CS Executive – Page 3

Underwriting of Shares & Debentures – Corporate and Management Accounting MCQ

April 11, 2023April 11, 2023 by Prasanna

Going through the Underwriting of Shares & Debentures – Corporate and Management Accounting CS Executive MCQ Questions with Answers you can quickly revise the concepts.

Underwriting of Shares & Debentures – Corporate and Management Accounting MCQs

Question 1.
A person who undertake to take up the whole or a portion of the offered shares or debentures as may not be subscribed for by the public is called -……..
(A) Writer
(B) Share writer
(C) Broker
(D) Underwriter
Answer:
(D) Underwriter

Question 2.
Underwriting is a contract of -……….
(A) Indemnity
(B) Bailment
(C) Guarantee
(D) Pledge
Answer:
(C) Guarantee

Question 3.
As per the SEBI Regulations, the subscription list for public issues should be kept open for at least ………. and not more
than ………… as disclosed in the prospectus.
(A) 5 working days; 8 working days
(B) 3 working days; 10 working days
(C) 3 working days; 7 working days
(D) 5 working days; 10 working days
Answer:
(B) 3 working days; 10 working days

Question 4.
As per SEBI Regulations, the minimum subscription has been fixed at of the issued amount.
(A) 60%
(B) 70%
(C) 80%
(D) 90%
Answer:
(D) 90%

Question 5.
As per Section 39(2), the amount payable on applications is fixed by the directors but it cannot be less than …… of the shares.
(A) 25% of the issue price
(B) 5% of the nominal value
(C) 25% of the nominal value
(D) 5% of the issue price
Answer:
(B) 5% of the nominal value

Question 6.
As per the SEBI Regulations the minimum application money to be paid shall not be less than -………….
(A) 25% of the issue price
(B) 5% of the nominal value
(C) 25% of the nominal value
(D) 5% of the issue price
Answer:
(A) 25% of the issue price

Question 7.
Section 40(6) of the Companies Act, 2013 provides that a company pay …………. to any person in connection with issue of securities subject to prescribed conditions.
(A) Salary
(B) Remuneration
(C) Commission
(D) Incentive
Answer:
(C) Commission

Question 8.
Which of the following is essential condition for payment of underwriting commission
(A) The payment of commission shall be authorized by the company’s articles of association.
(B) There shall not be paid commission to any underwriter on securities which are not offered to the public for subscription.
(C) A copy of the contract for the payment of commission is delivered to the Registrar at the time of delivery of the prospectus for registration.
(D) All of the above
Answer:
(D) All of the above

Question 9.
The underwriting commission may be paid out of:
(A) Proceeds of the issue
(B) Profit of the company
(C) Securities Premium
(D) All of the above
Answer:
(D) All of the above

Question 10.
In the event of non receipt of minimum subscription all applications moneys received should be refunded within period stated below:
(a) For non-underwritten issues: Within of the closure of the issue.
(b) For underwritten issues: Within of the closure of the issue.
Select the correct answer from the options given below.
(A) 7 days; 15 days
(B) 10 days; 15 days
(C) 15 days; 10 days
(D) 15 days; 7 days
Answer:
(D) 15 days; 7 days

Question 11.
In case of issue of shares, underwriting commission shall not exceed –
(A) 5% of the issue price
(B) 5% of the nominal value
(C) 10% of the market price
(D) 10% of the nominal value
Answer:
(A) 5% of the issue price

Question 12.
In case of issue of debentures, underwriting commission shall not exceed
(A) 2.5% of the nominal value
(B) 2.5% of the issue price
(C) 2.5% of the market price
(D) 3.5% of the face value
Answer:
(B) 2.5% of the issue price

Question 13.
In case of issue of shares, the rate of underwriting commission paid or agreed to be paid shall not exceed:
(A) 5% of the issue price
(B) A rate authorized by the articles
(C) 5% of the issue price or a rate authorized by the articles, whichever is more.
(D) 5% of the issue price or a rate authorized by the articles, whichever is less.
Answer:
(D) 5% of the issue price or a rate authorized by the articles, whichever is less.

Question 14.
In case of issue of debentures, the rate of underwriting commission paid or agreed to be paid shall not exceed:
(A) 2.5% of the issue price
(B) A rate authorized by the articles
(G) 2.5% of the issue price or a rate authorized by the articles, whichever is more.
(D) 2.5% of the issue price or a rate authorized by the articles, whichever is less.
Answer:
(D) 2.5% of the issue price or a rate authorized by the articles, whichever is less.

Question 15.
A definite commitment by the underwriter to take up a specified number of shares or debentures of a company irrespective of the number shares or debentures subscribed for by the public is known as -………………
(A) Definite underwriting
(B) Pakka underwriting
(C) Marked underwriting
(D) Firm underwriting
Answer:
(D) Firm underwriting

Question 16.
Unmarked application has to be distributed to underwriters in the ratio of –
(A) Gross Liability Ratio
(B) Last Agreed Ratio
(C) Net Liability Ratio
(D) Equal ratio
Answer:
(A) Gross Liability Ratio

Question 17.
Applications bearing the stamp of the respective underwriter are called as:…………..
(A) Firm applications
(B) Stamped applications
(C) Underwritten application
(D) Marked applications
Answer:
(D) Marked applications

Question 18.
A broker -…….
(A) Undertakes to find buyers who are willing to buy shares and debentures
(B) Does not guarantees the sale of shares and debentures
(C) Both (A) and (B)
(D) (B) only not (A)
Answer:
(C) Both (A) and (B)

Question 19.
An underwriter –
(A) Guarantees that if the public do not take up all shares the underwriters will purchase the remaining shares.
(B) Agrees to receive an underwriting commission at prescribed percentage allowed as per law.
(C) Both (A) and (B)
(D) (A) only not (B)
Answer:
(C) Both (A) and (B)

Question 20.
Who of the following generally acts as underwriter-…….
(A) Financial institutions
(B) Banks
(C) Merchant bankers
(D) All of the above
Answer:
(D) All of the above

Question 21.
As per SEBI Regulations, the merchant banker shall underwrite at least itself or jointly with other merchant bankers associated with the issue.
(A) 15% of issue size
(B) 10% of issue size
(C) 25% of issue size
(D) 5% of issue size
Answer:
(A) 15% of issue size

Question 22.
As per SEBI Regulations, the capital adequacy requirement for underwriter is net worth of
(A) ₹ 10 lakhs
(B) ₹ 20 lakhs
(C) ₹ 50 lakhs
(D) ₹ 100 lakhs
Answer:
(B) ₹ 20 lakhs

Question 23.
LPG Ltd. issued 32,000 shares which were underwritten as follows:
A: 19,200 shares, B: 8,000 shares & C: 4,800 shares.
The underwriters made applications for firm underwriting as –
A: 2,560 shares, B: 960 shares & C: 3,200 shares.
Details of marked application are –
A: 3,200 shares, B: 6,400 shares and C: 1,600 shares.
Unmarked applications are for 11,520 shares. Find out the net liability of individual underwriters.
(A) 10,624; 960; 4,416 respectively
(B) 10,642; 906; 4,461 respectively
(C) 10,264; 940; 4,146 respectively
(D) 10,462; 940; 4,641 respectively
Answer:
(A) 10,624; 960; 4,416 respectively

Question 24.
Cybertech Ltd. issued 1,00,000 shares for public subscription and these were underwritten by A, B and C in the ratio of 25%, 30% and 45% respectively. Applications were received for 80,000 shares and of these applications for 16,000 shares had the stamp of A, those for 20,000 shares had the stamp of B and those of 24,000 shares had the stamp of C. The remaining applications did not bear any stamp. Net liability of underwriters in shares is:

Answer:
(C)

Question 25.
NZ Ltd. issued 34,000 shares of ₹ 100 at a premium of ₹ 15 each. 90% of the issue was underwritten by M/s Broker & Co. Applications were received for 27,200 shares and allotment was fully made. Net liability of underwriter for shares =?
(A) 30,600 shares
(B) 24,480 shares
(C) 8,840 shares
(D) 6,120 shares
Answer:
(D) 6,120 shares

Question 26.
XM Ltd. issued 25,000 shares of ₹ 100 at a premium of ₹ 15 each. 90% of the issue was underwritten by M/s UWB & Co. at a maximum commission allowed under the Companies Act, 2013. Applications were received for 8,000 shares. Commission = ?
(A) ₹ 1,92,725
(B) ₹ 1,29,375
(C) ₹ 97,750
(D) ₹ 62,450
Answer:
(B) ₹ 1,29,375
Maximum commission allowed under the Companies Act, 2013 is 5% of issue price.
Commission is payable on ‘gross liability’ and not on ‘net liability’.
Hence, net liability need not be calculated.
Commission = 25,000 × 90% × 115 × 5%= 1,29,375

Question 27.
LG Ltd. issued 10,000 shares of ₹ 100 at a premium of ₹ 15 each. 90% of the issue was underwritten by M/s X & Co. at a 1 commission of 1% on the nominal value. Applications were received for 8,000 shares and allotment was fully made. All money Was received in one instalment. Net amount to be received from underwriter at the time of allotment of shares is -…………..
(A) ₹ 2,07,000
(B) ₹ 1,98,000
(C) ₹ 2,16,000
(D) ₹ 1,42,000
Answer:
(B) ₹ 1,98,000

Question 28.
Z Ltd. entered into an underwriting agreement with B Ltd. for commission of 2.5% for 6096 of the issue of ₹ 35,00,000, 1596 Debentures with a firm underwriting of ₹ 3,50,000. Marked application were for ₹ 24,50,000 debentures. Calculate the commission payable to under writer.
(A) ₹ 75,000
(B) ₹ 87,500
(C) ₹ 64,750
(D) ₹ 52,500
Answer:
(D) ₹ 52,500
Gross liability = 35,00,000 × 60% = 21,00,000
Commission = 21,00,000 × 2.5% = 52,500.

Question 29.
X Ltd. entered into an underwriting agreement with Y Ltd. for commission of 2.596 for 60% of the issue of ₹ 50,00,000, 15% Debenture with a firm underwriting of ₹ 5,00,000. Marked application were for ₹ 35,00,000 debenture. Net liability of underwriter = -…….
(A) Nil
(B) ₹ 6,00,000
(C) ₹ 5,00,000
(D) ₹ 8,00,000
Answer:
(C) ₹ 5,00,000

Question 30.
MM W Ltd. made an issue of47,000,10% mortgage debentures of ₹ 100 each at par. The whole of the issue was underwritten by Y & Co. 39,950 debentures were applied for and allotted to the public. Net liability of underwriter to take number of debenture will be -…….
(A) 39,950 debentures
(B) 47,000 debentures
(C) 7,050 debentures
(D) 8,370 debentures
Answer:
(C) 7,050 debentures
47,000 – 39,950 = 7,050

Question 31.
Biggie Ltd. made an issue of 10,000,10% mortgage debentures of ₹ 100 each at ₹ 96. The whole of the issue was underwritten by Smart Bulls. 8,500 debentures were applied for and allotted to the public. The underwriters discharged their liability and were paid commission at the rate of 2% on the nominal value of the debentures. Which of the following statement is correct
(A) Net amount to receivable from underwriter is ₹ 1,22,000
(B) Net amount payable to underwriter is ₹ 12,000
(C) Net amount to receivable from underwriter is ₹ 1,24,000
(D) Net amount payable to underwriter is ₹ 14,000
Answer:
(C) Net amount to receivable from underwriter is ₹ 1,24,000

Question 32.
Abrol Ltd. offered to the public 5,000, 9% mortgage debentures of ₹ 100 each at ₹ 105 and 80% of the issue was underwritten by Smart Bulls for commission @ 2.5%. Applications were received from public for 4,000 debentures which were allotted. Balance Sheet will tally at -……………..
(A) ₹ 5,03,500
(B) ₹ 4,93,500
(C) ₹ 4,63,500
(D) ₹ 5,23,500
Answer:
(B) ₹ 4,93,500

Question 33.
Sampada Ltd. was formed with a capital of 2,00,000 equity shares of ₹ 10 each. All shares were issued to public for subscription. Issue was underwritten as follows:
Ajay: 80,000 shares, Bijo: 60,000 shares and Rajat: 60,000 shares.
Marked applications were received in favour of Ajay for 32,000 shares, Bijo for 58,000 shares and Rajat for 42,000 shares. Applications for 30,000 shares were not marked.
Net liability of underwriters in shares is:

Answer:
(C)

Question 34.
K Ltd. issued for subscription 25,000 shares at a premium of ₹ 10 each. The issue was underwritten as follows:
A: 15,000 shares; B: 7,500 shares & C: 2,500 shares.
Firm application is as follows:
A: 2,500 shares; B: 1,000 shares & C: 500 shares.
Out of the total issue, 22,500 shares including firm underwriting were subscribed. Marked forms details:
A: 8,000 shares; B: 5,000 shares & C: 2,500 shares.
If firm underwriting shares are treated as unmarked application then net liability of each underwriter in shares will be –

Answer:
(A)
Data given in problem can be arranged as follows:

Question 35.
Take the data of above question. If firm underwriting shares are treated as marked application then net liability of each underwriter in shares will be –

Answer:
(B)
Data given in problem can be arranged as follows:

Question 36.
Sun Ltd. issued 1,00,000 equity shares. Whole of the issue was underwritten as follows:
M: 3596; L: 2596; T: 3096; P: 1096
Applications for 80,000 shares were received in all; out of which applications for 20,000 shares had the stamp of M; 15,000 that of L; 22,000 that of T and 8,000 of P. Remaining 15,000 applications did not beiar any stamp. Determine the liability of each underwriter.
(A) 4,875; 3,125; 1,750 & 250 shares respectively for M, L, T & P.
(B) 9,750; 6,250; 3,500 & 500 shares respectively for M, L, T & P.
(C) 13,650; 8,750; 4,900 & 700 shares respectively for M, L, T & P.
(D) 11,700; 7,500; 4,200 & 600 shares respectively for M, L, T & P.
Answer:
(B) 9,750; 6,250; 3,500 & 500 shares respectively for M, L, T & P.

Question 37.
S Ltd. issued 1,50,000 equity shares of ₹ 100 each at par. This issue was underwritten equally by A, B and C. Applications for 1,40,000 shares were received as per details given below:
If firm underwriting shares are treated as unmarked application then net liability of each underwriter in shares will be –

Unmarked applications are of 7,000 shares. It was agreed to credit the unmarked applications to A and C.

If firm underwriting shares are treated as unmarked application then net liability of each underwriter in shares will be –

Answer:
(C)

Question 38.
Take the data of above question. If firm underwriting shares are treated as marked application then net liability of each underwriter in shares will be –

Answer:
(B)

Authors Note: Generally, credit for unmarked application is given to all the underwriters in their gross liability ratio. However, credit is given only to A & C as stated in problem.

Cost of Capital – Financial Management MCQ

April 1, 2023April 1, 2023 by Prasanna

Cost of Capital – CS Executive Financial and Strategic Management MCQ Questions with Answers you can quickly revise the concepts.

Cost of Capital – Financial Management MCQ

Question 1.
The cost of equity share or debt is called –
(A) Related cost of capital
(B) Easy to calculate cost of capital
(C) Specific cost of capital
(D) Burden on the shareholder
Answer:
(C) Specific cost of capital

Question 2.
In which of the following method cost of equity capital is computed by dividing the dividend by market price per share or net proceeds per share?
(A) Price Earning Method
(B) Adjusted Price Method
(C) Adjusted Dividend Method
(D) Dividend Yield Method
Answer:
(D) Dividend Yield Method

Question 3.
In weighted average cost of capital, a company can affect its capital cost through –
1. Policy of capital structure
2. Policy of dividends
3. Policy of investment
Select the correct answer from the options given below:
(A) 1 only
(B) 2 & 3
(C) 1 & 3
(D) All 1, 2 & 3
Answer:
(D) All 1, 2 & 3

Question 4.
Which of the following is correct formula to calculate cost of equity under dividend yield method?

Answer:
(A)

Question 5.
……….. is the rate of return associated with the best investment opportunity for the firm and its shareholders that will be forgone if the projects presently under consideration by the firm were accepted.
(A) Explicit Cost
(B) Future Cost
(C) Implicit Cost
(D) Specific Cost
Answer:
(C) Implicit Cost

Question 6.
Cost of capital is equal to required return rate on equity in case if investors are only –
(A) Valuation Manager
(B) Common Stockholders
(C) Asset Seller
(D) Equity Dealer
Answer:
(B) Common Stockholders

Question 7.
Which of the following model/method makes use of beta (5) in calculation of cost of equity?
(A) Risk Adjusted Discount Model
(B) Capital Assets Pricing Method
(C) MM Model
(D) Price Earning Method
Answer:
(B) Capital Assets Pricing Method

Question 8.
Marginal cost –
(A) is the weighted average cost of new finance raised by the company.
(B) is the additional cost of capital when the company goes for further raising of finance.
(C) is the cost of raising an additional rupee of capital.
(D) All of the above
Answer:
(D) All of the above

Question 9.
Bond risk premium is added in to bond yield to calculate –
(A) Cost of option
(B) Cost of common stock
(C) Cost of preferred stock
(D) Cost of working capital
Answer:
(B) Cost of common stock

Question 10.
The cost of equity share or debt is called specific cost of capital. When specific costs are combined, then we arrive at –
(A) Maximum rate of return
(B) Internal rate of return
(C) Overall cost of capital
(D) Accounting rate of return
Answer:
(C) Overall cost of capital

Question 11.
Statement I:
Where earnings, dividends and equity share price all grow at the same rate, the cost of equity capital may be computed by dividend growth method.
Statement II:
When risk free rate is added to the market rate of return risk premium for the stock is arrived.
Select the correct answer from the options given below:
(A) Statement I is false but Statement II is true
(B) Both Statement I and Statement II are false
(C) Statement II is false but Statement I is true
(D) Both Statement I and Statement II are true
Answer:
(C) Statement II is false but Statement I is true

Question 12.
Interest rates, tax rates and market risk premium are factors which –
(A) Industry cannot control
(B) Industry can control
(C) Firm must control
(D) Firm cannot control
Answer:
(D) Firm cannot control

Question 13.
Assertion (A):
Cost of share capital would be based upon the expected rate of earnings of a company.
Reason (R):
Each investor expects a certain amount of earnings, whether distributed or not from the company in whose shares he invests.
Select the correct answer from the options given below:
(A) A is true but R is false
(B) A is false but R is true
(C) A and R both are true but R is not correct explanation of A
(D) A and R both are true and R is correct explanation of A
Answer:
(D) A and R both are true and R is correct explanation of A

Question 14.
If we deduct ‘risk free return’ from ‘market return’ and multiply it with ‘beta factor’ and again add ‘risk free return’, the resultant figure will be –
(A) Nil
(B) Risk premium
(C) Cost of equity
(D) WACC of the firm
Answer:
(C) Cost of equity

Question 15.
For each component of capital, a required rate of return is considered as:
(A) Component cost
(B) Evaluating cost
(C) Asset cost
(D) Asset depreciation value
Answer:
(A) Component cost

Question 16.
…….. is the rate that the firm pays to procure financing.
(A) Average Cost of Capital
(B) Combine Cost
(C) Economic Cost
(D) Explicit Cost
Answer:
(D) Explicit Cost

Question 17.
Which of the following method of cost of equity is similar to the dividend price approach?
(A) Discounted cash flow (DCF) method
(B) Capital asset pricing model
(C) Price earning method
(D) After tax equity method
Answer:
(C) Price earning method

Question 18.
Preferred dividend is divided by preferred stock price multiply by (1 – floatation cost) is used to calculate –
(A) Transaction cost of preferred stock
(B) Financing of preferred stock
(C) Weighted cost of capital
(D) Component cost of preferred stock
Answer:
(D) Component cost of preferred stock

Question 19.
Statement I:
Cost of retained earnings is the opportunity : cost of dividends foregone by shareholders.
Statement II:
The opportunity cost of reserve & surplus may be considered as their cost, which is equivalent to the income that would otherwise earn by placing these funds in alternative investment.
Select the correct answer from the options, given below:
(A) Statement I is false but Statement II is true
(B) Both Statement I and Statement II are false
(C) Statement II is false but Statement I is true
(D) Both Statement I and Statement II are true
Answer:
(D) Both Statement I and Statement II are true

Question 20.
How you will calculate expected dividend i e. dividend at the end of year one?
(A) D₁ = [D₀(1 + g)]
(B) D₁ = [D₀(1 -t)]
(C) D₁ = [D₀× (1 – g)]
(D) D₁ = [D₀+(1 – g)](1 -t)
Answer:
(A) D₁ = [D₀(1 + g)]

Question 21.
In weighted average cost of capital, rising in interest rate leads to –
(A) Increase in cost of debt
(B) Increase the capital structure
(C) Decrease in cost of debt
(D) Decrease the capital structure
Answer:
(A) Increase in cost of debt

Question 22.
………… is the cost which has already been incurred for financing a particular project
(A) Future Cost
(B) Historical Cost
(C) Implicit Cost
(D) Opportunity Cost
Answer:
(B) Historical Cost

Question 23.
In weighted average cost of capital, capital components are funds that are usually offered by:
(A) Stock market
(B) Investors
(C) Capitalist
(D) Exchange index
Answer:
(B) Investors

Question 24.
Overall cost of capital is called as –
(A) Composite cost of capital
(B) Combined cost of capital
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)

Question 25.
Premium which is considered as difference of expected return on common stock and current yield on Treasury bonds is called –
(A) Past risk premium
(B) Expected premium
(C) Current risk premium
(D) Beta premium
Answer:
(C) Current risk premium

Question 26.
Which of the following figure is irrelevant while calculating cost of redeemable preference shares?
(A) Floatation cost
(B) Discount
(C) EPS
(D) Net proceeds
Answer:
(C) EPS

Question 27.
Select which of the following statement is correct?
(I) Capital budget decision largely depends on the cost of capital of each source.
(II) Capital structure is the mix or proportion of the different kinds of short term securities.
Cost of capital helps to evaluate the financial performance of the firm.
(IV) As per MM approach, the cost of equity (Ke) is equal to capitalization rate of pure equity stream minus a premium for business risk.
Select the correct answer from the options given below:
(A) (I) and (II)
(B) (I), (III) and (IV)
(C) (D) and (III)
(D) (I) and (III)
Answer:
(D) (I) and (III)

Question 28.
An interest rate which is paid by firm as soon as it issues debt is classified as pre-tax –
(A) Term structure
(B) Market premium
(C) Risk premium
(D) Cost of debt
Answer:
(D) Cost of debt

Question 29.
Which of the following is controllable factor affecting the cost of capital of the firm?
(A) Dividend policy
(B) Level of interest rates
(C) Tax rates
(D) All of the above
Answer:
(A) Dividend policy

Question 30.
Which of the following is uncontrollable factor affecting the cost of capital of the firm?
(A) Investment Policy
(B) Capital Structure Policy
(C) Debt service charges
(D) None of the above
Answer:
(D) None of the above

Question 31.
Type of cost which is used to raise common equity by reinvesting internal earnings is classified as………
(A) Cost of common equity
(B) Cost of mortgage
(C) Cost of stocks
(D) Cost of reserve assets
Answer:
(A) Cost of common equity

Question 32.
Which of the following is correct formula to calculate cost of irredeemable preference shares?
(A) Preference dividend ÷ Net proceeds
(B) Preference dividend × (1 -t)
(C) [Preference dividend × (1 -t)] ÷ Net proceeds
(D) [Preference dividend -n Net proceeds] × (1-t)
Answer:
(A) Preference dividend ÷ Net proceeds

Question 33.
Which of the following factor affects the determination of cost of capital of the firm?
(A) General economic conditions
(B) Market conditions
(C) Operating and financing decisions
(D) All of the above
Answer:
(D) All of the above

Question 34.
Cost of equity which is raised by reinvesting earnings internally must be higher than the –
(A) Cost of initial offering
(B) Cost of new common equity
(C) Cost of preferred equity
(D) Cost of floatation
Answer:
(B) Cost of new common equity

Question 35.
During planning period, marginal cost to raise a new debt is classified as –
(A) Debt cost
(B) Borrowing cost
(C) Relevant cost
(D) Embedded cost
Answer:
(C) Relevant cost

Question 36.
After tax cost of debentures not redeemable during the life time of the company is –
(A) [Interest -5- Net proceeds] × (1 -t)
(B) Interest × (1 -t) ÷ Net proceeds
(C) Interest × (1 +t) ÷ Net proceeds
(D) [Interest ÷ Net proceeds] × (1 +t)
Answer:
(B) Interest × (1 -t) ÷ Net proceeds

Question 37.
Risk free rate is subtracted from expected market return is considered as:
(A) Country risk
(B) Diversifiable risk
(C) Equity risk premium
(D) Market risk premium
Answer:
(C) Equity risk premium

Question 38.
A firm’s overall cost of capital:
(A) varies inversely with its cost of debt.
(B) is unaffected by changes in the tax rate.
(C) is another term for the firm’s internal rate of return.
(D) is the required return on the total assets of a firm.
Answer:
(D) is the required return on the total assets of a firm.

Question 39.
Key sources of value (earning an excess return) for a company can be attributed primarily to
(A) competitive advantage and access to capital
(B) quality management and industry attractiveness
(C) access to capital and quality management
(D) industry attractiveness and competitive advantage
Answer:
(D) industry attractiveness and competitive advantage

Question 40.
Which of the following is correct formula to calculate cost of redeemable debentures?

Answer:
(D)

Question 41.
The weighted average cost of capital (K₀) results from a weighted average of the firm’s debt and equity capital costs. At a debt ratio of zero, the fin a is 100% equity financed. As debt is substituted for equity and as the debt ratio increases, the –
(A) K₀ declines because the after-tax debt cost is less than the equity cost (K_d < K_e).
(B) K₀ increases because the after-tax debt cost is less than the equity cost (K_d<K_e).
(C) K₀ do not show any change and tend to remain same.
(D) None of the above
Answer:
(A) K₀ declines because the after-tax debt cost is less than the equity cost (K_d < K_e).

Question 42.
The overall (weighted average) cost of capital is composed of a weighted average of
(A) the cost of common equity and the cost of debt
(B) the cost of common equity and the cost of preferred stock
(C) the cost of preferred stock and the cost of debt
(D) the cost of common equity, the cost of preferred stock, and the cost of debt
Answer:
(D) the cost of common equity, the cost of preferred stock, and the cost of debt

Question 43.
While calculating the WACC, cost of each component of the capital is weighted –
(A) In the ratio of 1:2:3:4
(B) by the relative proportion of that type of funds in the capital structure.
(C) by the relative proportion of that type of funds to total assets in the company
(D) Both (A) and (C)
Answer:
(B) by the relative proportion of that type of funds in the capital structure.

Question 44.
Which of the following formula you will use while calculating value of the firm?
(A) NOPAT ÷ K
(B) NOPAT × K₀
(C) NOPAT ÷K₀(1-t)
(D) None of the above
Answer:
(A) NOPAT ÷ K

Question 45.
For which of the following costs is it generally necessary to apply a tax adjustment to a yield measure?
(A) Cost of debt
(B) Cost of preferred stock
(C) Cost of common equity
(D) Cost of retained earnings
Answer:
(A) Cost of debt

Question 46.
The cost of preference share capital is calculated –
(A) by dividing the fixed dividend per share by the price per preference share and then adding risk premium.
(B) by dividing the fixed dividend per share by the price per preference share and then adding growth rate.
(C) by dividing the fixed dividend per share by the price per preference share.
(D) by dividing the fixed dividend per share by the book value per preference share.
Answer:
(C) by dividing the fixed dividend per share by the price per preference share.

Question 47.
Statement I:
Cost of equity capital is the rate of return which equates the present value of expected dividends with the market share price.
Statement II:
Dividend Yield Method cannot be used to calculate cost of equity of units suffering losses.
Select correct answer from the options given below:
(A) Both Statements are false.
(B) Statement I is true but Statement II is false.
(C) Statement II is true but Statement I is false.
(D) Both Statements are true.
Answer:
(D) Both Statements are true.

Question 48.
Which of the following is not a recognized approach for determining the cost of equity?
(A) Dividend discount model approach
(B) Before-tax cost of preferred stock plus risk premium approach
(C) Capital-asset pricing model approach
(D) Before-tax cost of debt plus risk premium approach
Answer:
(B) Before-tax cost of preferred stock plus risk premium approach

Question 49.
While calculating WACC on market value basis which of the following is not considered –
(A) After tax cost of debt
(B) Reserve and surplus
(C) Weight of each fund in capital structure
(D) Cost of term loan
Answer:
(B) Reserve and surplus

Question 50.
CAPM describes the between risk and return for securities.
(A) Linear relationship
(B) Hypothetical relationship
(C) No relationship
(D) Diagonal relationship
Answer:
(A) Linear relationship

Question 51.
Janardan is attempting to determine his company’s weighted-average cost of capital. His first step was to determine the required rates of return for his company’s long-term debt, preferred stock, and common stock. He then adjusted these required rates of return by multiplying each return by one minus the company’s marginal tax rate. Janardan is planning on using these three adjusted required return figures as his component costs of capital. How is Janardan doing so far?
(A) All three of Janardan’s component cost figures are correct.
(B) All three component cost figures are wrong.
(C) Only the required return (yield) on preferred stock and debt should have been adjusted for taxes.
(D) Only the required return (yield) on debt should have been adjusted for taxes.
Answer:
(D) Only the required return (yield) on debt should have been adjusted for taxes.

Question 52.
Which of the following may be defined as the cost of raising an additional rupee of capital?
(A) Average cost of capital
(B) Cost of retained earnings
(C) Marginal cost of capital
(D) Marginal cost of reserve & surplus
Answer:
(C) Marginal cost of capital

Question 53.
The non-diversifiable risk is attributable to factors that affect –
(A) Particular business
(B) All businesses
(C) Particular project
(D) Not to all businesses
Answer:
(B) All businesses

Question 54.
How the economic value added (EVA) is calculated?
(A) It is the difference between the market value of the firm and the book value of equity.
(B) It is the firm’s net operating profit after tax (NOPAT) less cost of capital.
(C) It is the net income of the firm less cost that equals the weighted average cost of capital multiplied by the book value of liabilities and equities.
(D) None of the above is correct.
Answer:
(B) It is the firm’s net operating profit after tax (NOPAT) less cost of capital.

Question 55.
Assertion (A):
The marginal weights represent the proportion of funds the firm intends to employ.
Reason (R):
The problem of choosing between the book value weights and the market value weights does not arise in the case of marginal cost of capital computation.
Select the correct answer from the options given below:
(A) A is true but R is false
(B) A is false but R is true
(C) A and R both are true but R is not correct explanation of A
(D) A and R both are true and R is correct explanation of A
Answer:
(D) A and R both are true and R is correct explanation of A

Question 56.
Which of the following is example of non-diversifiable risk?
(W) Interest Rate Changes
(X) Inflation
(Y) Political Changes
Select the correct answer from the options given below:
(A) (W) & (Y)
(B) (W) & (X)
(C) (X) & (Y)
(D) All of the above
Answer:
(D) All of the above

Question 57.
The cost of equity capital is all of the following EXCEPT:
(A) the minimum rate that a firm should earn on the equity-financed part of an investment.
(B) a return on the equity-financed portion of an investment that, at worst, leaves the market price of the stock unchanged.
(C) by far the most difficult component cost to estimate.
(D) generally lower than the before-tax cost of debt.
Answer:
(D) generally lower than the before-tax cost of debt.

Question 58.
Which of the following risk can be eliminated by an investor?
(A) Diversifiable risk
(B) Non-diversifiable risk
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(A) Diversifiable risk

Question 59.
Required rate of return = ?
(A) Risk free rate + Risk premium
(B) Risk free rate – Risk premium
(C) Risk free rate + Risk premium (1 -1)
(D) Risk free rate – Risk premium (1 +1)
Answer:
(A) Risk free rate + Risk premium

Question 60.
In calculating the proportional amount of equity financing employed by a firm, we should use:
(A) The common stock equity account on the firm’s balance sheet.
(B) The sum of common stock and preferred stock on the balance sheet.
(C) The book value of the firm.
(D) The current market price per share of common stock times the number of shares outstanding.
Answer:
(D) The current market price per share of common stock times the number of shares outstanding.

Question 61.
The New York based financial advisory postulated a concept of economic value added.
(A) Shawn Stewart & Co.
(B) Stem Stewart & Co.
(C) Stem Shawn & Co.
(D) S.S.&Co.
Answer:
(B) Stem Stewart & Co.

Question 62.
In calculating the costs of the individual components of a firm’s financing, the corporate tax rate is important to which of the following component cost?
(A) Common stock
(B) Debt
(C) Preferred stock
(D) None of the above
Answer:
(B) Debt

Question 63.
The rate of return on its existing assets that a firm must earn to maintain the current value of the firm’s stock is called the:
(A) Return on equity
(B) Internal rate of return
(C) Weighted average cost of capital
(D) Current yield
Answer:
(C) Weighted average cost of capital

Question 64.
Economic value added measures –
(A) the excess earning over P/E ratio
(B) the excess returns over cost of capital.
(C) the excess returns over existing EPS
(D) the excess earning over ROE
Answer:
(B) the excess returns over cost of capital.

Question 65.
Which one of the following is a correct statement regarding a firm’s weighted average cost of capital (WACC)?
(A) The WACC can be used as the required return for all new projects with similar risk to that of the existing firm.
(B) An increase in the market risk premium will tend to decrease a firm’s WACC.
(C) A reduction in the risk level of a firm will tend to increase the firm’s WACC.
(D) The WACC will decrease when the tax rate decreases for all firms that utilize debt financing.
Answer:
(A) The WACC can be used as the required return for all new projects with similar risk to that of the existing firm.

Question 66.
If a company’s EVA is negative –
(A) it is destroying shareholders wealth even though it may be reporting positive and growing EPS or return on capital employed
(B) it is destroying the overall cost of capital of the firm
(C) it is increasing the overall cost of capital of the firm causing low NPV
(D) it is increasing the overall cost of capital of the firm which can be adjusted by risk premium
Answer:
(A) it is destroying shareholders wealth even though it may be reporting positive and growing EPS or return on capital employed

Question 67.
The term ‘EVA’ is used for:
(A) Extra Value Analysis
(B) Economic Value Added
(C) Expected Value Analysis
(D) Engineering Value Analysis
Answer:
(B) Economic Value Added

Question 68.
Market values are often used in computing the weighted average cost of capital because –
(A) This is the simplest way to do the calculation.
(B) This is consistent with the goal of maximizing shareholder value.
(C) This is required by the Securities & Exchange Board of India.
(D) This is a very common mistake.
Answer:
(B) This is consistent with the goal of maximizing shareholder value.

Question 69.
…………. enhance the market value of shares and therefore equity capital is not free of cost.
(A) Face value
(B) Dividends
(C) Redemption value
(D) Book value
Answer:
(B) Dividends

Question 70.
Consider statements given below:
1. A debt-equity ratio of 2:1 indicates that for every 1 unit of equity, the company can raise 2 units of debt. The cost of floating a debt is greater than the cost of floating an equity issue.
State True or False:
(A) 1-True, 2-True
(B) 1-False, 2-True
(C) 1-False, 2-False
(D) 1-True, 2-False
Answer:
(D) 1-True, 2-False

Question 71.
Which one of the following represents ……….. the best estimate for a firm’s pre-tax cost of debt?
(A) twice the rate of return currently offered on risk-free securities
(B) the firm’s historical cost of capital
(C) the current yield-to-maturity on the firm’s existing debt
(D) the current coupon on the firm’s existing debt
Answer:
(C) the current yield-to-maturity on the firm’s existing debt

Question 72.
EVA = ?
(A) PAT – (Capital Employed × WACC)
(B) NOPAT -(Capital Employed × K_e)
(C) NOPAT-(Capital Employed × WACC)
(D) NOPAT – (Total Assets × K_e × K_d)
Answer:
(C) NOPAT-(Capital Employed × WACC)

Question 73.
An increase in market value of preferred stock will ………. the cost of preferred stock.
(A) increase
(B) not affect
(C) either increase or decrease
(D) decrease
Answer:
(D) decrease

Question 74.
Which of the following is advantage of EVA?
(A) The use of EVA is a substitute for detailed analysis of business drivers.
(B) EVA improves the overall cost of capital.
(C) In some cases, company pay bonuses to the employees on the basis of EVA generated. Thus, it promotes the employees for working hard for generating higher revenue.
(D) EVA improves the skill of financial analyst.
Answer:
(C) In some cases, company pay bonuses to the employees on the basis of EVA generated. Thus, it promotes the employees for working hard for generating higher revenue.

Question 75.
Capital structure weights are based on the:
(A) market value of a firm’s equity and the face value of its debt.
(B) initial issue values of a firm’s debt and equity.
(C) firm’s dividend and bond yields.
(D) market values of a firm’s debt and equity.
Answer:
(D) market values of a firm’s debt and equity.

Question 76.
The average of a firm’s cost of equity and after tax cost of debt that is weighted based on the firm’s capital structure is called the –
(A) Reward to risk ratio
(B) Weighted capital gains rate
(C) Structured cost of capital
(D) Weighted average cost of capital
Answer:
(D) Weighted average cost of capital

Question 77.
Which of the following action can be taken to improve EVA?
(A) Improve Asset Turnover Ratios
(B) Change the capital structure by substituting lower cost debt for higher cost equity
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)

Question 78.
Sam Toys is considering developing and distributing a new board game for children. The project is similar in risk to the firm’s current operations. The firm maintains a debt-equity ratio of 0.40 and retains all profits to fund the firm’s rapid growth. How should the firm determine its cost of equity?
(A) by adding the market risk premium to the after tax cost of debt
(B) by multiplying the market risk premium by (1 – 0.40)
(C) by using the dividend growth model
(D) by using the capital asset pricing model
Answer:
(D) by using the capital asset pricing model

Question 79.
Market value added is the difference between –
(A) EPS and Price Earning per share
(B) Cost of capital and economic value added
(C) The Company’s adjusted value for inflation and book value of various assets
(D) The Company’s market and book value of shares.
Answer:
(D) The Company’s market and book value of shares.

