Overdraft is Rs. 6,000; Loans Rs. 55000. What is the
Current Ratio?
Correct answer: 3:1

Question 3
What does a high p/v ratio imply about the organisation?
Correct answer: Making huge profits

Question 4
While lending loans and thus analysing financial statements, which is the most appropriate area
of interest the bankers will be interested in?
Correct answer: Solvency, Profitability and Liquidity

Question 5
Which activity will be affected with an increase in the balance in Accounts Payable?
Correct answer: Operating
Question 6
From the following particulars, calculate the break-even point Variable cost per unit = Rs.12 Fixed
expenses = Rs.60,000 Selling price per unit = Rs.18
Correct answer: 10,000 units

Question 7
What does 'Capital Employed' mean?
Correct answer: Networth+ Long term liabilites

Question 8
What is the ideal ratio of quick ratio ?
Correct answer: 1:1

Question 9
Which one of these statement explains the causes of the difference between the cash/bank
book (as per books) vis-a vis the bank statement
Correct answer: Bank Reconciliation Statement

Question 10
A product is sold at Rs. 150 per unit and its variable cost is Rs. 70 per unit. The fixed expenses of
the business are Rs. 8,000 per year. What is the Break-even point in terms of units?
Correct answer: 100 units

Question 11
Which of the following amounts will be added to balance as per cash book while preparing bank
reconciliation statement?
Correct answer: Cheque issued but not yet presented for payment

Question 12
What does analysis of financial statements comprise of?
Correct answer: Both Balance sheet and Income statement

Question 13
From the following information, find out: P/V Ratio Fixed Cost = Rs.40, 000 Profit = Rs. 20,000
B.E.P. = Rs. 80,000
Correct answer: 50%

Question 14
Who prepares the Bank Reconciliation Statement?
Correct answer: Accountant
Question 15
In cash book, what does favourable balance indicates?
Correct answer: Debit balance

Question 16
Which activity will be affected with the declaration and payment of dividends on a company's
stock in a cash flow statement?
Correct answer: Financing

Question 17
Where the entity reaches a scenario where there is no profit and loss and the costs equals
revenues, What is the strange situation referred to as ?
Correct answer: Break-even point/Indifference Point

Question 18
What is the formula to calculate contribution ?
Correct answer: Operating income plus fixed costs

Question 19
Which ratios measure an organisations performance in generating earnings over related
expenses over a specified time period?
Correct answer: Profitability ratios

Question 20
The cash inflows and outflows of any organisation can further be divided into how many
activities?
Correct answer: 3

Question 21
Which among the following is an internal user of the financial statement analysis?
Correct answer: Management

Question 22
A product is sold at a price of Rs. 120 per unit and its variable cost is Rs. 80 per unit. The fixed
expenses of the business are Rs. 8,000 per year. What is the Break-even point?
Correct answer: Rs. 24000

Question 23
Which one of the following is not a tool of financial analysis?
Correct answer: Budgeting
Question 24
Which ratios measure the ability of a company to meet its short term obligations?
Correct answer: Liquidity ratios

Question 25
From the information, Find BEP : Variable cost per unit - Rs 12; Fixed expenses - Rs 60,000;
Selling price per unit - Rs 18
Correct answer: 10000 units

Question 26
How is Net Working Capital Arrived at?
Correct answer: Total Current Assets less Total Current Liabilities

Question 27
If profit - 1,00,000; Contribution- Rs 5,00,000 then calculate fixed cost
Correct answer: 4,00,000

Question 28
When cheque is returned by bank due to insufficient fund, what is that cheque called as?
Correct answer: Dishonoured cheque

Question 29
If sales amounts to Rs 2,40,000; Gross Profit is Rs 60,000; What would be the Gross Profit Ratio?
Correct answer: 25%

Question 30
Which of the following amount will be deducted from balance as per cash book while preparing
bank reconciliation statement?
Correct answer: Cheque deposited but not yet collected

Continuous Assessment – 3
Question 1
How is the Accounting Rate of Return calculated?
Correct answer: Average PAT/average investment

Question 2
The sum of present value of cash inflow is Rs.48,691 and the initial outlay is Rs.45,000. Calculate
the NPV of the project.
Correct answer: Rs.3,691
Question 3
Which of these is not a relevant consideration for designing capital structure of a Company?
Correct answer: employee costs

Question 4
Which one of the following is defined as a firm's short-term assets and short-term liabilities?
Correct answer: Working capital

Question 5
A home loan of Rs. 20 lakh is to be repaid in 10 equal annual installments. If the loan carries 12%
interest p.a. what is the value of one installment?
Correct answer: Rs. 35,398

Question 6
Based on profitability index (PI), when is a project selected?
Correct answer: PI > 1

Question 7
An organisation has to earn a minimum rate of return in order to satisfy the investors. What is it
known as?
Correct answer: Weighted Average cost of capital

Question 8
Which of the following techniques is not applied during Capital Budgeting?
Correct answer: Networth method

Question 9
Calculate the effective rate of interest if the nominal rate of interest is 12% and interest is
compounded quarterly.
Correct answer: 12.60%

Question 10
A company is planning to invest Rs. 5 lakh in a project. It has forecast that the cash flows out of
the project over the next 4 years would be Rs. 1.50 lakh, Rs. 2 lakh, Rs. 2.50 lakh and Rs. 3.00 lakh.
What is the payback period of the project?
Correct answer: 2.6 years

Question 11
Corporate tax must be known for calculating the:
Correct answer: Cost of debt
Question 12
Identify the type of decision: A board meeting has been convened by Infosys to discuss
distribution of profits.
Correct answer: Dividend

Question 13
In which of the cost of the following method, the value of equity capital is computed by dividing
dividends by market price per share?
Correct answer: Price Earning Method

Question 14
A company has a financial structure where equity is 70% of its total debt plus equity. Its cost of
equity is 10% and gross loan interest is 5%. Tax rate is 30%. Calculate the company's weighted
average cost of capital.
Correct answer: 8.05%

Question 15
Which of the following is not a capital budgeting decision?
Correct answer: Working capital planning and management

Question 16
Which of these relate to Capital budgeting decisions by the management?
Correct answer: Investment decisions/capital expenditure in projects having long term benefit
to the organisation.