Question 80.
All else constant, which one of the following will increase a firm’s cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of ₹1 a share and has a beta of 1.2.
(A) a reduction in the dividend amount
(B) an increase in the dividend amount
(C) a reduction in the market rate of return
(D) a reduction in the risk-free rate
Answer:
(D) a reduction in the risk-free rate

Question 81.
………. represents the economic profits generated by a business above and beyond the minimum return required by all providers of capital.
(A) Shareholder Value Added (SVA)
(B) Economist Value Added (EVA)
(C) Market Makers Value Added (MM VA)
(D) Debt holders Value Added (DVA)
Answer:
(A) Shareholder Value Added (SVA)

Question 82.
A firm’s overall cost of equity is:
(A) is generally less that the firm’s WACC given a leveraged firm.
(B) unaffected by changes in the market risk premium.
(C) highly dependent upon the growth rate and risk level of the firm.
(D) generally less than the firm’s after tax cost of debt.
Answer:
(C) highly dependent upon the growth rate and risk level of the firm.

Question 83.
The common stock of a company must provide a higher expected return than the debt of the same company because –
(A) There is less demand for stock than for bonds.
(B) There is greater demand for stock than for bonds.
(C) There is more systematic risk involved for the common stock.
(D) There is a market premium required for bonds.
Answer:
(C) There is more systematic risk involved for the common stock.

Question 84.
The after tax cost of debt generally increases when:
I. A firm’s bond rating increases.
H. Market rate of interest increases.
III. Tax rates decrease.
IV. Bond prices rise.
Select correct answer from the options given below:
(A) I & III only
(B) II & III only
(C) I, II & III only
(D) II, III & IV only
Answer:
(B) II & II only

Question 85.
Rank in ascending order (ie. 1 = lowest, while 3 = highest) the likely after-tax component costs of a Company’s long-term financing.
(A) 1 = bonds; 2 = common stock; 3 = preferred stock.
(B) 1 = bonds; 2 = preferred stock; 3 = common stock.
(C) 1 = common stock; 2 = preferred stock; 3 = bonds.
(D) 1 = preferred stock; 2 = common stock; 3 = bonds.
Answer:
(B) 1 = bonds; 2 = preferred stock; 3 = common stock.

Question 86.
The cost of preferred stock is computed the same as the:
(A) Pre-tax cost of debt
(B) Return on an annuity
(C) After tax cost of debt
(D) Return on a perpetuity
Answer:
(D) Return on a perpetuity

Question 87.
The pre-tax cost of debt:
(A) is based on the current yield to maturity of the firm’s outstanding bonds.
(B) is equal to the coupon rate on the latest bonds issued by a firm.
(C) is equivalent to the average current yield on all of a firm’s outstanding bonds.
(D) is based on the original yield to maturity on the latest bonds issued by a firm.
Answer:
(A) is based on the current yield to maturity of the firm’s outstanding bonds.

Question 88.
The cost of preferred stock:
(A) is equal to the dividend yield.
(B) is equal to the yield to maturity.
(C) is highly dependent on the dividend growth rate.
(D) is independent of the stock’s price.
Answer:
(A) is equal to the dividend yield.

Question 89.
………. describes the relationship between non diversifiable and return for securities.
(A) Risk Reward Model
(B) CAPM Model
(C) MM Model
(D) Stewart Model
Answer:
(B) CAPM Model

Question 90.
The after tax cost of debt:
(A) varies inversely to changes in market interest rates.
(B) will generally exceed the cost of equity if the relevant tax rate is zero.
(C) is unaffected by changes in the market rate of interest.
(D) has a greater effect on a firm’s cost of capital when the debt-equity ratio increases.
Answer:
(D) has a greater effect on a firm’s cost of capital when the debt-equity ratio increases.

Question 91.
Match the following:
List I — List II
A. Expected dividend — 1. Flotation cost
B. Beta coefficient — 2. Retained earnings
C. Issue expenses — 3. CAPM
D. Personal tax rate — 4. Growth rate
Select the correct answer from the options given below:

Answer:
(C)

Question 92.
Weighted average cost of capital for a firm may be dependent upon the firm’s:
1. Rate of growth
2. Debt-equity ratio
3. Preferred dividend payment
4. Retention ratio
Select correct answer from the options given below:
(A) 1 & 3 only
(B) 2 & 4 only
(C) 1, 2 & 4 only
(D) 1,2,3 & 4
Answer:
(D) 1,2,3 & 4

Question 93.
By observing the financial market, we can observe that –
(A) Normally cost equity is more than cost of debt
(B) Normally cost of debt is more than cost of equity
(C) If beta factor is more than 1 then security is less risky than market
(D) None of the above
Answer:
(D) None of the above

Question 94.
Which one of the following statements is correct for a firm that uses debt in its capital structure?
(A) The WACC should decrease as the firm’s debt-equity ratio increases.
(B) When computing the WACC, the weight assigned to the preferred stock is based on the coupon rate multiplied by the par value of the preferred.
(C) The firm’s WACC will decrease as the corporate tax rate decreases.
(D) The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book value per share.
Answer:
(A) The WACC should decrease as the firm’s debt-equity ratio increases.

Question 95.
Match List-I with List-II:

Answer:
(A)

Question 96.
As per Net Income approach if capitalization rate increases, market value of firm –
(A) Decreases
(B) Increases
(C) Remains constant
(D) Without data it is not possible to tell what will happen
Answer:
(A) Decreases

Question 97.
Which of the following formula is correct to calculate the value of levered firm as per MM Model? .
(A) Value of unlevered firm – (Value of debt × Tax Rate)
(B) Value of unlevered firm × Value of debt × Tax Rate
(C) Value of unlevered firm + (Value of debt × Tax Rate)
(D) Value of unlevered firm ÷ (Value of debt ÷ Tax Rate)
Answer:
(C) Value of unlevered firm + (Value of debt × Tax Rate)

Question 98.
Match List-I with List-II:

Answer:
(B)

Question 99.
P/E Ratio is –
(A) Profitability ratio
(B) Turnover ratio
(C) Market test ratio
(D) Liquid ratio
Answer:
(C) Market test ratio

Question 100.
Market price = ?
(A) P/E Ratio × EPS
(B) EPS/K_e
(C) D₁/K_e
(D) All of the above
Answer:
(D) All of the above

Question 101.
R Ltd. has disbursed a dividend of 75 on each equity share of 25. The market price of share is 200. Corporate tax rate is 40. Its cost of equity is –
(A) 30.0%
(B) 37.5%
(C) 35.7%
(D) 33.5%
Answer:
(B) 37.5%
75/200 = 0375 Le. 37.5%

Question 102.
F Ltd. issued 1,00,000 equity share of ₹ 100 each at a premium of ₹ 20 each. Company has incurred issue expenses of ₹ 50,000. Corporate tax rate is 40%. The equity shareholders expects the rate of dividend to 18% p.a. Cost of equity = ?
(A) 15.60%
(B) 15.65%
(C) 15.06%
(D) 16.50%
Answer:
(C) 15.06%
Issue expenses are 50,000.
Issue expenses per share = 0.5.
Net proceeds per share = 120 – 0.5 = 119.5
18/119.5 = 0.1506 i.e. 15.06%

Question 103.
The equity of JPG Ltd. is traded in the market at ₹ 225 each. It book value per share is ₹ 100. The dividend expected at the year end per share is ₹ 45. The subsequent growth in dividends is expected at the rate of 0.06. Calculate the cost of equity capital.
(A) 0.26
(B) 0.22
(C) 0.33
(D) 0.28
Answer:
(A) 0.26

Question 104.
Sara Ltd. has its shares having face value of ₹ 25 each quoted on the stock exchange, the current price per share is ₹ 60. The gross dividends per share over the last four years have been ₹ 3, ₹ 3.3, ₹ 3.63 & ₹ 4. Calculate cost of equity.
(A) 17.33%
(B) 13.17%
(C) 15.33%
(D) 0.01733
Answer:
(A) 17.33%
It can be observed from the data that dividends are growing by 10%.

Question 105.
Current market price of equity shares of Jack Ltd. is ₹ 120. The company has issued new equity shares of ₹ 30 each at ₹ 120 and the cost of its flotation is ₹ 1.50 per share. The gross dividends per share over the last six years have been ₹ 3.15, ₹ 3.3, ₹ 3.48, ₹ 3.63, ₹ 3.81 and ₹ 4.02. It is expected to maintain the fixed dividend payout ratio in the future. Applicable tax rate is 35%. Cost of equity of Jack Ltd. is –
(A) 0.856
(B) 0.0856
(C) 0.0865
(D) 0.0586
Answer:
(B) 0.0856
It can be observed from the data of dividend that it growing by 5%.

K_e= 0.0856 = 8.56%

Question 106.
Bharat Ltd. has its equity shares of ₹ 10 each quoted in a stock exchange with market price of ₹ 140. A constant expected annual growth rate of 6% and a dividend of ₹ 9 per share has been paid for the last year. Calculate the cost of capital.
(A) 12.28%
(B) 12.43%
(C) 66.82%
(D) 12.81%
Answer:
(D) 12.81%

Question 107.
F Ltd. has paid-up capital of ₹ 10,00,000. Equity share of ₹ 10 each and the current market price of its equity shares is ₹ 630. The dividend declared by the company during last 5 years is given below:
Year — DPS
2014 — 13.50
2015 — 15.75
2016 — 22.50
2017 — 27.00
2018 — 31.50
Risk free rate of interest on government securities is 9%. K_e = ?
(A) 45.3%
(B) 30.2%
(C) 28.9%
(D) 16.4%
Answer:
(B) 30.2%
It can be observed from the data that dividend is growing by average rate of 24% as shown below. Hence, growth rate can be taken as 24%.

Question 108.
P Ltd. has 1,50,000 equity shares of ₹ 25 each and its current market value is ₹ 150 each. The before tax profit of the company for the year just ended is ₹ 36,36,363. Tax rate is 34%. Cost of equity of P Ltd. –
(A) 10.76%
(B) 12.72%
(C) 10.67%
(D) 13.48%
Answer:
(C) 10.67%
Profit after tax 3636,363 – 12,36,363 = 24,00,000
EPS =24,00,000/1,50,000 = 16 pcr share
Price Earning Method.

Question 109.
NSZ Ltd. has equity of 15 Million and 10% debentures of 20 Million. Cost of equity is 18% and pre-tax cost of debt is 1096. Company estimates its EBI for 7 Million. Applicable tax rate is 30%. What is the Economic value added of NSZ Ltd.
(A) 0.088 Million
(B) 0.678 Million
(C) 0.798 Million
(D) 0.533 Million
Answer:
(C) 0.798 Million

Question 110.
Maya Ltd. share beta factor (P) is 1.1214. Dividend paid by the company last year was ₹ 3.60 per share on face value of ₹ 20. The risk free rate of interest on government bonds is 7.596. The expected rate of return on company equity shares is 13%. What is the cost of equity (K_e) of
@ Maya Ltd.?
(A) 12.89%
(B) 13.67%
(C) 14.52%
(D) 13.03%
Answer:
(B) 13.67%
K_e = R_f+β(R_m– R_f)
= 7.5+1.1214(13-7.5)
= 13.6796

Question 111.
H Ltd. p is 1.8025. Dividend paid by the company last year was ₹ 9 per share on face value of ₹ 30. The risk free rate is 0.61275. Risk premium is 0.0825. Calculate cost of equity capital.
(A) 21%
(B) 6.28%
(C) 14.77%
(D) 12%
Answer:
(A) 21%
K_e = R_f+ p (R_m— R_f)
Note: Risk Premium = (R_m — R_f)
= 6.1275 + 1.8025 (8.25)
= 2196

Question 112.
Rao Ltd. earns profit after tax ₹ 3,96,000. Corporate tax is 0.4. Its capital structure consist of equity shares ₹ 9,60,000; 15% Term loan ₹ 4,80,000. Cost of equity is 0.12. Its economic value added is –
(A) ₹ 2,66,400
(B) ₹ 2,80,800
(C) ₹ 2,08,800
(D) ₹ 2,80,008
Answer:
(B) ₹ 2,80,800

Question 113.
Lava Inc.’s ₹ 100 par value preferred stock just paid its ₹ 10 per share annual dividend. The preferred stock has a current market price of ₹ 96 a share. The firm’s marginal tax rate is 40 percent, and the firm plans to maintain its current capital structure relationship into the future. The component cost of preferred stock to Lava Inc. would be closest to –
(A) 6.52 percent
(B) 6.25 percent
(C) 10.24 percent
(D) 10.42 percent
Answer:
(D) 10.42 percent
10/96=0.1042 i.e 10.42%

Question 114.
A financial consultant has gathered following facts for HPLC Ltd. Systematic risk of the firm is 1.1425. 182 days treasury bill yield is 6%. Expected yield on market portfolio is 13%. GDP growth rate is 996. Sensex is 39,118. What is the cost of equity?
(A) 13.96%
(B) 14.00%
(C) 14.52%
(D) 18.91%
Answer:
(B) 14.00%
K_e=R_f+p(R_m-R_f)
= 6 + 1.1425 (13 – 6)
= 14%

Question 115.
Following details are submitted by Rajlakhami Ltd.
EBIT
Equity Capital Reserves & Surplus 10% Debentures Current Assets Cost of Equity Income Tax Rate Economic Value Added = ?
(A) ₹ 43.75 lakh
(B) ₹ 40.75 lakh
(C) ₹ 43.57 lakh
(D) ₹ 45.37 lakh
Answer:
(A) ₹ 43.75 lakh

Question 116.
An analyst has calculated economic value added of ₹ 43,750 for Z Ltd. WACC of the company is 11.5% and applicable tax rate is 30%. The company paid interest of ₹ 1,00,000 during the year. Total assets of the company are ₹ 17,50,000. What is profit after tax (PAT) of the company?
(A) ₹ 2,45,000
(B) ₹ 1,45,000
(C) ₹ 1,75,000
(D) ₹ 3,15,000
Answer:
(C) ₹ 1,75,000

Question 117.
The beta coefficient of Zebra Ltd. is 1.16. The company has been maintaining 2.5% rate of growth in dividends and earnings. The last dividend paid was ₹ 1.20 per share. Return on government securities is 5%. Return on market portfolio is 7%. The current market price of one share of Zebra Ltd. is ₹ 14. The earnings per share is ₹ 1.95. It was decided to take cost of equity, the average for four methods that are generally adopted to calculate the cost of equity in general. Average Ke = ?
(A) 10.33%
(B) 13.93%
(C) 11.29%
(D) 7.32%
Answer:
(A) 10.33%

Question 118.
A Company issues ₹ 50,00,000 12% Debentures of ₹ 100 each. Risk premium is 8%. Debentures are redeemable after the expiry of fixed period of 7 years. The Company is in 35% tax bracket. Calculate the cost of debt after tax, if debentures are issued at par.
(A) 0.78
(B) 7.8%
(C) 8.7%
(D) 0.87
Answer:
(B) 7.8%

Question 119.
Prsanna Ltd. issued 12% bonds of ₹ 100 each at par. Corporate tax rate is 34% including surcharge and education cess. Cost of Debt = ?
(A) 7.92%
(B) 8.42%
(C) 10%
(D) 12.48%
Answer:
(A) 7.92%

Question 120.
Parag Ltd. issued 14% bonds of ₹ 100 each at 98%. Corporate tax rate is 34%. Issue expense per bond was ₹ 1.5. Cost of Debt=?
(A) 9.24%
(B) 9.38%
(C) 9.58%
(D) 9.12%
Answer:
(C) 9.58%

Question 121.
A Company issues ₹ 75,00,000 12% Debentures of ₹ 100 each. Risk premium is 13.5%. Debentures are redeemable after the expiry of fixed period of 7 years at par. The Company is in 35% tax bracket. Calculate the cost of debt after tax, if debentures are issued at 10% discount.
(A) 9.72%
(B) 7.80%
(C) 9.27%
(D) 8.46%
Answer:
(A) 9.72%

Question 122.
A Company issues ₹ 48,50,000 12% Debentures of ₹ 100 each. Debentures are redeemable at par after the expiry of fixed period of 7 years. The Company is in 35% tax bracket. Calculate the cost of debt after tax, if debentures are issued at 10% premium. –
(A) 6.77%
(B) 6.07%
(C) 7.60%
(D) 6.88%
Answer:
(B) 6.07%

Question 123.
Following data is available for XYZ Ltd.:
No. of debentures = ₹ 5,00,000
Face value = ₹ 1,000
Coupon rate = 8%
Discount on issue = 1% of face value
Issue expenses = ₹ 6,25,000
Term =12 years
Corporate tax rate = 25%
These debentures are redeemable at premium of ₹ 14.
What is cost of debt (Kd)?
(A) 6.20%
(B) 5.87%
(C) 6.44%
(D) 8.32%
Answer:
(A) 6.20%

Question 124.
Y Ltd. issues preference shares of face value ₹ 500 each carrying 14% dividend and it realizes ₹ 480 per share. The shares are repayable after 12 years at 2% premium. Corporate tax rate is 25%. Issue expense per share was ₹ 2.5.
(A) 14.65%
(B) 15.82%
(C) 14.73%
(D) 14.92%
Answer:
(C) 14.73%

Question 125.
PAPA Ltd. retains ₹ 26,25,000 out of its current earnings. The expected rate of return to the shareholders, if they had invested the funds elsewhere is 15%. The brokerage is 2% and the shareholders come in 14% tax bracket. Calculate the cost of retained earnings.
(A) 12.64%
(B) 11.37%
(C) 14.80%
(D) 12.90%
Answer:
(A) 12.64%
Since, the expected rate of return to the shareholders, if they had invested the funds elsewhere is 15%. The brokerage is 2%. Net K_e = 15-0.3 = 14.7.
Cost of retained earnings:
K = K_e (1 – t_p) t_p = Personal tax rate applicable to shareholder.
= 14.7 (1 – 0.14)
= 12.64%

Question 126.
Chetna Fashions is expected to pay an annual dividend of ₹ 0.80 a share next year. The market price of the stock is ₹ 22.40 and the growth rate is 5%. What is the firm’s cost of equity?
(A) 7.58 percent
(B) 7.91 percent
(C) 8.24 percent
(D) 8.57 percent
Answer:
(D) 8.57 percent

Question 127.
Sweet Treats common stock is currently priced at ₹ 19.06 a share. The company just paid ₹ 1.15 per share as its annual dividend. The dividends have been increasing by 2.5% annually and are expected to continue doing the same. What is this firm’s cost of equity?
(A) 8.68%
(B) 8.86%
(C) 6.18%
(D) 6.03%
Answer:
(A) 8.68%

Question 128.
Narendra Ltd. is planning for issue of 15% Preference Shares of ₹ 100 each, redeemable at par after 8 years. They are expected to be sold at a premium of 596. Flotation cost is 9% of face value. Corporate tax is 35% and corporate dividend tax is 10%. The cost of preference shares on the basis of present value of future cash flow shall be –
Use following rates for your calculations:

(A) 17.49%
(B) 16.22%
(C) 18.34%
(D) 19.20%
Answer:
(A) 17.49%

Question 129.
Z Ltd. is planning for issue of 15% Debentures of ₹ 100 each, redeemable at par after 5 years. They are expected to be sold at par. Flotation cost is 10% of face value. Corporate tax is 35%. Cost of debentures on the basis on present value of future cash flow shall be –
Use following rates for your calculations:

(A) 11.37%
(B) 12.57%
(C) 14.87%
(D) 12.97%
Answer:
(B) 12.57%

Question 130.
Ramola Ltd. report its NOPAT ₹ 25,00,000. Its capital employed and economic value added is ₹ 60,00,000 & ₹ 19,00,000 respectively. What is overall cost of capital of Ramola Ltd.
(A) 10.9%
(B) 11%
(C) 10%
(D) 9.8%
Answer:
(C) 10%
EVA = NOPAT – (Capital Employed ×WACC)
19,00,000 = 25,00,000 – (60,00,000 × x)
– 6,00,000 = – 60,00,000x
x = 0.1 ie. 10%

Question 131.
Mr. Investor, purchases an equity share of growing company, ATT Ltd. for ₹ 210. He expects that the ATT Ltd. to pay dividend of ₹ 10.5, ₹ 11.025 & ₹ 11.575 in year 1, 2 & 3 respectively. He expects to sell shares at the end of year 3 at ₹ 243.10. Determine the growth rate in dividend.
(A) 4%
(B) 5%
(C) 6%
(D) 7%
Answer:
(B) 5%

Question 132.
Mr. Lucky, purchases an equity share of growing company, XYY Ltd. for ₹ 525. He expects that the XYY Ltd. to pay dividend of ₹ 26.25, ₹ 27.83 & ₹ 29.50 in year 1, 2 & 3 respectively. He expects to sell shares at the end of year 3 at ₹ 607.75. What is the required rate of return of Mr. Lucky on his equity investment?
(A) 11.50%
(B) 10.50%
(C) 10.05%
(D) 11.05%
Answer:
(D) 11.05%

Question 133.
Mumbai Ltd. expected to pay dividend at ₹ 2 for the next year. As the company is a market leader with good future, dividend is likely to grow by 5% every year. The equity shares are now treaded at ₹ 80 per share in the stock exchange. Tax rate applicable to the company is 50%. The capital structure of the company also contains debt on which interest is payable @ 14%. The. capital structure has ratio of Equity & Debt 80:20. WACC = ?
(A) 9.40%
(B) 7.40%
(C) 8.40%
(D) 7.98%
Answer:
(B) 7.40%

Question 134.
Beeta Ltd. has furnished the following information:
Earnings Per Share (EPS) — ₹ 14
Dividend Payout Ratio — 25%
Market Price Per Share — ₹ 140
Rate of Tax — 26%
Growth rate of dividend — 9%
The company wants to raise additional capital of ₹ 10 lakhs including debt of 14 lakhs. Cost of debt (before tax) is 12% up to ₹ 2 lakhs and 1496 beyond that. Compute the marginal weighted average cost of additional capital.
(A) 11.75%
(B) 10.75%
(C) 11.57%
(D) 12.57%
Answer:
(B) 10.75%

Question 135.
National Ltd. has 12,000 equity shares of ₹ 100 each. Sale price is equity share ₹ 115 per share; flotation cost ₹ 5 per share. Expected dividend growth rate is 5% and expected dividend at the end of the financial year is ₹ 11 per share. What is the cost of equity shares of National Ltd.?
(A) 0.1133
(B) 0.1278
(C) 0.1475
(D) 0.15
Answer:
(D) 0.15

Question 136.
Raman Ltd. has 1096 Preference Share Capital of ₹ 4,50,000. Face value is ₹ 10. Issue price of preference share is ₹ 100 per share; flotation cost ₹ 2 per share. What is the cost of preference shares to Raman Ltd.?
(A) 10.20%
(B) 9.10%
(C) 12.50%
(D) 11.22%
Answer:
(A) 10.20%

Question 137.
Raja Ltd. has 8% Debentures (Face value ₹ 2,500) of ₹ 9,00,000 which are redeemable at 5% premium, sold at 98%, 3% flotation costs with maturity of 20 years. Corporate tax rate is 35%. The company paid debenture interest of 60,000 out of total interest payable of 72,000. After tax cost of debt is -…………
(A) 8.7%
(B) 7.7%
(C) 5.7%
(D) 6.7%
Answer:
(C) 5.7%

Question 138.
Equity shares of Anuradha Ltd. are quoted in stock exchange at ₹ 325 per share. New issue priced at ₹ 312.5 and flotation cost will be ₹ 12.5 per share. During 5 years dividend on equity shares have steadily grown from ₹ 26.5 to ₹ 35.48. Dividend at the end of current year is expected at ₹ 37.5 per share. It has retained earning of ₹ 30,00,000. Corporate tax is 35% and shareholders are in tax slab of 20%. Ignore dividend tax. Calculate cost of equity and cost of retained earnings?
(A) K_e= 18.50%; K_r = 14.80%
(B) K_e = 18.00%; K_r = 14.40%
(C) K_e= 17.54%; K_r = 14.03%
(D) K_e= 18.94%; K_r = 15.15%
Answer:
(A) K_e= 18.50%; K_r = 14.80%
During 5 years dividend on equity shares have steadily grown from 26.5 to 35.48. Hence, growth rate = g = 6%.

Question 139.
Compute the EVA with the help of following information:
Equity — 10,00,000
Debt (10%) — 5,00,000
Profit after tax — 2,00,000
Risk-free rate of return is — 7%.
Beta (β) = 0.9
Market rate of return = 15%.
Applicable tax rate is 40%.
(A) ₹ 57,950
(B) ₹ 57,590
(C) ₹ 57,905
(D) ₹ 59,750
Answer:
(A) ₹ 57,950

Question 140.
The company proposes to issue 11 year 15% debentures of ₹ 500. Yield on debentures of similar maturity and risk class is 16%; flotation cost 3% of face value. Corporate tax is 35%. Issue price and after tax cost of debt would be –
(A) Issue price = 486.75; K_d = 12.10%
(B) Issue price = 468.75; K_d = 11.10%
(C) Issue price = 475.68; K_d = 10.10%
(D) Issue price = 457.86; K_d = 12.12%
Answer:
(B) Issue price = 468.75; K_d = 11.10%
Market price of debentures
Since, the yield on debentures of similar maturity and risk class is 16%, the company would be required to offer debenture at discount.

Question 141.
From the following details calculate the WACC:

(A) 17.28%
(B) 16.52%
(C) 16.34%
(D) 17.93%
Answer:
(A) 17.28%

Question 142.
A Company has ₹ 180 Million of 10% Debentures having face value of ₹ 100. The debentures are redeemable after 3 years and interest is paid annually. The current ex-interest debenture market value is ₹ 103. Pre-tax cost of debentures on the basis of present value of future cash flow shall be –
Use following rates for your calculations:

(A) 9.32%
(B) 7.91%
(C) 8.02%
(D) 8.82%
Answer:
(D) 8.82%

Question 143.
The following is the capital structure of a company:

Current market price of equity share is ₹ 200. For the last year the company had paid equity dividend at 25% and its dividend is likely to grow 5% every year. Corporate tax rate is 30% and shareholders personal income tax rate is 20%. Compute WACC on the basis of book value.
(A) 13.36%
(B) 14.50%
(C) 13.96%
(D) 12.32%
Answer:
(A) 13.36%

Question 144.
The following is the capital structure of a company:

Current market price of equity share is ₹ 200. For the last year the company had paid equity dividend at 25% and its dividend is likely to grow 5% every year. Corporate tax rate is 30%. Compute WACC on the basis of market value.
(A) 14.5 percent
(B) 13.5 percent
(C) 12.9 percent
(D) 14.1 percent
Answer:
(A) 14.5 percent

Question 145.
Debt as percentage of total capital of the Kinara Ltd. is 20%. Its cost of equity is 16% and pre-tax cost of debt is 12%. Tax rate is 50%. What is overall cost of capital
(A) 16%
(B) 14%
(C) 15%
(D) 16.6%
Answer:
(B) 14%

Question 146.
Debt as percentage of total capital of the Tiger Ltd. is 60%. Its cost of equity is 24% and pre-tax cost of debt is 20%. Tax rate is 50%. What is overall cost of capital of Tiger Ltd.?
(A) 14.6%
(B) 13.6%
(C) 17.6%
(D) 15.6%
Answer:
(D) 15.6%

Question 147.
Compute the EVA with the help of following information:
Equity — 15,00.000
Debt (10%) — 7,00,000
Profit after tax — 4,00,000
Risk-free rate of return is 7%. Beta (β) 0.9, Market rate of return 15%. Applicable tax rate is 40%.
(A) 1,87,020
(B) 1,78,020
(C) 1,87,200
(D) 1,85,200
Answer:
(A) 1,87,020

Question 148.
AB Ltd. estimates the cost of equity and debt components of its capital for different levels of debt; equity mix as follows:
Debt as % of total capital Cost of equity Cost of debt (pre-tax)

Tax Rate is 50%
Select the best capital mix for the company so that its overall cost of capital is minimum.
(A) I
(B) II
(C) III
(D) IV
Answer:
(B) II

Question 149.
The preferred stock of ISO Ltd. pays an annual dividend of ₹ 6.50 a share and sells for ₹ 48 a share. What is ISO’s cost of preferred stock?
(A) 9.19%
(B) 7.38%
(C) 13.54%
(D) 9.46%
Answer:
(C) 13.54%
6.5/48 = 0.1354 i.e. 13.54%

Question 150.
Calculate the weighted marginal cost of capital for the company, if it raises ₹ 10 Crores next year, given the following information:
(i) Next expected dividend is ₹ 3.60 and expected to grow at the rate of 7%.
(ii) Income-tax rate is 40%.
(iii) Amount will be raised by equity and debt in equal proportions.
(iv) Additional issue of equity shares will result in the next price per share being fixed at ₹ 32.
(v) Debt capital raised by way of term loans will cost 15%. for the first ₹ 2.5 Crores and 16%. for the balance.
Select the correct answer from the options given below:
(A) 12.775%.
(B) 15.625%.
(C) 13.775%.
(D) 15.475%.
Answer:
(B) 15.625%.

Question 151.
Nikon Enterprises just paid an annual dividend of ₹ 1.56 per share. This dividend is expected to increase by 3 percent annually. Currently, the firm has a beta of 1.13 and a stock price of ₹ 28 a share. The risk-free rate is 3 percent and the market rate of return is 10.5 percent. What is your best estimate of Nikon’s cost of equity?
(A) 8.74 percent
(B) 11.48 percent
(C) 9.72 percent
(D) 10.11 percent
Answer:
(D) 10.11 percent

Question 152.
Jakson Ltd. has 12,000 bonds outstanding at a quoted price of 98 percent of face value. The bonds mature in eleven years and carry a 9 percent annual coupon. What is your best estimate of Jackson’s after-tax cost of debt if the applicable tax rate is 35 percent?
(A) 6.03%
(B) 5.77%
(C) 8.33%
(D) 7.04%
Answer:
(A) 6.03%

Question 153.
Mona Industries has a capital structure of 55% common stock, 10% preferred stock, and 45% debt. The firm has a 60% dividend payout ratio, a beta of 0.89, and a tax rate of 38%. Given this, which one of the following statements is correct?
(A) The after-tax cost of debt will be greater than the current yield-to-maturity on the firm’s bonds.
(B) The firm’s cost of preferred is most likely less than the firm’s actual cost of debt.
(C) The firm’s cost of equity is unaffected by a change in the firm’s tax rate.
(D) The cost of equity can only be estimated using the SML approach.
Answer:
(C) The firm’s cost of equity is unaffected by a change in the firm’s tax rate.

Question 154.
Baba Ltd. has a cost of equity of 12%, a pre-tax cost of debt of 7%, and a tax rate of 35%. What is the firm’s weighted average cost of capital if the debt-equity ratio is 0.60?
(A) 9.21%
(B) 10.01%
(C) 10.13%
(D) 11.11%
Answer:
(A) 9.21%

Question 155.
JKL Ltd. has ₹ 10 equity shares amounting to ₹ 15 Crore. The current market price per equity share is ₹ 60. The prevailing default risk free interest rate on 10 year GOI treasury bonds is 5.5%. The average market risk premium is 8%. The beta of the company is 1.1875. K, = ?
(A) 15%
(B) 11%
(C) 12%
(D) 13%
Answer:
(A) 15%
K=R_f+ β(R_m– R_f)
= 5.5 + 1.1875 × 8 = 15%

Question 156.
ABC Ltd. has three divisions: A, B & C. Division A has the least risk and Division C has the most risk. ABC Ltd. has an after tax cost of debt of 4.6% and a cost of equity of 9.5%. Company is financed with 50% debt & 50% equity. Management has told the divisional manager of Division A that projects in that division are assigned a discount rate that is 1% less than the firm’s weighted average cost of capital. What is the discount rate applicable to Division A?
(A) 6.65%
(B) 6.31%
(C) 7.18%
(D) 6.05%
Answer:
(D) 6.05%

Question 157.
PWA Ltd. has ₹ 1,000,9.5% debentures amounting to ₹ 1,500 Million. The debentures of PWA Ltd. are redeemable after 3 years and are quoting at ₹ 981.05 per debenture. The beta of the company is 1.1785. The applicable income tax rate for the company is 35%. K_d = ?
(A) 1.59%
(B) 6.87%
(C) 7.86%
(D) 8.67%
Answer:
(B) 6.87%

Question 158.
PWA Ltd. has ₹ 100,10.5% preference shares amounting to ₹ 100 Million. The preferred stock of the company is redeemable after 5 years is currently selling at ₹ 98.15 per preference share. The beta of the company is 1.7158. The applicable income tax rate for the company is 35%. K_P =?
(A) 10%
(B) 11%
(C) 12%
(D) 13%
Answer:
(B) 11%

Question 159.
G Ltd. has 10,000 shares of common stock outstanding at a price per share of ₹ 46 and a rate of return of 14%. The Company has 5,000 shares of 7% preferred stock outstanding at a price of ₹ 58 a share. The outstanding debt has a total face value of ₹ 2,00,000 and a market price equal to 98% of face value. Yield-to-maturity (YTM) on the debt is 8.03%. What is the firm’s weighted average cost of capital?
(A) 10.62%
(B) 12.65%
(C) 8.62%
(D) 9.99%
Answer:
(A) 10.62%

Question 160.
Calculate the marginal cost of capital (MCC) for the firm if it raises ₹ 750 million for a new project. The firm plans to have a target debt to value ratio of 20%. The beta of new project is 1.4375. The debt capital will be raised through term loans. It will carry interest rate of 9.5% for the first ₹ 100 million and 10% for the next ₹ 50 million. The current market price per equity share is ₹ 60. The prevailing default risk free interest rate on 10-year GOI treasury bonds is 5.5%. The average market risk premium is 8%.
(A) 14.86%
(B) 12.22%
(C) 13.04%
(D) 15.95%
Answer:
(A) 14.86%

ABC Ltd. needs additional finance of 750 million with debt to value ratio of 80%.
This finance will be raised as follows:

Question 161.
Black & White Ltd. has a cost of equity of 11% and a pre-tax cost of debt of 8.5%. The firm’s target weighted average cost of capital is 9% and its tax rate is 35%. What is the firm’s target debt-equity ratio?
(A) 0.6203
(B) 0.5756
(C) 0.5572
(D) 0.5113
Answer:
(B) 0.5756
K_d = 8.5 (1 – 0.35) = 5.525%.
WACC is 9 thus total of product must be 900 (9 × 100).
Let the % of debt in total capital be ‘x’
Thus, % of equity must be 100 – x

Question 162.
You are analyzing the beta for A Ltd. and have divided the Company into four broad business groups, with market values and betas for each group.

A Ltd. had ₹ 50 billion in debt outstanding. Market risk premium is 8.5. Treasury bond rate is 7.5%. Estimate cost of equity for A Ltd.
(A) 16.85%
(B) 20.25%
(C) 18.34%
(D) 24.50%
Answer:
(C) 18.34%

Question 163.
R&G Company has equity share capital (2,00,000 shares) ₹ 20,00,000. The company’s share has current market price of ₹ 27.75 per share. The expected dividend per share in next year is 50% of the 2019 EPS. The EPS of the last 4 years is as follows. The past trends are expected to continue.

Calculate the cost of ordinary equity.
(A) 17%
(B) 24%
(C) 16%
(D) 21%
Answer:
(A) 17%
It can be observed from the data of EPS that it is growing by 12% per annum. Hence, growth rate can be taken 12%.

D₁ = 2.773 × 50%
= 1.3865
It is given in problem that the expected divided per share in next year is 50% of the 2019 EPS.

Question 164.
The Company can issue 14% new debenture. The company’s debenture is currently selling at ₹ 98. Face value of debenture is ₹ 100. The company’s marginal tax rate is 50%. What is cost of debenture (i) based on book value; (ii) based on market value?
(A) 14% & 14.28%
(B) 6% & 6.12%
(C) 7% & 7.14%
(D) 8% & 8.16%
Answer:
(C) 7% & 7.14%
Cost of debt based on book value Cost of debt based on marker value:

Question 165.
Ganesh Ltd. requires amount of ₹ 5,00,000 to finance a project. It was decided to raise such finance by issue of debentures. Cost of debt is 10% (before tax) up to ₹ 2,00,000 and 13% (before tax) beyond that. Tax rate is 30%. What is the average marginal cost of capital of new finance of ₹ 5,00,000?
(A) 7.37%
(B) 11.5%
(C) 8.26%
(D) 9.12%
Answer:
(C) 8.26%

Question 166.
C Ltd. wishes to raise additional finance of ₹ 20 lakhs for meeting its investment plans. C Ltd. has ? 4,00,000 in the form of retained earnings available for investment purposes. Further details are:
Debt equity ratio 25:75. Earnings per share, ₹ 12. Dividend payout 50% of earnings. Expected growth rate = 10%. Market price per share = ₹ 60. Tax rate = 30%. Shareholder’s personal tax rate=20%. Cost of debt at the rate of 10% (before tax) up to ₹ 2,00,000 and 13% (before tax) beyond that.
WACC = ?
(A) 16.27%
(B) 17.52%
(C) 15.89%
(D) 14.42%
Answr:
(A) 16.27%
Determination of Pattern for raising the additional finance:
Equity = 20,00,000 × 75% = 15,00,000
Debt = 20,00,000 × 25% = 5,00,000
Cost of equity – Dividend Growth Method:

Calculate cost of debt as per hint of previous question and then calculate WACC as shown below.

WACC = 1626.50 = 16.27%

Question 167.
Gentry Motor, Inc. a producer of turbine generator, is in this situation:
EBIT = ₹ 40 lakhs
Tax rate = 35%
Debt outstanding = ₹ 20 lakhs
K_d = 10%
K_e = 15%
Shares outstanding = 6,00,000 shares
What is the Gentry’s earning per share (EPS) and market price per share (P_o)?
(A) EPS = 3.98; Market Price = ₹ 27.76
(B) EPS = 4; Market Price = ₹ 26.67
(C) EPS = 4.72; Market Price = ₹ 30.44
(D) EPS = 3; Market Price = ₹ 25
Answer:
(B) EPS = 4; Market Price = ₹ 26.67

Question 168.
Following are the extracts from financial statements of Zipway Ltd.:

Market price per equity share is 15 and per debenture is 95. Calculate WACC on market value basis.
(A) 12.25%
(B) 10.88%
(C) 14.56%
(D) 13.74%
Answer:
(B) 10.88%

Question 169.
Following data is available for H Ltd.:

All the earnings are distributed after payment of all taxes. Assume that the income-tax rate on the company is 35% and the additional tax on the amount
of dividend distributed is 20%. Calculate
WACC.
(A) 6.524%
(B) 8.125%
(C) 10,897%
(D) 12.346%
Answer:
(A) 6.524%

Question 170.
Following data is available for Z Ltd.:

All the earnings are distributed after payment of all taxes. Assume that the income-tax rate on the company is 35% and the additional tax on the amount of dividend distributed is 20%. Calculate WACC.
(A) 8.214%
(B) 10.582%
(C) 9.299%
(D) 12.324%
Answer:
(C) 9.299%

Question 171.
A company is planning to raise ₹ 20,00,000 additional long-term funds to finance its additional capital budget of the current year. The debentures of the company to be sold on a 14% net yield basis to the company, and equity shares to be sold at ₹ 50 per share net to the company, are the alternatives being considered. The company expects to pay dividend of ₹ 5 per share at the end of coming year. The required rate of return is 16%. Determine the growth rate of the company which market is anticipating.
(A) 3%
(B) 4%
(C) 5%
(D) 6%
Answer:
(D) 6%

Question 172.
The required rate of return is 16%. Management is anticipating 8% growth rate. The company expects to pay dividend of ₹ 5 per share at the end of coming year. On this basis, at what price should the equity share be sold by the company?
(A) 60.2
(B) 62.5
(C) 64.3
(D) 61.7
Answer:
(B) 62.5

Question 173.
Following information has been extracted from the books of Unique Fashioners Ltd.:

Applicable tax rate is 40%. Company has been paying 20% dividend per annum constantly. Compute average cost of capital on book value weights if the current market price of a share of ₹ 100 is ₹ 160.
(A) 14.87%
(B) 12.73%
(C) 9.24%
(D) 10.42%
Answer:
(D) 10.42%

Question 174.
Workout the marginal cost of capital from the following data:

(A) 13.83%
(B) 12.83%
(C) 14.83%
(D) 15.83%
Answer:
(A) 13.83%

Question 175.
Workout the marginal cost of capital from the following data:

(A) 15.20%
(B) 14.20%
(C) 16.20%
(D) 18.20%
Answer:
(C) 16.20%

Question 176.
Workout overall cost of capital after raising of additional finance from the following data:

(A) 12.91%
(B) 15.91%
(C) 17.91%
(D) 14.91%
Answer:
(D) 14.91%

Question 177.
The prevailing risk-free rate of interest in 10-Year GOl Treasury Bonds is 5.5%. The average risk premium is 8%. The beta of the company is 1.1875. The beta of project is 1.4375. The debt can be raised at an interest rate of 9.5% up to first 10 Crore and @ 10% for the rest of the amount. Tax rate is 35%. You are required to calculate cost of equity and debt.

Answer:
(A)
Cost of equity – CAPM Method:
K=R_f+P(R_m-R_f)
= 5.5 + 1.4375 × 8 = 17%
The company now wants to take up a project requiring an investment of 75 Crore with a debt-equity ratio of 2096. Hence, debt portion will be 15 Crore and equity portion will be 60 Crore.

Question 178.
The prevailing risk-free rate of interest in 10-Year GOI Treasury Bonds is 5.5%. The average risk premium is 8%. The beta of the company is 1.1875. The company now wants to take up a project requiring an investment of ₹ 75 Crore with a debt- equity ratio of 20%. The beta of this project is 1.4375. The debt can be raised at an interest rate of 9.5% up to first ₹ 10 Crore and @10% for the rest of the amount. Find out the marginal cost of capital, if the tax rate is 35%.
(A) 13.38 percent
(B) 14.86 percent
(C) 15.34 percent
(D) 12.12 percent
Answer:
(B) 14.86 percent
Cost of equity – CAPM Method:
K=R_f+P(R_m-R_f)
= 5.5 + 1.4375 × 8 = 17%
The company now wants to take up a project requiring an investment of 75 Crore with a debt-equity ratio of 2096. Hence, debt portion will be 15 Crore and equity portion will be 60 Crore.

Question 179.
Cost of equity and preference capital of Priyanka Ltd. are 17.43% & 10%. Before tax cost of debentures and term loan are 12% & 15%. Applicable tax rate is 30%. Ratio of weight in capital structure is 5:2:3:5 of Equity, Preference, Debt & Term Loan respectively. Priyanka Ltd. has following investment opportunities that are typical average risk projects for the company:
Projects — Rate of Return
A — 17.4%
B — 16.0%
C — 14.2%
D — 13.7%
E — 10.7%
Which projects should Priyanka Ltd. accept?
(A) A, B, C but not E & D
(B) A, B, D but not C & E
(C) A, B, C & D but not E
(D) B, C, D & E but not A
Answer:
(C) A, B, C & D but not E
Overall cost of capital of Priyanka Ltd. is 12.32% so it can accept the project that yield above it. Thus, it accept Project A, B, C & D but not E.

Question 180.
Sushant Ltd. gives following details:
₹ in lakhs
Equity shares — 50
10% Preference shares — 10
14% Debentures — 20
Equity shares are sold at ₹ 25 per share. Company will pay next year a dividend of ₹ 4 per share which will grow at 8% forever.
Company raises an additional ₹ 20 lakhs by issuing 15% debentures. This would increase the expected dividend to ₹ 5 per share with no change in growth rate, but the price will fall to ₹ 20 per share. What is the impact of raising additional finance?
(A) WACC fall from 17.8% to 15.2%
(B) WACC increases from 17.8% to 20.65%
(C) WACC fall from 21.65% to 18.7%
(D) WACC increases from 18.7% to 21.56%
Answer:
(D) WACC increases from 18.7% to 21.56%

Question 181.
Capital structure of S Ltd. is as under:
6% Debentures (₹ 100 each) — 2,00,000
7% Debentures (₹ 100 each) — 1,00,000
8% Pref. shares (₹ 100 each) — 2,00,000
Equity shares (₹ 100 each) — 4,00,000
Retained earnings — 1,00,000
EPS of the company in the past many years has been ₹ 15. Equity shares are sold at ₹ 125. Tax rate is 30% and shareholders’ personal tax liability is 10%. Find out WACC of the company on book value basis.
(A) 8.81 percent
(B) 10.92 percent
(C) 4.79 percent
(D) 15.33 percent
Answer:
(A) 8.81 percent

Question 182.
Shares of Alfa Ltd. are currently being quoted at a price earnings ratio of 7.5 times. Retained earnings of the company being 37.5% is ₹ 6 per share. Compute company’s cost of equity if investors’ expected annual growth rate is 8%.
(A) 15%
(B) 16%
(C) 17%
(D) 20%
Answer:
(C) 17%

Question 183.
If expected rate of return on equity shares is 1596, dividend just paid is ₹ 10 per share and expected annual growth rate is 10% then at what price share will trade in market at the end of year one?
(A) ₹ 222 per share
(B) ₹ 44.4 per share
(C) ₹ 111 per share
(D) ₹ 200 per share
Answer:
(A) ₹ 222 per share

Question 184.
A Ltd. gives following details:
Equity Capital [ 10 each] — ₹ 2,50,000
Market value per share — ₹ 20
Dividend per share — ₹ 4
Debentures [ 100] — ₹ 1,00,000
Market value per debenture — 125
Interest rate — 10%
Tax rate — 50%
WACC based on market value = ?
(A) 12.20%
(B) 16.80%
(C) 18.40%
(D) 13.60%
Answer:
(B) 16.80%

Question 185.
B Ltd. gives following details:
Equity Capital [₹ 10 each] — ₹ 5,00,000
Market value per share — ₹ 12
Dividend per share — ₹ 2.88
Debentures [₹ 100] — ₹ 2,50,000
Market value per debenture 80
Interest rate — 8%
Tax rate — 50%
WACC based on market value = ?
(A) 19.25%
(B) 22.65%
(C) 16.45%
(D) 18.75%
Answer:
(A) 19.25%

Question 186.
P Ltd. is considering various proposals costing less than 30 lakhs. Company does not want to disturb its present capital structure of 30% debt and 70% of equity.
Other details:

Assuming the tax rate is 50%, compute the cost of capital of two projects ABC and XYZ whose fund requirements are 8 lakhs and 21 lakhs respectively
(A) ABC = 13.10%; XYZ = 11.12%
(B) ABC = 11.30%; XYZ = 12.15%
(C) ABC = 12.03%; XYZ = 15.12%
(D) ABC = 10.30%; XYZ = 13.15%
Answer:
(B) ABC = 11.30%; XYZ = 12.15%

Question 187.
Krishna Ltd. is currently financed with 10,00,000, 7% bonds and 20,00,000 of common stock. The stock has a beta of 1.5, risk-free rate of return 4% and market risk premium 3.5%. The marginal tax rate for a company of this size is 35%. Compute the WACC of Krishna Ltd. on book value basis?
(A) 6.87%
(B) 8.76%
(C) 9.34%
(D) 7.68%
Answer:
(D) 7.68%

Question 188.
Apoorva Ltd. has assets of ₹ 32,00,000 that have been financed as follows:
Equity shares (100 each) — 18,00,000
General reserve — 3,60,000
Debt — 10,40,000
For the year ended the company’s total profits before interest and taxes were 6,23,000. Company pays 8% interest on borrowed capital and the tax bracket is 40%. The market value of the equity is 150 per share. From the above, determine the weighted average cost of capital using market values as weights.
(A) 9.01%
(B) 10%
(C) 12%
(D) 11.23%
Answer:
(B) 10%

Question 189.
ABC Ltd. has 10,000 shares 7 each, 10,000,12% debentures and 20,000 as short term loan @ 10%. Tax rate for the company is 30%. Assume the cost of equity capital as 20%. Calculate WACC at book value.
(A) 16.24%
(B) 17.48%
(C) 14.26%
(D) 13.27%
Answer:
(A) 16.24%

Question 190.
Mohan Ltd. has paid increasing dividends of ₹ 0.54, ₹ 0.58, ₹ 0.62, ₹ 0.67 and ₹ 0.72 a share over the past 4 years, respectively. Firm estimates that future increases in their dividends will be comparable to the arithmetic average growth rate over these past 4 years. The stock is currently selling for? 38.60 a share. The risk-free rate is 4% and the market risk premium is 8%. What is your best estimate of cost of equity if their beta is 1.22?
(A) 14.06%
(B) 9.46%
(C) 12.97%
(D) 11.61%
Answer:
(D) 11.61%
(0.58 – 0.54)/0.54 × 100 = 7.41%
(0.62 – 0.58)/0.58 × 100 = 6.90%
(0.67 – 0.62)/0.62 × 100 = 8.07%
(0.72 – 0.67)/0.67 × 100 = 7.46%
Average rate of growth = 7.46%
K_e as per dividend growth model = (0.77/38.60) + 0.0746 = 0.0945 ie. 9.45%
K_e as per CAPM Model = 4 + (1.22 × 8)= 13.76%
Best estimate of cost of equity = (9.45 + 13.76)/2 = 11.61%

Question 191.
What is the overall (weighted average) cost of capital in the following situation?
The firm has 12 million in long-term debt, 2 million in preferred stock, and 8 million in common equity- all at market values. The before-tax cost for debt, preferred stock, and common equity forms of capital are 8%, 9%, and 15%, respectively. Assume 40% tax rate.
(A) 6.40%
(B) 6.54%
(C) 8.89%
(D) 10.90%
Answer:
(C) 8.89%

Question 192.
Equity dividend expected at the end of year is 20 per share whereas anticipated dividend growth rate is 5%. Corporate tax is 30%. Market price per share is 200. What is cost of equity?
(A) 10.5%
(B) 15%
(C) 12.9%
(D) 14%
Answer:
(B) 15%

Question 193.
Dividend per share is 15 and sell it for 120 and floatation cost is 3, then component cost of preferred stock will be – ………………
(A) 12.82 times
(B) 0.l282tirnes
(C) 0.1282
(D) 12.82
Answer:
(C) 0.1282

Question 194.
If future return on common stock is 19% and rate on T-bill is 11% then current market risk premium will be:
(A) 30%
(B) 8%
(C) 0.8
(D) None of the above
Answer:
(B) 8%

Question 195.
Stock selling price is 65, expected dividend is 20 and cost of common stock is 42% then expected growth rate will be –
(A) 11.23%
(B) 0.01123
(C) 11.23 times
(D) 11.23
Answer:
(A) 11.23%

Question 196.
Dividend per share is 18 and sell it for 122 and floatation cost is 4, then component cost of preferred stock will be:
(A) 1525%
(B) 1525 times
(C) 0.01525
(D) 15.52%
Answer:
(A) 1525%

Question 197.
Stock selling price is 45, an expected dividend is 10 per share and an expected growth rate is 8%, then cost of common stock would be:
(A) 3.02
(B) 32%
(C) 3022%
(D) 32.30%
Answer:
(C) 3022%

Question 198.
Interest rate is 12% and tax savings (1-0.40) then after-tax component cost of debt will be –
(A) 0.072
(B) 7.2 times
(C) 17.14
(D) 17.14times
Answer:
(A) 0.072

Question 199.
Cost of common stock is 14% and bond risk premium is 9% then bond yield will be –
(A) 0.0156
(B) 0.05
(C) 0.23
(D) 0.6428
Answer:
(B) 0.05

Question 200.
Cost of common stock is 16% and bond yield is 9% then bond risk premium would be-
(A) 0.07
(B) 7.0
(C) 0.0178
(D) 0.25
Answer:
(A) 0.07

Fund Flow Statement – Corporate and Management Accounting MCQ

March 31, 2023March 31, 2023 by Prasanna

Going through the Fund Flow Statement – Corporate and Management Accounting CS Executive MCQ Questions with Answers you can quickly revise the concepts.

Fund Flow Statement – Corporate and Management Accounting MCQs

Question 1.
Uses of funds include a (an):
(A) Decrease in cash
(B) Increase in any liability
(C) Increase in fixed assets
(D) Tax refund
Answer:
(C) Increase in fixed assets

Question 2.
Which of the following would be included in a fund flow statement?
(A) Depreciation charges
(B) Dividends
(C) Goodwill written off
(D) Patent amortization
Answer:
(B) Dividends

Question 3.
An examination of the sources and uses of funds statement is part of:
(A) A forecasting technique
(B) A funds flow analysis
(C) A ratio analysis
(D) Calculations for preparing the balance sheet
Answer:
(B) A funds flow analysis

Question 4.
Which of the following is NOT a fund outflow for the firm?
(A) Depreciation
(B) Dividends
(C) Interest payments
(D) Taxes
Answer:
(A) Depreciation

Question 5.
Which of the following would be considered a use of funds?
(A) A decrease in accounts receivable
(B) A decrease in cash
(C) An increase in account payable
(D) An increase in cash
Answer:
(B) A decrease in cash

Question 6.
For a profitable firm, total sources of funds will always …….. total uses of funds.
(A) be equal to
(B) be greater than
(C) be less than
(D) have no consistent relationship to
Answer:
(A) be equal to

Question 7.
“Fund flow statement reveals the effects of transactions involving movement of cash”. This statement is
(A) Correct
(B) Incorrect
(C) Partially Correct
(D) Irrelevant
Answer:
(A) Correct

Question 8.
A cash flow statement is like an income statement.
(A) I agree
(B) I disagree
(C) I cannot say
(D) The statement is ambiguous
Answer:
(B) I disagree

Question 9.
Funds flow statement and cash flow statement are one and the same.
(A) True
(B) False
(C) Partly true
(D) The statement is irrelevant
Answer:
(B) False

Question 10.
Increase in the amount of bills payable results in ……..
(A) Increase in funds
(B) Decrease in funds
(C) No change in funds
(D) I cannot say
Answer:
(A) Increase in funds

Question 11.
Funds from operations is equal to
(A) Net profit plus increase in outstanding expenses
(B) Net profit plus increase in debtors
(C) Net profit plus increase in stock
(D) None of the above
Answer:
(A) Net profit plus increase in outstanding expenses

Question 12.
Non-cash transactions
(A) Form part of fund flow statement
(B) Do not form part of fund flow statement
(C) May or may not form part of fund flow statement
(D) I cannot say whether they are part of fund flow statement
Answer:
(B) Do not form part of fund flow statement

Question 13.
Fund flow statement shows the position of business as on …………. of the business period.
(A) Opening date
(B) Closing date
(C) Between opening and closing date
(D) None of the above
Answer:
(C) Between opening and closing date

Question 14.
A decrease in current liability
(A) Increases working capital
(B) Decreases working capital
(C) No effect on working capital
(D) Decreases the current ratio
Answer:
(A) Increases working capital

Question 15.
The difference between fixed assets and current assets is known as
(A) Fixed assets turnover ratio
(B) Net working capital.
(C) Gross working capital
(D) Hidden working capital
Answer:
(C) Gross working capital

Question 16.
Amortization of preliminary expenses is:
(A) Sources of funds
(B) Application funds
(C) Reduces funds from operation
(D) Neither source nor application of funds
Answer:
(D) Neither source nor application of funds

Question 17.
Cash or credit sales …….. the working capital when sales are made on profit.
(A) Increases
(B) Decreases
(C) Will not affect
(D) Cannot say anything without monetary figures
Answer:
(A) Increases

Question 18.
Cash or credit sales ………. the working capital when sales are made on loss.
(A) Increases
(B) Decreases
(C) Will not affect
(D) Cannot say anything without monetary figures
Answer:
(B) Decreases

Question 19.
Collection from debtors will the working capital
(A) Increases
(B) Decreases
(C) Will not affect
(D) Cannot say anything without monetary figures
Answer:
(C) Will not affect

Question 20.
Sale of old plant & machinery the working capital.
(A) Increases
(B) Decreases
(C) Will not affect
(D) Cannot say anything without monetary figures
Answer:
(A) Increases

Question 21.
Increase in fixed assets in cash …………. the working capital.
(A) Increases
(B) Decreases
(C) Will not affect
(D) Cannot say anything without monetary figures
Answer:
(B) Decreases

Question 22.
Net profit+Non cash expenditure =
(A) Funds from operation
(B) Use of funds
(C) Application of funds
(D) EBIT
Answer:
(A) Funds from operation

Question 23.
Income tax paid
(A) Will increase working capital
(B) Will decrease working capital
(C) Application of funds
(D) (B) & (C)
Answer:
(C) Application of funds

Question 24.
Find flow statement can very well be equated with
(A) Profit & loss account
(B) Balance sheet
(C) Statement of retained earnings
(D) None of the above
Answer:
(D) None of the above

Question 25.
Increase in amount of debtors results in:
(A) Decrease in cash
(B) Increase in cash
(C) No change in cash
(D) Decrease in working capital
Answer:
(C) No change in cash

Question 26.
All of the following are true regarding the purpose of the statement of fund flows except
(A) It is for evaluating management decisions
(B) It is for predicting future cash flows
(C) It is for reporting net income
(D) It is for determining the company’s ability to pay dividends to share-holders and interest and principle to creditors
Answer:
(C) It is for reporting net income

Question 27.
Working capital is defined as:
(A) Total assets less intangible assets
(B) Current assets less liabilities
(C) Current assets divided by current liabilities
(D) Current assets less current liabilities
Answer:
(D) Current assets less current liabilities

Question 28.
Which of the following transactions is NOT reflected in a fund flow statement?
(A) Sale of treasury stock
(B) Declaration of a stock dividend
(C) Purchase of foreign subsidiary with cash
(D) Issuance of convertible bonds
Answer:
(B) Declaration of a stock dividend

Question 29.
Conversion of convertible debenture into shares is
(A) Source of funds
(B) Application of funds
(C) Increase or decrease in working capital
(D) Neither source nor application of funds.
Answer:
(D) Neither source nor application of funds.

Question 30.
Which of the following is internal source of funds?
(A) Funds generated from operation
(B) Sales of non-current assets
(C) Existing surplus working capital
(D) All of the above
Answer:
(D) All of the above

Question 31.
……. is prepared to know the financial position of a company on a particular date.
(A) Balance sheet
(B) Trund flow statement
(C) Profit & loss account
(D) None of the above
Answer:
(A) Balance sheet

Question 32.
How many balance sheet(s) are required to prepare fund Row statement?
(A) 1
(B) 2
(C) 2 or more
(D) No balance sheet is required
Answer:
(C) 2 or more

Question 33.
…… is also called statement of sources & application of funds and statement of changes in financial position.
(A) Balance sheet
(B) Position statement
(C) Income statement
(D) Fund flow statement
Answer:
(D) Fund flow statement

Question 34.
Which of the following can be shown on the “sources side” in fund flow statement?
(A) Funds lost in operation
(B) Net increase in working capital
(C) Net decrease in working capital
(D) Redemption of debentures
Answer:
(C) Net decrease in working capital

Question 35.
Which of the following can be shown on the “Application side” in fund flow statement?
(A) Funds lost in operation .
(B) Non-trading payments
(C) Net increase in working capital
(D) All of the above
Answer:
(D) All of the above

Question 36.
While solving problem on fund flow statement, if no adjustment appears for the “provision for taxation” & “proposed dividend” then
(A) Difference between opening balance and closing balance is transferred to profit & loss adjustment account
(B) Difference between opening balance and closing balance is treated as amount paid during the year.
(C) Amount equal to opening balance will be treated as amount paid and amount equal to closing balance is treated as provision make.
(D) Any of the above
Answer:
(C) Amount equal to opening balance will be treated as amount paid and amount equal to closing balance is treated as provision make.

Question 37.
If pre-acquisition dividend is received it is credited to
(A) Profit and loss adjustment account
(B) Capital work-in-progress account
(C) Investment account
(D) Capital account
Answer:
(C) Investment account

Question 38.
If preference shares are redeemed at premium then amount debited to ………… preference share capital
(A) Face value of shares multiplied by number of shares
(B) Sale price per share multiplied by number of shares
(C) Face value minus premium of shares multiplied by number of shares
(D) None of the above
Answer:
(A) Face value of shares multiplied by number of shares

Question 39.
Any decrease in asset item represents
(A) Uses of funds
(B) Sources of funds
(C) Both (A) and (B)
(D) None of the above
Answer:
(B) Sources of funds

Question 40.
An increase in account receivables would be a ……
(A) Sources of funds
(B) Reuse of funds
(C) Application of funds
(D) Both (A) and (C)
Answer:
(A) Sources of funds

Question 41.
When closing balance of profit & loss account is starting point, which of the following item will not be added to calculate funds from operation?
(A) Pre-acquisition dividend received
(B) Provision for depreciation
(C) Interim dividend
(D) Interest on debenture
Answer:
(A) Pre-acquisition dividend received

Question 42.
Which of the following transactions would NOT be reported on a statement of fund flows?
(A) Purchase of equipment
(B) Retirement of debt prior to maturity
(C) Exchange of common shares for equipment
(D) Sale of treasury shares at a price in excess of cost
Answer:
(C) Exchange of common shares for equipment

Question 43.
Following are the balance sheet changes:
₹ 5,005 decrease in accounts receivable ₹ 12,012 decrease in notes payable ₹ 10,001 increase in accounts payable ₹ 8,950 decrease in net fixed assets A “use” of funds would be:
(A) ₹ 8,950 decrease in net fixed assets
(B) ₹ 5,005 decrease in accounts receivable
(C) ₹ 10,001 increase in accounts payable
(D) ₹ 12,012 decrease in notes payable
Answer:
(D) ₹ 12,012 decrease in notes payable

Sources of funds		Application/use of funds
Decrease in current assets Increase in current liability		Increase in current assets Decrease in current liability
Decrease in fixed assets		Increase in fixed assets

Question 44.
Which of the following transaction shows the source of funds?
(A) ₹ 9,850 increase in inventories
(B) ₹ 5,005 decrease in accounts receivable
(C) ₹ 7,000 increase in cash
(D) ₹ 12,012 decrease in notes payable.
Answer:
(B) ₹ 5,005 decrease in accounts receivable

Sources of funds		Application/use of funds
Decrease in current assets Increase in current liability		Increase in current assets Decrease in current liability
Decrease in fixed assets		Increase in fixed assets

Question 45.
Use the following information to calculate net fund flow:
Cash sales ₹ 1,00,000; cash from account receivable payments ₹ 2,00,000; cash dividends received ₹ 3,000; dividends paid ₹ 4,000; rent paid ₹ 5,000; and amortization expense ₹ 6,000.
(A) ₹ 2,98,000
(B) ₹ 2,94,000
(C) ₹ 3,04,000
(D) ₹ 2,90,000
Answer:
(B) ₹ 2,94,000

Question 46.
The assets of another company were purchased for ₹ 60,000 payable in fully paid shares of the company. These assets consisted of stock ₹ 22,000 and machinery ₹ 18,000 and goodwill 20,000. In addition, sundry purchases of plant were made totalling ₹ 5,650. How much amount will be shown in fund flow statement?
(A) ₹ 22,000 + 5,650 will be shown on the application side.
(B) ₹ 22,000 + 5,650 will be shown on the sources side.
(C) ₹ 22,000 will be shown on the sources side and ₹ 5,650 on the application side.
(D) ₹ 22,000 will be shown on the application side and ₹ 5,650 on the sources side.
Answer:
(C) ₹ 22,000 will be shown on the sources side and ₹ 5,650 on the application side.

Question 47.
In the books of X Ltd. balance of machinery account at the beginning of the year was ₹ 82,000 and at the end was 90,000. Balance in accumulated depreciation was ₹ 40,000 at the beginning and ₹ 44,000 at the end. New machinery was purchased for ₹ 30,000 but old Machinery costing ₹ 15,000 was sold for ₹ 5,000, accumulated depreciation was ₹ 8,000. How much amount will be shown in fund flow statement?
(A) ₹ 5,000 on the sources side and ₹ 37,000 on the application side.
(B) ₹ 5,000 on the sources side and ₹ 30,000 on the application side.
(C) ₹ 5,000 on the sources side and ₹ 25,000 on the application side.
(D) ₹ 30,000 on the sources side and ₹ 5,000 on the application side.
Answer:
(B) ₹ 5,000 on the sources side and ₹ 30,000 on the application side.
₹ 5,000 received from sale of machinery is source and ₹ 30,000 purchased is application.

Question 48.
In the books of Y Ltd. balance of share capital account at the beginning of the year was 12,50,000 and at the end was 3,00,000. During the year 12% dividend was paid in cash. How it will be disclosed in fund flow statement?
(A) ₹ 30,000 will be shown on the application side as dividend paid.
(B) ₹ 36,000 will be shown on the application side as dividend paid.
(C) ₹ 36,000 will be shown on the application side as dividend paid and ₹ 50,000 will be shown on the sources side as issue of share capital.
(D) ₹ 30,000 will be shown on the application side as dividend paid and ₹ 50,000 will be shown on the sources side as issue of share capital.
Answer:
(D) ₹ 30,000 will be shown on the application side as dividend paid and ₹ 50,000 will be shown on the sources side as issue of share capital.

Question 49.
In the books of N Ltd. balance of 5% debenture at the beginning of the year was ₹ 1,00,000 and at the end was 80,000. At the end of the year ₹ 20,000, 5% debentures were redeemed by purchase from open market @ ₹ 96. Ignoring other transaction net fund flow from transaction relating to debenture = ?
(A) Net outflow 25,000
(B) Net outflow 24,200
(C) Net outflow 20,000
(D) Net outflow 19,200
Answer:
(B) Net outflow 24,200
Redemption amount = 20,000 × 96% = 19,200 + 5,000 (interest) = 24,200.

Question 50.
In the books of N Ltd. balance of profit and loss account at the beginning of the year was ₹ 20,450 and at the end was ₹ 33,450. Additional information:
– During the year the company paid an interim dividend of ₹ 10,000 and directors have recommended a final dividend of ₹ 15,000.
– The net profit for the year (after providing for depreciation ₹ 40,000 writing off preliminary expenses ₹ 7,200 and making provision for taxation ₹ 32,000) amounted to ₹ 38,000.
– Profit on sale of fixed assets ₹ 2,000 Funds from operation = ?
(A) ₹ 1,53,200
(B) ₹ 1,15,200
(C) ₹ 1,17,200
(D) ₹ 1,05,200
Answer:
(B) ₹ 1,15,200

Question 51.
Income statement of Z Ltd. for the year ended was as follows:

(A) ₹ 91,050
(B) ₹ 1,09,050
(C) ₹ 97,450
(D) ₹ 99,300
Answer:
(B) ₹ 1,09,050
Calculation of funds from operation by shortcut method:

Important Note: While calculating funds from operation through shortcut method following logic is applied.
Cost of goods sold and operating expenses incurred in cash have to be deducted from sales. If income statement starts from gross profit then only operating expense.s incurred in cash has to deducted.
Alternatively, If you start from net profit then add the following items to get funds from operation:

Non-operating expenses
Non-cash items like depreciation or goodwill written off
Financial expense like lifterest.

Deduct following items :

Non-operating income like profit on sale of assets or investment.

Question 52.
Income statement of Z Ltd. for the year ended was as follows:

Funds from operation = ?
(A) ₹ 1,15,200
(B) ₹ 8,64,000
(C) ₹ 4,80,000
(D) ₹ 3,52,000
Answer:
(D) ₹ 3,52,000
Funds from operation = 40,32,000 – 31,68,000 – 3,84,000 – 1,28,000 = 3,52,000.

Question 53.
From the following data find out increase/decrease in working capital.

(A) Decrease in working capital ₹ 4,000.
(B) Decrease in working capital ₹ 5,000.
(C) Increase in working capital ₹ 5,000.
(D) Increase in working capital ₹ 4,000.
Answer:
(A) Decrease in working capital ₹ 4,000.

Decrease in Working Capital = 1,21.000 – 1,17,000 = 4,000

Question 54.
Income statement of Z Ltd. for the year ended was as follows:

Funds from operation = ?
(A) ₹ 3,696
(B) ₹ 3,051
(C) ₹ 3,942
(D) ₹ 4,317
Answer:
(B) ₹ 3,051
Funds from operation = 20,301 – 15,984 – 375 – 891 = 3,051

Question 55.
Income statement of Z Ltd. for the year ended was as follows:

Funds from operation = ?
(A) ₹ 5,98,500
(B) ₹ 5,43,500
(C) ₹ 9,16,000
(D) ₹ 5,41,500
Answer:
(A) ₹ 5,98,500
Funds from operation = 46,37,200 – 37,21,200 – 3,17,500 = 5,98,500

Question 56.
Income statement of P Ltd. for the year ended was as follows:

(A) ₹ 9,29,300
(B) ₹ 9,84,300
(C) ₹ 10,05,300
(D) ₹ 10,12,800
Use the following information to answer next 2 questions.
In the books of YT Ltd. balance in provision for taxation account on 1.4.2015 was ₹ 70,000 and 31.3.2016 was 1,00,000. On the same dates balance in Advance Tax Accounts was ₹ 80,000 & ₹ 1,05,000 respectively.
During the year 2015-2016, income tax for the year 2014-2015 was assessed at ₹ 76,000. A cheque of ₹ 4,000 was received along with the assessment order towards refund of income tax paid.
Answer:
(A) ₹ 9,29,300
Funds from operation = 36,40,200 – 27,10,700 = 9,29,300

Question 57.
Amount to be debited to Profit & Loss Adjustment A/c at the time preparing the fund flow statement = ?
(A) ₹ 1,06,000
(B) ₹ 1,05,000
(C) ₹ 76,000
(D) ₹ 1,01,000
Answer:
(A) ₹ 1,06,000

Question 58.
Amount of income tax paid during the year = ?
(A) ₹ 1,06,000
(B) ₹ 1,05,000
(C) ₹ 76,000
(D) ₹ 1,01,000
Use the following information to answer next 2 questions.
The capital structure of JCPL Ltd. is as

Additional Information:
Tax rate 30%
Equity share dividend paid 15%.
Market price per equity share ₹ 20.
Answer:
(B) ₹ 1,05,000

Question 59.
Dividend cover for preference shares = ?
(A) 1.1
(B) 1.65
(C) 3.46
(D) 3.64
Answer:
(D) 3.64

Question 60.
Dividend cover for equity shares = ?
(A) 1.1
(B) 1.65
(C) 3.46
(D) 3.64
Answer:
(A) 1.1

Question 61.
Earning Yield = ?
(A) 8.25%
(B) 8.52%
(C) 7.25%
(D) 7.52%
Answer:
(A) 8.25%

Question 62.
Price Earnings Ratio =
(A) 12.12
(B) 11.11
(C) 12.11
(D) 11.12
Answer:
(A) 12.12

Question 63.
Net fund flow = ?
(A) 12,000
(B) 1,02,000
(C) 2,22,000
(D) 1,52,000
Answer:
(B) 1,02,000

Question 64.
Beginning balance of Accounts Receivable was ₹ 45,000, and the ending balance was ₹ 48,000. Sales were ₹ 4,30,000. What was the net fund inflow from customer receipts?
(A) 4,27,000
(B) 4,33,000
(C) 4,75,000
(D) 3,82,000
Answer:
(A) 4,27,000
4,30,000 + 45,000 – 48,000 = 4,27,000

Question 65.
The opening balance of the Equipment account was ₹ 45,000; the ending balance was ₹ 54,000. The opening balance of Accumulated Amortization account was ₹ 24,000; the ending balance was ₹ 33,000. Equipment with a cost of ₹ 6,000 and accumulated amortization of ₹ 5,000 was sold for ₹ 1,200 cash. What was the amount of amortization expense for the year?
(A) ₹ 14,000
(B) ₹ 9,000
(C) ₹ 23,000
(D) ₹ 5,000
Answer:
(A) ₹ 14,000

Question 66.
Cash dividends of ₹ 42,500 were declared. The beginning and ending balance of the cash dividends payable account was ₹ 10,000 and ₹ 12,500, respectively. On the statement of fund flow, the cash dividend would be shown:
(A) 45,000
(B) 52,500
(C) 55,000
(D) 40,000
Answer:
(D) 40,000

Question 67.
Dec 2014: The net profit of A Ltd. amounted to ₹ 40,000.
Provision of income-tax — 33,000
Depreciation — 6,500
Preliminary expenses written off — 1,500
Bad debts — 500
Loss on sale of furniture — 2,500
Discount allowed to customers — 1,900
Discount received from trade creditors — 1,400
After considering the above information, find out the funds from operation —
(A) ₹ 84,000
(B) ₹ 83,500
(C) ₹ 85,400
(D) ₹ 85,900
Answer:
(A) ₹ 84,000

Question 68.
Dec 2014: Which of the following results into decrease in working capital —
(A) Goods sold on credit
(B) Decrease in current liabilities
(C) Decrease in current assets
(D) Increase in current assets
Answer:
(C) Decrease in current assets

Question 69.
June 2015: Which of the following does not result into inflow of funds in case of fund flow statement –
(A) Issue of equity share capital
(B) Premium received on issue of shares / debentures
(C) Sale of investments
(D) Cash received from debtors
Answer:
(D) Cash received from debtors

Question 70.
June 2015: Which of the following statement is not true –
(A) Fund flow statement is also known as statement of sources and application of funds
(B) Fund is equal to current assets minus current liabilities
(C) There is an inverse relationship be-tween current assets and working capital
(D) Fund flow statement is prepared on accrual basis
Answer:
(D) Fund flow statement is prepared on accrual basis

Question 71.
Dec 2015: Match the following:
List-I ——- List-II
p. Increase in funds — 1. Application of funds
Q. Goods purchased on credit — 2. Drain in working Capital
R. Commission — 3. Source of funds outstanding
S. Net loss — 4. No flow of funds
Select the correct answer from the options given below —

Answer:
(D)

Question 72.
Dec 2015:
Assertion (A):
Funds are not related to working capital.
Reason (R):
Flow of funds takes place whenever there is change in the funds.
Select the correct answer from the following —
(A) Both A and R are true and R is the correct explanation of A
(B) Both A and R are true, but R is not the correct explanation of A
(C) A is true, but R is false
(D) A is false, but R is true
Answer:
(D) A is false, but R is true

Question 73.
June 2016: If provision for taxation is treated as a current liability, then payment of tax is —
(A) An application of funds
(B) A source of funds
(C) No flow of funds
(D) None of the above
Answer:
(C) No flow of funds

Question 74.
June 2016: A company reported current year profit as ₹ 70,000 after the following adjustments:
Loss on sale of equipment :₹ 9,000
Premium on debenture redemption :₹ 1,500
Tax provision : ₹ 22,000
Dividend income : ₹ 4,000
Profit on revaluation of fixed asset : ₹ 2,500
The amount of fund from operations will be —
(A) ₹ 96,000
(B) ₹ 93,000
(C) ₹ 78,000
(D) ₹ 61,000
Answer:
(A) ₹ 96,000

Question 75.
June 2016: Which one of the following is a non-current item —
(A) Securities premium
(B) Outstanding wages
(C) Trade payables
(D) Bank balance
Answer:
(A) Securities premium

Question 76.
June 2016: Balance of investment account is ₹ 20,000 on 31st March, 2014 and ₹ 30,000 on 31st March, 2015. As per additional information, dividend received ₹ 3,000 includes ₹ 1,000 from pre-acquisition profit which is credited to investment account. The amount of investment purchased/sold during the year 2014-2015 is —
(A) ₹ 13,000 purchased
(B) ₹ 11,000 purchased
(C) ₹ 9,000 purchased
(D) ₹ 9,000 sold
Answer:
(B) ₹ 11,000 purchased

Question 77.
Dec 2016: A company reported current year profit of ₹ 12,00,000 which includes the following:
Profit on sale of equipment : ₹ 2,00,000
Share issue expenses : ₹ 1,50,000
Dividend income : ₹ 80,000
Tax : ₹ 90,000
Profit on revaluation of : ₹ 2,50,000 fixed assets
The amount of funds from operation will be —
(A) ₹ 11,90,000
(B) ₹ 8,20,000
(C) ₹ 10,70,000
(D) ₹ 10,50,000
Note: MCQ is wrongly drafted. For further clarification see the hints.