Question 17
Cash management refers to management of which category of accounts?
Correct answer: Cash and Bank Accounts

Question 18
What is the formula for calculating Profitability Index?
Correct answer: Total PV of cash inflows/Total PV of cash outflows

Question 19
What is the net cash outlay of the project if a new machine costs Rs. 2 lakh and cash realized
from the sale of existing machine Rs. 20,000, the book value of the old machine Rs. 40,000.
Correct answer: Rs. 1,80,000

Question 20
What do you technically refer to a stream of regular/periodic payments made over a specific
period of time ?
Correct answer: Annuity
Question 21
Which one of the following terms is defined as "management of a firm's long-term investments"?
Correct answer: Capital budgeting

Question 22
Money has time value. Which of the following statements is true?
Correct answer: Money today is more worth than same value of money tomorrow

Question 23
What type of a mechanism is Capital budgeting ?
Correct answer: Decision making

Question 24
Which table is used to find the present value of a sum of Rs.20,000 receivable at the end of each
year for the next 8 years at 7%?
Correct answer: Present value of annuity

Question 25
Which of the following model/ method makes use of Beta (β) in the calculation of the cost of
equity?
Correct answer: Capital Assets Pricing Method

Question 26
Identify the type of decision: The ITC board has cleared the company's proposal to issue new
shares in the market.
Correct answer: Financing

Question 27
What is the present value of Rs.5,000 receivable at the end of 5 years, discounted at 10% ?
Correct answer: Rs.3,105

Question 28
Shareholders wealth increases with the increase in which of the given options?
Correct answer: Dividend and Market value of the firm

Question 29
What is the firm's average cost of capital?
Correct answer: All sources of finance
Question 30
Which of these Capital Budgeting techniques do not ordinarily consider time value of money?
Correct answer: Payback period

01 Unit :Practice Multiple Choice Questions

Question 1
Outstanding wages A/c is________A/c
Correct answer: Personal

Question 2
The conventions, concepts, rules and procedures that together make up accepted accounting
practice at any given time are called _______
Correct answer: GAAP

Question 3
Creditor may be types
Correct answer: 4

Question 4
A process of accounting where revenue and expense recognition would occur when cash is
received and disbursed is called_______
Correct answer: Cash

Question 5
Which of the following implies that a business unit is separate and distinct from the person who
owns or controls it?
Correct answer: Business Entity

Question 6
Prepaid Insurance A/c is ________A/c
Correct answer: Personal

Question 7
Inflation accounting is also called _______
Correct answer: Replacement
Question 8
________accounting is a form of accounting which enables a business to be conducted more
efficiently.
Correct answer: Management

Question 9
Which of the following is a concept that implies each transaction and event must be expressible
in monetary terms ?
Correct answer: Money measurement

Question 10
Which of the following accounting system provides a system of checks and balances?
Correct answer: Double Entry

Question 11
Debt may be of types
Correct answer: 3

Question 12
Which of the following is the after-tax cash flow generated by a business minus the cost of the
capital it has deployed to generate that cash flow?
Correct answer: EVA

Question 13
It means that cash is received by the business from the proprietor. It results in the immediate
receipt of cash.
Correct answer: Bought goods for cash ` 2,000

Question 14
________ they are the present obligations arising from past events. It also arises when an asset is
created or acquired.
Correct answer: Liabilities

Question 15
Which of the following concept tells that to recognize revenue it has to be realized?
Correct answer: Realisation concept

Question 16
________ is an increase in economic benefits during the accounting period in the form of inflows
or enhancements of assets or a decrease in liabilities, thereby increases equity and net worth.
Correct answer: Income
Question 17
Bad Debts A/c is_______A/c
Correct answer: Nominal

Question 18
________basis is a process of accounting that recognizes the impact of transactions on the
financial statements in the time periods when revenues and expenses occur instead of when
cash is received.
Correct answer: Accrual

Question 19
Which of the following is the art of recording, classifying and summarising in a significant
manner, and in terms of money transactions and events which are in part at least, of a financial
character and interpreting the results thereof.
Correct answer: Accounting

Question 20
Which of the following is a residual interest in the assets after deducting liabilities?
Correct answer: Equity

02 Unit :Practice Multiple Choice Questions

Question 1
Revenue is generally recognized being earned at the point of time when
Correct answer: Billed to customers

Question 2
The documents relating to purchase of asset must be authorized by
Correct answer: Senior management

Question 3
Indicate all of the following statements that correctly describe the net income. Net income
Correct answer: Increases owners’ equity.

Question 4
Which one the following documents is prepared for documentary evidence by business?
Correct answer: All of these
Question 5
Accounting to the rules of debit and credit for balance sheet accounts:
Correct answer: Decrease in liability and owners’ equity accounts are recorded by debits.

Question 6
The basic sequence in the accounting process can best be described as
Correct answer: Transaction, source document, journal entry, ledger account, trial balance

Question 7
Which items influence the trial balance agreement?
Correct answer: Partial omission of a transaction

Question 8
What is used in preparing trial balance?
Correct answer: Ledger accounts

Question 9
The accounting system, in which accounting entries are made on the basis of amount, having
become due for payment or receipt, is known as?
Correct answer: Accrual system of accounting

Question 10
Bookkeeping is mainly concerned with
Correct answer: Recording the economic activities

Question 11
What is the trial balance used for?
Correct answer: It records balances of accounts

Question 12
Which one of the following systems of recording transactions has a dual aspect concept of
accounting?
Correct answer: Double entry system

Question 13
Trial balance is used to check the accuracy of
Correct answer: Ledger accounts balances
Question 14
When is trial balance prepared?
Correct answer: At the end of an accounting period

Question 15
Double entry bookkeeping means
Correct answer: Entry for two aspects of transaction

Question 16
Accrual-basis of accounting
Correct answer: Leads to the reporting of more complete information than cash-basis

Question 17
In the books of account, if a transaction is completely deleted, will it affect the trial balance?
Correct answer: No

Question 18
Which of the following accounts with normal balance is shown at the debit side of a trial balance?
Correct answer: Cash account

Question 19
When debit balance is equal to credit balance, then the trial balance means
Correct answer: Mathematically, Capital + Liabilities = Assets

Question 20
A manufacturer is considering the point at which a transaction can be recognized within its
profit and loss account. At which of the following stages is this permitted?
Correct answer: Order placed for the goods

03 Unit :Practice Multiple Choice Questions

Question 1
At the end of the year, depreciation account is transferred to:
Correct answer: Profit and loss account

Question 2
Depreciation is calculated under diminishing balance method, based on
Correct answer: Book value
Question 3
According to Companies Act, 1956, secret reserves can be created by:
Correct answer: Banking and insurance companies

Question 4
The main objective of depreciation is
Correct answer: To calculate net profit

Question 5
The loss on sale of an asset is debited to:
Correct answer: Profit and loss account

Question 6
Which of the following is the example of revenue reserve?
Correct answer: Investment fluctuation fund

Question 7
What is the purpose of making a provision for depreciation in the accounts?
Correct answer: To charge the cost of fixed assets against profits

Question 8
Depreciation amount charged on a machinery will be debited to:
Correct answer: Depreciation account

Question 9
Salvage value means
Correct answer: Estimated disposal value

Question 10
Dividend equalisation reserve is:
Correct answer: Specific reserve

Question 11
Which of the following methods of depreciation is not recognized by Income Tax Law?
Correct answer: Straight line Method

Question 12
Depreciation is charged on:
Correct answer: Fixed tangible assets
Question 13
Depreciation is generated due to
Correct answer: Wear and tear