Question 78.
June 2017: Which of the following is not applied in Management Accounting?
(A) Comparative Statement
(B) Managerial reporting
(C) Double entry system
(D) Operation research
Answer:
(D) Operation research

Question 79.
June 2017: Management Accounting aims at:
(A) Presentation of accounting information
(B) Assist in long-term planning
(C) Assist in day to day activities
(D) All of the above
Answer:
(D) All of the above

Question 80.
June 2017:
Assertion (A):
In management accounting firm decisions on pricing policy can be taken.
Reason (R):
As marginal cost per unit is constant from period to period within a short span of time.
Codes:
(A) A is true, but R is false
(B) A is false, but R is true
(C) Both A & R are true and R is the correct explanation of A
(D) Both A & R are true but R is not the correct explanation of A
Answer:
(C) Both A & R are true and R is the correct explanation of A

Question 81.
June 2017: Net Profit + Non-Cash expenses = ………
(A) Gross Profit
(B) Profit after tax
(C) Fund from operation
(D) Distributable profit
Answer:
(C) Fund from operation

Question 82.
June 2017: Match the following:
List I — List II
(a) Cash flow statements — (1) Inflow of fund
(b) Inflow of cash — (2) Short-term financial planning
(c) Investment (maturity period 3 months) — (3) Financing activity
(d) Payment of dividend — (4) Cash equivalent

Answer:
(B)

Question 83.
June 2017: Match the following:
List I — List II
(a) Increase in fund — (1) Application of funds
(b) Goods purchased on credit — (2) Drain in working capital
(c) Commission outstanding — (3) Source of fund
(d) Net loss — (4) No flow of funds

Answer:
(C)

Question 84.
Dec2017: Management accounting and cost accounting are to each other.
(A) Complementary
(B) Supplementary
(C) Opposite
(D) Independent
Answer:
(B) Supplementary

Question 85.
Dec 2017: Management accounting works on output of:
(A) Financial accounting
(B) Cost Accounting
(C) Statistics
(D) All of the above
Answer:
(D) All of the above

Question 86.
Dec 2017: In Management Accounting, analysis of accounting data are carried out with the help of:
(A) Tools and Techniques
(B) Statutory Forms
(C) Auditors
(D) Legal provisions
Answer:
(A) Tools and Techniques

Question 87.
Dec 2017 & Dec 2018: In fund flow statement, flow of fund will occur when a transaction is happened between:
(A) Current Assets & Current Liabilities
(B) Non-current Assets & Non-current Liabilities
(C) Current Assets & Non-current Assets
(D) All of the above
Answer:
(C) Current Assets & Non-current Assets

Question 88.
Dec 2017: While analyzing the opening and closing balance sheet of a company the following are observed:
Total increase in current assets ₹ 20,000 Total increase in current liabilities ₹ 80,000 Total decrease in current assets ₹ 1,30,000 Total decrease in current liabilities ₹ 30,000 Net change in working capital is:
(A) No change in working capital
(B) Net increase in working capital ₹ 1,60,000
(C) Net decrease in working capital ₹ 1,60,000
(D) None of the above
Answer:
(B) Net increase in working capital ₹ 1,60,000

Question 89.
June 2018:
Assertion (A):
Management accounting can be defined as processing and presenting of accounting, cost accounting and other economic data.
Reason (R):
It is analysis of all the transactions, financial and physical, to enable effective comparison to be made between the forecasts and actual performance.
Select the correct answer from the options given below:
(A) Both A and R are true and R is the correct explanation of A
(B) Both A and R are true but R is not the correct explanation of A
(C) A is true but R is false
(D) A is false but R is true
Answer:
(B) Both A and R are true but R is not the correct explanation of A

Question 90.
June 2018: Which of the following does not come under the scope of management accounting?
(A) Formation, installation and operation of accounting, cost accounting, tax accounting and information system.
(B) The compilation and preservation of vital data for management planning.
(C) Providing and installing an effective system of feedback.
(D) Publishing the financial statements and get them audited by statutory auditor
Answer:
(D) Publishing the financial statements and get them audited by statutory auditor

Question 91.
June 2019: Which of the following statement is correct?
(A) A decrease in current liability during the year results in increase in working capital.
(B) Only non cash expenses are added to net profit to find out funds from operations.
(C) Conversion of debentures into equity shares appears in fund flow statement.
(D) Collection of debtors is a source of fund.
Answer:
(A) A decrease in current liability during the year results in increase in working capital.

Question 92.
June 2019: Depreciation provided during the year: Furniture ₹ 15,000, Building ₹ 14,000. The statement of P & L for the year:
Opening balance ₹ 38,500 Add: Profit for the year ₹ 40,300, Less: Goodwill written off ₹ 15,000, Closing balance ₹ 63,800.
What will be the amount of funds from operation?
(A) ₹ 69,300
(B) ₹ 54,300
(C) ₹ 78,800
(D) ₹ 25,300
Answer:
(A) ₹ 69,300
63,800 + 15,000 + 15,000 + 14,000 – 38,500 = 69,300

Introduction to Management – Strategic Management MCQ

March 30, 2023March 30, 2023 by Prasanna

Introduction to Management – CS Executive Financial and Strategic Management MCQ Questions with Answers you can quickly revise the concepts.

Introduction to Management – Strategic Management MCQ

Question 1.
The word “management” derives its origin from a word –
(A) monos
(B) konos
(C) nomos
(D) lomos
Answer:
(C) nomos

Question 2.
Who stated that management means, “Getting things done through and with people”?
(A) James
(B) Koontz and O’Donnell
(C) Haimann
(D) Henry Fayol
Answer:
(B) Koontz and O’Donnell

Question 3.
According to whom “to manage is to forecast, and to plan, to organize to command, to coordinate and to command”?
(A) Haimann
(B) Koontz and O’Donnell
(C) Hick
(D) Henry Fayol
Answer:
(D) Henry Fayol

Question 4.
The word “management” derives its origin from ………….word nomos.
(A) Roman
(B) Italian
(C) Greek
(D) Egyptian
Answer:
(C) Greek

Question 5.
“Management is the function of getting things done through people and directing the efforts of individuals towards a common objective”. It is observed by –
(A) Haimann
(B) Koontz and O’Donnell
(C) Hick
(D) Henry Fayol
Answer:
(A) Haimann

Question 6.
Hick defines management as “the process of getting things done by the and through the
(A) People, Manager
(B) People, employee
(C) People, people
(D) Manager, People
Answer:
(C) People, people

Question 7.
Koontz & d O’Donnell state that management means, “Getting things done
(A) Through people
(B) With people
(C) Through or with people
(D) Through and with people
Answer:
(D) Through and with people

Question 8.
According to Henry Fayol, “to manage is …………. , to organize to command, to coordinate and to command”
(A) To forecast
(B) To plan
(C) To budget and to control
(D) To forecast and to plan
Answer:
(D) To forecast and to plan

Question 9.
Haimann observes that, “management is the function of …………
(A) Getting things done through people and directing the efforts of individuals towards a common objective.
(B) Forecast, and to plan, to organize to command.
(C) The process of getting things done by the people and through the people.
(D) Thinking and utilizing human, material & financial resources in such a manner that would result in best combination.
Answer:
(A) Getting things done through people and directing the efforts of individuals towards a common objective.

Question 10.
Which of the following is importance of management?
(1) It arranges the factors of production, assembles and organizes the resources.
(2) It helps the country to keep balanced approached in social order.
(3) It utilizes all the physical & human resources productively.
(4) It helps the employees to get stronger trade union.
(5) It gets maximum results through minimum input by proper planning and by using minimum input.
Select the correct answer from the options given below –
(A) (4), (2) & (1)
(B) (3), (2) & (5)
(C) (1) & (3)
(D) (3), (1) & (5)
Answer:
(D) (3), (1) & (5)

Question 11.
Importance of management:
(A) It enables the organization to survive in changing environment.
(B) It improves standard of living and increases the profit which is beneficial to business and society.
(C) Management fills up various positions with right persons, having right skills, training and qualification.
(D) All of the above
Answer:
(D) All of the above

Question 12.
Which of the following statement is false?
(A) Management can then well be described as a science albeit a variable one if compared with the nature of exact physical sciences.
(B) We can have the same kind of experimentation in management as is possible in natural sciences.
(C) Management has now a theoretical base with a number of principles relating to coordination, organization, decision-making and so on.
(D) Management is a vital function concerned with all aspects of the working of an enterprise.
Answer:
(B) We can have the same kind of experimentation in management as is possible in natural sciences.

Question 13.
Management is science.
(A) Exact
(B) An inexact
(C) Pure
(D) Perfect
Answer:
(B) An inexact

Question 14.
Management is science.
(A) Developed
(B) Developing
(C) Well settled
(D) Exact
Answer:
(B) Developing

Question 15.
Management is -………..
(A) Science
(B) Art
(C) Both science and art
(D) History
Answer:
(C) Both science and art

Question 16.
Management is an art. Which of the following statement does not support that management is art?
(A) The process of management involves the use of know how and skills.
(B) The process of management is directed towards the accomplishment of concrete results.
(C) The process of management is directed towards the accomplishment of concrete results.
(D) Management is personalized in the 5 sense that every manager has his own approach to problems.
(D) It deals with complex human phenomena about which knowledge is still limited
Answer:
(D) It deals with complex human phenomena about which knowledge is still limited

Question 17.
Management qualifies all tests of a profession except
(A) Dominance of service motive
(B) Restricted entry
(C) Systematic body of knowledge
(D) Use of knowhow and skills
Answer:
(D) Use of knowhow and skills

Question 18.
Who is popularly known as the ‘founder of modem management theory?
(A) Frederick Taylor
(B) Luther Gulick
(C) Newmann and Summer
(D) Henry Fayol
Answer:
(D) Henry Fayol

Question 19.
Henry Fayol, the ……………. industrialist and popularly known as the ‘founder of modem management theory’,
(A) German
(B) French
(C) Greek
(D) American
Answer:
(B) French

Question 20.
Planning is deciding in advance – S
(A) What is to be done
(B) How is to be done
(C) When it is to be done
(D) All of above
Answer:
(D) All of above

Question 21.
Which of the following is the preparatory step for actions and helps in bridging the gap between the present and the future?
(A) Controlling
(B) Directing
(C) Motivating
(D) Planning
Answer:
(D) Planning

Question 22.
Which of the following comprises determination and laying down of objectives, policies, procedures, rules, programmes, budget, and strategies?
(A) Motivating process
(B) Planning process
(C) Controlling process
(D) Directing process
Answer:
(B) Planning process

Question 23.
Which of the following is fundamental function of management and all other functions of management are greatly influenced by it?
(A) Controlling
(B) Directing
(C) Motivating
(D) Planning
Answer:
(D) Planning

Question 24.
……………. is concerned with both the “orderly” assemblage of human and material resources as well as the process of development of a structure of formally identified and distinguished tasks, roles and relationships that may be attributable to the various members so that they may effectively work as a group.
(A) Planning
(B) Directing
(C) Organizing
(D) Staffing
Answer:
(C) Organizing

Question 25.
Organizing as a function of management involves –
(A) Determination of activities of the enterprise keeping in view its objectives.
(B) Laying down of suitable selection and placement procedures
(C) Guiding, counselling and instructing the subordinates about the proper way of doing the job
(D) Measurement of actual performance against the standard and recording deviations
Answer:
(A) Determination of activities of the enterprise keeping in view its objectives.

Question 26.
Division of work among people and coordination of their efforts to achieve specific objectives are the fundamental aspects of –
(A) Forecasting
(B) Organization
(C) Motivation
(D) None of above
Answer:
(B) Organization

Question 27.
provides the organization with adequate number of competent and qualified personnel at all levels in the enterprise.
(A) Motivation process
(B) Directing process
(C) Forecasting process
(D) HR process/staffing
Answer:
(D) HR process/staffing

Question 28.
Which of the following function of management starts issuing orders and instructions to subordinates and ends with getting things done by satisfaction of various need of subordinates?
(A) Motivation
(B) Directing
(C) Forecasting
(D) Staffing
Answer:
(B) Directing

Question 29.
Directing the subordinates involves –
(A) Delegation of authority and fixing of responsibility for carrying out the assigned duties.
(B) Guiding, counselling and instructing the subordinates about the proper way of doing the job.
(C) Co-ordination of activities and authority relations throughout the organization.
(D) Classification of activities into convenient groups for the purpose of division.
Answer:
(B) Guiding, counselling and instructing the subordinates about the proper way of doing the job.

Question 30.
Control –
(A) Is closely related to the planning job of the manager.
(B) Should not be viewed merely as a postmortem of past achievements and performance.
(C) Should suggest corrective measures so that negative deviations may not re-occur in future.
(D) All of the above
Answer:
(D) All of the above

Question 31.
Maintaining discipline and rewarding effective performance is part of function of management.
(A) Planning
(B) Directing
(C) Forecasting
(D) Staffing
Answer:
(B) Directing

Question 32.
Which of the following consists in knowing the extent to which actions are in conformity with plans adopted and instructions issued so that errors and deviations are promptly reported and analyzed, and suitable corrective actions taken?
(A) Forecast
(B) Planning
(C) Controlling
(D) Decision
Answer:
(C) Controlling

Question 33.
Controlling involves:
(A) Harmonizing the work relations and efforts at all levels for common purpose.
(B) Innovation because the manager not only adjusts his organization according to future conditions but also attempts to effect changes in these conditions.
(C) Measurement of actual performance against the standard and recording deviations.
(D) Issuing orders and instructions.
Answer:
(C) Measurement of actual performance against the standard and recording deviations.

Question 34.
Which of the following is not one of the five elements of management?
(A) Planning
(B) Co-ordination
(C) Centralization
(D) Command
Answer:
(C) Centralization

Question 35.
Control is closely related to the ………… job of the manager.
(A) Planning
(B) Discipline
(C) Order
(D) Motivation
Answer:
(A) Planning

Question 36.
Who is popularly known as the father of ‘scientific management?
(A) Luther Gulick
(B) Newmann
(C) Henry Fayol
(D) Frederick Taylor
Answer:
(D) Frederick Taylor

Question 37.
The scientific management movement early in the ……… century was hailed as a “second industrial revolution”.
(A) Seventieth
(B) Eightieth
(C) Ninetieth
(D) Twentieth
Answer:
(D) Twentieth

Question 38.
Who is popularly known as the father of ‘modem management theory’
(A) Luther Gulick
(B) Newmann
(C) Henry Fayol
(D) Frederick Taylor
Answer:
(C) Henry Fayol

Question 39.
How many principles of management have been suggested by the Henry Fayol?
(A) Ten
(B) Twelve
(C) Fourteen
(D) Fifteen
Answer:
(C) Fourteen

Question 40.
Out of principles of management suggested by the Henry Fayol, ‘Discipline’ is necessary to ensure obedience and respect for –
(A) Juniors’
(B) Society
(C) Superiors
(D) Older people in society
Answer:
(C) Superiors

Question 41.
“Unity of Command” means –
(A) An employee shall give orders to one junior only.
(B) An employee shall receive orders from one senior only.
(C) An employee shall receive orders from as much senior as possible.
(D) An employee shall have one plan for every action.
Answer:
(B) An employee shall receive orders from one senior only.

Question 42.
“Unity of Direction” means –
(A) An employee shall receive orders from one senior only.
(B) A group of activities with common objectives shall have one head but different plans
(C) A group of activities with common objectives shall have one head and one plan
(D) More than one manager should supervise the employees.
Answer:
(C) A group of activities with common objectives shall have one head and one plan

Question 43.
A group of activities with common objectives shall have one head and one plan. This principle is known as –
(A) Scalar chain
(B) Unity of discipline
(C) Unity of command
(D) Unity of direction
Answer:
(D) Unity of direction

Question 44.
An employee shall receive orders from one senior only. This principle is known as –
(A) Scalar chain
(B) Unity of discipline
(C) Unity of command
(D) Unity of direction
Answer:
(C) Unity of command

Question 45.
As per Henry Fayol principle of “Subordination”-
(A) Organizational interest should be subordinate to individual interest.
(B) Individual interest should be subordinate to general interest.
(C) Individual should not have any sort of interest at all.
(D) Organizational interest should be subordinate to national interest.
Answer:
(B) Individual interest should be subordinate to general interest.

Question 46.
Which of the following principle of Henry Fayol refers to superior-subordinate relations?
(A) Esprit de corps
(B) Stability of tenure of personnel
(C) Division of work
(D) Scalar chain
Answer:
(D) Scalar chain

Question 47.
Fayol’s functions of management include:
(A) Planning, designating, completing, cooperating
(B) Punishing, commanding, organizing, coordinating, controlling
(C) Preparing, commanding, operating, consulting, controlling
(D) Planning, commanding, organizing, coordinating, controlling
Answer:
(D) Planning, commanding, organizing, coordinating, controlling

Question 48.
Which of the following principle of Henry Fayol emphasizes the need for teamwork?
(A) Esprit de corps
(B) Stability of tenure of personnel
(C) Division of work
(D) Scalar chain
Answer:
(A) Esprit de corps

Question 49.
Management is system.
(A) Social
(B) Close
(C) An open
(D) None of the above
Answer:
(C) An open

Question 50.
Scientific management is based on the assumption that –
(A) Observation would reveal the workers need to be multi-skilled.
(B) Workers can decide their own methods of performing tasks.
(C) The scientific observation of people at work would reveal the one best way to do the task.
(D) Workers would receive a set wage regardless of performance.
Answer:
(C) The scientific observation of people at work would reveal the one best way to do the task.

Question 51.
Administration is concerned with –
(A) Policy implementation
(B) Policy making
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(B) Policy making

Question 52.
Broadly speaking, administration is concerned with –
(A) Planning
(B) Organizing
(C) Motivating and controlling
(D) Planning and organizing
Answer:
(D) Planning and organizing

Question 53.
Administration is done by –
(A) Top level management
(B) Middle level management
(C) Lower level management
(D) None of above
Answer:
(A) Top level management

Question 54.
Board of directors of any company is normally concerned with –
(A) Management
(B) Administration
(C) Health of managers
(D) None of the above
Answer:
(B) Administration

Question 55.
Administration is a process of -………
(A) Laying down broad policies
(B) Objectives of the organization
(C) Either (A) or (B)
(D) Both (A) & (B)
Answer:
(D) Both (A) & (B)

Question 56.
It is also said that administration is ……….
(A) Lower level function
(B) Middle level function
(C) Top-level function
(D) None of the above
Answer:
(C) Top-level function

Question 57.
Management includes –
(A) Administrative management
(B) Operative management
(C) Either (A) or (B)
(D) Both (A) & (B)
1. An all-pervasive function
2. Fundamental function
Select the correct answer from the options given below –
(A) 2 only
(B) Neither 1 nor 2
(C) Both 1 and 2
(D) 1 only
Answer:
(D) 1 only

Question 58.
Administration can be viewed as:
(A) Less important than management
(B) The same thing as management
(C) Part of management
(D) Separate from management
Answer:
(C) Part of management

Question 59.
Decision-making skills are required at –
(A) Top level management
(B) Middle level of management
(C) All levels of management
(D) None of the above
Answer:
(C) All levels of management

Question 60.
Managers require a combination of technical competence, social and human skills and conceptual ability. Technical competence may be defined as:
(A) The ability to view the complexities of the operations of the organization as a whole, including environmental influences
(B) The ability to secure the effective use of human resources of the organization
(C) The ability to apply specific knowledge, methods and skills to discrete tasks
(D) None of the above
Answer:
(C) The ability to apply specific knowledge, methods and skills to discrete tasks

Question 61.
What type of approach is most frequently identified with Human Capital Management (HCM)?
(A) Controlling
(B) Interpersonal and technical
(C) Formalized, technical and manipulative
(D) Influencing and manipulative
Answer:
(C) Formalized, technical and manipulative

Question 62.
Which of the following is NOT a measure of a manager’s effectiveness?
(A) Absenteeism and sickness
(B) Level of Staff turnover
(C) Accidents at work
(D) Speed of promotion through the organization
Answer:
(D) Speed of promotion through the organization

Question 63.
How you will describe the planning as function of management?
given below –
(A) 2 only
(B) Neither 1 nor 2
(C) Both 1 and 2
(D) 1 only
Answer:
(C) Both 1 and 2

Question 64.
Planning is deciding in advance –
(I) What is to be done?
(II) How is to be done?
(III) When it is to be done?
(IV) Who has to do it?
Select the correct answer from the options
given below –
(A) (I)
(B) (I), (II),
(C) (I), (II), (III)
(D) (I), (II), (III), (IV)
Answer:
(D) (I), (II), (III), (IV)

Question 65.
Identify the best definition of planning.
(A) An integrated process, in which plans are formulated, carried out and controlled.
(B) Devising ways of achieving the objectives of an organization.
(C) The core activity of planners and planning departments.
(D) Setting an organization’s objectives and the means of reaching them.
Answer:
(D) Setting an organization’s objectives and the means of reaching them.

Question 66.
Planning –
(A) Involves identification and classification of activities of the enterprise
(B) Involves choosing the proper course of action from among alternatives
(C) Is based upon individual incentives rather than group incentives
(D) Give employees fresh insights into their own personalities and it can also help them understand why others sometimes respond as they do.
Answer:
(B) Involves choosing the proper course of action from among alternatives

Question 67.
Which qualities should a person possess to succeed in planning?
(I) Reflective thinking
(II) Pondering
(III) Imagination
(IV) Farsightedness
(V) Reflecting
Select the correct answer from the options given below –
(A) (I), (III) & (V)
(B) (IV), (III) & (II)
(C) (II),(III),(I)&(V)
(D) (IV), (I) & (III)
Answer:
(D) (IV), (I) & (III)

Question 68.
Limitations of planning:
(A) Planning is a continuous function of management
(B) Since the future cannot be predicted with absolute accuracy, premising is always subject to a margin of error and guess-work which are reflected in various plans based on them.
(C) Planning is an all-pervasive and a primary function of management.
(D) Planning is the selecting and relating of facts and the making and using of assumptions regarding the future in the visualization and formulation of proposed activities believed necessary to achieve desired results.
Answer:
(B) Since the future cannot be predicted with absolute accuracy, premising is always subject to a margin of error and guess-work which are reflected in various plans based on them.

Question 69.
A statement defines the company’s business, its objectives and its approach to reach those objectives.
(A) Planning
(B) Mission
(C) Forecasting
(D) Policy
Answer:
(B) Mission

Question 70.
Planning process comprises determination and laying down of –
(i) Objectives
(ii) Policies
(iii) Procedures
(iv) Rules
(v) Remuneration
Select the correct answer from the options given below –
(A) (i), (ii), (iii), (v)
(B) (i), (ii), (iii), (iv)
(C) (i), (ii), (iv), (v)
(D) (i), (iii), (iv), (v)
Answer:
(B) (i), (ii), (iii), (iv)

Question 71.
The second step involved in planning process is the –
(A) Evaluation of alternatives
(B) Formulating derivative plans
(C) Establishment of planning premises
(D) Establishing objectives
Answer:
(C) Establishment of planning premises

Question 72.
Which of the following can be treated as internal planning premise?
(A) Politico-technological conditions
(B) Socio-economic conditions
(C) Sales forecast
(D) Technological changes
Answer:
(C) Sales forecast

Question 73.
Which of the following can be treated as external planning premise?
(A) Politico-technological conditions
(B) Marketing plans
(C) Sales forecast
(D) Strategic Plans
Answer:
(A) Politico-technological conditions

Question 74.
Identify the correct steps in planning.
I. Selecting a course of action
II. Determining alternative courses
III. Establishing objectives
IV. Formulating derivative plans
V. Evaluation of alternatives
VI. Establishment of planning premises
Select the correct answer from the options given below –
(A) III, VI, II, IV, I, V
(B) VI, III, II, V, I, IV
(C) III, IV, II, V, I, VI
(D) III, VI, II, V, I, IV
Answer:
(D) III, VI, II, V, I, IV

Question 75.
Identify correct steps in forecasting.
I. Analysis of deviations
II. Forecasting future course of business
III. Improving the existing forecasting procedure
IV. Identifying and developing the structure
Select the correct answer from the options given below –
(A) II, IV, I, III
(B) III, I, II, IV
(C) I, III, IV, II
(D) IV, II, I, III
Answer:
(D) IV, II, I, III

Question 76.
Statement 1:
Forecasting does not play any role in planning.
Statement 2:
Forecasts are based on postulations and assumptions and, as such, are subject to some amount of guess-work.
(A) Statement 1 and Statement 2 both are false.
(B) Statement 1 and Statement 2 both are true.
(C) Statement 1 is true but Statement 2 is false.
(D) Statement 2 is true but Statement 1 is false.
Answer:
(D) Statement 2 is true but Statement 1 is false.

Question 77.
Risk cannot be managed unless it is
(A) Assessed
(B) Identified
(C) Measured
(D) Evaluated
Answer:
(B) Identified

Question 78.
In decision making under different conditions, what is the difference between risk and uncertainty?
(A) Under risk, information is reliable; under uncertainty, it is not.
(B) Under risk, choices are clear and the chances of different outcomes can be measured; under uncertainty, neither applies
(C) Under risk, there is a well defined problem; under uncertainty, the definition is unclear.
(D) Under risk, probabilities can be measured; under uncertainty, they cannot
Answer:
(B) Under risk, choices are clear and the chances of different outcomes can be measured; under uncertainty, neither applies

Question 79.
Which of the following is not a principle of decision-making?
(A) Principle of definition
(B) Principle of evidence
(C) Principle of identity
(D) Principle of prudence
Answer:
(D) Principle of prudence

Question 80.
In case of decision making, “diagnosing the real problem implies”
(A) Analyzing the internal and external factors and discovering relations between them
(B) Knowing the gap between what exists and what is expected to happen, identifying the reasons for the gap
(C) Decentralizing routine matters so that top management can concentrate on vital and strategic decisions
(D) Actual selection of a course of action from among a number of alternatives
Answer:
(B) Knowing the gap between what exists and what is expected to happen, identifying the reasons for the gap

Question 81.
Identify correct steps in decision making.
I. Identifying the real problem
II. Discovery of alternatives
III. Analysis of available alternatives
IV. Selection of alternatives
V Communication of decision
Select the correct answer from the options given below –
(A) II, IV, I, III, V
(B) III, I, II, IV, V
(C) I, III, II, IV, V
(D) I, II, III, IV, V
Answer:
(D) I, II, III, IV, V

Question 82.
Which of the following is not related with ‘business plans?
(A) Largely enforced business goals
(B) The reasons why they are believed attainable
(C) The plan for reaching those goals
(D) Changes in perception and branding
Answer:
(D) Changes in perception and branding

Question 83.
Which of the following best expresses the difference between programmed and non-programmed decisions?
(A) Made by managers who prefer a thinking or technocratic style; made by managers who use judgment and follow intuition
(B) Have computer routines developed for them; are not computerized
(C) Handled with decision rules; decision rules cannot be developed
(D) Occur under certainty or risk; occur under uncertainty or ambiguity
Answer:
(C) Handled with decision rules; decision rules cannot be developed

Question 84.
Identify correct sequence/steps in organizing function of management.
(I) Delegation of authority and placing of responsibility.
(II) Identification and classification of activities of the enterprise consistent with its objectives.
(III) Making provision for effective coordination and establishment of definite lines of supervision.
(IV) Establishing superior subordinate relationship within the departments.
(V) Grouping various activities into workable units or departments.
Select the correct answer from the options given below –
(A) II, V, I, III & IV
(B) II, V, IV, I & III
(C) II, I, V, IV & III
(D) II, V, I, IV & III
Answer:
(D) II, V, I, IV & III

Question 85.
Which of the following is one of the steps in organizing function of management?
(A) Identification of opportunities and avoiding or mitigating losses.
(B) Grouping various activities into workable units or departments
(C) Structured approach in managing uncertainty related to a threat.
(D) Promote greater openness in decision making and improves communication
Answer:
(B) Grouping various activities into workable units or departments

Question 86.
Due to which function of management superior subordinate relationships are established?
(A) Planning
(B) Decision making
(C) Organizing
(D) Controlling
Answer:
(C) Organizing

Question 87.
The total activities of an individual industrial organization may be separated into major functions like production, purchasing, marketing, and financing, and each such function is further sub-divided into various jobs. This is called as –
(A) Developing relationships
(B) Determination of objectives
(C) Identification and grouping of activities
(D) Risk management
Answer:
(C) Identification and grouping of activities

Question 88.
Which of the following refers to the relationship between people based not on procedures but on personal attitudes, prejudices, likes and dislikes?
(A) Formal organization
(B) Informal organization
(C) Matrix organization
(D) Project organization
Answer:
(B) Informal organization

Question 89.
Authority may be described as the right of a manager to command –
(A) Superiors
(B) Subordinates
(C) Other manager
(D) All of above
Answer:
(B) Subordinates

Question 90.
It is that makes the managerial position real and vests in him the power to order his subordinates and secure necessary compliance.
(A) Authority
(B) Responsibility
(C) Accountability
(D) Duties & obligations
Answer:
(A) Authority

Question 91.
………….. is the obligation of a subordinate to carry out duties assigned.
(A) Authority
(B) Responsibility
(C) Delegation
(D) Power
Answer:
(B) Responsibility

Question 92.
Which of the following denotes answer ability for the accomplishment of the task assigned by the superior to his subordinate?
(A) Responsibility
(B) Accountability
(C) Power
(D) Authority
Answer:
(B) Accountability

Question 93.
Which of the following can be delegated?
(A) Power
(B) Responsibility
(C) Accountability
(D) Authority
Answer:
(D) Authority

Question 94.
Which of the following refers to capacity to influence the behaviour of others and secure obedience?
(A) Power
(B) Responsibility
(C) Accountability
(D) None of the above
Answer:
(A) Power

Question 95.
Responsibility is exacted while authority flows
(A) Downward; upward
(B) Upward; upward
(C) Upward; downward
(D) Downward; downward
Answer:
(C) Upward; downward

Question 96.
Arrange the process of delegation in proper from.
(1) Creation of accountability
(2) Allocation of duties
(3) Assignment of responsibility
(4) Delegation of authority
Select the correct answer from the options given below –
(A) (3), (4), (2), (1)
(B) (2), (3), (4), (1)
(C) (2), (4), (1), (3)
(D) (2), (4), (3), (1)
Answer:
(D) (2), (4), (3), (1)

Question 97.
“Principles of exception’ relating to delegation of authority requires that –
(A) When authority is delegated, responsibility steps in and is coextensive with authority.
(B) Whether specific or general, written or unwritten, delegation of authority must be very clear in terms of its contents, functional relations, scope and assignments.
(C) Problems involving unusual matters should be referred upward and decided by higher level executives.
(D) Specific written delegations help both the manager and the recipient of authority.
Answer:
(C) Problems involving unusual matters should be referred upward and decided by higher level executives.

Question 98.
Principle of “clarity of delegation” required that –
(A) Only problems involving unusual matters should be referred upward and decided by higher level executives.
(B) When authority is delegated, responsibility steps in and is coextensive with authority.
(C) Whether specific or general, written or unwritten, delegation of authority must be very clear in terms of its contents, functional relations, scope and assignments.
(D) If the manager is able to pass on obligation along with delegation of authority to the subordinates, the rule of single chain of command will be violated.
Answer:
(C) Whether specific or general, written or unwritten, delegation of authority must be very clear in terms of its contents, functional relations, scope and assignments.

Question 99.
As per scalar principal of delegation –
(A) The delegatee should also be given a clear idea about the tasks assigned, what is expected of the recipient in his own job and how his obligation fits into the general plan.
(B) Whenever authority is delegated, reponsibility steps in and is coextensive with authority.
(C) It is expected that the recipient of authority shall make proper use of it and make all the decisions falling within the scope of his authority.
(D) Subordinates must know who delegates authority to them and to whom matters beyond their own authority must be referred.
Answer:
(D) Subordinates must know who delegates authority to them and to whom matters beyond their own authority must be referred.

Question 100.
As per principle of unity of command of delegation –
(A) Subordinates must know who delegates authority to them and to whom matters beyond their own authority must be referred.
(B) In case of delegation, except for the inevitable instances of splintered authority, the right of discretion over a particular activity will flow from a single superior to a subordinate.
(C) Larger number of decisions and more important of them are made by those occupying higher positions in the organization.
(D) Delegation of authority is essential in as much as no organization is possible without delegation.
Answer:
(B) In case of delegation, except for the inevitable instances of splintered authority, the right of discretion over a particular activity will flow from a single superior to a subordinate.

Question 101.
Which of the following refers to the tendency to withhold a larger part of formal authority at higher echelons of management hierarchy?
(A) Delegation of authority
(B) Decentralization
(C) Centralization
(D) Exception principle
Answer:
(C) Centralization

Question 102.
…………. means partial dispersal of authority from central/top management to lower level.
(A) Delegation of authority
(B) Decentralization
(C) Centralization
(D) All of above
Answer:
(B) Decentralization

Question 103.
Where larger part of the authority is delegated down the levels of management so that decisions are made a near the source of action, such a tendency in the organization is described a –
(A) Delegation of authority
(B) Decentralization
(C) Centralization
(D) Principle of functional definition
Answer:
(B) Decentralization

Question 104.
The Principles of Unity of Command and Unity of Direction was given by –
(A) W.F. Taylor
(B) Lyndall Urwick
(C) Henry Fayol
(D) None of the above
Answer:
(C) Henry Fayol

Question 105.
‘Each individual should be given a particular job to do according to his ability and made responsible for that.’ Which step in the organizing process does the sentence relate to –
(A) Allotment of duties
(B) Identification and grouping of activities
(C) Developing relationships
(D) Integration of activities
Answer:
(A) Allotment of duties

Question 106.
The framework of interrelationships among individuals and departments that describe relationships of reporting and accountability is called –
(A) Chain of command
(B) Functional arrangement
(C) Specialization
(D) Organizational structure
Answer:
(D) Organizational structure

Question 107.
The formal channel that defines the lines of authority and accountability in a hierarchical organizational structure is called –
(A) Line positions
(B) Chain of command
(C) Staff positions
(D) Line and staff positions
Answer:
(B) Chain of command

Question 108.
Determining the number of people who are accountable to a single manager refers to –
(A) Chain of command
(B) Degree of centralization
(C) Span of control
(D) Degree of specialization
Answer:
(C) Span of control

Question 109.
“Span of management’ is often referred to as –
I. Span of control
II. Span of supervision
III. Span of authority
IV. Span of responsibility
Select the correct answer from the options given below –
(A) I
(B) I, II
(C) I, II, III
(D) I, II, III, IV
Answer:
(D) I, II, III, IV

Question 110.
Human Resource Management (HRM) is that part of management which is –
(A) Concerned with how people at work use the various resources available in organization.
(B) Concerned with people at work and with their relationship with an enterprise.
(C) Concerned with how manager effectively use the various resources available in organization.
(D) Concerned with how manager effectively control the people in organization.
Answer:
(B) Concerned with people at work and with their relationship with an enterprise.

Question 111.
Human Resource Management is often referred to as –
(A) Peoples Management
(B) Human Management
(C) Resource Management
(D) Personnel Management
Answer:
(D) Personnel Management

Question 112.
Blue-collar workers are
(A) Working on machines and engaged in loading, unloading
(B) Clerical employees
(C) Executive employees
(D) Contract employees
Answer:
(A) Working on machines and engaged in loading, unloading

Question 113.
White-collar workers are
(A) Working on machines and engaged in loading, unloading
(B) Clerical employees
(C) Executive employees
(D) Contract employees
Answer:
(B) Clerical employees

Question 114.
The process of searching for prospective employees and encouraging them to apply for the jobs in an organization is known as –
(A) Selection
(B) Placement
(C) Recruitment
(D) Manpower planning
Answer:
(C) Recruitment

Question 115.
…………. is the process by which candidates for employment are distinguished between those who are suitable and those who are not.
(A) Manpower planning
(B) Selection
(C) Recruitment
(D) Induction
Answer:
(B) Selection

Question 116.
Training is generally given to ……… in organization.
(A) Managers
(B) Middle and lower level people
(C) Executives
(D) None of the above
Answer:
(B) Middle and lower level people

Question 117.
Development process is taken for –
(A) Middle and lower level people
(B) Manager & executives
(C) Debtor & creditors
(D) Chairman & Directors
Answer:
(B) Manager & executives

Question 118.
Which of the following is /are benefits of training?
(A) It ensures long-term increase in the sales of the organization.
(B) It helps to reduce the time and cost required to reach the acceptable level of performance.
(C) It improves the leadership quality of employee.
(D) It gives employees fresh insights into their own personalities and it can also help them understand why others sometimes respond as they do.
Answer:
(B) It helps to reduce the time and cost required to reach the acceptable level of performance.

Question 119.
Direction starts with issuing …………. to subordinates and ends with getting things done by satisfaction of various needs of subordinates.
(A) Orders
(B) Request
(C) Instructions
(D) (A) or (C)
Answer:
(D) (A) or (C)

Question 120.
The most important characteristic of direction is –
(A) Guiding
(B) Procurement
(C) Planning
(D) Thinking
Answer:
(A) Guiding

Question 121.
Which of the following is essential of the directing function of management?
(A) Identifying the activities and grouping them into convenient classes
(B) Motivating the subordinates to direct their behaviour in a desired pattern.
(C) Revise the structure on the basis of assessment of personnel and other resources
(D) None of the above
Answer:
(B) Motivating the subordinates to direct their behaviour in a desired pattern.

Question 122.
Essential of the directing function –
(A) Delegation of authority to the executives of the departments
(B) Identifying and diagnosing the real problem
(C) Analysis and evaluation of available alternatives
(D) Maintaining discipline and rewarding effective performance.
Answer:
(D) Maintaining discipline and rewarding effective performance.

Question 123.
Which of the following is not principle of direction?
(A) Principle of unity of command
(B) Principle of evidence
(C) Principle of unity of direction
(D) Principle of democratic leadership
Answer:
(B) Principle of evidence

Question 124.
Which of the following is not principle of direction?
(A) Principle of democratic leadership
(B) Principle of navigational change
(C) Principle of unity of direction
(D) Principle of unity of command
Answer:
(B) Principle of navigational change

Question 125.
Which of the following statements about leadership is false?
(A) Leadership does not necessarily take place within a hierarchical structure of an organization
(B) Not every leader is a manager
(C) When people operate as leaders their role is always clearly established and defined
(D) All of the above
Answer:
(C) When people operate as leaders their role is always clearly established and defined

Question 126.
…………… is a voluntary collective action to serve a common purpose. Whereas is the orderly synchronization of group efforts so as to provide unity of action in the pursuit of common purpose.
(A) Motivation, Co-operation
(B) Co-ordination, Co-operation
(C) Co-operation, Direction
(D) Co-operation, Co-ordination
Answer:
(D) Co-operation, Co-ordination

Question 127.
Arrange the process of control in proper form.
(1) Follow through
(2) Establishment of goals and standards
(3) Corrective action
(4) Measurement of actual performance
Select the correct answer from the option given below –
(A) (4), (2), (3), (1)
(B) (2), (3), (4), (1)
(C) (4), (1), (3), (2)
(D) (2), (4), (3), (1)
Answer:
(D) (2), (4), (3), (1)

Question 128.
Which of the following is essential of good control system?
(A) Motivation
(B) Feedback
(C) Self control
(D) All of above
Answer:
(B) Feedback

Question 129.
Organizational control systems:
(A) Always penalize ethical decision making.
(B) Rely entirely on formal controls
(C) May help to embed corporate social responsiveness
(D) Are just another name for budgeting
Answer:
(C) May help to embed corporate social responsiveness

Question 130.
Consider the following statements: Planning involves –
1. Forecasting
2. Choice among alternative courses of action.
3. Wishful thinking
4. Decision only by production manager Of these statements:
(A) 1,2, 3 and 4 are correct
(B) 1, 3 and 4 are correct
(C) 1 and 2 are correct
(D) 2 and 3 are correct
Answer:
(C) 1 and 2 are correct

Question 131.
If a general manager asks the sales manager to recruit some salesman on his behalf, it is an instance of –
(A) Division of authority
(B) Decentralization of authority
(C) Delegation of authority
(D) Delegation of responsibility
Answer:
(C) Delegation of authority

Question 132.
While delegating, a superior delegates –
(A) Only authority
(B) Authority and responsibility
(C) Authority, responsibility and accountability
(D) Authority and responsibility but not accountability
Answer:
(A) Only authority

Question 133.
Directing function of management implies
1. Planning
2. Staffing
3. Leadership
4. Motivation
Choose the correct answer using the codes given below:
(A) 1 and 2
(B) 3 and 4
(C) 2 and 4
(D) 2, 3 and 4
Answer:
(B) 3 and 4

Question 134.
Consider the following statements:
1. Decentralization and delegation are closely interrelated.
2. Delegation and decentralization both are desirable.
3. Decentralization is not suitable for large organization.
4. Delegation is not possible in the case of small organizations.
Of these statements:
(A) 1 and 2 are correct
(B) 2 and 3 are correct
(C) 1 and 4 are correct
(D) 1, 3 and 4 are correct
Answer:
(A) 1 and 2 are correct

Question 135.
Delegation of authority is linked to
(A) Managerial planning
(B) Management coordination
(C) Management control
(D) Scientific management
Answer:
(C) Management control

Question 136.
Decentralization of an organization is commanded on account of which of the following advantages?
1. Reduced burden on top executives
2. Development of employees
3. Improvement of morale
4. Solves problems of coordination
Select the correct answer from the options given below.
(A) 2 and 3
(B) 1,2 and 4
(C) 1, 2 and 3
(D) 3 and 4
Answer:
(C) 1, 2 and 3

Question 137.
When management pays attention to more important areas and when the day to day routine problems are looked after by lower level management, it is known as –
(A) Management by objectives
(B) Management by Exception
(C) Participative Management
(D) Critical path method
Answer:
(B) Management by Exception

Question 138.
Staffing includes –
1. Training
2. Appraisal
3. Placement
4. Directing
(A) 1 and 3
(B) 2 and 3
(C) 1,2 and 3
(D) 1,2, 3 and 4
Answer:
(C) 1,2 and 3

Question 139.
Span of controls means that -……………
(A) An organization consists of various departments
(B) Each person’s authority is clearly defined.
(C) Every subordinate has one superior.
(D) A manager can supervise only a limited number of subordinates.
Answer:
(D) A manager can supervise only a limited number of subordinates.

Question 140.
Which one of the following statement is correct?
(A) Planning and controlling are essentially one and the same.
(B) Controlling is a part of the planning process.
(C) Controlling is a substitute for planning
(D) A control process is meaningless without preset goals.
Answer:
(D) A control process is meaningless without preset goals.

Question 141.
Assertion (A):
One can have ‘power’ without having ‘authority’.
Reason (R):
People with ‘authority’ have ‘power’, but ‘power’ does not always denote authority.
Select the correct answer from the options given below.
(A) (A) and (R) both are true, but (R) is not a correct explanation of (A)
(B) (A) and (R) both are true, (R) is the correct explanation of (A)
(C) (A) is true and (R) is false
(D) (A) is false and (R) is true
Answer:
(B) (A) and (R) both are true, (R) is the correct explanation of (A)

Question 142.
Assertion (A):
Today managers with leadership qualities and skill are preferred to managers with expertise alone.
Reason (R):
The major organizational changes now emphasize managing people and processes.
Select the correct answer from the options given below.
(A) Both A and R are true and R is correct explanation of A
(B) Both A and R are true but R is not a correct explanation of A
(C) A is true but R is false
(D) A is false and R is true
Answer:
(A) Both A and R are true and R is correct explanation of A

Question 143.
Match the following:
List-I —- List-II
(a) Forecasting — (i) Controlling
(b) Communication — (ii) Planning
(c) Selection of manager — (iii) Leading
(d) Established performance standard — Staffing
Select the correct answer from the options given below

Answer:
(D)

Question 144.
Assertion (A):
Co-ordination implies the avoidance of all splintering efforts.
Reason (R):
One of the four benefits of coordination is unity of direction.
Select the correct answer from the options given below.
(A) Both A and R are true and R is correct explanation of A
(B) Both A and R are true but R is not a correct explanation of A
(C) A is true but R is false
(D) A is false but R is true
Answer:
(B) Both A and R are true but R is not a correct explanation of A

Question 145.
A strategy can be defined as –
(A) A plan designed to reach long-term objectives.
(B) A specific, narrow plan designed to achieve tactical planning.
(C) Designed to be the end of tactical planning.
(D) None of the above
Answer:
(A) A plan designed to reach long-term objectives.

Question 146.
Assertion (A):
Management is the development of people. Reason (R):
Management is not the direction of things.
Select the correct answer from the options given below.
‘Plans’ are natural out growths of the planning process.
(A) (A) is true and (R) is false
(B) (A) is false and (R) is true
(C) Both (A) and (R) are true
(D) Both (A) and (R) are false
Answer:
(A) (A) is true and (R) is false

Question 147.
Assertion (A): ‘Plan’ is a theoretical concept but ‘planning’
has particular values.
Reason (R):
Plans’ are natural out growths of the planning process.
(A) (A) is true and (R) is false
(B) (A) is false and (R) is true
(C) Both (A) and (R) are true
(D) Both (A) and (R) are false
Answer:
(C) Both (A) and (R) are true

Question 148.
Scalar principle of organization implies that –
(A) All subordinates have only one supervisor
(B) Line of authority is defined clearly
(C) Manager can directly supervise only a limited number of persons
(D) The subordinates need not necessarily have a supervisor
Answer:
(B) Line of authority is defined clearly

Leverages – Financial Management MCQ

March 29, 2023March 29, 2023 by Prasanna

Leverages – CS Executive Financial and Strategic Management MCQ Questions with Answers you can quickly revise the concepts.

Leverages – Financial Management MCQ

Question 1.
The term Leverage in general refers to a ……………
(A) Relationship between fixed cost and profit.
(B) Relationship between sales and fixed cost.
(C) Relationship between two interrelated variables.
(D) Relationship between two unrelated variables.
Answer:
(C) Relationship between two interrelated variables.

Question 2.
In financial analysis Leverage represents the influence of one over some other related
(A) Non-financial variable; financial variable
(B) Financial variable; financial variable
(C) Financial variable; non-financial variable
(D) Variable relating to revenue; financial variable
Answer:
(B) Financial variable; financial variable

Question 3.
Which of the following is not commonly used measures of leverage in financial analysis?
(A) Operating Leverage
(B) Financial Leverage
(C) Combined Leverage
(D) Matrix Leverage
Answer:
(D) Matrix Leverage

Question 4.
………….. is the ratio of net operating income before fixed charges to net operating income after fixed charges.
(A) Financial Leverage
(B) Operating Leverage
(C) Operation Leverage
(D) Fiscal Leverage
Answer:
(B) Operating Leverage

Question 5.
Operating leverage indicates the tendency of operating probts (EBIT) to vary disproportionately with –
(A) Probt
(B) Fixed cost
(C) Sales
(D) EPS
Answer:
(C) Sales

Question 6.
Degree of ………… is the ratio of the percentage increase in earning per share (EPS) to the percentage increase in earnings before interest and taxes (EBIT).
(A) Operating Leverage
(B) Combined Leverage
(C) Working Capital Leverage
(D) Financial Leverage
Answer:
(D) Financial Leverage

Question 7.
There is no operating leverage if there is no …………
(A) Probt
(B) Sales
(C) Fixed cost
(D) EPS
Answer:
(C) Fixed cost

Question 8.
EBIT is usually the same thing as: …………
(A) Funds provided by operations
(B) Earnings before taxes
(C) Net income
(D) Operating probt
Answer:
(D) Operating probt

Question 9.
Which of the following is correct formula to calculate Operating Leverage?

Answer:
(A)

Question 10.
In the context of operating leverage break-even analysis, if selling price per unit rises and all other variables remain constant, the operating break-even point in units will:
(A) Fall
(B) Rise
(C) Stay the same
(D) Still be indeterminate until interest and preferred dividends paid are known
Answer:
(A) Fall

Question 11.
Which of the following is correct formula to calculate Operating Leverage?

Answer:
(C)

Question 12.
A firm’s degree of total leverage (DTL) is equal to its degree of operating leverage its degree of financial leverage (DFL).
(A) Plus
(B) Minus
(C) Divided by
(D) Multiplied by
Answer:
(D) Multiplied by

Question 13.
If operating leverage is 4, this means that –
(A) 4% change in sales will cause 1% change in EBIT.
(B) 1% change in sales will cause 4% change in EBIT.
(C) 1% change in sales will cause 4% change in EPS.
(D) 4% change in sales will cause 1% change in EPS.
Answer:
(B) 1% change in sales will cause 4% change in EBIT.

Question 14.
Degree of total leverage can applied in measuring change in –
(A) EBIT to a percentage change in sales
(B) EPS to a percentage change in EBIT
(C) EPS to a percentage change in sales
(D) Sales to a percentage change in EBIT
Answer:
(C) EPS to a percentage change in sales

Question 15.
If the fixed costs are high, the operating leverage will also be –
(A) Low
(B) High
(C) Zero
(D) Negative
Answer:
(B) High

Question 16.
Measure of business risk is –
(A) Operating leverage
(B) Financial leverage
(C) Combines leverage
(D) Working capital leverage
Answer:
(A) Operating leverage

Question 17.
The presence of fixed costs in the total cost structure of a firm results into –
(A) Financial Leverage
(B) Operating Leverage
(C) Super Leverage
(D) Progressive leverage
Answer:
(B) Operating Leverage

Question 18.
A high operating leverage indicates –
(A) Highly favourable situation as it consists of low fixed costs.
(B) Highly risky situation as it consists of large interest costs.
(C) Highly favourable situation as it consists of higher EPS.
(D) Highly risky situation as it consists of large fixed costs.
Answer:
(D) Highly risky situation as it consists of large fixed costs.

Question 19.
Match List-I with List-II and select the correct answer using the codes given below the lists
.
Answer:
(C)

Question 20.
Operating leverage depends on –
I. Contribution
II. Interest cost
III. Fixed cost
IV. Volume of sales
V. EPS
VI. Profit after tax (PAT)
Select correct answer from the options given below:
(A) I, IV, III
(B) II, V,VI
(C) I, III, V
(D) VI, I, III
Answer:
(A) I, IV, III

Question 21.
Which of the following is correct formula to calculate Financial Leverage?

Answer:
(D)

Question 22.
A firm has a DOL of 4.5 at Q units. What does this tell us about the firm?
(A) If sales rise by 4.5%, then EBIT will rise by 1%.
(B) If EBIT rises by 4.5%, then EPS will rise by 1%.
(C) If EBIT rises by 1 %, then EPS will rise by 4.5%.
(D) If sales rise by 1 %, then EBIT will rise by 4.5%
Answer:
(D) If sales rise by 1 %, then EBIT will rise by 4.5%

Question 23.
High operating leverage shows –
(A) Higher burden of fixed cost and high EBIT.
(B) Low burden of fixed cost and high EBIT.
(C) Higher burden of fixed cost and low EBIT.
(D) Low burden of fixed cost and low EBIT.
Answer:
(C) Higher burden of fixed cost and low EBIT.

Question 24.
Operating leverage is directly ………. to business risk.
(A) Proportional
(B) Not proportional
(C) Unrelated
(D) Not related
Answer:
(A) Proportional

Question 25.
A firm has a DFL of 5.5. What does this tell us about the firm?
(A) If sales rise by 5.5%, then EBIT will rise by 1%.
(B) If EBIT rises by 5.5%, then EPS will rise by 1%.
(C) If EBIT rises by 1 %, then EPS will rise by 5.5%.
(D) If sales rise by 1 %, then EBIT will rise by 5.5%.
Answer:
(C) If EBIT rises by 1 %, then EPS will rise by 5.5%.

Question 26.
More operating leverage leads to –
(A) Less financial risk
(B) More financial risk
(C) More business risk
(D) Less business risk
Answer:
(C) More business risk

Question 27.
Which of the following is correct formula to calculate Financial Leverage?

Answer:
(A)

Question 28.
Higher operating leverage is related to the use of additional
(A) Fixed costs
(B) Variable costs
(C) Debt financing
(D) Common equity financing
Answer:
(A) Fixed costs

Question 29.
Financial leverage indicates –
(A) The tendency of profit before tax (PBT) to vary disproportionately with sales.
(B) The tendency of sales to vary disproportionately with fixed cost.
(C) The tendency of profit after tax (PAT) to vary disproportionately with fixed cost.
(D) The tendency of profit before tax (PBT) to vary disproportionately with operating profit (EBIT).
Answer:
(D) The tendency of profit before tax (PBT) to vary disproportionately with operating profit (EBIT).

Question 30.
Lower financial leverage is related to the use of additional
(A) Fixed costs
(B) Variable costs
(C) Debt financing
(D) Common equity financing
Answer:
(D) Common equity financing

Question 31.
The operating leverage indicates the impact of changes in sales on –
(A) Operating income
(B) Operating cost
(C) Operating profit after tax
(D) Operating sales
Answer:
(A) Operating income

Question 32.
Match List-I with List-II and select the correct answer using the codes given below the lists:

Answer:
(C)

Question 33.
If financial leverage is 2.5, this means that -……….
(A) 2.5% change in EBIT will cause 1% change in EBT
(B) 1% change in sales will cause 2.5% change in EBT
(C) 2.5% change in sales will cause 1% change in EBT
(D) 1% change in EBIT will cause 2.5% change in EBT
Answer:
(D) 1% change in EBIT will cause 2.5% change in EBT

Question 34.
Which of the following is correct formula to calculate Financial Leverage (FL) when capital structure consists of preference shares and equity shares?

Answer:
(C)

Question 35.
Which of the following formulas represents a correct calculation of the degree of operating leverage?
(A) (Q-Q_be)/Q
(B) (EBIT)/(EBIT – FC)
(C) [Q(P – V) + FC]/[Q(P – V)]
(D) [Q(P – V)]/[Q(P – V) – FC]
Answer:
(D) [Q(P – V)]/[Q(P – V) – FC]

Question 36.
Where a company has large amount of fixed interest charges, the financial leverage will be
(A) High
(B) Low
(C) Negative
(D) Unreliable
Answer:
(A) High

Question 37.
Which of the following formulas represents the correct calculation of the degree of financial leverage?
(A) [NI + T + I]/[NI -I – PD/(1 – T)]
(B) EBIT/[EBIT -1 – PD/(1 – T)]
(C) EBIT/[NI -1 – PD/(1 – T)]
(D) All of the above are correct methods to calculate the degree of financial leverage (DFL).
Answer:
(B) EBIT/[EBIT -1 – PD/(1 – T)]

Question 38.
The maximum amount of debt (and other fixed-charge financing) that a firm can adequately service is referred to as the …………………
(A) debt capacity
(B) debt-service burden
(C) adequacy capacity
(D) fixed-charge burden
Answer:
(A) debt capacity

Question 39.
High financial leverage is not good as is it indicates the large content of –
(A) Fixed cost
(B) Fixed interest charges
(C) Variable cost charges
(D) Contribution
Answer:
(B) Fixed interest charges

Question 40.
The cash required during a specific period to meet interest expenses and principal payments is referred to as the:
(A) Debt capacity
(B) Debt-service burden
(C) Adequacy capacity
(D) Fixed-charge burden
Answer:
(B) Debt-service burden

Question 41.
Earnings to equity shareholders (EPS) will fluctuate violently if –
(A) Financial leverage is very high
(B) Operating leverage is very high
(C) Working capital leverage is very high
(D) Operating leverage is very low
Answer:
(A) Financial leverage is very high

Question 42.
If the Return on Investment (ROI) exceeds the rate of interest on debt, it is financial leverage.
(A) Unfavourable
(B) Adverse
(C) A favourable
(D) Negative
Answer:
(C) A favourable

Question 43.
Which one of the following is correct?
(i) Liquidity ratios measure’s long term solvency of a concern.
(ii) Inventory is a part of liquidity assets.
(iii) Financial leverage is related to business risk.
(iv) The amount of gross assets is equal to net capital employed.
Select the correct answer from the options given below:
(A) (i), (ii) and (iv)
(B) (ii), (iii) and (iv)
(C) (i), (ii), (iii) and (iv)
(D) None of the above
Answer:
(D) None of the above

Question 44.
High operating leverage combined with high financial leverage will constitute –
(A) Favourable situation
(B) Positive situation
(C) Less risky situation
(D) Risky situation
Answer:
(D) Risky situation

Question 45.
Read the following statement.
(i) With the increase in fixed cost operating leverage diminishes.
(ii) Net working Capital is the excess of current assets over current liabilities.
(iii) Greater the size of the business unit larger will be the requirement of working capital.
(iv) Working Capital is also known as circulating capital.
Which of the above statement is correct?
(A) (i), (ii) and (iii)
(B) (ii), (iii) and (iv)
(C) (iii), (iv) and (i)
(D) (i), (ii) and (iv)
Answer:
(B) (ii), (iii) and (iv)

Question 46.
Which of the following can be treated as ‘Ideal Situation?
(A) High operating cost and low financial leverage.
(B) Low operating leverage and high financial leverage.
(C) Operating & financial leverage both should below.
(D) Operating & financial leverage both should be high.
Answer:
(C) Operating & financial leverage both should below.

Question 47.
Assertion (A):
High operating leverage shows higher burden of fixed cost.
Reason (R):
As fixed cost goes on increasing EBIT reduces.
Select the correct answer from the options given below:
(A) (A) is correct but (R) is incorrect.
(B) (A) is incorrect but (R) is correct.
(C) Both (A) and (R) are not correct.
(D) (A) is correct and (R) is correct explanation of (A)
Answer:
(D) (A) is correct and (R) is correct explanation of (A)

Question 48.
Which of the following statement is correct?
(A) If a business firm has a lot of variable costs as compared to fixed costs, then the firm is said to have high operating leverage.
(B) Combined Leverage = % change in EPS multiplied by % change in Sales
(C) If a business firm has a lot of fixed costs as compared to variable costs, then the firm is said to have high operating leverage.
(D) If contribution is less than fixed cost, operating leverage will be favourable and vice versa.
Answer:
(C) If a business firm has a lot of fixed costs as compared to variable costs, then the firm is said to have high operating leverage.

Question 49.
Operating leverage may be defined as:
(A) the degree to which debt is used in financing the firm
(B) the difference between price and variable costs
(C) the extent to which capital assets and fixed costs are utilized
(D) the difference between fixed costs and the contribution margin
Answer:
(C) the extent to which capital assets and fixed costs are utilized

Question 50.
Degree of ………….. is the ratio of percentage change in earning per share to the percentage change in sales.
(A) Financial leverage
(B) Operating leverage
(C) Combined leverage
(D) Working leverage
Answer:
(C) Combined leverage

Question 51.
The conservative firm will utilize:
(A) High fixed costs
(B) High degree of operating leverage
(C) Low degree of operating leverage
(D) Low profit margin
Answer:
(C) Low degree of operating leverage

Question 52.
Which of the following is correct formula to calculate Combined Leverage when capital structure consists of preference shares and equity shares?

Answer:
(D)

Question 53.
Which one of the following is correct?
(I) Hard core working capital assets may be defined as that part of the current assets which represent the very minimum level of raw materials, work-in-process, finished goods, stores, debtors and cash which are in circulation to ensure continuity of production.
(II) Operating leverage is the ratio of fixed cost to net operating income after tax.
Select the correct answer from the options given below:
(A) Statement I correct while Statement II is incorrect.
(B) Statement II correct while Statement I is incorrect.
(C) Both Statement I and Statement II are incorrect.
(D) Both Statement I and Statement II are correct.
Answer:
(A) Statement I correct while Statement II is incorrect.

Question 54.
Which of the following statement is true?
(1) If contribution exceeds fixed cost, operating leverage will be favourable and vice versa.
(2) If ROI exceeds the rate of interest on debt, financial leverage will be favourable and vice versa.
Select correct answer from the options given below:
(A) (1) only
(B) (2) only
(C) Both (1) and (2)
(D) Neither (1) nor (2)
Answer:
(C) Both (1) and (2)

Question 55.
Indentify incorrect statement.
1. Securitization is short term finance arrangement.
2. If ROI is exactly equal to the rate of interest on debt, there is no financial leverage and EPS will not be affected.
3. A negative working capital means the company currently is unable to meet its long-term liabilities.
4. A desire to maintain an established dividend policy may affect the volume of working capital, or changes in working capital may bring about an adjustment of dividend policy.
Select correct answer from the options given below:
(A) 2 & 4
(B) 1 & 3
(C) 1 & 4
(D) 2 & 3
Answer:
(B) 1 & 3

Question 56.
Assertion (A):
Financial leverage indicates the tendency of EBT to vary disproportionately with operating profit.
Reason (R):
Management wants to maximize EPS and in doing so it also satisfies the primary goal of financial management i e. maximization of the owner’s wealth as represented by the value of business.
Select correct answer from the options given below:
(A) Both A and Rare true and R is correct explanation of A.
(B) Both A and R are true but R is not correct explanation of A.
(C) A is true but R is false.
(D) A is false but R is true.
Answer:
(B) Both A and R are true but R is not correct explanation of A.

Question 57.
The relationship between the cost of equity and financial leverage in accordance with MM proposition II can be expressed by-
(A) R = Equity/100
(B) R = Equity/Debt × 100
(C) R=r_o + (r_o-r_d)(1-T_c)
(D) R = Equity/Income
Answer:
(C) R=r_o + (r_o-r_d)(1-T_c)

Question 58.
Match List-I with List-II and select the correct answer using the codes given below the lists:

Answer:
(C)

Question 59.
Degree of Combined leverage can be obtained by –
(A) EBIT + Fixed Costs/EBIT – Interest Expense
(B) EBT/Sales
(C) Sales/Contribution × 100
(D) Sales/Cash × 100
Answer:
(A) EBIT + Fixed Costs/EBIT – Interest Expense

Question 60.
Match List-I with List-Il and select the correct answer using the codes given below the lists:

Answer:
(A)

Question 61.
Match List-I with List-II and select the correct answer using the codes given below the lists:

Answer:
(D)

Question 62.
Factoring is a -……………
(A) Financial Planning
(B) Production Plan
(C) Cost of Sales
(D) New Financial Service
Answer:
(D) New Financial Service

Question 63.
Degree of operating leverage can be computed by
(A) % change in Operating Income /% change in sales
(B) 96 Sales/% Profit
(C) Sales/Cost of Production
(D) Sales/Fixed Cost
Answer:
(A) % change in Operating Income /% change in sales

Question 64.
Which formula may be used for ‘EPS?
(A) Net Profit/100 × Share Capital
(B) Dividend/Net Profit × 100
(C) Net Income – Dividend on Preferred Stock/Average outstanding Shares
(D) Net Profit/Sales
Answer:
(C) Net Income – Dividend on Preferred Stock/Average outstanding Shares

Question 65.
Factoring involves –
(A) Purchase and collection of debts
(B) Sales ledger management
(C) Provision of specialized services relating to credit investigation
(D) All of the above
Answer:
(D) All of the above

Question 66.
Capital Employed is –
(A) Fixed Assets + Cash + Bank
(B) Shareholders Funds + Long Term Funds
(C) Assets – Net Worth
(D) Long Term Funds + Current Liabilities – Current Assets
Answer:
(B) Shareholders Funds + Long Term Funds

Question 67.
A firm with high operating leverage has:
(A) Low fixed costs in its production process.
(B) High variable costs in its production process.
(C) High fixed costs in its production process.
(D) High price per unit.
Answer:
(C) High fixed costs in its production process.

Question 68.
A firm with high operating leverage is characterized by while one with high financial leverage is characterized by ………..
(A) Low fixed cost of production; low fixed financial costs
(B) High variable cost of production; high variable financial costs
(C) High fixed costs of production; high fixed financial costs
(D) Low costs of production; high fixed financial costs
Answer:
(C) High fixed costs of production; high fixed financial costs

Question 69.
If three Options are available to the company and operating leverage is same in all the three options; however, financial leverage is increasing then combined leverage will be –
(A) Same in all the three options
(B) Increasing in all the three options
(C) Dressing in all the three options
(D) Not possible to tell without figures.
Answer:
(B) Increasing in all the three options

Question 70.
If financial leverage in one then which of following two figures will be the same –
(A) Sales; contribution
(B) Contribution; EBIT
(C) EBIT; EBT
(D) None of the above
Answer:
(C) EBIT; EBT

Question 71.
In which of the following case it can be said that the firm has favourable financial leverage?
(A) When interest on loan funds is greater than internal rate of return (IRR).
(B) When interest on loan funds is less than return on investment (ROI).
(C) When return on investment (ROI) is equal to than internal rate of return (IRR).
(D) When return on investment (ROI) is greater than interest on loan funds.
Answer:
(D) When return on investment (ROI) is greater than interest on loan funds.

Question 72.
As compared to other firms in the industry, the company has high beta and high operating leverage. It shows that –
(A) Company is in more risk as compared to other firms in the industry.
(B) Company is in less risk as compared to other firms in the industry.
(C) Company’s risk and risk of all other firms in the industry is same.
(D) None of the above
Answer:
(A) Company is in more risk as compared to other firms in the industry.

Question 73.
Combined leverage shows –

Answer:
(D)

Question 74.
Which of the following figure is not required to calculate operating leverage?
(A) Contribution
(B) EBIT
(C) EPS
(D) All of the above
Answer:
(C) EPS

Question 75.
Which of the following figure is not required to calculate financial leverage?
(A) EBT
(B) Contribution
(C) Sales
(D) Market price
Answer:
(D) Market price

Question 76.
Output (units) = 3,00,000 Fixed cost = ₹ 3,50,000 Unit variable cost = ₹ 1.00 Interest expenses = ₹ 25,000 Unit selling price = ₹ 3.00 Applicable tax rate is 3596 Calculate Operating Leverage.
(A) 1.11
(B) 2.40
(C) 2.67
(D) 1.07
Answer:
(B) 2.40

Question 77.
Output (units) = 3,00,000 Fixed cost = ₹ 3,50,000 Unit variable cost = ₹ 1.00 Interest expenses = ₹ 25,000 Unit selling price = ₹ 3.00 Applicable tax rate is 3596 Calculate Financial Leverage.
(A) 1.11
(B) 2.40
(C) 2.67
(D) 1.07
Answer:
(A) 1.11

Question 78.
Output (units) = 3,00,000 Fixed cost = ₹ 3,50,000 Unit variable cost = ₹ 1.00 Interest expenses = ₹ 25,000 Unit selling price = ₹ 3.00 Applicable tax rate is 3596 Calculate Combined Leverage.
(A) 2.67
(B) 2.30
(C) 2.00
(D) 2.15
Answer:
(A) 2.67

Question 79.
If operating leverage is 2.1429 and financial leverage is 1.0699 then combined leverage will be -………….
(A) 2.2927
(B) 2.0029
(C) 0.4993
(D) Data given is not sufficient
Answer:
(A) 2.2927
Combined Leverage = 2.1429 × 1.0699 = 2.2927

Question 80.
If combined leverage is 2 and financial leverage is 1.25 then operating leverage will be -……………
(A) 0.625
(B) 2.50
(C) 1.60
(D) Data given is not sufficient
Answer:
(C) 1.60
Combined Leverage = Operating Leverage × Financial Leverage
2 = x × 1.25
x = Operating Leverage = 2/1.25 = 1.6

Question 81.
If combined leverage is 2.2926 and operating leverage is 2.1429 then financial leverage will be
(A) 1.0699
(B) 0.9347
(C) 4.9128
(D) Data given is not sufficient
Answer:
(A) 1.0699

Question 82.
A company has sales of ₹ 1 lakh. The variable costs are 40% of the sales while the fixed operating costs amount to ₹ 30,000. The amount of interest on long-term debts is ₹ 10,000. You are required to calculate the combined leverage.
(A) 4
(B) 2
(C) 3
(D) 5
Answer:
(C) 3

Question 83.
Operating leverage is 4. This means 10% change in sales will cause -……………
(A) 4% change in variable cost
(B) 40% change in EPS
(C) 4% change in EBIT
(D) 40% change in EBIT
Answer:
(D) 40% change in EBIT

Question 84.
Financial leverage is 2.5. This means 10% change in EBIT will cause -……….
(A) 2.5% change in EBT
(B) 2.5% change in EPS
(C) 25% change in sales
(D) 25% change in EBT and EPS
Answer:
(D) 25% change in EBT and EPS

Question 85.
Combined leverage is 3.125. This means 10% change in Sales will cause -…………..
(A) 31.25% change in PAT
(B) 31.25% change in EPS
(C) 31.25% change in capital employed
(D) Both (A) and (B)
Answer:
(D) Both (A) and (B)

Question 86.
If there is a 10% increase in sale, EBIT increase by 35% and if sales increase by 6%, taxable income will increase by 24%. Operating leverage must be –
(A) 1.15
(B) 3.50
(C) 4.00
(D) 2.67
Answer:
(B) 3.50
If there is a 10% increase in sale, EBIT increase by 35% (10 × 3.5). Concept of operating leverage applied.

Question 87.
If EBIT increases by 6%, taxable income increases by 6.9%. If sales increase by 6%, taxable income will increase by 24%.
Financial leverage must be -………….
(A) 1.19
(B) 1.13
(C) 1.12
(D) 1.15
Answer:
(D) 1.15
If EBIT increases by 6% taxable income increase by 6.9% (6 × 1.15). Concept of financial leverage applied.

Question 88.
If sales increase by 6% taxable income ie. PAT and EPS will increase by 24%.
Combined leverage must be –
(A) 3
(B) 4
(C) 5
(D) 6
Answer:
(B) 4
If sales increase by 6% taxable income will increase by 24% (6 × 4). Concept of combined leverage applied.

Question 89.
The capital structure of a company consists of the following securities.
10% Preference Share Capital — 1,00,000
Equity Share Capital (₹ 10 Shares) — 1,00,000
12% Debenture — 75,000
The amount of operating profit is ₹ 69,000. The company is in 35% tax bracket. You are required to calculate the financial leverage of the company.
(A) 1.1500
(B) 1.5466
(C) 1.1566
(D) 1.1554
Answer:
(B) 1.5466

Question 90.
Operating leverage is 7 and financial leverage is 2.2858. How much change in sales will be required to bring 70% change in EBIT?
(A) 10%
(B) 70%
(C) 11.429%
(D) 30%
Answer:
(A) 10%

Question 91.
Financial leverage = 1.5465 EBIT = ₹ 1,38,000
Interest = ₹ 18,000 Tax rate = 35%.
Capital structure of the company consists of equity shares and preference shares.
Amount of Preference Dividend = ?
(A) ₹ 19,950
(B) ₹ 19,898
(C) ₹ 20,000
(D) ₹ 19,899
Answer:
(C) ₹ 20,000

Question 92.
Total assets of Alpha Company are ₹ 3,00,000. The company’s total assets turnover ratio is 3, its fixed operating cost is ₹ 1,50,000 and its variable operating cost ratio is 50%. The income-tax rate is 50%. It also has long term debts of ₹ 1,20,000 on which interest @ 10% is payable. Operating, Financial & Combined Leverages of the company are –
(A) 1.5; 1.042; 1.563 respectively
(B) 1.05; 1.42; 1.05625 respectively
(C) 1.50; 1.42; 2.13 respectively
(D) 1.55; 1.042; 1.6151 respectively
Answer:
(A) 1.5; 1.042; 1.563 respectively

Question 93.
Contribution = ₹ 4,00,000
EBIT = ₹ 3,00,000
10% Debenture = ₹ 6,00,000
Combined leverage = ?
(A) 1.63
(B) 1.66
(C) 1.68
(D) 1.62
Answer:
(B) 1.66
Operating leverage = 4,00,000/3,00,000= 1.33
Financial leverage = 3,00,000/2,40,000 = 1.25
Combined leverage = 1.33 × 1.25 = 1.66

Question 94.
Operating leverage = 2
Combined leverage = 3.5
EBIT = ₹ 2,80,000
Interest = ₹ 40,000
Tax rate = 50%.
Capital structure of the company consists of equity shares and preference shares.
Amount of Preference Dividend = ?
(A) ₹ 39,967
(B) ₹ 39,970
(C) ₹ 39,000
(D) ₹ 40,000
Answer:
(D) ₹ 40,000

Question 95.
EBIT = ₹ 4,00,000 Fixed cost = ₹ 6,00,000 Interest = ₹ 80,000 Combined leverage = ?
(A) Sufficient data is not given
(B) 3.12
(C) 3.215
(D) 3.125
Answer:
(D) 3.125
Contribution = 4,00,000 + 6,00,000 = 10,00,000
EBT = 4,00,000 – 80,000 = 3,20,000

Question 96.
EBIT = ₹ 40,000 Variable cost = ₹ 2,40,000 Sales = ₹ 4,00,000 Operating leverage = ?
(A) 3.5
(B) 4.125
(C) 4.0
(D) 3.125
Answer:
(C) 4.0

Question 97.
Contribution = ₹ 7,00,000
Fixed cost = ₹ 2,00,000
Interest = ₹ 3,00,000
Financial leverage = ?
(A) 2.0
(B) 1.5
(C) 2.5
(D) 1.0
Answer:
(C) 2.5

Question 98.
Contribution of a firm is ₹ 4,000.
Situation A — ₹ 1,000
Situation B — ₹ 2,000
Situation C — ₹ 3,000
Compute the operating leverage for the three situations.
(A) 1.33; 1.18; 1.82
(B) 1.33; 2.36; 2.86
(C) 2.86; 2.00; 3.64
(D) 1.33; 2.00; 4.00
Answer:
(D) 1.33; 2.00; 4.00

Question 99.
EBIT of a firm is ₹ 3,000.