Question 14
Total amount of depreciation of an asset cannot exceed its
Correct answer: Depreciable value

Question 15
Which of the following is the example of capital reserve?
Correct answer: Premium received on issue of shares or debentures

Question 16
General reserves are shown in:
Correct answer: Balance sheet

Question 17
Asset Disposal A/c is prepared when:
Correct answer: Provision for depreciation a/c is prepared

Question 18
According to straight line method of providing depreciation, the depreciation
Correct answer: Remains constant

Question 19
According to fixed instalment method, depreciation is calculated on
Correct answer: Original cost

Question 20
In accounting, becoming out of date or obsolete is known as
Correct answer: Obsolescence

04 Unit :Practice Multiple Choice Questions

Question 1
Schedule III of the Companies Act, 2013 provides instructions for the preparation of the _______
of Indian corporations.
Correct answer: Balance sheet and the profit and loss statement
Question 2
The Profit and Loss account is prepared to ascertain _______ by the business over an accounting
period. Choose the correct option.
Correct answer: both a and b

Question 3
Which among the following are the forms of the balance sheet?
Correct answer: Horizontal or vertical

Question 4
Which of these is NOT included in current liabilities?
Correct answer: Capital work-in-progress

Question 5
As per Schedule III of the Companies Act, 2013, which of the following represents fixed assets?
Correct answer: All of these

Question 6
_______ is the balance in the statement of profit and loss disclosing allocations and
appropriations, such as dividend paid, bonus shares and transfer to/from reserves.
Correct answer: Surplus

Question 7
The _______ refers to a statement that summarises and presents the financial position of a
company on any given date.
Correct answer: balance sheet

Question 8
As per general instructions for the preparation of profit and loss account, in respect of a finance
company, revenue from operations shall include revenue from _______ .
Correct answer: Both a and c

Question 9
In a balance sheet, the _______ balances are reflected by assets.
Correct answer: debit

Question 10
_______ is the final process for any accounting year.
Correct answer: Preparation of financial statements
Question 11
As per the reverse order of liquidity format of the balance sheet, which of the following comes
under the heading of a fixed asset?
Correct answer: All of these

Question 12
Schedule III of the Companies Act, 2013 provides general instructions for the preparation
of _______ .
Correct answer: balance sheet only

Question 13
The format of financial statements prescribed in Schedule III of the Companies Act, 2013 was
voluntarily applicable from _______ .
Correct answer: April 2015

Question 14
Capital work-in-progress is a _______ .
Correct answer: fixed asset

Question 15
In a profit and loss account, all indirect revenue expenses are shown in the ______ side and the
indirect revenue incomes are shown in the ______ side.
Correct answer: debit; credit

Question 16
Preparation of the financial statement is the _______ step of the accounting cycle.
Correct answer: final

Question 17
Repairs to building and machinery are categorised under which of the following heads?
Correct answer: Miscellaneous expenditures

Question 18
If the turnover of the corporate body is below one hundred crore rupees, then which of the
following rounding off methods shall apply?
Correct answer: Rounded off to the nearest hundreds, thousands, rupees lakhs or millions, or
decimals thereof

Question 19
Profit and loss statement is also called_______ . Choose the correct option.
Correct answer: Statement of income
Question 20
In order to achieve _______ , organisations prepare financial statements by following a uniform
pattern or standards as instructed by the local Accounting Standards Board (ASB) and the
relevant Act.
Correct answer: comparability

05 Unit :Practice Multiple Choice Questions

Question 1
In a cash book, bank charges of `5,000 was not recorded. Name the correct cash book
adjustment
Correct answer: It will be credited in cash book

Question 2
On the bank statement, cash deposited by the company is known as
Correct answer: Credit

Question 3
Bank reconciliation statement compares a bank statement with_____________ .
Correct answer: Cashbook

Question 4
Unpresented cheques also referred to as
Correct answer: Outstanding cheques

Question 5
An unadjusted balance in a cash book is because of the result of which error?
Correct answer: The omission of Bank charges

Question 6
Bank reconciliation description is composed of
Correct answer: Business Accountant

Question 7
In a cash book, the favourable balance indicates
Correct answer: Debit Balance

Question 8
What type of cheques is that which is issued by a firm but not yet presented to the bank?
Correct answer: Outstanding cheques
Question 9
‘NSF’ marked in cheque sent back by the bank indicates
Correct answer: Not sufficient funds

Question 10
What is “Deposit in transit” in bank reconciliation?
Correct answer: Added to Bank Balance

06 Unit :Practice Multiple Choice Questions

Question 1
Which one is the ratio of cost of goods sold by an organisation to its average inventory during a
given accounting period?
Correct answer: Inventory Turnover Ratio

Question 2
Which of the following ratios measures short-term solvency?
Correct answer: Liquidity ratios

Question 3
Activity ratios are also known as:
Correct answer: All of these

Question 4
Which ones are also referred to as management ratios?
Correct answer: Activity ratios

Question 5
Current ratio is also known as
Correct answer: Working capital ratio

Question 6
Quick Ratio is also referred to as the___________ . Which one is correct?
Correct answer: Acid test ratio

Question 7
Activity ratios include:
Correct answer: All of these
Question 8
Liquid ratio is also known as:
Correct answer: Quick ratio

Question 9
Ratio analysis:
Correct answer: All of these

Question 10
Quick assets divided by current liabilities is:
Correct answer: Liquid ratio

Question 11
In which of the following measures is the operating liquidity available to an organisation?
Correct answer: Working capital turnover ratio

Question 12
Liquidity ratios include:
Correct answer: All of these

Question 13
When the concept of ratio is defined in respected to the items shown in the financial statements,
it is termed as
Correct answer: Accounting ratio

Question 14
A higher value of Debtors Turnover Ratio can ___________ the average collection period of the
organisation.
Correct answer: lower

Question 15
Operating Ratio is used to examine the profitability from ___________ .
Correct answer: sale of core products

Question 16
Which of the following ratios is used to compare an organisation’s total loans against its
shareholders’ investments in an organisation?
Correct answer: Debt-Equity ratio
Question 17
Solvency ratios include:
Correct answer: All of these

Question 18
___________ measures an organisation’s ability to meet its long-term obligations.
Correct answer: Solvency Ratio

Question 19
Which of the following is not true about ratio analysis?
Correct answer: It is not useful in inter-firm and intra firm comparison.

Question 20
Which of the following liabilities are taken into account for the quick ratio?
Correct answer: All of these

Question 21
Which of the following is not a limitation of ratio analysis?
Correct answer: It cannot be used in forecasting.