Compute the financial leverage for the three plans respectively.
(A) 1.33; 1.11; 1.43
(B) 1.25; 1.18; 1.43
(C) 1.66; 1.48; 1.90
(D) 1.25; 1.11; 1.43
Answer:
(D) 1.25; 1.11; 1.43

Question 100.
Calculate Financial Leverage & EPS assuming 20% before tax rate of return on assets. Other data:

Applicable tax rate firm is 50%.
Select the correct answer from the options given below:

Answer:
(C)

Question 101.
If the combined leverage and operating leverage figures of a company are 2.5 and 1.25 respectively, find the financial leverage and P / V ratio, given that the equity dividend per share is ₹ 2, interest payable per year is ₹ 1 lakh, total fixed cost ₹ 0.5 lakh and sales ₹ 10 lakhs.
(A) 3.125; 25%
(B) 2.00; 40%
(C) 2.00; 25%
(D) 3.00; 40%
Answer:
(C) 2.00; 25%
Operating Leverage × Financial Leverage = Combined Leverage
1.25 × Financial Leverage = 2.5
Financial Leverage = 2

Question 102.
A firm has sales of ₹ 75,00,000, variable cost of ₹ 42,00,000 and fixed cost of ₹ 6,00,000. It has a debt of ₹ 45,00,000 at 9% and equity of ₹ 55,00,000. What is the firm’s ROI?
(A) 72%
(B) 27%
(C) 32%
(D) 23%
Answer:
(B) 27%

Question 103.
A firm has sales of ₹ 75,00,000, variable cost of ₹ 42,00,000 and fixed cost of ₹ 6,00,000. It has a debt of ₹ 45,00,000 at 9% and equity of ₹ 55,00,000. Does it have favourable financial leverage?
(A) ROI is less than interest on loan funds and hence it has no favourable financial leverage.
(B) ROI is equal to interest on loan funds and hence it has favourable financial leverage.
(C) ROI is greater than interest on loan funds and hence it has favourable financial leverage.
(D) ROI is greater than interest on loan funds and hence it has unfavourable financial leverage.
Answer:
(C) ROI is greater than interest on loan funds and hence it has favourable financial leverage.

Question 104.
A firm has sales of ₹ 75,00,000, variable cost of ₹ 42,00,000 and fixed cost of ₹ 6,00,000. It has a debt of ₹ 45,00,000 at 9% and equity of ₹ 55,00,000.
If the firm belongs to an industry whose asset turnover is 3, does it have high or low asset leverage?
(A) Industry asset turnover ratio is 3 whereas firm has asset turnover ratio 4 which is high as compared to industry.
(B) Industry asset turnover ratio is 3 whereas firm has asset turnover ratio 1.75 which is low as compared to industry.
(C) Industry asset turnover ratio is 3 whereas firm has asset turnover ratio 0.75 which is low as compared to industry.
(D) None of the above
Answer:
(C) Industry asset turnover ratio is 3 whereas firm has asset turnover ratio 0.75 which is low as compared to industry.

Question 105.
A firm has sales of ₹ 75,00,000, variable cost of ₹ 42,00,000 and fixed cost of ₹ 6,00,000. It has a debt of ₹ 45,00,000 at 9% and equity of ₹ 55,00,000. What are the operating, financial and combined leverages of the firm?
(A) 1.22, 1.44, 1.18
(B) 1.22, 1.12, 1.44
(C) 1.22, 1.18, 1.44
(D) 1.20, 1.18, 1.44
Answer:
(C) 1.22, 1.18, 1.44

Question 106.
A firm has sales of ₹ 75,00,000, variable cost of ₹ 42,00,000 and fixed cost of ₹ 6,00,000. It has a debt of ₹ 45,00,000 at 9% and equity of ₹ 55,00,000. At what level of sales the EBT of the firm will be equal to zero?
(A) ₹ 22,84,091
(B) ₹ 10,05,000
(C) ₹ 22,48,910
(D) ₹ 10,50,000
Answer:
(A) ₹ 22,84,091

Question 107.
Following data is available for A Ltd.
Financial Leverage — 3:1
Interest — 2,000
Operating Leverage — 4:1
Variable cost (% to sales) — 66.67%
Income Tax Rate — 45%
Contribution = ?
(A) ₹ 6,000
(B) ₹ 12,000
(C) ₹ 36,000
(D) ₹ 18,000
Answer:
(B) ₹ 12,000

Question 108.
Following data is available for B Ltd.
Financial Leverage — 4:1
Interest — 3,000
Operating Leverage — 5:1
Variable cost (% to sales) — 75%
Income Tax Rate — 45%
What are the sales of B Ltd.?
(A) ₹ 12,000
(B) ₹ 20,000
(C) ₹ 60,000
(D) ₹ 80,000
Answer:
(D) ₹ 80,000

Question 109.
Following data is available for C Ltd.
Financial Leverage — 2:1
Interest — ₹ 10,000
Operating Leverage — 3:1
Variable cost (% to sales) — 50%
Income Tax Rate — 45%
What is the sales and profit after tax (PAT) of C Ltd?
(A) ₹ 1,20,000; ₹ 5,500
(B) ₹ 1,00,000; ₹ 5,000
(C) ₹ 1,50,000;₹ 6,500
(D) ₹ 1,50,000;₹ 6,000
Answer:
(A) ₹ 1,20,000; ₹ 5,500

Question 110.
A Financial Analyst has gathered following data for PQR Ltd.
Change in revenue = 27%
Change in operating profit after tax = 20%
Change in operating income = 25%
What should be the operating leverage of PQR Ltd.?
(A) 0.74
(B) 0.93
(C) Above 1.00
(D) 1.93
Answer:
(B) 0.93

Question 111.
A Financial Analyst has gathered following data for TUV Ltd. & WXY Ltd.:

Using the concept of operating leverage concept and beta state which company has more risk as compared to market?
(A) TUV Ltd. is more risky
(B) WXY Ltd. is more risky
(C) TUV Ltd. & WXY Ltd. both are more risky as compared to market as there operating leverages and betas are more than market. However, WXY Ltd. is more risky than market as well as TUV Ltd.
(D) TUV Ltd. & WXY Ltd. both are less risky as compared to market as there operating leverages and betas are more than market.
Answer:
(C) TUV Ltd. & WXY Ltd. both are more risky as compared to market as there operating leverages and betas are more than market. However, WXY Ltd. is more risky than market as well as TUV Ltd.

Question 112.
Details of R Ltd. are given below:

Operating & Combined Leverage are 1.4 & 2.8 respectively. Income Tax Rate is 30%. Calculate EPS.
(A) 1.50
(B) 1.55
(C) 1.05
(D) 1.00
Answer:
(C) 1.05
Combined Leverage = Operating Leverage × Financial Leverage
2.8 = 1.4 × Financial Leverage
Financial Leverage = 2

2x – 5.1= x
x = 5.1
EBIT = x = 5.1
EBT = 5.1 – 2.55 = 2.55

Contribution – Fixed Cost EBIT
Contribution – 2.04 = 5.1
Contribution = 7.14

Question 113.
Take the data of above question and calculate P/V Ratio.
(A) 23.8%
(B) 22.8%
(C) 20.8%
(D) 24.8%
Answer:
(A) 23.8%
Combined Leverage = Operating Leverage × Financial Leverage
2.8 = 1.4 × Financial Leverage
Financial Leverage = 2

2x – 5.1= x
x = 5.1
EBIT = x = 5.1
EBT = 5.1 – 2.55 = 2.55

Contribution – Fixed Cost EBIT
Contribution – 2.04 = 5.1
Contribution = 7.14

Question 114.
Take the data of above question and tell at what level of sales the earning before tax (EBT) of the company will be equal to zero?
(A) ₹ 19.00 lakh
(B) ₹ 19.20 lakh
(C) ₹ 19.29 lakh
(D) ₹ 19.92 lakh
From the following information answer next 5 questions:
The capital structure of JCPL Ltd. is as follows:

Answer:
(C) ₹ 19.29 lakh
Combined Leverage = Operating Leverage × Financial Leverage
2.8 = 1.4 × Financial Leverage
Financial Leverage = 2

2x – 5.1= x
x = 5.1
EBIT = x = 5.1
EBT = 5.1 – 2.55 = 2.55

Contribution – Fixed Cost EBIT
Contribution – 2.04 = 5.1
Contribution = 7.14

Additional Information:
Profit after tax (tax rate 30%) — ₹ 1,82,000
Operating expenses (including depreciation ₹ 90,000) being 1.50 times of EBIT.
Equity share dividend paid — 15%.
Market price per equity share — ₹ 20.

Question 115.
Calculate operating & financial leverage.
(A) 1.30; 1.59
(B) 1.59; 1.30
(C) 1.39; 1.50
(D) 1.50; 1.39
Answer:
(A) 1.30; 1.59

If there are preference shares in capital structure then following formula has to be used to calculate the financial leverage.

EBIT = EBT + Interest
EBIT = 2,60,000 + 40,000
EBIT = 3,00,000
Operating expenses EBIT × 1.5
=3,00,000 × 1.5
= 4,50,000
Operating expenses = Variable Cost + Fixed Cost
4,50,000 = Variable Cost + 90,000 (Depreciation)
Variable Cost = 3,60,000

Question 116.
Cover for the preference and equity share of dividends = ?
(A) 1.10; 3.65
(B) 1.65; 1.10
(C) 1.85; 2.10
(D) 3.64; 1.10
Answer:
(D) 3.64; 1.10

If there are preference shares in capital structure then following formula has to be used to calculate the financial leverage.

EBIT = EBT + Interest
EBIT = 2,60,000 + 40,000
EBIT = 3,00,000
Operating expenses EBIT × 1.5
=3,00,000 × 1.5
= 4,50,000
Operating expenses = Variable Cost + Fixed Cost
4,50,000 = Variable Cost + 90,000 (Depreciation)
Variable Cost = 3,60,000

Question 117.
Earnings Per Share (EPS) = ?
(A) 1.56
(B) 1.65
(C) 1.91
(D) 1.19
Answer:
(B) 1.65

If there are preference shares in capital structure then following formula has to be used to calculate the financial leverage.

EBIT = EBT + Interest
EBIT = 2,60,000 + 40,000
EBIT = 3,00,000
Operating expenses EBIT × 1.5
=3,00,000 × 1.5
= 4,50,000
Operating expenses = Variable Cost + Fixed Cost
4,50,000 = Variable Cost + 90,000 (Depreciation)
Variable Cost = 3,60,000

Question 118.
Earning Yield Ratio = ?
(A) 8.00%
(B) 8.52%
(C) 8.25%
(D) 8.75%
Answer:
(C) 8.25%

If there are preference shares in capital structure then following formula has to be used to calculate the financial leverage.

EBIT = EBT + Interest
EBIT = 2,60,000 + 40,000
EBIT = 3,00,000
Operating expenses EBIT × 1.5
=3,00,000 × 1.5
= 4,50,000
Operating expenses = Variable Cost + Fixed Cost
4,50,000 = Variable Cost + 90,000 (Depreciation)
Variable Cost = 3,60,000

Question 119.
Price earnings ratio = ?
(A) 12.00 times
(B) 12.12 times
(C) 12.21 times
(D) 12.19 times
Answer:
(B) 12.12 times

If there are preference shares in capital structure then following formula has to be used to calculate the financial leverage.

EBIT = EBT + Interest
EBIT = 2,60,000 + 40,000
EBIT = 3,00,000
Operating expenses EBIT × 1.5
=3,00,000 × 1.5
= 4,50,000
Operating expenses = Variable Cost + Fixed Cost
4,50,000 = Variable Cost + 90,000 (Depreciation)
Variable Cost = 3,60,000

Question 120.
You are Finance Manager Big Pen Ltd. The degree of operating leverage of your company is 5.0. The degree of financial leverage of your company is 3.0. Your Managing Director has found that the degree of operating leverage and the degree of financial leverage of your nearest competitor Small Pen Ltd. are 6.0 and 4.0 respectively. In his opinion, the Small Pen Ltd. is better than that Big Pen Ltd. because of higher value of degree of leverages. Which of the following statement is correct in relation to facts given above?
(A) High operating leverage shows higher burden of fixed cost consequently higher business risk. As Small Pen Ltd. has higher operating leverage hence it has high business risk as compared to Big Pen Ltd.

(B) High financial leverage shows higher burden of interest cost consequently higher financial risk. As Small Pen Ltd. has higher financial leverage hence it has high financial risk as compared to Big Pen Ltd.

(C) High combined leverage shows combined effect of higher burden of fixed and interest cost consequently higher business & financial risk. As Small Pen Ltd. has higher combined leverage hence it has high business risk & financial risk

(D) All of the above
From the following information answer next 3 questions:

A simplified income statement of Abbiash Ltd. is given below.

Answer:
(D)

Question 121.
Calculate percentage increase in EBIT if sales increases by 10%.
(A) 13.61%
(B) 13.16%
(C) 13.25%
(D) 13.52%
Answer:
(A) 13.61%
(1) Operating leverage is 1.36 1, this means that 10% change in sales will cause 13.61% change in EBIT.
(2) Financial leverage is 2.122, this means that 10% change in EBIT will cause 21.22% change in EBT.
(3) Combined leverage is 2.888, this means that 10% change in sales will cause 28.889 change in PAT/EPS.

Question 122.
Calculate percentage increase in EBT if EBIT increases by 10%.
(A) 21.21%
(B) 21.00%
(C) 21.22%
(D) 22.11%
Answer:
(C) 21.22%
(1) Operating leverage is 1.36 1, this means that 10% change in sales will cause 13.61% change in EBIT.
(2) Financial leverage is 2.122, this means that 10% change in EBIT will cause 21.22% change in EBT.
(3) Combined leverage is 2.888, this means that 10% change in sales will cause 28.889 change in PAT/EPS.

Question 123.
Calculate percentage increase in EPS if sales increases by 10%.
(A) 28.00%
(B) 28.88%
(C) 28.44%
(D) 28.33%
From the following information answer next 5 questions:
DIGI Computers Ltd. is a manufacturer of computer systems. It has total sales of ₹ 1 Crore. Its variable and fixed costs amount to ₹ 60 lakhs and ₹ 10 lakhs respectively. It has borrowed ₹ 60 lakhs @ 10% per annum and has an equity capital of ₹ 75 lakhs.
Answer:
(B) 28.88%
(1) Operating leverage is 1.36 1, this means that 10% change in sales will cause 13.61%
change in EBIT.
(2) Financial leverage is 2.122, this means that 10% change in EBIT will cause 21.22% change in EBT.
(3) Combined leverage is 2.888, this means that 10% change in sales will cause 28.889 change in PAT/EPS.

Question 124.
What is company’s return on investment (ROI)?
(A) 20.00%
(B) 22.00%
(C) 22.22%
(D) 20.22%
Answer:
(C) 22.22%

Return on Investment (ROI) is 22.22% whereas interest on loan funds is 10 which is less than ROI and hence company has favourable financial leverage. calculation of asset turnover ratio and comparison with industry:

Industry asset turnover ratio is 1 whereas DIGI Ltd. has asset turnover ratio 0.74 which is low as compared to industry. This means that either DIGI Ltd. has low sales as compared to industry or its assets are high and not effectively utilized towards sales.
Computation of leverages:

Question 125.
Does it have favourable financial leverage?
(A) ROI is less than interest on loan funds and hence it has no favourable financial leverage.
(B) ROI is equal to interest on loan funds and hence it has favourable financial leverage.
(C) ROI is greater than interest on loan funds and hence it has favourable financial leverage.
(D) ROI is greater than interest on loan funds and hence it has unfavourable financial leverage.
Answer:
(C) ROI is greater than interest on loan funds and hence it has favourable financial leverage.

Return on Investment (ROI) is 22.22% whereas interest on loan funds is 10 which is less than ROI and hence company has favourable financial leverage. calculation of asset turnover ratio and comparison with industry:

Industry asset turnover ratio is 1 whereas DIGI Ltd. has asset turnover ratio 0.74 which is low as compared to industry. This means that either DIGI Ltd. has low sales as compared to industry or its assets are high and not effectively utilized towards sales.
Computation of leverages:

Question 126.
If the firm belongs to an industry whose asset turnover is 1, does it have high or low asset leverage?
(A) Industry asset turnover ratio is 1 whereas firm has asset turnover ratio 2.74 which is high as compared to industry.
(B) Industry asset turnover ratio is 1 whereas firm has asset turnover ratio 1.75 which is low as compared to industry.
(C) Industry asset turnover ratio is 1 whereas firm has asset turnover ratio 0.74 which is low as compared to industry.
(D) None of the above
Answer:
(C) Industry asset turnover ratio is 1 whereas firm has asset turnover ratio 0.74 which is low as compared to industry.

Question 127.
What are the operating, financial and combined leverages of the firm?
(A) 1.33; 1.25; 1.67
(B) 1.33; 1.67; 1.25
(C) 1.25; 1.33; 1.67
(D) None of the above
Answer:
(A) 1.33; 1.25; 1.67

Return on Investment (ROI) is 22.22% whereas interest on loan funds is 10 which is less than ROI and hence company has favourable financial leverage. calculation of asset turnover ratio and comparison with industry:

Industry asset turnover ratio is 1 whereas DIGI Ltd. has asset turnover ratio 0.74 which is low as compared to industry. This means that either DIGI Ltd. has low sales as compared to industry or its assets are high and not effectively utilized towards sales.
Computation of leverages:

Question 128.
If sales drop to ₹ 50 lakhs, what will be the new EBIT?
(A) ₹ 20,00,000
(B) ₹ 15,00,000
(C) ₹ 50,00,000
(D) ₹ 10,00,000
Answer:
(D) ₹ 10,00,000

Return on Investment (ROI) is 22.22% whereas interest on loan funds is 10 which is less than ROI and hence company has favourable financial leverage. calculation of asset turnover ratio and comparison with industry:

Industry asset turnover ratio is 1 whereas DIGI Ltd. has asset turnover ratio 0.74 which is low as compared to industry. This means that either DIGI Ltd. has low sales as compared to industry or its assets are high and not effectively utilized towards sales.
Computation of leverages:

Question 129.
From the following data of Abhishek Ltd., compute the operating leverage, financial leverage, combined leverage.
EBIT — 10 lakh
Profit before tax (PBT) — 4 lakh
Fixed cost — 6 lakh
(A) 1.6; 2.5; 4.0
(B) 2.5; 1.6; 4.0
(C) 4.0; 2.5; 1.6
(D) 4.0; 1.5; 2.5
Answer:
(A)

Question 130.
From the following data of Tanishka Ltd., compute the percentage change in earnings per share (EPS), if sales are expected to increase by 5%:
EBIT — 16.00 lakh
Profit before tax (PBT) — 6.40 lakh
Fixed cost — 9.60 lakh
(A) 5%
(B) 10%
(C) 4%
(D) 20%
Answer:
(D) 20%
From the following data of Tanishka Ltd., compute the percentage change in earnings per share (EPS), if sales are expected to increase by 5%. Thus, 5% change in sales will cause 20% change in PAT/EPS.

Question 131.
Following data is available for Alpha Ltd.
Financial leverage — 2:1
Operating leverage — 3:1
Interest charges — 20 lakh
Corporate tax rate — 40%
Variable (% of sales) — 60%
Sales ?
(A) 1,00,00,000
(B) 1,20,00,000
(C) 2,00,00,000
(D) 3,00,00,000
Answer:
(D) 3,00,00,000

Question 132.
Following data is available for X Ltd.
Variable cost (% of sales) — 70%
Interest expense — ₹ 20,000
DOL — 5:1
DFL — 3:1
Corporate tax rate — 30%
EBIT = ?
(A) ₹ 30,000
(B) ₹ 20,000
(C) ₹ 60,000
(D) ₹ 15,000
Answer:
(A) ₹ 30,000

Question 133.
Following data is available for Y Ltd.
Variable cost (% of sales) — 75%
Interest expense — ₹ 30,000
DOL — 6:1
DFL — 4:1
Corporate tax rate 30%
Contribution = ?
(A) ₹ 9,60,000
(B) ₹ 2,40,000
(C) ₹ 3,00,000
(D) ₹ 7,80,000
Answer:
(B) ₹ 2,40,000

Question 134.
Following data is available for Z Ltd.
Variable cost (96 of sales) — 50%
Interest expense — ₹ 1,00,000
DOL — 2:1
DFL — 2:1
Corporate tax rate — 30%
Sales = ?
(A) ₹ 4,00,000
(B) ₹ 6,00,000
(C) ₹ 8,00,000
(D) ₹ 9,00,000
From the following information answer next 3 questions:

Answer:
(C) ₹ 8,00,000

Question 135.
What percentage will EBIT increase, if there is a 1096 increase in sales?
(A) 32.096
(B) 31.1496
(C) 33.71%
(D) 32.5%
Answer:
(D) 32.5%

Question 136.
What percentage will taxable income increase, if EBIT increases by 6%?
(A) 6.86%
(B) 6.67%
(C) 6.33%
(D) 6.22%
Answer:
(A) 6.86%

Question 137.
What percentage will taxable income increase, if the sales increase by 6%
(A) 22.29%
(B) 22.92%
(C) 22.78%
(D) 22.87%
From the following information answer next 3 questions.
Following information relating to the operations and capital structure of Swadeshi Ltd. is available:
Installed capacity: 2,000 units
Production & sales: 50% of installed capacity
Selling price per unit: ₹ 20
Variable cost per unit: ₹ 10.
Fixed costs:
Situation-1: ₹ 4,000
Situation-2: ₹ 5,000
Capital structure:

Answer:
(A) 22.29%

Question 138.
What is the Operating Leverage?

Answer:
(C)
Actual production and sales = 2,000 × 50% = 1,000 units
Sales – Variable Cost Contribution; 20 – 10 = 10

Question 139.
What is the Financial Leverage?

Answer:
(C)
Actual production and sales = 2,000 × 50% = 1,000 units
Sales – Variable Cost Contribution; 20 – 10 = 10

Question 140.
What is the Combined Leverage?

Answer:
(C)
Actual production and sales = 2,000 × 50% = 1,000 units
Sales – Variable Cost Contribution; 20 – 10 = 10

Question 141.
Total assets of Honey Well Ltd. are ₹ 6,00,000. Total assets turnover ratio is 2.5 times. The fixed operating costs are ₹ 2,00,000 and variable operating cost ratio is 40%. Income tax rate is 30%. Calculate operating, financial and combined leverage?
(A) 1.2857; 1.0355; 1.3314
(B) 1.0355; 1.2857; 1.3314
(C) 1.3314; 1.0355; 1.2857
(D) 1.2857; 1.3314; 1.2857
Answer:
(A) 1.2857; 1.0355; 1.3314

Question 142.
Total assets of Q Ltd. are ₹ 6,00,000. Total assets turnover ratio is 2.5 times. The fixed operating costs are ₹ 2,00,000 and variable operating cost ratio is 40%. Income tax rate is 30%. No. of equity shares are 18,000. Determine the likely level of EBIT if EPS is ₹ 6.
(A) ₹ 1,54,286
(B) ₹ 1,78,286
(C) ₹ 1,54,682
(D) ₹ 1,78,862
Answer:
(B) ₹ 1,78,286

Question 143.
Which of the following company has greater business risk? (₹ in lakhs)

(A) A Ltd.
(B) B Ltd.
(C) C Ltd.
(D) D Ltd.
Answer:
(D) D Ltd.
D Ltd. has high operating leverage and hence its business risk is higher as compared to other companies.

Question 144.
ABC Ltd. has an average selling price of ₹ 10 per unit. Its variable unit costs are ₹ 7 and fixed costs amount to ₹ 1,70,000. It finances all its assets by equity funds. It pays 30% tax on its income. PQR Ltd. is identical to ABC Ltd. except in respect of the pattern of financing. The latter finances its assets 50% by equity and 50% by debt, the interest on which amounts to ₹ 20,000.
Which of the following statement is correct?
(A) Both companies have similar business risk.
(B) PQR Ltd. has high financial risk as compared to ABC Ltd.
(C) PQR Ltd. has high business risk & financial risk as compared to ABC Ltd.
(D) All of the above
Answer:
(D) All of the above
(1) High operating leverage shows higher burden of fixed cost consequently higher business risk. As both companies has similar operating leverage hence both has same business risk.
(2) High financial leverage shows higher burden of interest cost consequently higher financial risk. As POR Ltd. has higher financial leverage hence it has high financial risk as compared to ABC Ltd.
(3) High combined leverage shows combined effect of higher burden of fixed and interest cost consequently higher business & financial risk. As POR Ltd. has higher combined leverage hence it has high business risk & firancial risk as compared to ABC Ltd.

Question 145.
Bling Ltd. supplies following data:
Operating leverage 2.5; financial leverage 3; EPS ₹ 30; market price per share ₹ 225; and capital 20,000 shares. It is proposed to raise a loan of ₹ 50,00,000 @18% for expansion. After expansion, sales will increase by 25% and fixed cost by ₹ 3,00,000.
Work out the market price per share after expansion, assuming tax rate @ 50%.
(A) 25.56
(B) 52.56
(C) 56.25
(D) 65.52
Answer:
(C) 56.25

x = Profit available for equity shareholder 6,00,000
Tax rate is 509õ hence profit before tax will be Rs. 12,00,000.

Question 146.
S Ltd. produces products with a selling price per unit of ₹ 100. Fixed cost is ₹ 2,00,000. 5,000 units are produced and sold. Annual profit is ₹ 50,000. Company’s all equity-financed assets are ₹ 5,00,000. The company proposes to change its production process, adding ₹ 4,00,000 to investment by debt financing and ₹ 50,000 to fixed operational costs. The consequences of such a proposal are:
(i) Reduction in variable cost per unit by — ₹ 10
(ii) Increase in output by — 2,000 units
(iii) Reduction in selling price per unit to — ₹ 95
Assume cost of capital 10%. Measure the degree of operating leverage for present and proposed situation.
(A) 4.85; 3.00
(B) 2.58; 5.00
(C) 5.00; 2.85
(D) 2.85; 5.00
Answer:
(C) 5.00; 2.85

Question 147.
During year 2018-19, Gulf Oil India made sales of worth ₹ 257 Crores, which was down by 7.4% compared to previous year’s sales. While the company could reduce its overheads, its variable input cost went-up significantly. As a result, variable cost-to-sales ratio in 2018-19 stood at 55.8% as opposed to 48.5% in the previous year. The financial highlights for the year 2018 – 19 are as given under:
(₹ in Crores)
Sales — 257.00
Overheads — 103.50
Depreciation — 2.70
Interest — 6.50
Earnings before tax — 0.70
Company is expecting a decline in sales by 1% in the next year. If the cost structure remains the same, what will be the expected EBIT?
(A) ₹ 6.06 Crore
(B) ₹ 5.60 Crore rise by 1%.
(C) ₹ 60.06 Crore
(D) ₹ 5.06 Crore
Answer:
(A) ₹ 6.06 Crore

Operating leverage is 15.78; thus, if company is expecting a decline in sales by 1% in the next year, then EBIT will decline by 15.78%.
Expected EBIT = 7.20 – 1.14 (15.78% of 7.20) = 6.06 Crores

Question 148.
A firm has a DOL of 3.5 at Q units. What does this tell us about the firm?
(A) If sales rise by 3.5% at the firm, then EBIT will rise by 1%.
(B) If EBIT rises by 3.5% at the firm, then EPS will rise by 1%.
(C) If EBIT rises by 1% at the firm, then EPS will rise by 3.5%.
(D) If sales rise by 1% at the firm, then EBIT will rise by 3.5%
Answer:
(D) If sales rise by 1% at the firm, then EBIT will rise by 3.5%.

Question 149.
A firm has a DFL of 3.5. What does this tell us about the firm?
(A) If sales rise by 3.5%, then EBIT will rise by 1%.
(B) If EBIT rises by 3.5%, then EPS will rise by 1%.
(C) If EBIT rises by 1%, then EPS will rise by 3.5%.
(D) If sales rise by 1% at the firm, then EBIT will rise by 3.5%.
Answer:
(C) If EBIT rises by 1%, then EPS will rise by 3.5%.

Question 150.
Calculate the degree of financial leverage (DFL) for a firm when its EBIT is 20,00,000. The firm has 30.00,000 in debt that costs 10% annually. The firm also has a 9%, ₹ 10,00,000 preferred stock issue outstanding. The firm pays 40% in taxes.
(A) 0.78
(B) 0.80
(C) 1.24
(D) 1.29
Answer:
(A) 0.78

Activity Based Costing (ABC) – Corporate and Management Accounting MCQ

March 29, 2023March 29, 2023 by Prasanna

Going through the Activity Based Costing (ABC) – Corporate and Management Accounting CS Executive MCQ Questions with Answers you can quickly revise the concepts.

Activity Based Costing (ABC) – Corporate and Management Accounting MCQs

Question 1.
Activity based costing:
(A) Uses a plant wide overhead rate to assign overhead
(B) Is not expensive to implement
(C) Typically applies overhead costs using direct labour hours
(D) Uses multiple activity rates
Answer:
(D) Uses multiple activity rates

Question 2.
Consider the following statements regarding traditional costing systems:
A. Overhead costs are applied to products on the basis of volume related measures.
B. All manufacturing costs are easily traceable to the goods produced.
C. Traditional costing systems tend to distort unit manufacturing costs when numerous goods are made that have widely varying production requirements.
Select the correct answer from the options given below
(A) A only
(B) B only
(C) A & C only
(D) A & B only
Answer:
(C) A & C only

Question 3.
The following tasks are associated with an activity-based costing system:
(1) Calculation of cost application rates
(2) Identification of cost drivers
(3) Assignment of cost to products
(4) Identification of cost pools
Which of the following choices correctly expresses the proper order of the preceding tasks?
(A) (1), (2), (3), (3)
(B) (4), (2), (1), (3)
(C) (4), (2), (3), (1)
(D) (2), (4), (1), (3)
Answer:
(B) (4), (2), (1), (3)

Question 4.
…….. an item for which cost measurement is required e.g. product, job or a customer.
(A) Cost Pool
(B) Cost Driver
(C) Cost Absorption
(D) Cost Object
Answer:
(D) Cost Object

Question 5.
In an ABC system, the allocation bases that are used for applying costs to services or procedures are called…………
(A) Cost Pool
(B) Cost Driver
(C) Cost Absorption
(D) Cost Object
Answer:
(B) Cost Driver

Question 6.
Costs that are caused by a group of things being made, handled or processed at a single time are referred to as …….
(A) Unit Level Cost
(B) Batch Level Cost
(C) Product Level Cost
(D) Facility Level Cost
Answer:
(B) Batch Level Cost

Question 7.
Cost of maintaining a building is
(A) Unit Level Cost
(B) Batch Level Cost
(C) Product Level Cost
(D) Facility Level Cost
Answer:
(D) Facility Level Cost

Question 8
should be subtracted from net product revenues instead of an arbitrary and illogical apportionment.
(A) Facility Level Cost
(B) Product Level Cost
(C) Organizational Level Cost
(D) High Level Cost
Answer:
(C) Organizational Level Cost

Question 9.
In traditional absorption costing system which of the following type activities are identified?
A. Unit Level Activities
B. Batch Level Activities
C. Product Level Activities
D. Facility Level Activities
Select the correct answer from the options given below.
(A) A & B
(B) B & C
(C) B & D
(D) A & D
Answer:
(D) A & D

Question 10.
Which of the following tasks is not normally associated with an activity-based costing system?
(A) Calculation of cost application rates
(B) Identification of cost pools
(C) Preparation of allocation matrices
(D) Identification of cost drivers
Answer:
(C) Preparation of allocation matrices

Question 11.
Which of the following is not a broad, cost classification category typically used in activity based costing?
(A) Facility Level
(B) Product Level
(C) Organizational Level
(D) Management Level
Answer:
(D) Management Level

Question 12.
In an activity-based costing system, direct materials used would typically be classified as a:
(A) Unit Level Cost
(B) Batch Level Costs
(C) Product Level Cost
(D) Facility Level Cost
Answer:
(A) Unit Level Cost

Question 13.
Which of the following is least likely to be classified as a batch level activity in an activity based costing system?
(A) Quality assurance
(B) Receiving and inspection
(C) Property taxes
(D) Production setup
Answer:
(C) Property taxes

Question 14.
GODREJ, an appliance manufacturer, is developing a new line of ovens that uses controlled-laser technology. Research and testing costs associated with the new ovens is said to arise from a:
(A) Unit Level Activity
(B) Competitive Level Activity
(C) Facility Level Activity
(D) Product Sustaining Activity
Answer:
(D) Product Sustaining Activity

Question 15.
Consider the following statements regarding product sustaining activities:
A.They must be done for each batch of product that is made.
B. They must be done for each unit of product that is made.
C. They are needed to support an entire product line.
Which of the above statements is/are true?
(A) A & B only
(B) B only
(C) C only
(D) A & C only
Answer:
(C) C only

Question 16.
Which of the following is the proper sequence of events in an activity based costing system?
(A) Identification of cost drivers, identification of cost pools, calculation of cost application rates, assignment of cost to products.
(B) Identification of cost pools, identification of cost drivers, calculation of cost application rates, assignment of cost to products.
(C) Assignment of cost to products, identification of cost pools, identification of cost drivers, calculation of cost application rates.
(D) Calculation of cost application rates, identification of cost drivers, identification of cost pools, assignment of cost to products.
Answer:
(B) Identification of cost pools, identification of cost drivers, calculation of cost application rates, assignment of cost to products.

Question 17.
The salaries of a manufacturing plant’s management are said to arise from:
(A) Unit Level Activities
(B) Batch Level Activities
(C) Product Sustaining Activities
(D) Facility Level Activities
Answer:
(D) Facility Level Activities

Question 18.
The division of activities into unit level,batch level, product sustaining level, and facility level categories is commonly known as a ‘
(A) Cost Object
(B) Cost Application Method
(C) Cost Hierarch
(D) Cost Estimation Method
Answer:
(C) Cost Hierarch

Question 19.
Basic types of cost pool allocations include:
(A) Allocation of costs to segments, products, and services
(B) Determining inputs for CVP models
(C) Establishing cash flows for capital budgeting analyses
(D) Reallocation of costs among service departments
Answer:
(A) Allocation of costs to segments, products, and services

Question 20.
The main difference(s) between how traditional costing and activity based costing treat indirect manufacturing costs is/ are that
(A) Traditional costing uses only production volume based drivers while activity based costing uses only non production volume based drivers.
(B) Traditional costing treats only unit level costs as variable, while ABC systems treat unit level, batch level and product level costs as variable.
(C) Traditional cost allocations are usu-ally based on a plant wide overhead rate, while ABC systems use departmental overhead rates.
(D) (B) & (C)
Answer:
(C) Traditional cost allocations are usually based on a plant wide overhead rate, while ABC systems use departmental overhead rates.

Question 21.
Activity based cost systems would probably provide the greatest benefits for organizations that use
(A) Job order costing
(B) Process costing
(C) Standard costing
(D) Historical costing
Answer:
(A) Job order costing

Question 22.
Under a traditional costing system, which of the following costs would likely be classified as indirect with respect to the various products manufactured?
(A) Plant maintenance
(B) Factory supplies
(C) Machinery depreciation
(D) All of the above
Answer:
(D) All of the above

Question 23.
PK Ltd. is changing from a traditional costing system to an activity based system. As a result of this action, which of the following costs would likely change from indirect to direct?
(A) Direct materials, factory supplies
(B) Production setup, finished-goods inspection & direct materials
(C) Production setup, finished-goods inspection and product shipping
(D) All of the above
Answer:
(C) Production setup, finished-goods inspection and product shipping

Question 24.
Of the following organizations, activity based costing can be used by:
(A) Manufacturers
(B) Financial services firms
(C) Book publishers
(D) All of the above
Answer:
(D) All of the above

Question 25.
Which of the following statements about activity based costing is false?
(A) Activity based costing cannot be used by service businesses.
(B) In comparison with traditional costing systems, activity based costing tends to use more cost pools and more cost drivers.
(C) In comparison with traditional costing systems, activity based costing results in less cost averaging of various diversified activities.
(D) In comparison with traditional-costing systems, activity based costing results in more costs being classified as direct costs.
Answer:
(A) Activity based costing cannot be used by service businesses.

Question 26.
Review cost of commercial loan applications is cost.
(A) Unit level
(B) Facility level
(C) Batch level
(D) Product sustaining
Answer:
(A) Unit level

Question 27.
All of the following are examples of product-level activities except:
(A) Human resource management
(B) Advertising a product
(C) Testing a prototype of a new product
(D) Parts administration
Answer:
(A) Human resource management

Question 28.
All of the following are examples of batch level activities except:
(A) Purchase order processing
(B) Setting up equipment
(C) The clerical activity associated with processing purchase orders to pro-duce an order for a standard product
(D) Worker recreational facilities
Answer:
(D) Worker recreational facilities

Question 29.
Which of the following statement is/ are true?
(A) An activity based costing system is generally easier to implement and maintain than a traditional costing system.
(B) One of the goals of activity based management is the elimination of waste by allocating costs to products that waste resources.
(C) Activity based costing uses a number of activity cost pools, each of which is allocated to products on the basis of direct labour-hours.
(D) Activity rates in activity based costing are computed by dividing costs from the first stage allocations by the activity measure for each activity cost pool.
Answer:
(D) Activity rates in activity based costing are computed by dividing costs from the first stage allocations by the activity measure for each activity cost pool.

Question 30.
Activity based costing systems:
(A) Use a single, volume-based cost driver.
(B) Assign overhead to products based on the products’ relative usage of direct labour.
(C) Often reveal products that were under or over cost by traditional costing systems.
(D) Typically use fewer cost drivers than more traditional costing systems.
Answer:
(C) Often reveal products that were under or over cost by traditional costing systems

Question 31.
Which of the following activities is NOT a batch level activity?
(A) Processing purchase orders
(B) Designing products
(C) Receive raw materials from suppliers
(D) Setting up equipment
Answer:
(B) Designing products

Question 32.
Which of the following characteristics would be an indicator that a company would benefit from switching to activity based costing?
(A) Only one homogenous product is produced on a continuous basis
(B) The existing cost system is reliable and have produced excellent results
(C) Overhead costs are high and increasing and no one seems to know why
(D) The costs of implementing ABC out-weigh the benefits
Answer:
(C) Overhead costs are high and increasing and no one seems to know why

Question 33.
Which of the following is a limitation of activity-based costing?
(A) Costs are accumulated by each major activity
(B) A variety of activity measures are used
(C) All costs in an activity cost pool pertain to a single activity
(D) Activity based costing relies on the assumption that the cost in each cost pool is strictly proportional to its cost measure
Answer:
(D) Activity based costing relies on the assumption that the cost in each cost pool is strictly proportional to its cost measure

Question 34.
Which costing system will trace the most costs as direct costs?
(A) Job Order Costing
(B) Process Costing
(C) Activity Based Costing
(D) Absorption Costing
Answer:
(C) Activity Based Costing

Question 35.
Providing the power required to run production equipment is an example of a:
(A) Facility level activity
(B) Batch level activity
(C) Unit level activity
(D) Product level activity
Answer:
(C) Unit level activity

Question 36.
All of the following are part of the activity based cost system hierarchy except for
(A) Input costs
(B) Batch level costs
(C) Product sustaining costs
(D) Facility sustaining cost
Answer:
(A) Input costs

Question 37.
Activity based costinghas which benefit over traditional cost analysis for services firms
(A) Identifies high cost/low value activities
(B) Pinpoints differences in the costs of serving different customers
(C) Provides an overall assessment of average overhead costs
(D) Focuses on margins for the delivery of services by volume
Answer:
(B) Pinpoints differences in the costs of serving different customers

Question 38.
Which one of the following statements is true about activity based costing and traditional costing system?
(A) In the activity based costing, as in traditional costing systems, non-manufacturing costs are not assigned to products.
(B) When there are batch level or product level costs, in comparison to a traditional cost system, an activity based costing system ordinarily will shift costs from high volume to low volume products.
(C) ABC is typically used as a replacement for a company’s traditional costing system.
(D) The first-stage allocation in activity-based costing is the process by which overhead costs are assigned to products before they are assigned to customers.
Answer:
(B) When there are batch level or product level costs, in comparison to a traditional cost system, an activity based costing system ordinarily will shift costs from high volume to low volume products.

Question 39.
Which of the following is NOT a limitation of activity based costing?
(A) Maintaining an activity based costing system is more costly than maintaining a traditional direct labour based costing system.
(B) Changing from a traditional direct labour based costing system to an activity based costing system changes product margins and other key performance indicators used by managers. Such changes are often resisted by managers.
(C) In practice, most managers insist on fully allocating all costs to products, customers, and other costing objects in an activity based costing system. This results in overstated costs.
(D) More accurate product costs may result in increasing the selling prices of some products.
Answer:
(D) More accurate product costs may result in increasing the selling prices of some products.

Question 40.
What does manufacturing overhead cost consist of?
(A) All manufacturing costs.
(B) All manufacturing costs, EXCEPT direct materials and direct labour.
(C) Indirect materials but NOT indirect labour.
(D) Indirect labour but NOT indirect materials.
Answer:
(B) All manufacturing costs, EXCEPT direct materials and direct labour.

Question 41.
ZPALtd. customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 7,000 calls and incurred costs of ₹ 2,03,000. If 2,940 of these calls were for the company’s wholesale operation (the remainder were for the retail division), costs allocated to the retail division should amount to:
(A) ₹ 85,260
(B) ₹ 1,17,740
(C) ₹ 2,03,000
(D) Nil
Use the following information to answer next 4 questions.
ABC Ltd. uses activity based costing to determine product costs for external financial reports. ABC Ltd. has provided the

Answer:
(A) ₹ 85,260
Calls for retail division = 7,000 – 2,940 = 4,060 4,060
2,03,000 × \(\frac{4,060}{7,000}\)=1,17,740

Question 42.
The activity rate for the batch setup activity cost pool is closet to:
(A) ₹ 66.60
(B) ₹ 106.60
(C) ₹ 97.00
(D) ₹ 177.60
Answer:
(A) ₹ 66.60
\(\frac{5,32,800}{8,000}\)=66.6

Question 43.
The activity rate for the Machine related activity cost pool is closet to:
(A) ₹ 66.60
(B) ₹ 106.60
(C) ₹ 97.00
(D) ₹ 17.20
Answer:
(D) ₹ 17.20
\(\frac{1,37,600}{8,000}\)=17.2

Question 44.
The total amount of overhead cost allocated to Product X would be:
(A) ₹ 4,76,800
(B) ₹ 2,98,900
(C) ₹ 2,91,000
(D) ₹ 3,87,850
Answer:
(B) ₹ 2,98,900

Question 45.
The total amount of overhead cost allocated to Product Y would be:
(A) ₹ 2,98,900
(B) ₹ 5,33,000
(C) ₹ 4,76,800
(D) ₹ 2,91,000
Answer:
(C) ₹ 4,76,800

Question 46.
A Company uses activity based costing to compute product costs for external reports. The company has three activity cost pools and applies overhead using predetermined overhead rates for each activity cost pool. Estimated costs and activities are presented below for the three activity cost pools:

The amount of overhead for Activity 3 if current activity was 1,340:
(A) ₹ 38,519.00
(B) ₹ 39,704.20
(C) ₹ 38,564.00
(D) ₹ 23,876.80
Use the following information to answer next 2 questions.
Company Y estimated that it will incur a total overhead cost of 16,00,000. It considers implementing activity based costing. Three cost pools and respective activity measures have been identified:

The company currently uses traditional costing and allocates overhead based on direct labour hours.
Answer:
(B)
38,519 × \(\frac{1,340}{1,300}\)=39,704

Question 47.
How much overhead is assigned to Product 1 using traditional costing?
(A) 3,75000
(B) 3,00,000
(C) 3,25,000
(D) 2,25,000
Answer:
(A) 3,75000
Total Overheads = 2,00,000 + 1,00,000 + 3,00,000 = 6,00,000
6,00,000 × \(\frac{1,200}{2,000}\) =3,30,000

Question 48.
How much overhead would be assigned to Product 1 if activity based costing is used?
(A) ₹ 3,00,000
(B) ₹ 1,73,000
(C) ₹ 4,20,000
(D) ₹ 3,60,000
Answer:
(D) ₹ 3,60,000

Question 49.
Company X uses activity-based costing for its two products: Products B & D. One of the activity cost pools is parts administration. The total estimated overhead cost for that pool was ₹5,50,000 and the expected activity was 2,000 part types. If Product D requires 1,200 part types, the amount of overhead allocated to it would be:
(A) ₹ 2,75,000
(B) ₹ 3,00,000
(C) ₹ 3,30,000
(D) ₹ 3,45,000
Answer:
(C) ₹ 3,30,000
5,50,000 ×\(\frac{1,200}{2,000}\)=3,30,000

Question 50.
One of company A’s cost pools is parts administration. The expected overhead cost for that cost pool was ₹ 3,80,000 and the expected activity was 5,000 part types. The actual overhead cost for the cost pool was ₹ 4,20,000 at an actual activity of 6,000 part types. The activity rate used to assign costs for that cost pool was:
(A) ₹ 63 per part type
(B) ₹ 76 per part type
(C) ₹ 70 per part type
(D) ₹ 84 per part type
Use the following information to answer next 9 questions.
Hi-Tech Products manufactures 3 types of DVD players: Economy, Standard & Deluxe. The company, which uses activity based costing, has identified 5 activities and related cost drivers. Each activity, its budgeted cost and related cost driver is identified below.

The following information pertains to each product line of DVD players for next year

Answer:
(B)
\(\frac{3,80,000}{5,000}\)=76

Question 51.
What is Hi-Tech’s cost application rate for the material-handling activity?
(A) ₹ 1.00 per part
(B) ₹ 2.25 per part
(C) ₹ 2.25 per part
(D) ₹ 13.23 per part
Answer:
(A) ₹ 1.00 per part
No. of parts = (10,000 × 10) + (5,000 × 15) + (2,000 × 25) = 2,25,000
Material Handing Activity Rate =\(\frac{2,25,000}{2,25,000}\)= ₹ 1 per part

Question 52.
What is Hi-Tech’s cost application rate for the automated machinery activity?
(A) ₹ 24.00 per machine hour
(B) ₹ 24.50 per labour hour
(C) ₹ 49.42 per unit
(D) ₹ 50.00 per machine hour
Answer:
(A) ₹ 24.00 per machine hour
Machine Hours = (10,000 × 1) + (5,000 × 3) + (2,000 × 5) = 35,000
Machinery Activity Rate = \(\frac{8,40,000}{35,000}\) = ₹24 per machine hour

Question 53.
What is Hi-Tech’s cost application rate for the finishing activity?
(A) ₹ 5.00 per labour hour
(B) ₹ 5.00 per machine hour
(C) ₹ 5.00 per unit
(D) ₹ 7.50 per unit
Answer:
(A) ₹ 5.00 per labour hour
Labour Hours = (10,000 × 2) + (5,000 × 2) + (2,000 × 2) = 34,000
Finishing Activity Rate =\(\frac{1,70,000}{34,000}\) = ₹ 5 per labour hour

Question 54.
What is Hi-Tech’s cost application rate for the packaging activity?
(A) ₹ 4.86 per machine hour
(B) ₹ 5.00 per labour hour
(C) ₹ 10.00 per unit
(D) ₹ 100.00 per order shipped
Answer:
(D) ₹ 100.00 per order shipped
Packaging Activity Rate = \(\frac{1,70,000}{1,700}\) = ₹ 100 per order shipped

Question 55.
Under an activity based costing system, what is the per unit cost of Economy?
(A) ₹ 141
(B) ₹ 164
(C) ₹ 225
(D) ₹ 228
Answer:
(B) ₹ 164

Question 56.
Under an activity based costing system, what is the per unit cost of Standard?
(A) ₹ 164
(B) ₹ 228
(C) ₹ 272
(D) ₹282
Answer:
(C) ₹ 272

Question 57.
Under an activity based costing system, what is the per-unit cost of Deluxe?
(A) ₹ 272
(B) ₹ 282
(C) ₹ 320
(D) ₹ 440
Answer:
(D) ₹ 440

Question 58.
Assume that Hi-Tech is using a volume based costing system, and the preceding manufacturing costs are applied to all products based on direct labour hours. How much of the preceding cost is assigned to Deluxe?
(A) ₹ 4,56,471
(B) ₹ 6,46,471
(C) ₹ 9,61,176
(D) ₹ 11,41,176
Answer:
(A) ₹ 4,56,471
38,80,000 × \(\frac{4,000}{34,000}\) = 4,56,471

Question 59.
Assume that Hi-Tech is using a volume based costing system and the preceding manufacturing costs are applied to all products based on direct labour hours. How much of the preceding cost is assigned to Standard?
(A) ₹ 4,56,471
(B) ₹ 6,46,471
(C) ₹ 9,61,176
(D) ₹ 11,41,176
Use the following information to answer next 4 questions.
A company manufacturing two products A & B furnishes the following data for the year:

The annual overheads are as under:
Volume related activity costs : ₹ 5,50,000
Set-up related costs :₹ 8,20,000
Purchase related costs : ₹ 6,18,000
Answer:
(D)
38,80,000 ×\(\frac{10,000}{34,000}\)=11,41,176

Question 60.
Overhead cost per unit of Product A as per traditional absorption costing system = ?
(A) ₹ 28.40 per unit
(B) ₹ 24.52 per unit
(C) ₹ 56.80 per unit
(D) ₹ 103.32 per unit
Answer:
(C) ₹ 56.80 per unit

Question 61.
Overhead cost per unit of Product B as per traditional absorption costing system = ?
(A) ₹ 28.40 per unit
(B) ₹ 24.52 per unit
(C) ₹ 56.80 per unit
(D) ₹ 103.32 per unit
Answer:
(A) ₹ 28.40 per unit

Question 62.
Overhead cost per unit of Product A as per activity based costing system = ?
(A) ₹ 28.40 per unit
(B) ₹ 24.52 per unit
(C) ₹ 56.80 per unit
(D) ₹ 103.32 per unit
Answer:
(D) ₹ 103.32 per unit

Question 63.
Overhead cost per unit of Product B as per activity based costing system = ?
(A) ₹ 24.40 per unit
(B) ₹ 24.52 per unit
(C) ₹ 24.80 per unit
(D) ₹ 23.32 per unit
Answer:
(B) ₹ 24.52 per unit

Question 64.
JF Ltd. uses activity based costing to determine the costs of its two products: A & B. The estimated total cost and expected activity for one of the company’s three activity cost pools are as follows.

The activity rate under the activity based costing system for this activity is closest to:
(A) ₹ 4.00
(B) ₹ 8.59
(C) ₹ 18.00
(D) ₹ 20.00
Use the following information to answer next 4 questions.
Best Chair Company makes two types of chairs, hand-built lounge chair (HC) and a folding beach chair (FC). The company had used a job order costing system and applies overhead on the basis of direct labour hours. Best Chair expects to produce 40,000 HC and 1,00,000 FC next year. Total direct material costs are ₹ 32,00,000 for HC and ₹ 10,00,000 FC. Best Chair has begun changing to an activity based costing system. The company has reported the following results from the first stage cost allocations for year’s production:
Activity ——– Overheads
Labour related — 3,00,000
Machine related — 4,50,000
Machine set-up — 7,30,000
Order processing — 6,00,000
General factory — 5,00,000

Answer:
(D)

Question 65.
What is direct labour rate per hour as per traditional costing system?
(A) ₹ 8.60 per direct labour hour
(B) ₹ 1.67 per direct labour hour
(C) ₹ 5.85 per direct labour hour
(D) ₹ 1.00 per direct labour hour
Answer:
(A) ₹ 8.60 per direct labour hour

Question 66.
What is total unit cost per chair of HC as per traditional costing system?
(A) ₹ 37.10 per unit
(B) ₹ 167.10 per unit
(C) ₹ 157.20 per unit
(D) ₹ 101.50 per unit
Answer:
(D) ₹ 101.50 per unit

Question 67.
What is total unit cost per chair of FC as per traditional costing system?
(A) ₹ 27.20 per unit
(B) ₹ 151.20 per unit
(C) ₹ 10.96 per unit
(D) ₹ 167.10 per unit
Answer:
(A) ₹ 27.20 per unit

Question 68.
What is cost driver rate for labour related activity?
(A) ₹ 8.60 per direct labour hour
(B) ₹ 5.00 per direct labour hour
(C) ₹ 1.00 per direct labour hour
(D) ₹ 3.60 per direct labour hour
Answer:
(C) ₹ 1.00 per direct labour hour

Question 69.
What is cost driver rate for order processing activity?
(A) ₹ 146.00 per order
(B) ₹ 100.00 per order
(C) ₹ 122.85 per order
(D) ₹ 144.67 per order
Answer:
(A) ₹ 146.00 per order

Question 70.
What is total unit cost per chair of HC as per activity based costing system?
(A) ₹ 117.125 per unit
(B) ₹167.10 per unit
(C) ₹ 157.20 per unit
(D) ₹ 151.50 per unit
Answer:
(A) ₹ 117.125 per unit

Question 71.
What is total unit cost per chair of FC as per activity based costing system?
(A) ₹ 57.20 per unit
(B) ₹ 151.20 per unit
(C) ₹ 20.96 per unit
(D) ₹ 167.10 per unit
Answer:
(C) ₹ 20.96 per unit

Question 72.
Dec 2014: Cost attribution to cost units on the basis of benefit received from indirect activities, such as ordering, setting-up, assuring quality is known as:
(A) Allocation
(B) Activity based costing
(C) Always better control
(D) Absorption
Answer:
(B) Activity based costing

Question 73.
Dec 2014: Which of the following is not included in batch level activities —
(A) Material ordering cost
(B) Machine set-up cost
(C) Inspection cost
(D) Designing the product
Answer:
(D) Designing the product

Question 74.
Dec 2014: In activity based costing, the allocation basis used for applying costs to services or products is called —
(A) Cost driver
(B) Cost object
(C) Allocation
(D) Applicator
Answer:
(A) Cost driver

Question 75.
June 2015: In activity based costing, an item for which cost measurement is required is called —
(A) Cost driver
(B) Cost object
(C) Allocation
(D) Cost pool
Answer:
(B) Cost object

Question 76.
June 2015: Under activity based costing, ‘material ordering’ is considered as —
(A) Unit level activity
(B) Batch level activity
(C) Product level activity
(D) Facility level activity
Answer:
(B) Batch level activity

Question 77.
June 2015: According to Chartered Institute of Management Accountants (CIMA), cost attribution to cost units on the basis of benefits received from indirect activities e.g. ordering, setting-up, assuring quality is known as —
(A) Absorption costing
(B) Marginal costing
(C) Activity based costing
(D) Job costing
Answer:
(C) Activity based costing

Question 78.
Dec 2015: The basis of apportionment of overheads which takes into account the profitability of various departments is called —
(A) FIFO basis
(B) LIFO basis
(C) Ability to pay basis
(D) Activity basis
Answer:
(D) Activity basis

Question 79.
Dec 2015: The key area(s) of activity based costing is/are —
(A) Product cost differentiation
(B) Identification of non-value added cost
(C) Distribution between fixed and variable cost
(D) Both (A) and (B) above
Answer:
(D) Both (A) and (B) above

Question 80.
June 2016: Match the following events with type of activity:
Event —- Type of activity
(i) Material ordering — (A) Product level activity
(ii) Designing the product — (B) Facility level activity
(iii) Production manager salary — (C) Unit level activity
(iv) Use of consumables — (D) Batch level activity
Select the correct answer using the codes given below —

Answer:
(D)

Question 81.
Select the correct answer using the codes given below —
(i) Calculation of overheads application rates.
(ii) Identification of cost drivers
(iii) Identification of cost pools
(iv) Assignment of overheads cost to products.
Select the correct answer from the options given below —
(A) (i), (iii), (iv), (ii)
(B) (ii), (iii), (i), (iv)
(C) (iii), (ii), (i), (iv)
(D) (ii), (iii), (iv), (t)
Answer:
(C) (iii), (ii), (i), (iv)

Question 82.
Dec 2016: Which of the following is the main cost driver of customer order processing activity —
(A) Flow of the product from assembly line
(B) Order value
(C) Number of problem suppliers
(D) Number of machine charges
Answer:
(B) Order value

Question 83.
Dec 2016:
Assertion (A)
Activity based costing is not normally used for external reporting purpose.
Reason (R)
Activity based costing does not conform to generally accepted principles.
Select the correct answer from the options given below —
(A) Both A and R are true and R is the correct explanation of A
(B) Both A and R are true but R is not the correct explanation of A
(C) A is true, but R is false
(D) A is false, but R is true
Answer:
(A) Both A and R are true and R is the correct explanation of A

Question 84.
Dec 2016: A homogeneous cost pool is one that —
(A) Does not change over time
(B) Needs many activity drivers to be allocated to a cost object
(C) Can be explained with a single activity driver
(D) Has only one type of material assigned to it
Answer:
(C) Can be explained with a single activity driver

Question 85.
Dec 2017: In Traditional absorption costing system cost are first traced to:
(A) Activities
(B) Organizational unit
(C) Products
(D) Cost centres
Answer:
(B) Organizational unit

Question 86.
Dec 2017: The main reason for the usage of Activity Based Costing, by replacing the traditional costing system is that:
(A) The overhead recovery rates used in traditional costing system are inappropriate for decision-making
(B) The companies deal with more number of product at present
(C) No scope for cause and effect relationship in traditional costing
(D) The new manufacturing technology needs information for feedback of performance even the product is in progress.
Answer:
(B) The companies deal with more number of product at present

Question 87.
Dec 2017: In Activity Based Costing, inspection of product is a ……… level activity.
(A) Unit
(B) Batch
(C) Product
(D) Facility
Answer:
(B) Batch

Question 88.
Dec 2017:
Assertion (A):
Implementation of ABC System requires substantial resources which are costly to maintain.
Reason (R):
Activity Based Costing is a two-stage product costing.
Select the correct answer from the options given below:
(A) Both A and R are true and R is the correct explanation of A
(B) Both A and R are true but R is not the correct explanation of A
(C) A is true, but R is false
(D) A is false, but R is true
Answer:
(B) Both A and R are true but R is not the correct explanation of A

Question 89.
Dec 2017: Match the following:
List – I — List – II
(a) Unit level activity (1) Material ordering
(b) Batch level activity (2) Plant security
(c) Product level activity (3) Use of indirect material
(d) Facility level activity (4) Parts management

Answer:
(A)

Question 90.
Dec 2017: Fast Ltd., manufactures three types of products A, B and C following ABC System. During a period the company incurred ₹ 73,000 as inspection cost and it was worked for 10, 20 and 9 production runs respectively for producing products A, B and C. The inspection costs for product B under ABC system was:
(A) ₹ 15,000
(B) ₹ 40,000
(C) ₹ 18,000
(D) ₹ 24,000
Answer:
(B) ₹ 40,000

Inspection cost per hour = 73,000 = 146 = 500.
Inspection cost for Product B = 20 × 4 × 500 = 40,000.

Question 91.
June 2018: Which of the following statement is not true in respect of Activity based costing?
(A) Activity based costing improves control over overheads costs.
(B) Setting up equipment is a batch level activity.
(C) In Activity based costing each cost pool has its own predetermined overhead rate.
(D) Activity based costing is less expensive to implement than traditional costing.
Answer:
(D) Activity based costing is less expensive to implement than traditional costing.

Question 92.
June 2018: Performing periodic maintenance on buildings and general use equipments is an example of:
(A) Facility level activity
(B) Unit level activity
(C) Batch level activity
(D) Product level activity
Answer:
(B) Unit level activity

Question 93.
June 2018: The division of activities into unit level, batch level, product level, and facility level categories is commonly known as a:
(A) Cost object
(B) Cost application
(C) Cost hierarchy
(D) Cost estimation
Answer:
(B) Cost application

Question 94.
Dec 2018: Costs which are caused by a group of things being made or processed at a single time are referred to as:
(A) Product-level costs
(B) Cost pool
(C) Organizational-level costs
(D) Batch level costs
Answer:
(D) Batch level costs

Question 95.
Dec 2018: Level Activities are identified in traditional Absorption Costing.
(A) Unit
(B) Batch
(C) Product
(D) Business
Answer:
(A) Unit

Question 96.
Dec 2018: encourages managers to identify which activities are value added activities.
(A) Standard Costing
(B) Activity-based Costing
(C) Uniform Costing
(D) Direct Costing
Answer:
(B) Activity-based Costing

Question 97.
Dec 2018: ABC emphasize on:
(A) More precise profit analysis
(B) More accurate costing
(C) Improved cost control
(D) All of the above three
Answer:
(D) All of the above three

Question 98.
June 2019: In ABC System, the allocation basis that are used for applying costs to services or procedures are called:
(A) Cost Pool
(B) Cost Absorption
(C) Cost Object
(D) Cost Driver
Answer:
(D) Cost Driver

Overview of Cost – Corporate and Management Accounting MCQ

March 27, 2023March 27, 2023 by Prasanna

Going through the Overview of Cost – Corporate and Management Accounting CS Executive MCQ Questions with Answers you can quickly revise the concepts.

Overview of Cost – Corporate and Management Accounting MCQs

Question 1.
Which of these is not an objective of Cost Accounting?
(A) Ascertainment of cost
(B) Determination of selling price
(C) Cost control and cost reduction
(D) Assisting shareholders in decision making
Answer:
(D) Assisting shareholders in decision making

Question 2.
A profit centre is a centre
(A) Where the manager has the responsibility of generating and maximising profits
(B) Which is concerned with earning an adequate Return on Investment
(C) Both of the above
(D) Which manages cost
Answer:
(A) Where the manager has the responsibility of generating and maximising profits

Question 3.
Responsibility centre can be categorised into:
(A) Cost centres only
(B) Profit centres only
(C) Investment centres only
(D) Cost centres, profit centres and investment centres
Answer:
(D) Cost centres, profit centres and investment centres

Question 4.
Cost Unit is defined as:
(A) Unit of quantity of product, service or time in relation to which costs may be ascertained or expressed
(B) A location, person or an item of equipment or a group of these for which costs are ascertained and used for cost control
(C) Centres having the responsibility of generating and maximising profits
(D) Centres concerned with earning an adequate return on investment
Answer:
(A) Unit of quantity of product, service or time in relation to which costs may be ascertained or expressed

Question 5.
Fixed cost is a cost:
(A) Which changes in total in proportion to changes in output
(B) Which is partly fixed and partly variable in relation to output
(C) Which do not change in total during a given period despite changes in output
(D) Which remains same for each unit of output
Answer:
(C) Which do not change in total during a given period despite changes in output

Question 6.
Uncontrollable costs are the costs which be influenced by the action of a specified member of an undertaking
(A) Cannot
(B) Can
(C) May or may not
(D) Must
Answer:
(A) Cannot

Question 7.
Element/s of Cost of a product are:
(A) Material only
(B) Labour only
(C) Expenses only
(D) Material, Labour & Expenses
Answer:
(D) Material, Labour & Expenses

Question 8.
Abnormal cost is the cost:
(A) Cost normally incurred at a given level of output
(B) Cost not normally incurred at a given level of output
(C) Cost which is charged to customer
(D) Cost which is included in the cost of the product
Answer:
(B) Cost not normally incurred at a given level of output

Question 9.
Conversion cost includes cost of converting ………. into …………
(A) Raw material, WIP
(B) Raw material, Finished goods
(C) WIP, Finished goods
(D) Finished goods, Saleable goods
Answer:
(B) Raw material, Finished goods

Question 10.
Sunk costs are ….
(A) Relevant for decision making
(B) Not relevant for decision making
(C) Cost to be incurred in future
(D) Future costs
Answer:
(B) Not relevant for decision making

Question 11.
Describe the method of costing to be applied in case of Nursing Home:
(A) Operating Costing
(B) Process Costing
(C) Contract Costing
(D) Job Costing
Answer:
(A) Operating Costing

Question 12.
Describe the cost unit applicable to the Bicycle industry:
(A) Per part of bicycle
(B) Per bicycle
(C) Per tonne
(D) Per day
Answer:
(B) Per bicycle

Question 13.
Cost accounting
(A) Deals with historic data
(B) Has futuristic in approach
(C) Both (A) & (B)
(D) Neither (A) nor (B)
Answer:
(B) Has futuristic in approach

Question 14.
Which of the following is feature of job costing?
(A) Single order
(B) Single contract
(C) Every job is cost unit itself
(D) All of the above
Answer:
(D) All of the above

Question 15
……….. may be defined as the technique of presenting cost data where in variable costs and fixed costs are shown separately for managerial decision-making.
(A) Direct Costing
(B) Absorption Costing
(C) Marginal Costing
(D) Variance Analysis
Answer:
(C) Marginal Costing

Question 16.
In which of the following cost accounting has do not have any role?
(A) Price fixation
(B) Inventory control
(C) Service sector
(D) Price earning
Answer:
(D) Price earning

Question 17.
……….. is form of specific order costing which applies where work is undertaken as per customer’s specific requirement.
(A) Batch costing
(B) Operation costing
(C) Job costing
(D) Composite costing
Answer:
(C) Job costing

Question 18.
Maintenance department in a factory is a ………..
(A) Profit Center
(B) Investment Centre
(C) Cost Driver
(D) Service Centre
Answer:
(D) Service Centre

Question 19.
Process Costing is generally adopted by:
(A) Chemical industries
(B) Oil refineries
(C) Soap manufacturing
(D) All of the above
Answer:
(D) All of the above

Question 20.
Costs of direct material, direct labour and direct expenses can be directly allocated or identified with a particular cost centres or a cost unit are the examples of …………
(A) Common Costs
(B) Indirect Cost
(C) Differential Costs
(D) Traceable Costs
Answer:
(D) Traceable Costs

Question 21
………….. method of costing is used in large scale contract, as in case of building construction.
(A) Composite Costing
(B) Multiple Costing
(C) Operation Costing
(D) Contract Costing
Answer:
(D) Contract Costing

Question 22.
Indirect costs are also known as …………..
(A) Common Costs
(B) Traceable Costs
(C) Implicit Costs
(D) Sunk Costs
Answer:
(A) Common Costs

Question 23
……..is a specialized system of job costing applied to long-term contracts.
(A) Composite Costing
(B) Batch Costing
(C) Direct Costing
(D) Contract costing
Answer:
(D) Contract costing

Question 24
…….. is the name given to the technique whereby standard costs are pre-determined and subsequently compared with the recorded actual costs.
(A) Direct Costing
(B) Absorption Costing
(C) Marginal Costing
(D) Variance Analysis
Answer:
(D) Variance Analysis

Question 25
…………. represents the resources that have been sacrificed to attain a particular objective.
(A) Expense
(B) Cost
(C) Assets
(D) Liability
Answer:
(B) Cost

Question 26.
Indirect costs are ………… to cost centres or cost units.
(A) Allocated
(B) Apportioned
(C) Aggregated
(D) Allowed
Answer:
(B) Apportioned

Question 27.
Standard costing is not suitable ……..
(A) Where the manufacturing method involves production of standardised goods of repetitive nature
(B) Manufacturing organization producing different types of products
(C) Organizations engaged in service sector
(D) All of the above
Answer:
(C) Organizations engaged in service sector

Question 28
method of costing is used when it is desired to ascertain the cost of carrying out an operation in a department.
(A) Operating Costing
(B) Operation Costing
(C) Composite Costing
(D) Process Costing
Answer:
(B) Operation Costing

Question 29.
Which of the following is not objective of cost accounting?
(A) To arrive at the cost of production of every unit, job, operation, process.
(B) To provide information to enable management to make short-term decisions.
(C) To present true & fair view of overall results of the transactions, and events.
(D) None of the above
Answer:
(C) To present true & fair view of overall results of the transactions, and events.

Question 30.
A company presently does not utilise its available capacity. In case of full capacity utilisation, the cost per unit shall
(A) Increase
(B) Decrease
(C) Remain constant
(D) None of the above
Answer:
(B) Decrease

Question 31.
Service costing is also known as
(A) Operation Costing
(B) Operating Costing
(C) Direct Costing
(D) Uniform Costing
Answer:
(B) Operating Costing

Question 32.
One of the most important technique in cost planning is :
(A) Direct Cost
(B) Budget
(C) Cost Sheet
(D) Marginal Costing
Answer:
(D) Marginal Costing

Question 33.
CIMA, London defines as, “the establishment of budgets, standard costs and actual costs of operations, processes, activities or products; and the analysis of variances, profitability or the social use of funds”
(A) Management Accounting
(B) Standard Costing
(C) Budgetary Control
(D) Cost Accounting
Answer:
(D) Cost Accounting

Question 34.
The variable cost per unit is:
(A) Variable in nature
(B) Fixed in nature
(C) Semi-variable in nature
(D) None of the above
Answer:
(B) Fixed in nature

Question 35.
Which of the following difficulty is not faced at the time installation of costing system in any organization?
(A) Lack of support from top management
(B) Resistance from the existing staff
(C) Keen competition in oversea market
(D) All of the above
Answer:
(C) Keen competition in oversea market

Question 36.
The total cost for producing 10 items is ₹ 15 and that for producing 15 items is ₹ 20. What is the fixed cost?
(A) ₹10
(B) ₹ 15
(C) ₹ 5
(D) None of the above
Answer:
(C) ₹ 5

Question 37.
Cost accounting
(A) Present true & fair view of overall results of the transactions, and events.
(B) Uses monetary information only
(C) Both (A) & (B)
(D) Neither (A) nor (B)
Answer:
(D) Neither (A) nor (B)

Question 38.
The main purpose of cost accounting is to:
(A) Maximise profits
(B) Help in inventory valuation
(C) Provide information to management for decision making
(D) Aid in the fixation of selling price
Answer:
(C) Provide information to management for decision making

Question 39.
Direct costing technique can be applied:
(A) Stock valuation
(B) Determining whether to make or buy the product
(C) Close down decisions – like closing down of a department or shop
(D) All of the above
Answer:
(D) All of the above

Question 40.
The CIMA, London, defines a …………………….. as, “a unit of product or service in relation to which costs are ascertained.”
(A) Cost Unit
(B) Cost Object
(C) Profit Center
(D) Cost Centres
Answer:
(A) Cost Unit

Question 41.
The cost accountant is intimately connected with the …………..
(A) Production
(B) Marketing
(C) Finance
(D) All of the above
Answer:
(D) All of the above

Question 42.
The term ……. is defined as the amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unit.
(A) Differential Cost
(B) Marginal Cost
(C) Relevant Cost
(D) Incremental Cost
Answer:
(B) Marginal Cost

Question 43.
Which of the following cannot be treated as are direct beneficiary of cost accounting?
(A) Management
(B) Debtors
(C) Employees
(D) Shareholders
Answer:
(D) Shareholders

Question 44.
Pre-determined costs may be either:
(A) Standard cost
(B) Estimated cost
(C) Standard cost or estimated cost
(D) Estimated cost but not a standard cost
Answer:
(C) Standard cost or estimated cost

Question 45.
Who may by order direct cost audit of a company, if in its opinion it is necessary to do so?
(A) The Ministry of Corporate Affairs
(B) The Parliament
(C) The Central Government
(D) All of the above
Answer:
(C) The Central Government

Question 46.
Which of the following statement is false?
(A) The use of the term cost without qualification is not misleading.
(B) Fixed Costs are also called ‘traceable costs’
(C) Marginal cost is a predetermined calculation of how much costs should be under specified working conditions.
(D) All of the above
Answer:
(D) All of the above

Question 47.
Which of the following is not method of costing?
(A) Uniform Costing
(B) Operating Costing
(C) Operation Costing
(D) Contract Costing
Answer:
(A) Uniform Costing

Question 48.
If financial records can yield all the necessary costing information, it is not necessary to have a separate costing department.
(A) False
(B) True
(C) Partly correct
(D) Partly incorrect
Answer:
(B) True

Question 49.
A ………. is a planned cost for a unit of product of service rendered.
(A) Standard cost
(B) Marginal Cost
(C) Opportunity Cost
(D) Historical Cost
Answer:
(A) Standard cost

Question 50.
………… is defined as, “the techniques and process of ascertaining costs”.
(A) Cost Accounting
(B) Management Accounting
(C) Costing
(D) Cost Ascertainment
Answer:
(C) Costing

Question 51.
Historical cost is the actual cost, determined
(A) In advance
(B) After the event
(C) Estimated basis
(D) By applying common sense
Answer:
(B) After the event

Question 52.
A power house in a factory is a ………….
(A) Service Centre
(B) Production Centre
(C) Profit Center
(D) Impersonal Cost Centre
Answer:
(A) Service Centre

Question 53.
The management accounting data is derived from the ……….
(A) Cost accounting
(B) Financial accounting
(C) Cost & financial accounting
(D) Financial management
Answer:
(C) Cost & financial accounting

Question 54
………. are those cost, which can be identified easily and indisputably with a unit of operation or costing unit or cost centre.
(A) Traceable Costs
(B) Common Costs
(C) Indirect Costs
(D) Historical Cost
Answer:
(A) Traceable Costs

Question 55.
Service costing is used by
(A) Power generation
(B) Hospitals
(C) Transport companies
(D) All of the above
Answer:
(D) All of the above

Question 56.
If costs are classified “By behaviour”, then which of the following is the correct classification?
(A) FixedCost,VariableCost & Semi-Variable Cost
(B) Historical Cost, Pre-Determined Cost, Standard Cost, Estimated Cost
(C) Production Cost, Administration Cost, Selling Cost, Distribution Cost, Research & Development Cost.
(D) Material, Labour, Overheads
Answer:
(A) FixedCost,VariableCost & Semi-Variable Cost

Question 57.
Which of the following report is not generated by cost accounting?
(A) Consumption of material statements
(B) Labour utilization statements
(C) Earnings per share
(D) Cost sheets
Answer:
(C) Earnings per share

Question 58.
Costs of indirect material, indirect labour and indirect expenses in aggregate constitute the ………..
(A) Overhead costs
(B) Historical Costs
(C) Pre-determined Costs
(D) Estimated Costs
Answer:
(A) Overhead costs

Question 59
…….. is a pre-determined cost based on past performance adjusted to anticipated changes.
(A) Te-be Veimme
(B) Estimated Costs
(C) Differential Cost
(D) Historical Costs
Answer:
(B) Estimated Costs

Question 60.
Which of the following is purpose of cost accounting?
(A) It is more attached with reporting the results and position of business.
(B) It aims at classifying and summarizing in significant manner and in terms of money, transaction and events, which are, in part at least, of a monetary in nature and interpreting the result thereof.
(C) Both (A) & (B)
(D) Neither (A) nor (B)
Answer:
(D) Neither (A) nor (B)

Question 61.
Increase in total variable cost is due to:
(A) Increase in fixed cost
(B) Increase in sales
(C) Increase in production
(D) All of the above
Answer:
(C) Increase in production

Question 62.
Indirect costs to cost units or cost centres and have to be absorbed or recovered into cost units are termed as indirect costs.
(A) Cannot be directly allocated
(B) Cannot be directly apportioned
(C) Both (A) & (B)
(D) Either (A) or (B)
Answer:
(A) Cannot be directly allocated

Question 63.
CIMA, London defines as, “the establishment of budgets, standard costs and actual costs of operations, processes, activities or products; and the analysis of variances, probability or the social use of funds”
(A) Management Accounting
(B) Financial Accounting
(C) Cost Accounting
(D) Financial Management
Answer:
(C) Cost Accounting

Question 64.
…………. is the aggregate cost related to a cost unit, which consists of a group of similar articles which maintain its identity throughout one or more stages of production.
(A) Pre-determined Costs
(B) Batch Cost
(C) Process Cost
(D) Operation Cost
Answer:
(B) Batch Cost

Question 65.
Which of the following statement is false?
(A) In most of the cases cost accounting system is installed on grounds of its benefits.
(B) Costing helps in making estimates
(C) Costing helps in determining and enhancing efficiency.
(D) The existing financial accounting staff may not resist to the costing system.
Answer:
(D) The existing financial accounting staff may not resist to the costing system.