Question 22
Accounting ratios are divided into four main categories. Which one of the following was not
included in it?
Correct answer: Control ratios

Question 23
The ideal level of current ratio is:
Correct answer: 2:1

Question 24
The ideal level of liquid ratio is:
Correct answer: 1:1
07 Unit :Practice Multiple Choice Questions

Question 1
MOS is known as:
Correct answer: Difference between total sales and sales at bep

Question 2
The CVP analysis helps a finance manager in framing:
Correct answer: Budget

Question 3
P/V ratio establishes the relationship between:
Correct answer: Contribution and sales value

Question 4
If the P/V ratio is 30% of sales, then what is the remaining 70% of sales?
Correct answer: Variable cost

Question 5
Marginal cost is equal to :
Correct answer: Total cost – Fixed cost

Question 6
Contribution is equal to:
Correct answer: Selling price – Variable cost

Question 7
The CVP analysis is used for finding __________ of a project.
Correct answer: Profitability

Question 8
Where the cost under two alternatives is equal, the break-even point is calculated with the help
of:
Correct answer: Cost BEP

Question 9
The break-even analysis is done by finding __________ of an organisation.
Correct answer: BEP
Question 10
If an organisation deals with several products, its break-even point can be calculated with the
help of:
Correct answer: Composite BEP

Question 11
Marginal cost is equal to:
Correct answer: Variable cost

Question 12
The CVP analysis, break-even analysis, and MOS are the tools used for:
Correct answer: Financial business analysis

Question 13
The relationship between profit and volume can be represented through __________ ratio.
Correct answer: P/V

Question 14
Which one of the following is not an advantage of P/V ratio?
Correct answer: Providing information on variations in capital invested

Question 15
Profit is equal to:
Correct answer: Contribution – Fixed cost

Question 16
__________ is the change in the total cost of production when an additional unit of product is
produced.
Correct answer: Marginal cost

08 Unit :Practice Multiple Choice Questions

Question 1
Which of the following factors highlights the reliability of information?
Correct answer: All of these
Question 2
__________ refers to the analysis of the percentage increase or decrease in corresponding items
in comparative financial statements.
Correct answer: Horizontal Analysis

Question 3
The cash inflows and outflows of any organisation can further be classified into how many
activities?
Correct answer: Three

Question 4
__________ can be defined as the difference between net total sales and cost of goods sales.
Correct answer: Gross loss

Question 5
Which of the following statements are correct?
A. Financial statements are also referred to as annual records.
B. Financial statements are historical.
C. Financial statements are only interim reports of accounts.
Correct answer: Both A and B

Question 6
Which among the following is also known as the statement of sources of funds and application of
funds?
Correct answer: Balance sheet

Question 7
Among the following, which one refers to the total amount of money received by a business
entity after selling its products or services?
Correct answer: Revenue

Question 8
Profit and loss statement is also called __________ . Choose the correct option.
Correct answer: Statement of income

Question 9
Among the following, which is/are the importance of financial statement analysis?
Correct answer: All of these
Question 10
Which among the following are the activities that are related to the purchase or sale of long-term
investments and assets?
Correct answer: Investing activities

Question 11
Which one is the expense that a business entity has to bear in day-to-day business operations?
Correct answer: Operating expense

Question 12
In order to achieve __________ , organisations prepare financial statements by following a
uniform pattern or standards as instructed by the international or local accounting standards
board.
Correct answer: Both ‘a’ and ‘c’

Question 13
Which among the following refers to the ability of financial statements to stand useful over time
against financial information obtained from other sources?
Correct answer: Comparability

Question 14
Which of the following is/are types of financial statement analysis?
Correct answer: All of the above

Question 15
Preparation of the financial statement is the __________ step of the accounting cycle.
Correct answer: final

Question 16
The profit and loss account or the income statement shows which types of expenses are
incurred by the organisation during a particular period?
Correct answer: Revenues and expenses

Question 17
Which among the following measures the actual cash generated by the organisation within a
particular period?
Correct answer: Cash flow statement

Question 18
Which among the following are the forms of the balance sheet?
Correct answer: Horizontal or vertical
Question 19
The Profit and Loss account is prepared to ascertain __________ by the business over an
accounting period. Choose the correct option.
Correct answer: both a and b

Question 20
__________ part of financial statements reflects the financial performance of the organisation.
Correct answer: Profit and loss

Question 21
Which among the following expenses is/are indirect expense(s)?
Correct answer: All of these

09 Unit :Practice Multiple Choice Questions

Question 1
What does a high P/E ratio suggest?
Correct answer: A company shares are currently overpriced.

Question 2
Unlisted company can be valued at
Correct answer: Net asset method

Question 3
What is the most important use of the P/E ratio for investors?
Correct answer: It helps investors decide whether a company’s shares are overpriced or under-
priced.

Question 4
A company has a profit attributable to ordinary shareholders of 100,000. The number of
ordinary shares of £1 in issue during the year was 300,000. The market
value of the company’s shares at the yearend was 6.50. The price/earnings ratio for
this company is:
Correct answer: 19.5 times

Question 5
What is the value of the firm usually based on?
Correct answer: The value of equity.
Question 6
Which of the following defines the market to book value?
Correct answer: The ratio of stock market valuation divided by the value of its NAV.

Question 7
What does the price-to-earnings ratio (P/E) tell you?
Correct answer: How much investors are willing to pay per unit of a company’s earnings.

Question 8
Which of the following has net profit as basis for calculation?
Correct answer: Average rate of return

Question 9
Internal rate of return is …
Correct answer: Rate at which discounted cash inflow is equal to the discounted cash outflow

Question 10
Book value of assets includes
Correct answer: Fixed assets, current asset, intangible asset

Question 11
How is the P/E ratio calculated?
Correct answer: Market value per share/earnings per share

Question 12
Which of the following valuation methods is based on “Going concern concept”?
Correct answer: Book value method

Question 13
What does the price/earnings (PE) ratio measure?
Correct answer: The multiple that the stock market places on a company’s earnings

Question 14
Which of the following is not one of the three fundamental methods of firm valuation?
Correct answer: Market share

Question 15
Promotion of welfare of human by corporate is called ________ .
Correct answer: Corporate philanthropy
Question 16
Corporate wealth maximisation is the value maximisation for ________ .
Correct answer: Stakeholders

Question 17
Shareholder’s wealth increases with the increase in ________ .
Correct answer: Dividend and market value of the firm

Question 18
Listed companies can be valued at
Correct answer: Market value

Question 19
Leasing of machinery can be categorised as ________ .
Correct answer: Financing decision

Question 20
A mutually exclusive decision means:
Correct answer: Accepting of an alternative, leads to rejecting of other

10 Unit :Practice Multiple Choice Questions

Question 1
Time value of money indicates that
Correct answer: A unit of money obtained today is worth more than a unit of money obtained in
future

Question 2
What is the present value of cash flow of ` 40,000 expected to be received at the end of 4 years if
the given interest rate is 10% per annum? Choose the correct answer:
Correct answer: ` 27,320

Question 3
If the nominal rate of interest is 10% per annum and there is quarterly compounding, the
effective rate of interest will be:
Correct answer: 10.38% per annum
Question 4
Relationship between annual nominal rate of interest and annual effective rate of interest, if
frequency of compounding is greater than one:
Correct answer: Effective rate > Nominal rate

Question 5
Mr. X takes a loan of ` 50,000 from HDFC Bank. The rate of interest is 10% per annum. The first
installment will be paid at the end of year 5. Determine the amount of equal annual installments if
Mr. X wishes to repay the amount in five installments.
Correct answer: ` 19310

Question 6
If P = ` 1,000, i = 5% and n = 4 years, then the future value (FV) of a cash flow is equal to:
Correct answer: ` 1,215

Question 7
Time value of money supports the comparison of cash flows recorded at different time period by
Correct answer: Using either a or b

Question 8
An investment should be undertaken by the investor in case the present value of cash receipts is
period________ than the present value of outlay expense made.
Correct answer: higher

Question 9
In an ordinary annuity, where cash flows arise at the end of each period, the future value is
computed as of the period________ cash flow.
Correct answer: last

Question 10
Heterogeneous cash flows can be made comparable by
Correct answer: Either a or b

Question 11
If FV = ` 5,200, i = 5% and n = 6 years, then the present value (P) of a cash flow is equal to:
Correct answer: ` 3,880
Question 12
If an investor makes a deposit investment of 2,000 into a bank that pays 5% interest
per year, then he is likely to haveperiod________ at the end of the second year.
Choose the correct answer:
Correct answer: 2,025

Question 13
In an ordinary annuity, where cash flows arise at the end of each period, the present value is
computed as of one period________ the first cash flow.
Correct answer: before

Question 14
If the nominal rate of return is 10% per annum and annual effective rate of interest is 10.25% per
annum, determine the frequency of compounding:
Correct answer: 2

Question 15
The present value of an annuity of ` 5,000 p.a. at 4% interest compounded annually for a period
of 12 years is:
Correct answer: None of these

Question 16
While computing the future value of a single cash flow, in the formula FVn= P0( 1+ i)n stands for:
Correct answer: Interest rate per payment period

Question 17
If R = ` 100, i = 5% and n = 10, then the future value of an annuity is equal to:
Correct answer: ` 1,258

Question 18
If R = ` 10,000, i = 4% and n = 18 years, then the present value of an annuity is equal to:
Correct answer: ` 790

Question 19
When the value of an annuity after 25 years at 5% interest compounded annually is ` 50,000, the
annuity’s periodic amount will be:
Correct answer: ` 1,047

Question 20
The present value of an annuity of ` 80 for a period of 20 years at the rate of 5% per annum is:
Correct answer: ` 997
11 Unit :Practice Multiple Choice Questions

Question 1
In which of the following conditions, a project is accepted?
Correct answer: Any of these

Question 2
Capital budgeting is a _________ mechanism.
Correct answer: Decision-Making

Question 3
Which of the following is the criterion for IRR (internal rate of return)?
Correct answer: Accept IRR > Cost of capital

Question 4
Cash flows are analysed on _________ basis.
Correct answer: After-tax

Question 5
Projects with _________ are preferred.
Correct answer: Lower payback period

Question 6
_________ is the rate at which an investment is expected to generate earnings during its useful
life.
Correct answer: Internal rate of return

Question 7
_________ on capital is called ‘Cost of capital’.
Correct answer: Normally expected return

Question 8
_________ methods account for the time value of money when determining the viability of
projects.
Correct answer: Discounted cash flows
Question 9
Which of the following are factors affecting the evaluation and selection of capital projects?
Correct answer: All of these

Question 10
_________ are expenditures required to comply with statutory requirements.
Correct answer: Mutually Exclusive Projects

Question 11
Capital budgeting describes a firm’s formal planning process for the acquisition and investment
of capital and results in a capital budget, i.e., the firm’s formal plan outlay for the purchase
of ________ .
Correct answer: Fixed assets

Question 12
If you had to choose between two projects based on their NPV, which one would you choose?
Correct answer: Highest NPV

Question 13
Capital budgeting is known as:
Correct answer: Both a. and b.

Question 14
A project is approved if _________ .
Correct answer: Both a.and b.

Question 15
Future net income values discounted by the cost of capital are referred to as _________ .
Correct answer: Net present values

Question 16
Criterion is often preferred _________ .
Correct answer: Internal rate of return
12 Unit :Practice Multiple Choice Questions

Question 1
The cost of equity capital can be determined using the realised yield technique by applying the
formula ___________.
Correct answer: Ke = [{(D-P)/p} – 1] x 100

Question 2
___________ is derived by first calculating the cost of capital of each source depending on the
capital’s market value.
Correct answer: Marginal cost of capital

Question 3
What does CAPM stand for?
Correct answer: Capital asset pricing model

Question 4
The rate of return a corporation pays to shareholders is known as the ___________ .
Correct answer: Cost of equity

Question 5
Weighted average cost of capital (WACC) represents which of the following options
Correct answer: Required return on all new projects with similar risk to the firm

Question 6
Choose the most appropriate option with respect to a firm’s overall cost of capital?
Correct answer: Cost of capital is the required return on the total assets of a firm

Question 7
With the ___________ approach, an investor aims to earn the same amount of dividend as the
company has paid in the previous few years.
Correct answer: Realised yield

Question 8
The difference between the actual return and inflation is known as ___________.
Correct answer: Real income

Question 9
A project that has some risk which is being considered by diversified shareholders. What type of
risk is present?
Correct answer: Beta risk
Question 10
In the formula of weighted average cost of capital = (KE × E) + (KP × P) + (KD × D) + (KR × R), what
does D stand for?
Correct answer: Dividend

Question 11
With respect to a company, which of the following statements is correct?
Correct answer: None of the above

Question 12
Which of the following is not required while calculating the cost of equity under CAPM method?
Correct answer: Market price of equity share

Question 13
The cost of equity is 13% and bond risk premium is 5%. Select the bond yield from the given
options.
Correct answer: 0.08

Question 14
Profits that are held by companies instead of distributing them as dividends are
called ___________ earnings.
Correct answer: Retained

Question 15
A beta greater than 1 signifies that the ___________.
Correct answer: Stock is more volatile than the market

Question 16
Which of the following approaches is not used to estimate the cost of equity capital?
Correct answer: External yield method

Question 17
Corporate tax rate must be known for calculating the ___________.
Correct answer: Cost of debt

Question 18
The cost of capital is the highest in case of ___________ .
Correct answer: Equity
Question 19
The cost of preference capital is the amount of dividend paid and expenses incurred for
raising ___________.
Correct answer: Preference shares

Question 20
While calculating the cost of debt using formula KD = [(1-T) ×R] ×100; T stands for ___________.
Correct answer: Tax rate

13 Unit :Practice Multiple Choice Questions

Question 1
Which of the following would be consistent with an aggressive approach to financing working
capital?
Correct answer: Financing some long-term needs with short-term funds.

Question 2
The factors that affect dividend policy are:
Correct answer: Tax consideration

Question 3
What are the different types of underlying assets?
Correct answer: Stock indices

Question 4
Under which type of bank borrowing can a borrower obtain credit from a bank against its bills?
Correct answer: Purchase or discounting of bills

Question 5
Which of the following are theories for dividend relevance?
Correct answer: Walter’s model

Question 6
The percentage of earnings paid as dividends is called _______.
Correct answer: Pay out ration
Question 7
To financial analysts, “working capital” means the same thing as _______.
Correct answer: Current assets

Question 8
What is not a form of dividend?
Correct answer: Split reverse

Question 9
Hirer is entitled to claim _______.
Correct answer: Depreciation

Question 10
What are the various methods of estimating cash?
Correct answer: All of these

Question 11
Firms which are capital intensive rely on _______.
Correct answer: Debt

Question 12
Money market financial services not include:
Correct answer: Merchant banking

Question 13
What are the aspects of working capital management?
Correct answer: All of these

Question 14
Which of the following is a technique that helps the exporter to sell the receivables to any bank
or financial institution without recourse?
Correct answer: Derivatives

Question 15
Factoring involves:
Correct answer: Management of receivables of borrower

Question 16
The art of managing, within the acceptable level of risk, the consolidated funds optimally and
profitably are called _______.
Correct answer: Treasury management
Question 17
_______ function includes a firm’s attempts to balance cash inflows and outflows.
Correct answer: Liquidity

Question 18
What are people who buy or sell in the market to make profits called?
Correct answer: Speculators

Question 19
Which of the following is not an advantages of trade credit?
Correct answer: Buyout financing

Question 20
The tools of treasury management does not include:
Correct answer: Risk management

14 Unit :Practice Multiple Choice Questions

Question 1
An organisation uses fixed cost on its cost structure is called:
Correct answer: Operating leverage

Question 2
Which of the following is true for the Net Income Approach?
Correct answer: VF = VE+VD

Question 3
Formula of financial leverage is .
Correct answer: Earnings before interest and tax / (Earnings before interest and tax – Interest)

Question 4
Which of the following is true for Net Income Approach?
Correct answer: Higher Debt is better
Score: 1 out of 1 Yes
Which of the following indicate that the company has a high operating leverage?
Correct answer: Both a and b
Question 6
Which of the following statements is false?
Correct answer: The ultimate conclusions of NI approach and the NOI approach are same

Question 7
Which one of the following values remains constant in the NOI Approach?
Correct answer: Overall cost of capital (WACC) and Kd

Question 8
Which of the following uses fixed interest securities in the capital structure?
Correct answer: Financial leverage

Question 9
Which of the following formula is used to measure the degree of operating leverage?
Correct answer: Contribution/EBIT

Question 10
Formula of operating leverage is .
Correct answer: Contribution / Earnings before interest and tax

Question 11
Which of the following formula is used to measure the degree of financial leverage?
Correct answer: EBIT/EBT

Question 12
Which of the following statements is not true about capital structure?
Correct answer: Proportion of various types of securities is known as capital structure.

Question 13
In which of the following way the margin of safety is related to a degree of operating leverage?
Correct answer: Reciprocal

Question 14
Formula of earnings per share is .
Correct answer: (Profit after tax – Preference dividend. / Number of Equity shares

Question 15
Which of the following statements is not true about the capital structure of a company?
Correct answer: The financing decision affects the total operating profits of the firm.
Question 16
NI and NOI approach has been suggested by which of the following?
Correct answer: David Durand

Question 17
As per the Net Income Approach, the cost of equity is .
Correct answer: Constant

Question 18
Which of the following is intended to financial leverage?
Correct answer: Increase return on capital employed and net equity

Question 19
The term capital structure refers to the relationship between:
Correct answer: Debentures, preference share and equity share capital

Question 20
Which of the following is an assumption of the Net Income Approach?
Correct answer: All of these

15 Unit :Practice Multiple Choice Questions

Question 1
The advantage of using the low-regular-and-extra dividend policy is that
Correct answer: the firm avoids giving the shareholders false hopes.

Question 2
Modigliani and Miller suggest that the value of the firm is not affected by the firm’s dividend
policy, due to
Correct answer: the clientele effect.

Question 3
Which of the following is not very relevant in dividend decisions?
Correct answer: Capital market conditions

Question 4
According to the residual theory of dividends, if the firm’s equity need is less than the amount of
retained earnings, the firm would
Correct answer: declare a dividend equal to the remaining balance.
Question 5
According to the residual theory of dividends, if the firm’s equity need exceeds the amount of
retained earnings, the firm would
Correct answer: pay no cash dividends.

Question 6
Which one of the following is not true about dividend decisions?
Correct answer: Dividends can be paid when there are losses.

Question 7
The residual theory of dividends suggests that dividends are ________ to the value of the firm.
Correct answer: irrelevant

Question 8
The purpose of a stock split is to
Correct answer: enhance the trading activity of the stock by lowering the market price.

Question 9
The purpose of a reverse stock split is to
Correct answer: increase the price of the stock.

Question 10
The clientele effect refers to
Correct answer: the firm’s ability to attract stockholders whose dividend preferences are similar
to the firm’s dividend policy.

Question 11
Modigliani and Miller argue that when the firm has no acceptable investment opportunities, it
should
Correct answer: distribute the unneeded funds to the owners.

Question 12
Modigliani and Miller, recognising that dividends do somehow affect stock prices, suggest that
positive effects of dividend increases are attributable
Correct answer: not to the dividend itself but the informational content of the dividends
concerning future earnings.

Question 13
Which one of the following is a payment of either cash or shares of stock that is paid out of
earnings to a firm’s shareholders?
Correct answer: Dividend
Question 14
A stock split has ________ effect on the firm’s capital structure.
Correct answer: no

Question 15
The information content of dividends refers to
Correct answer: dividend changes as indicators of a firm’s future.

Question 16
Stock repurchases are made for all of the following reasons EXCEPT
Correct answer: to decrease the book value of equity.

Question 17
The problem with the regular dividend policy from the firm’s perspective is that
Correct answer: even when earnings are low, the company must pay a fixed dividend.

Question 18
The shareholder receiving a stock dividend receives
Correct answer: nothing of value.

Question 19
When common stock is repurchased and retired, the underlying motive is to
Correct answer: distribute the excess cash to the owners.

Model paper

1. Which of the following is not the internal user of accounting information?

a) Owners

b) Management

c) Employees

d) Investors
2. Which idea is based on the principle of Accounting period?

a) Money measurement concept

b) Separate Business Entity

c) Cost concept

d) Matching concept

3. Who issues Indian Accounting principles?

a) IFRS

b) ICAI

c) IndAS

d) GAAP

4. What is the process of recording the transactions into a journal called as?

a) Journalising

b) Prime entry

c) Ledger

d) Narration

5. Which type of entry in which only two accounts are affected?

a) Compound entry

b) Journal entry

c) Journalising entry

d) Compound an journal entry

6. What reduces the prices of the goods set by the seller to the buyer for buying goods of a certain
quantity or value?

a) Discount

b) Cash discount

c) Trade discount

d) Discount and Cash discount

7. What is the other name of Actual cost?

a) Estimated cost

b) Historical cost

c) Current cost

d) Future cost

8. Which depreciation method considers both the value of the asset and the amount of interest?

a) Straight line method

b) Diminishing Balance method

c) Annuity method

d) Insurance Policy method

9. Calculate the amount of depreciation for the second year according to WDV. Opening value of
machinery Rs. 500000. Amount of depreciation 20%. Life of machinery 5 years

a) Rs. 100000

b) Rs. 125000

c) Rs. 80000

d) Rs. 250000

10. In Cash book, what does favourable balance indicates?

a) Credit balance

b) Debit balance

c) Bank overdraft

d) Adjusted balance

11. In cash book, bank charges of ₹5,000 was not recorded. Name the correct cash book adjustment

a) It will be credited in cash book

b) It will be debited in cash book

c) No adjustment needed in the cash book

d) Charges will be added to the cash book balance

12. $5000 deposited in bank account was entered twice in the cash book. Identify the correct
adjustment in cash book.

a) $5000 will be credited

b) $5000 will be debited

c) $10,000 will be credited

d) $10,000 will be debited

13. What is the ideal level of quick ratio?

a) 1:1

b) 2:1

c) 3:1

d) 0.5:1

14. "Revenue from Operations: Cash Sales ₹ 5, 00,000 Credit Sales ₹ 6, 00,000 Sales Return ₹ 1,
00,000 Current Assets ₹ 3, 00,000 Current Liabilities ₹ 1, 00,000 Calculate Working Capital Turnover
Ratio"

a) 1 time

b) 3 times

c) 5 times

d) 7 times

15. Which among the following are the forms of Balance Sheet?

a) Horizontal

b) Vertical

c) Horizontal or Vertical

d) Both Horizontal and Vertical

16. Which among the following is known as statement of sources of funds and application of funds?

a) Trading account

b) Profit and Loss account

c) Cash Flow statement

d) Balance Sheet

17. Which decision involves a determination of the total amount of assets needed, the composition
of the assets, and whether any assets need to be reduced, eliminated or replaced?

a) Dividend

b) Investment

c) Financing

d) Accounting

18. Which of the following has net profit as a basis for calculation?

a) NPV

b) IRR

c) ARR

d) Pay back

19. Which goal states that an increase in the value of a business is required to increase the value of
the shares?

a) Profit maximisation

b) Wealth maximisation

c) Both Profit and Wealth maximisation

d) Neither Profit nor wealth maximization

20. Calculate the future value of a sum of Rs 1,000 if it is invested at 8% interest for a period of one
year

a) 1000

b) 1080

c) 1800

d) 1808

21. In how many years a sum will be doubled if it is invested at 9%

a) 7

b) 8

c) 9

d) 10

22. What is the technique under which a future sum of money is calculated for a given period of time
at a specified rate of return?

a) Discounting

b) Compounding

c) Both discounting and compounding

d) Neither discounting or compounding

23. What do you technically refer to a stream of regular/periodic payments made over a specific
period of time?

a) Funds flow

b) Project cash stream

c) Cash flows

d) Annuity
24. How do you calculate the cost of retained earnings?

a) It is same as Cost of equity

b) It is the same as cost of preference shares

c) It is the same as cost of term loans

d) It is the same as cost of debentures

25. Which function includes a firm's attempts to balance cash inflows and outflows?

a) Finance

b) Investment

c) Liquidity

d) Dividend

26. All businesses need money for their day to day operations. What is this called as?

a) Working capital

b) Capital financing

c) Loan financial

d) Net working capital

27. What is degree of operating leverage?

a) Contribution/EBIT

b) EBIT/EBT

c) EBIT/EPS

d) Contribution/EBT

28. What is the important assumption under Net Income Approach (capital structure decisions)?

a) Change in leverage impacts overall cost of capital

b) Change in leverage is irrelevant to the cost of capital

c) Change in leverage impacts cost of capital marginally

d) Change in leverage and Cost of Capital have no correlation and not interdependent
29. What is the level at which cost of production is equal to the sales?

a) Profit

b) Loss

c) Break Even

d) Profit & Loss

30. A firm is said to be financially unlevered firm if the firm has?

a) Only debts in its capital structure

b) Only owner ‘s equity in its capital structure

c) Both external equity and owner's equity in its capital structure along with Debts

d) Only equity share capital in its capital structure and no debts

types of profitability ratios and its formulae

Profitability ratios are financial metrics that help to assess a company's ability to generate profits
relative to its revenue, assets, or equity. The most commonly used types of profitability ratios are:

1. Gross profit margin: This ratio indicates the profitability of a company's sales after deducting the
cost of goods sold (COGS). The formula for the gross profit margin is:

Gross profit margin = (Revenue - COGS) / Revenue

2. Operating profit margin: This ratio measures the profitability of a company's core business
operations by deducting all operating expenses from its revenue. The formula for the operating
profit margin is:

Operating profit margin = Operating income / Revenue

3. Net profit margin: This ratio shows the percentage of revenue that remains after deducting all
expenses, including taxes and interest. The formula for the net profit margin is:

Net profit margin = Net income / Revenue

4. Return on assets (ROA): This ratio measures a company's ability to generate profits from its
assets. The formula for the ROA is:

ROA = Net income / Total assets

5. Return on equity (ROE): This ratio measures the amount of profit generated by a company's
shareholders' equity. The formula for the ROE is:

ROE = Net income / Shareholders' equity

types of solvency ratios and its formulae
Solvency ratios are financial metrics that measure a company's ability to meet its long-term financial
obligations. These ratios help investors and creditors assess a company's financial health and its
ability to manage debt. Here are some common types of solvency ratios and their formulas:

1. Debt-to-equity ratio: This ratio measures the proportion of a company's financing that comes
from debt compared to equity. The formula for the debt-to-equity ratio is:

Debt-to-equity ratio = Total liabilities / Shareholders' equity

2. Debt-to-asset ratio: This ratio shows the proportion of a company's assets that are financed by
debt. The formula for the debt-to-asset ratio is:

Debt-to-asset ratio = Total liabilities / Total assets

3. Interest coverage ratio: This ratio measures a company's ability to pay interest on its debt
obligations. The formula for the interest coverage ratio is:

Interest coverage ratio = Earnings before interest and taxes (EBIT) / Interest expense

4. Debt service coverage ratio: This ratio indicates a company's ability to meet its debt payments,
including both principal and interest. The formula for the debt service coverage ratio is:

Debt service coverage ratio = Earnings before interest, taxes, depreciation, and amortization
(EBITDA) / Total debt service

5. Fixed charge coverage ratio: This ratio is similar to the debt service coverage ratio, but it includes
all fixed charges such as lease payments, preferred dividends, and debt principal payments. The
formula for the fixed charge coverage ratio is:

Fixed charge coverage ratio = Earnings before fixed charges and taxes (EBFCT) / Fixed charges
types of market test ratios and its formulae
Market test ratios are financial metrics that measure how the market perceives a company's
financial health and performance. These ratios use market data, such as stock prices and market
capitalization, to evaluate a company's performance relative to its competitors and the broader
market. Here are some common types of market test ratios and their formulas:

1. Price-to-earnings (P/E) ratio: This ratio measures the price investors are willing to pay for
each dollar of a company's earnings. The formula for the P/E ratio is:

P/E ratio = Market price per share / Earnings per share (EPS)

2. Price-to-sales (P/S) ratio: This ratio measures the price investors are willing to pay for each
dollar of a company's sales. The formula for the P/S ratio is:

P/S ratio = Market price per share / Sales per share

3. Price-to-book (P/B) ratio: This ratio measures the price investors are willing to pay for each
dollar of a company's net assets. The formula for the P/B ratio is:

P/B ratio = Market price per share / Book value per share

4. Dividend yield ratio: This ratio measures the return on investment from a company's
dividends. The formula for the dividend yield ratio is:

Dividend yield ratio = Annual dividends per share / Market price per share

5. Market-to-book ratio: This ratio compares a company's market value to its book value. The
formula for the market-to-book ratio is:

Market-to-book ratio = Market value per share / Book value per share

Explain the concept of marginal costing and its formulae

Marginal costing is a cost accounting concept that focuses on identifying the variable costs
associated with producing a product or service. It separates fixed costs from variable costs,
which helps management make informed decisions regarding production levels, pricing, and
profitability. Marginal costing is also known as direct costing or variable costing.

The key idea behind marginal costing is that only the variable costs incurred in producing a
product or service are relevant for making decisions about pricing and production. Fixed costs,
such as rent and salaries, are considered sunk costs and are not factored into the
decisionmaking process. By understanding the variable costs associated with a product,
management can calculate the contribution margin, which is the difference between the sales
price and variable costs per unit.

The formula for calculating the contribution margin per unit is:

Contribution margin per unit = Sales price per unit - Variable cost per unit

The formula for calculating the total contribution margin is:

Total contribution margin = Sales revenue - Variable cost

 The total contribution margin can be used to cover the fixed costs and generate a profit. The
break-even point, which is the point where total revenue equals total costs, can be calculated
using the contribution margin per unit and the fixed costs. The formula for calculating the
breakeven point in units is:

Break-even point in units = Fixed costs / Contribution margin per unit

Cost volume profit analysis and its formula

Cost-volume-profit (CVP) analysis is a financial tool used to analyze how changes in sales volume,
costs, and prices affect a company's profitability. This analysis helps management determine the
level of sales necessary to cover all costs and generate a profit. The CVP analysis is based on the
following formulae:

1.. Contribution margin (CM): This is the amount of revenue remaining after deducting variable
costs. The formula for calculating the contribution margin is:

CM = Sales revenue - Variable costs

2. Contribution margin ratio (CMR): This is the ratio of the contribution margin to sales revenue,
expressed as a percentage. The formula for calculating the contribution margin ratio is:

CMR = (Contribution margin / Sales revenue) x 100%

3. Break-even point (BEP): This is the level of sales at which total revenue equals total costs. The
formula for calculating the break-even point in units is: BEP (in units) = Fixed costs / (Sales price per
unit - Variable cost per unit) The formula for calculating the break-even point in dollars is:

BEP (in dollars) = Fixed costs / CMR

4. Margin of safety (MOS): This is the difference between actual or projected sales revenue and the
break-even point. The formula for calculating the margin of safety is:

MOS = Actual or projected sales revenue - Break-even point

5. Target profit: This is the profit that a company wants to achieve. The formula for calculating the
sales revenue required to achieve a target profit is:

Sales revenue = (Fixed costs + Target profit) / CMR

Explain the concepts of capital budgeting and its formula
Capital budgeting is the process of evaluating and selecting long-term investment projects that have
a positive net present value (NPV) and will create value for the company over time. It involves
analyzing the costs and benefits of a project to determine whether it is worthwhile to invest in it.
Capital budgeting is a critical part of financial management because it involves allocating the
company's financial resources in a way that maximizes shareholder value.

The following are some important concepts and formulae related to capital budgeting:

1. Net present value (NPV): This is the difference between the present value of cash inflows
and the present value of cash outflows. A project with a positive NPV is considered to be a
good investment. The formula for calculating NPV is:

NPV = PV of cash inflows - PV of cash outflows where PV is the present value of future cash
flows, discounted at the company's cost of capital.

2. . Internal rate of return (IRR): This is the rate at which the NPV of a project equals zero. A
project with an IRR greater than the company's cost of capital is considered to be a good
investment. The formula for calculating IRR is:

0 = PV of cash inflows - PV of cash outflows, when discounted at IRR

3. Payback period: This is the length of time it takes for a project to generate enough cash
flows to recover its initial investment. The formula for calculating the payback period is

Payback period = Initial investment / Annual cash flows

4. Profitability index (PI): This is the ratio of the present value of cash inflows to the initial
investment. A project with a PI greater than 1 is considered to be a good investment. The
formula for calculating PI is:

PI = PV of cash inflows / Initial investment

Explain the concepts of profit maximization and wealth maximization. what are the
types of profit maximization and wealth maximization and its formulae
Profit maximization and wealth maximization are two important concepts in financial
management. Profit maximization focuses on maximizing short-term profits, while wealth
maximization focuses on maximizing the long-term value of the company for shareholders.

Profit Maximization: Profit maximization is the process of increasing profits by maximizing

revenues and minimizing costs. There are two types of profit maximization: Total profit
maximization and Marginal profit maximization

1. Total profit maximization: This refers to maximizing the total profit of the company. The
formula for calculating total profit is: Total profit = Total revenue - Total cost

2. Marginal profit maximization: This refers to maximizing the profit from each additional unit
of output sold. The formula for calculating marginal profit is: Marginal profit = Marginal
revenue - Marginal cost
Wealth Maximization: Wealth maximization is the process of increasing the long-term value of the
company for shareholders. This is done by investing in projects that have a positive net present
value (NPV) and will create value for the company over time. The formula for calculating NPV has
been explained earlier.

1. Total wealth maximization: This refers to maximizing the total wealth of the company. The
formula for calculating total wealth is: Total wealth = Market value of equity + Debt

2. Marginal wealth maximization: This refers to maximizing the wealth from each additional
unit of investment. The formula for calculating marginal wealth is: Marginal wealth =
Marginal NPV / Marginal investment