Question 66.
Interest paid on own capital not involving any cash outflow is example of:
(A) Product Cost
(B) Opportunity Cost
(C) Imputed Cost
(D) Explicit Cost
Answer:
(C) Imputed Cost

Question 67.
An example of fixed cost is:
(A) Direct material cost
(B) Works manager’s salary
(C) Depreciation of machinery
(D) Chargeable expenses
Answer:
(B) Works manager’s salary

Question 68.
…….. is the name given to a common system of costing followed by number of firms in the same industries.
(A) Common Costing
(B) Absorption Costing
(C) Direct Costing
(D) Uniform Costing
Answer:
(D) Uniform Costing

Question 69.
Differential costs are also known as ………………
(A) Incremental Cost
(B) Opportunity Cost
(C) Period Cost
(D) Controllable Cost
Answer:
(A) Incremental Cost

Question 70.
The cost audit order can be given by the Central Government only in respect of Class of Companies which is required to maintain books of account under the provisions of …….. of the Companies Act, 2013.
(A) Section 148
(B) Section 138
(C) Section 209(1)(d)
(D) Section 128
Answer:
(A) Section 148

Question 71.
“Rent paid for the factory building which is temporarily closed” is example of
(A) Imputed cost
(B) Sunk cost
(C) Shut down cost
(D) Temporary cost
Answer:
(C) Shut down cost

Question 72.
Cost accounting system can be installed without management accounting.
(A) False
(B) True
(C) Partly incorrect
(D) None of the above
Answer:
(B) True

Question 73.
……………. is the cost of selecting one course of action and the loosing of the opportunities to carry out other course of action.
(A) Replacement Cost
(B) Hypothetical Cost
(C) Explicit Cost
(D) Opportunity Cost
Answer:
(D) Opportunity Cost

Question 74.
If costs are classified “by time’’, then which of the following is the correct classification?
(A) Marginal Cost, Differential Cost, Opportunity Cost, Replacement Cost, Relevant Cost, Imputed Cost, Sunk Cost, Normal Cost, Abnormal Cost, Avoidable Cost, Unavoidable Cost etc.
(B) Historical Cost, Pre-Determined Cost, Standard Cost, Estimated Cost
(C) Production Cost, Administration Cost, Selling Cost, Distribution Cost, Research & Development Cost.
(D) Material, Labour, Overheads
Answer:
(B) Historical Cost, Pre-Determined Cost, Standard Cost, Estimated Cost

Question 75.
Cost of goods produced includes:
(A) Production cost and finished goods inventory
(B) Production cost and work-in-progress
(C) Production cost, work-in-progress and finished goods inventory
(D) None of the above
Answer:
(B) Production cost and work-in-progress

Question 76.
Which of the following “cost unit” is suitable for Bicycle industries?
(A) Number
(B) Per kilogram
(C) Per tonne
(D) Per square foot
Answer:
(A) Number

Question 77.
Conversion Cost = …………….
(A) Direct wages + Direct expenses
(B) Direct wages + Direct expenses + Manufacturing overhead
(C) Direct material + Direct wages + Direct expenses + Manufacturing overhead
(D) Direct material + Direct wages + Direct expenses + Manufacturing overhead + Variable administrative overheads
Answer:
(B) Direct wages + Direct expenses + Manufacturing overhead

Question 78.
When a new factory is stared or when a new product is introduced, certain expenses are incurred. There are trial runs. Such costs are termed as ………… and treated as deferred revenue expenditure.
(A) Pre-production costs
(B) Preliminary expenses
(C) Prepaid costs
(D) Capital loss
Answer:
(A) Pre-production costs

Question 79.
Conversion cost is equal to the total of:
(A) Material cost and direct wages
(B) Material cost and indirect wages
(C) Direct wages and factory overhead
(D) Material cost and factory overhead
Answer:
(C) Direct wages and factory overhead

Question 80
………….. are also known as out of pocket costs.
(A) Explicit Costs
(B) Implicit Costs
(C) Notional Costs
(D) Economic Costs
Answer:
(A) Explicit Costs

Question 81.
………….. are the costs, which have been created by a decision that was made in the past and cannot be changed by any decision that will be made in the future.
(A) Sunk Costs
(B) Historical Costs
(C) Past Costs
(D) All of the above
Answer:
(D) All of the above

Question 82.
Which of the following cost is controllable cost?
(A) Fixed Costs
(B) Variable Costs
(C) Fixed Costs & Indirect Costs
(D) Period Costs
Answer:
(B) Variable Costs

Question 83.
Which of the following “cost unit” are suitable for chemical industries?
(A) Per meter, Per square foot, Ream
(B) Per gross, Per gallon, Per dozen bottle
(C) Liter, gallon, kilograms, tonne
(D) None of the above
Answer:
(C) Liter, gallon, kilograms, tonne

Question 84.
………….. is normally incurred at a given level of output in the conditions in which that level of output is achieved.
(A) Normal cost
(B) Abnormal Cost
(C) Process Cost
(D) All of the above
Answer:
(A) Normal cost

Question 85.
A company intends to rearrange production facilities, of future costs are as under:

Item of cost	Existing	Proposed rearrangement
Direct material	10.00	10.00
per unit
Direct labour	5.00	4.00
per unit

With reference to above data which cost is relevant cost for a company?
(A) Direct material cost
(B) Direct labour cost
(C) Both (A) & (B)
(D) Either (A) or (B)
Answer:
(B) Direct labour cost

Question 86.
According to CIMA, A cost which can be influenced by its budget holder is known as
(A) Controllable Costs
(B) Notional Costs
(C) Uncontrollable Costs
(D) Fixed Costs
Answer:
(A) Controllable Costs

Question 87.
…… is any sub-unit of an organization to which both revenues and costs are assigned, so that the responsibility of a sub-unit may be measured.
(A) Profit Centre
(B) Cost Centre
(C) Process Cost Centre
(D) Investment Centre
Answer:
(A) Profit Centre

Question 88.
……………. are not recorded in the books of account.
(A) Implicit Costs
(B) Explicit Costs
(C) Sunk Costs
(D) All of the above
Answer:
(A) Implicit Costs

Question 89.
Which of the following “cost unit” is not used by the organization engaged in providing services?
(A) Tonne km
(B) Passenger km
(C) Kilowatt hour
(D) Per meter
Answer:
(D) Per meter

Question 90.
Product costs are ……………
(A) Fixed in nature.
(B) Related period, hence also known as indirect cost.
(C) Not controllable.
(D) Also known as direct cost.
Answer:
(D) Also known as direct cost.

Question 91.
………. is an unusual or a typical cost
whose occurrence is usually irregular and unexpected.
(A) Normal Cost
(B) Abnormal Cost
(C) Budgeted Cost
(D) All of the above
Answer:
(B) Abnormal Cost

Question 92.
In which of the following industries “contract costing” is used?
(A) Ship building
(B) Nursing home
(C) Textile mills
(D) Bicycle
Answer:
(A) Ship building

Question 93.
………. is a variable cost of one unit of a product or a service ie., a cost which would be avoided if that unit was not produced or provided.
(A) Differential Cost
(B) Incremental Cost
(C) Replacement Cost
(D) Relevant Cost
Answer:
(D) Relevant Cost

Question 94.
………… are the costs incurred in relation to the temporary closing or a department/ division/enterprise.
(A) Start up costs
(B) Shutdown costs
(C) Temporary costs
(D) Relevant costs
Answer:
(B) Shutdown costs

Question 95.
Costs which are ascertained after they have been incurred are known as …………
(A) Imputed costs
(B) Sunk costs
(C) Historical costs
(D) Opportunity costs
Answer:
(C) Historical costs

Question 96.
Prime costs plus variable overhead is known as:………….
(A) Production cost
(B) Marginal costs
(C) Total cost
(D) Cost of sales
Answer:
(A) Production cost

Question 97.
Notional costs are considered in …………..
(A) Financial Accounting
(B) Cost Accounting
(C) Both (A) & (B)
(D) Neither (A) nor (B)
Answer:
(B) Cost Accounting

Question 98.
Costs that change in response to alternative courses of action are called:
(A) Relevant costs
(B) Differential costs
(C) Target costs
(D) Sunk costs
Answer:
(B) Differential costs

Question 99.
Which of the following method of costing is suitable for “Interior decoration”?
(A) Job Costing
(B) Operating Costing
(C) Multiple Costing
(D) Batch Costing
Answer:
(A) Job Costing

Question 100.
…………. are also known as accounting costs.
(A) Explicit Costs
(B) Implicit Costs
(C) Notional Costs
(D) Opportunity costs
Answer:
(A) Explicit Costs

Question 101.
Indirect costs are known as:
(A) Variable costs
(B) Fixed costs
(C) Overheads
(D) None of the above
Answer:
(C) Overheads

Question 102.
If ₹ 10 is spend on producing 10 units and ₹ 15 for producing 15, then the fixed cost per unit is:
(A) ₹ 0
(B) ₹ 1
(C) ₹ 2
(D) ₹ 5
Answer:
(A) ₹ 0

Question 103.
The main difference between the profit centre and investment centre is:
(A) Decision making
(B) Revenue generation
(C) Cost incurrence
(D) Investment
Answer:
(A) Decision making

Question 104.
A division of company, which produces and markets the product, can be called as …….
(A) Profit Centre
(B) Process Centre
(C) Service Centre
(D) Investment Centre
Answer:
(A) Profit Centre

Question 105.
Which of the following is not a relevant cost?
(A) Replacement cost
(B) Sunk cost
(C) Marginal cost
(D) Standard cost
Answer:
(B) Sunk cost

Question 106.
Which of the following cost is linked with the calculation of cost of inventories?
(A) Product Cost
(B) Period Cost
(C) Both Product & Period Cost
(D) Historical Cost
Answer:
(A) Product Cost

Question 107.
All of the following are features of a relevant cost except:
(A) They affect the future cost
(B) They cause an increment in cost
(C) Relevant cost is a sunk cost
(D) They affect the future cash flows
Answer:
(C) Relevant cost is a sunk cost

Question 108.
Which of the following method of costing is suitable for “Airline Company”?
(A) Job Costing
(B) Operating Costing
(C) Multiple Costing
(D) Batch Costing
Answer:
(B) Operating Costing

Question 109.
Which of the following statement is TRUE about the relevant cost?
(A) It is a sunk cost
(B) It is an opportunity cost
(C) It do not affect the decision making process
(D) All costs are relevant
Answer:
(B) It is an opportunity cost

Question 110.
The cost of electricity bill of the factory is treated as:
(A) Fixed cost
(B) Variable cost
(C) Step cost
(D) Semi variable cost
Answer:
(D) Semi variable cost

Question 111.
A firm uses its own capital or uses its owner’s time and/or financial resources both are examples of ……….
(A) Implicit Cost
(B) Explicit Cost
(C) Sunk Cost
(D) Relevant Cost
Answer:
(A) Implicit Cost

Question 112.
Which of the following would be considered to be an investment centre?
(A) Managers have control over marketing
(B) Managers have a sales team
(C) Managers have a sales team and are given a credit control function
(D) Managers can purchase capital assets and are given a credit control function
Answer:
(D) Managers can purchase capital assets and are given a credit control function

Question 113.
The total cost incurred in the operation of a business undertaking other than the cost of manufacturing and production is known as………..
(A) Direct cost
(B) Variable cost
(C) Commercial cost
(D) Conversion cost
Answer:
(C) Commercial cost

Question 114.
If costs are classified by nature, then which of the following is the correct classification?
(A) Marginal Cost, Differential Cost, Opportunity Cost, Replacement Cost, Relevant Cost, Imputed Cost, Sunk Cost, Normal Cost, Abnormal Cost, Avoidable Cost, Unavoidable Cost etc.
(B) Historical Cost, Pre-Determined Cost, Standard Cost, Estimated Cost
(C) Production Cost, Administration Cost, Selling Cost, Distribution Cost, Research & Development Cost.
(D) Material, Labour, Expenses
Answer:
(D) Material, Labour, Expenses

Question 115.
In decision making all costs already incurred in past should always be:
(A) Ignored
(B) Considered
(C) Partially ignored
(D) Partially considered
Answer:
(A) Ignored

Question 116.
Cost accounting concepts include all of the following except:
(A) Planning
(B) Controlling
(C) Sharing
(D) Costing
Answer:
(C) Sharing

Question 117.
Which of the following statement is TRUE about historical cost?
(A) It is always relevant to decision making
(B) It is always irrelevant to decision making
(C) It is always an opportunity cost
(D) It is always realizable value
Answer:
(B) It is always irrelevant to decision making

Question 118.
Colin Drury defined as, “any activity for which a separate measurement of costs is desired”.
(A) Cost Driver
(B) Cost Centre
(C) Cost Object
(D) Profit Center
Answer:
(C) Cost Object

Question 119.
Expenses such as rent and depreciation of a building are shared by several departments these are:
(A) Indirect expenses
(B) Direct expenses
(C) Joint expenses
(D) All of the above
Answer:
(A) Indirect expenses

Question 120.
Period costs are:
(A) Expensed when the product is sold
(B) Included in the cost of goods sold
(C) Related to specific period
(D) Not expensed
Answer:
(C) Related to specific period

Question 121.
All of the following compose cost of goods sold except:
(A) Raw material
(B) Labour
(C) Capital
(D) Factory overhead
Answer:
(C) Capital

Question 122.
…………. can be influenced by the action of the executive heading the responsibility center.
(A) Fixed Costs
(B) Uncontrollable Costs
(C) Controllable Costs
(D) Unavoidable Costs
Answer:
(C) Controllable Costs

Question 123.
CIMA defines as, a production or service, function, activity or item of equipment whose costs may be attributed to cost units.
(A) Cost Driver
(B) Cost Centre
(C) Investment Centre
(D) Profit Center
Answer:
(B) Cost Centre

Question 124.
A segment of the business that generates both revenue and cost is called:
(A) Profit centre
(B) Cost centre
(C) Cost driver
(D) All of these
Answer:
(A) Profit centre

Question 125.
What will be the impact of normal loss on the overall per-unit cost?
(A) Per unit cost will increase
(B) Per unit cost will decrease
(C) Per unit cost remain unchanged
(D) Normal loss has no relation to unit cost|
Answer:
(A) Per unit cost will increase

Question 126.
A fixed cost:
(A) May change in total when such change is not related to changes in production
(B) Will not change in total because it is not related to changes in production
(C) Is constant per unit for each unit of change in production
(D) May change in total, depending on production with the relevant range
Answer:
(B) Will not change in total because it is not related to changes in production

Question 127.
All of the following are the features of fixed costs except:
(A) Although fixed within a relevant range of activity level but are relevant to a decision making when it is avoidable.
(B) Although fixed within a relevant range of activity level but are relevant to a decision making when it is incremental.
(C) Generally it is irrelevant
(D) It is relevant to decision making under any circumstances
Answer:
(D) It is relevant to decision making under any circumstances

Question 128
…………. are constant per unit but change in totality.
(A) Fixed Costs
(B) Semi-variable Costs
(C) Uncontrollable Costs
(D) Variable Costs
Answer:
(D) Variable Costs

Question 129.
The basic assumption made with respect to fixed costs is that
(A) Fixed cost is a controllable cost
(B) Fixed cost is a product cost
(C) Fixed cost is an irrelevant cost
(D) Fixed cost is a period cost
Answer:
(D) Fixed cost is a period cost

Question 130.
Which of the following is NOT a relevant cost to decision making?
(A) Opportunity costs
(B) Relevant benefits
(C) Avoidable costs
(D) Sunk costs
Answer:
(D) Sunk costs

Question 131.
Which of the following product cost is Included in prime cost and conversion cost?
(A) Direct labour
(B) Manufacturing overhead
(C) Direct material
(D) Work in Process
Answer:
(A) Direct labour

Question 132.
Which of the following costs would NOT be a period cost?
(A) Indirect materials
(B) Administrative salaries
(C) Advertising costs
(D) Selling costs
Answer:
(A) Indirect materials

Question 133.
Management Accounting seeks to serve the purpose of management to run a business more efficiently and thus uses the techniques of:
(A) Financial Accounting
(B) Cost Accounting
(C) Mathematics and Statistics
(D) All of the above
Answer:
(D) All of the above

Question 134.
Which of the following is not a method of costing?
(A) Marginal costing
(B) Job costing
(C) Process costing
(D) Operating costing
Answer:
(A) Marginal costing

Question 135.
Which of the following is not a Technique of costing?
(A) Absorption costing
(B) Standard costing
(C) Multiple costing
(D) Marginal costing
Answer:
(C) Multiple costing

Question 136.
A cost centre is:
(A) A unit of production in relation to which costs are ascertained
(B) A location which is responsible for controlling direct costs
(C) Any location or department which incurs cost
(D) None of these
Answer:
(A) A unit of production in relation to which costs are ascertained

Question 137.
A cost centre is:
(A) A unit of product or service in relation to which costs are ascertained
(B) An amount of expenditure attributable to an activity
(C) A production or service location, function, activity or item of equipment for which costs are accumulated
(D) A centre for which an individual budget is drawn up
Answer:
(A) A unit of product or service in relation to which costs are ascertained

Question 138.
Cost centre may be –
(A) Location
(B) Person
(C) Item of equipment
(D) Any of the above
Answer:
(D) Any of the above

Question 139.
A ……….. is a planned cost for a unit of product of service rendered.
(A) Standard cost
(B) Marginal Cost
(C) Opportunity Cost
(D) Historical Cost
Answer:
(A) Standard cost

Question 140.
Raw materials directly identifiable as part of the final product is classified as:
(A) Period costs
(B) Fixed costs
(C) Direct materials
(D) Any of the above
Answer:
(C) Direct materials

Question 141.
Inventory consists of ……….
(A) Intangible property
(B) Tangible property
(C) (A)or(B)
(D) (A) & (B)
Answer:
(B) Tangible property

Question 142.
Which of the following statement is correct in relation to “Need for proper inventory control”?
(A) Inadequate inventory may lead to keep men and machines waiting.
(B) Materials do not constitute a significant part of the total production cost hence proper planning and controlling of inventories is not a big deal.
(C) Funds are not tied up in surplus stores and stocks.
(D) All of the above
Answer:
(A) Inadequate inventory may lead to keep men and machines waiting.

Question 143.
Inventory is valued at ……..
(A) Replacement price
(B) Replacement price or purchase value, whichever is less.
(C) At cost or net realizable value which-ever is less.
(D) Replacement price or net realizable value, whichever is less.
Answer:
(C) At cost or net realizable value which-ever is less.

Question 144.
Inventory held for sale in the ordinary course of business is known as ………….
(A) Finished Goods
(B) Raw Material
(C) Work-in-progress
(D) Miscellaneous inventory
Answer:
(A) Finished Goods

Question 145.
Which of the following method is based on the assumption that, latest consignment of a materials or goods manufactured are exhausted first and the closing stock is valued at the cost of earliest lot in hand?
(A) FIFO Method
(B) Highest-in-first-out method
(C) Average cost method
(D) LIFO Method
Answer:
(D) LIFO Method

Question 146.
………….. are those cost, which can be identified and traceable to particular product or costing unit or cost centre.
(A) Indirect material costs
(B) Period costs
(C) Direct material costs
(D) Fixed costs
Answer:
(C) Direct material costs

Question 147.
Wood used in production of tables and chairs, steel bars used in steel factory etc. are the examples of ………..
(A) Indirect material
(B) Direct material
(C) Fixed material
(D) All of the above
Answer:
(B) Direct material

Question 148.
……….. are those items, which are moving at a slow rate and this may arise due to general depression in demand due to keen competition.
(A) Dormant stocks
(B) Written-off stocks
(C) Slow moving stocks
(D) Any of the above
Answer:
(C) Slow moving stocks

Question 149.
………… are those items which are not moving temporarily but their movement is expected shortly.
(A) Slow moving stock
(B) Dormant stocks
(C) Non-marketable stock
(D) Less efficient stock
Answer:
(B) Dormant stocks

Question 150.
If small quantities of direct material used in the end product like gums and threads are used in binding books then it may be categorized as
(A) Miscellaneous cost
(B) Preliminary cost
(C) Indirect material cost
(D) Fixed cost of production
Answer:
(C) Indirect material cost

Question 151.
Which of the following technique can be used for inventory control?
(A) Standard Costing
(B) ABC Analysis
(C) Integrated Accounting System
(D) Any of the above
Answer:
(B) ABC Analysis

Question 152.
……….. is an optimum quantity of material to be ordered every time an order is placed. EOQ may be defined as that quantity of purchase which minimizes material order cost and material carrying cost.
(A) Quantity in such lot which has maximum discount
(B) Special Order Quantity (SOQ)
(C) Standard Order Quantity (SOQ)
(D) Economic Order Quantity (EOQ)
Answer:
(D) Economic Order Quantity (EOQ)

Question 153.
The model and formula of EOQ was developed by in 1913.
(A) F.W. Taylor
(B) F. Wilson Harris
(C) F. Walter Harris
(D) F.W. Marshall
Answer:
(B) F. Wilson Harris

Question 154.
Under ………… a continuous record of receipt and issue of materials is maintained by the stores department and the information about the stock of material is always available.
(A) Perpetual Inventory System
(B) Continuous Stock Taking
(C) Periodic Inventory System
(D) Just in time
Answer:
(A) Perpetual Inventory System

Question 155.
purchase means the purchase of goods or material such that delivery immediately precedes their use.
(A) Economic order quantity
(B) Reorder point
(C) Re-order Quantity
(D) Just in time (JIT)
Answer:
(D) Just in time (JIT)

Question 156.
Out of the following, what is not the work of purchase department?
(A) Receiving purchase requisition
(B) Exploring the sources of material supply
(C) Preparation and execution of purchase orders
(D) Accounting for material received
Answer:
(D) Accounting for material received

Question 157.
Which one out of the following is not an inventory valuation method?
(A) FIFO
(B) LIFO
(C) Weighted Average
(D) EOQ
Answer:
(D) EOQ

Question 158.
In case of rising prices (inflation), FIFO method will:
(A) Provide lowest value of closing stock and profit
(B) Provide highest value of closing stock and profit
(C) Provide highest value of closing stock but lowest value of profit
(D) Provide highest value of profit but lowest value of closing stock
Answer:
(B) Provide highest value of closing stock and profit

Question 159.
In case of rising prices (inflation), LIFO will:
(A) Provide lowest value of closing stock and profit
(B) Provide highest value of closing stock and profit
(C) Provide highest value of closing stock but lowest value of profit
(D) Provide highest value of profit but lowest value of closing stock
Answer:
(A) Provide lowest value of closing stock and profit

Question 160.
The labour cost which is traceable or identified to particular product or cost centre is known as –
(A) Indirect labour cost
(B) Direct labour cost
(C) Variable labour cost
(D) (B) or (C)
Answer:
(D) (B) or (C)

Question 161.
Rent free accommodation or accommodation provided at concessional rate should be classified as:
(A) Fringe Benefits
(B) Deferred Monetary Benefits
(C) Fixed standard labour cost
(D) Pecuniary Benefits
Answer:
(A) Fringe Benefits

Question 162.
………. is process whereby company make assessment of particular job to know how worth is it.
(A) Merit Rating
(B) Performance appraisal
(C) Induction
(D) Job evaluation
Answer:
(D) Job evaluation

Question 163.
Direct labour cost ……….
(A) Should be treated as production overhead.
(B) Should be charged using supplementary overhead rate
(C) Should be treated as abnormal cost and charged to costing profit & loss account.
(D) Becomes part of prime cost.
Answer:
(D) Becomes part of prime cost.

Question 164.
Direct labour cost is in nature.
(A) Variable
(B) Fixed
(C) Semi-variable
(D) Fixed or semi-variable
Answer:
(A) Variable

Question 165.
Which of the following is not objective of time-keeping?
(A) Preparation of payrolls
(B) Ascertaining idle time
(C) Ascertaining and controlling labour cost
(D) Disability, making a worker unfit for work
Answer:
(D) Disability, making a worker unfit for work

Question 166.
In relation to labour cost “Production Bonus” will be classified as
(A) Pecuniary Benefits
(B) Deferred Monetary Benefits
(C) Fringe Benefits
(D) Non-Pecuniary Gains
Answer:
(A) Pecuniary Benefits

Question 167.
When some benefit or allowances are given to employee in addition to normal wages/salary, then such additional benefits are popularly called as
(A) Additional benefits
(B) Deferred benefits
(C) Non-absorbed labour cost
(D) Fringe benefits
Answer:
(D) Fringe benefits

Question 168.
…………. refers to correct recording of the employees’ attendance time.
(A) Time booking
(B) Timekeeping
(C) Time spending
(D) Time pass
Answer:
(B) Timekeeping

Question 169.
Overhead refers to
(A) Direct or prime cost
(B) All indirect costs
(C) Only factory indirect costs
(D) Only indirect expenses
Answer:
(B) All indirect costs

Question 170.
Allotment of whole item of cost to a cost centre or cost unit is known as
(A) Cost Apportionment
(B) Cost Allocation
(C) Cost Absorption
(D) Machine hour rate
Answer:
(B) Cost Allocation

Question 171.
Overhead cost covers
(A) Indirect Materials
(B) Indirect Labour
(C) Indirect Expenses
(D) All of the above
Answer:
(D) All of the above

Question 172.
If an item of overhead expenditure is charged specifically to a single department this would be an example of:
(A) Apportionment
(B) Allocation
(C) Re-apportionment
(D) Absorption
Answer:
(B) Allocation

Question 173.
The arrangement of various items of overhead costs in logical groups having regard to their nature is known as
(A) Absorption of overheads
(B) Apportionment of overheads
(C) Allocation of overheads
(D) Classification of overheads
Answer:
(D) Classification of overheads

Question 174
……….. implies the allotment of whole items of cost to cost centres or cost units whether it may be production cost centres or service cost centres.
(A) Apportionment
(B) Allocation
(C) Absorption
(D) Classification
Answer:
(B) Allocation

Question 175.
The process of distribution of over-heads allotted to a particular department or cost centre over the units produced is called
(A) Allocation
(B) Apportionment
(C) Absorption
(D) Departmentalization
Answer:
(B) Apportionment

Question 176.
If overheads are classified by “element wise” then which of the following classification is correct?
(A) Production overhead, Administrative overheads, Selling overheads, Distribution overhead, Research & development overhead
(B) Variable overhead, Fixed overhead, Semi-variable overhead
(C) Indirect materials, Indirect labour, Indirect expenses
(D) None of the above
Answer:
(C) Indirect materials, Indirect labour, Indirect expenses

Question 177.
Cost of primary packing necessary for protecting the product or for convenient handling, should
(A) Become a part of the prime cost
(B) Become a part of the factory over-heads
(C) Charged to costing profit and loss account using supplementary over-head rate.
(D) Treated as selling and distribution overheads
Answer:
(A) Become a part of the prime cost

Question 178.
If actual overheads are less than pre-determined overheads then it is case of:
(A) Under Absorption
(B) Over Absorption
(C) Low Absorption
(D) None of the above
Answer:
(B) Over Absorption

Question 179.
If actual overheads are more than predetermined overheads then it is case of:
(A) Over Absorption
(B) Under Absorption
(C) (A) or (B)
(D) (A) & (B)
Answer:
(B) Under Absorption

Question 180.
Opening Stock = 25,000 units, Closing Stock = 15,000 units. Purchases = 1,90,000 units. ( Take 1 year = 360 days). Stock Velocity = ?
(A) 30 days
(B) 90 days
(C) 60 days
(D) 36 days
Answer:
(D) 36 days

Question 181.
Inventory turnover ratio = 2.5 times, Opening Stock=90,000 units, Closing Stock = 1,10,000 units. Purchases = ?
(A) 2,30,000 units
(B) 2,70,000 units
(C) 2,50,000 units
(D) 2,40,000 units
Answer:
(B) 2,70,000 units

Material Consumed = 2,50,000
Opening Stock + Purchases – Closing Stock = Material Consumed
90,000 + Purchases – 1,10,000 = 2,50,000
Purchases = 2,70,000

Question 182.
Stock Velocity =180 days, Material consumed = 1,50,000, Closing Stock = 62,500 units. Opening stock = ?
(A) 2,12,500 units
(B) 3,00,000 units
(C) 87,500 units
(D) 1,62,500 units
Answer:
(C) 87,500 units

Question 183.
The following data relate to two activity levels of production :

No. of units	4,500	5,750
Overheads (₹)	2,69,750	2,89,125

(A) ₹ 15.50
(B) ₹ 44.44
(C) ₹ 59.94
(D) None of the above
Answer:
(A) ₹ 15.50

Question 184.
If you know that with 8 emits of output, average fixed cost is ₹ 12.50 and average variable cost is ₹ 81.25, then total cost at this output level is:
(A) ₹ 93.75
(B) ₹ 97.78
(C) ₹750
(D) ₹ 880
Answer:
(C) ₹750

Question 185.
Following data has been extracted from the records of manufacturing company:
Total overhead for an activity level of 5,00,000 machine hours = ?

Machine Hours	8,00,000	3,00,000
Overheads	₹52,00,000	₹32,00,000

(A) ₹ 32,00,000
(B) ₹ 52,00,000
(C) ₹ 40,00,000
(D) ₹ 45,00,000
Answer:
(C) ₹ 40,00,000

Question 186.
A management consultancy recovers overheads on chargeable consulting hours. Budgeted overheads were ₹ 6,15,000 and actual consulting hours were 32,150. Over-heads, were under-recovered by ₹ 35,000. If actual overheads, were ₹ 6,94,075, what was the budgeted overhead absorption rate per hour ?
(A) ₹ 19.13
(B) ₹ 20.50
(C) ₹ 21.59
(D) ₹ 22.68
Answer:
(B) ₹ 20.50

Question 187.
Following data are made available by the company for the year ended 31.3.2019:
Administrative overheads = ₹ 1,58,342
Production overheads = ₹ 3,48,482
Factory cost = ₹ 10,57,736
Work-in-progress = ₹ 25,487
Machine hour = 4,188 hours
Absorption rate for absorption of production overhead = ?
(A) ₹ 121.02 per hour
(B) ₹ 252.36 per hour
(C) ₹ 373.58 per hour
(D) ₹ 83.21 per hour
Answer:
(D) ₹ 83.21 per hour

Question 188.
The monthly budget of a department is as under:
Direct material : ₹ 45,000
Direct wages : ₹ 60,000
Overheads : ₹ 90,000
Direct labour hours : Hours 15,000
Machine hours : ₹ Hours 30,000
Find out the overhead recovery rate based on machine hours.
(A) 6 per hour
(B) 3 per hour
(C) 300%
(D) 50%
Answer:
(B) 3 per hour

Question 189.
Following data relate to two output levels of a department:
Machine hours — 17,000 — 18,500
Overheads (₹) — 2,46,500 — 2,51,750
The variable overhead rate per hour = ?
(A) ₹ 5 per hour
(B) ₹ 4.5 per hour
(C) ₹ 4 per hour
(D) ₹ 3.5 per hour
Answer:
(D) ₹ 3.5 per hour

Question 190.
Direct material=₹ 2,100, Direct wages = ₹ 660. Overhead absorption rate for Ma-chining, Assembly, Packing departments was respectively ₹ 4.5, ₹ 1.4, ₹ 2.5 per hour. Requires working of 180, 120 & 40 hours work in Machining, Assembly and Packing department respectively. The factory adds 30% on the factory cost to cover administration & selling overheads and profit. Selling price = ? .
(A) ₹ 3,585
(B) ₹ 4,661
(C) ₹ 4,989
(D) ₹ 5,262
Answer:
(C) ₹ 4,989

Question 191.
B Ltd. estimated that during the year 75,000 machine hours would be used and it has been using an overhead absorption rate of ₹ 6.40 per machine hour in its machining department. During the year the overhead expenditure amounted to ₹ 4,72,560 and 72,600 machine hours were used. Which one of the following statements is correct?
(A) Overhead was under-absorbed by ₹ 7,440
(B) Overhead was under-absorbed by ₹ 7,920
(C) Overhead was over-absorbed by ₹ 7,440
(D) Overhead was over-absorbed by ₹ 7,920
Answer:
(B) Overhead was under-absorbed by ₹ 7,920

Question 192.
A business always absorbs its overheads on labour hours. In the 8th period, 18,000 hours were worked, actual overheads were ₹ 2,79,000 and there was ₹ 36,000 over-absorption. The overhead absorption rate per hours was:
(A) ₹ 15.50
(B) ₹ 17.50
(C) ₹ 18.00
(D) ₹ 13.50
Answer:
(B) ₹ 17.50

Question 193.
A company calculates the prices of jobs by adding overheads to the prime cost and adding 30% to total costs as a profit margin. Job number Y256 was sold for ₹ 1,690 and incurred overheads of ₹ 694. What was the prime cost of the job?
(A) ₹ 489
(B) ₹ 606
(C) ₹ 996
(D) ₹ 1,300
Answer:
(B) ₹ 606

Question 194.
H Ltd. uses pre-determined overhead rates to apply manufacturing overhead to jobs. The pre-determined overhead rate is based on machine hours in the machining department and direct labour cost in the assembly department. At the beginning of the year, the company made the following estimates:

What predetermined overhead rates would be used in the Machining and Assembly Departments, respectively.
(A) 110% and? 15
(B) ₹ 5.00 and 50%
(C) ₹ 8.00 and 50%
(D) ₹ 5.00 and 200%
Answer:
(D) ₹ 5.00 and 200%

Question 195.
Job 21 was unfinished at the end of the accounting period. The total cost assigned to the job is ? 12,000 of which ₹ 3,000 is direct material. Factory overhead is allocated to goods in process at 150% of direct labour cost. What was the amount of direct labour charged to Job 21?
(A) ₹ 9,000
(B) ₹ 3,600
(C) ₹ 4,000
(D) ₹ 3,000
Answer:
(B) ₹ 3,600

Question 196.
The production cost to produce one unit of finished goods was ₹ 45. Direct materials were 1/3 of the total cost, and direct labour was 40% of the combined total of direct labour and direct materials. The cost for direct materials, direct labour, and factory overhead was:
(A) ₹ 15, ₹ 18, & ₹ 12 respectively
(B) ₹ 15, ₹ 12, & ₹ 18 respectively
(C) ₹ 15, ₹ 16, & ₹ 14 respectively
(D) ₹ 15, ₹ 10, & ₹ 20 respectively
Answer:
(D) ₹ 15, ₹ 10, & ₹ 20 respectively

15 + 0.4% = %
15 = 0.6%
% = Prime Cost = 25

Question 197.
Following details are given to you:
Raw materials consumed ₹ 80,000
Direct wages Factory overheads Office overheads Cost of production
(A) ₹ 88,000
(B) ₹ 50,000
(C) ₹ 68,000
(D) ₹ 60,000
Answer:
(B) ₹ 50,000

Question 198.
Dec 2014: The term used for ‘process of ascertaining the cost’ is known as ………..
(A) Cost
(B) Costing
(C) Cost accounting
(D) Cost accountancy
Answer:
(B) Costing

Question 199.
Dec 2014: Which element of total cost is common in prime cost and conversion cost ………..
(A) Variable overheads
(B) Fixed overheads
(C) Direct materials
(D) Direct labour
Answer:
(D) Direct labour

Question 200.
Dec 2014: The cost that increases as the volume of activity decreases within the relevant range, is known as ………..
(A) Average cost per unit
(B) Average variable cost per unit
(C) Total fixed cost
(D) Total variable cost
Answer:
(A) Average cost per unit

Question 201.
Dec 2014: Which of the following is generally used as cost unit of brick works ……..
(A) 1,000 bricks
(B) 100 bricks
(C) 10 bricks
(D) 1 brick
Answer:
(A) 1,000 bricks

Question 202.
Dec 2014: Relevant costs are ……..
(A) Future costs
(B) Standard costs
(C) Controllable costs
(D) Historical costs
Answer:
(A) Future costs

Question 203.
Dec 2014: Which of the following is not considered as a function of management accounting?
(A) Financial planning
(B) Decision making
(C) Reporting
(D) Cost computation
Answer:
(B) Decision making

Question 204.
Dec 2014: The cost of selecting one course of action and forgoing the other is known as ………
(A) Sunk cost
(B) Differential cost
(C) Opportunity cost
(D) Joint cost
Answer:
(C) Opportunity cost

Question 205.
Dec 2014: Expenditure on labour and materials that cannot be economically identified with a specific saleable cost unit is known as …….
(A) Prime cost
(B) Overheads
(C) Direct cost
(D) Abnormal loss
Answer:
(B) Overheads

Question 206.
Dec 2014: For a manufacturing company, which of the following is an example of period cost rather than a product cost……..
(A) Depreciation on factory equipment
(B) Commission to salesman
(C) Wages of machine operator
(D) Insurance on factory equipment
Answer:
(D) Insurance on factory equipment

Question 207.
Dec 2014: Which of the following is known as full costing ………….
(A) Variable costing
(B) Differential costing
(C) Marginal costing
(D) Absorption costing
Answer:
(D) Absorption costing

Question 208.
Dec 2014: Which of the following is not true? Fixed costs remain fixed …………
(A) Over a short period
(B) Over a long period and within relevant range
(C) Over a short period and within a relevant range
(D) Over a long period
Answer:
(D) Over a long period

Question 209.
Dec 2014: According to Section 2( 13) of the Companies Act, 2013, ‘books of account’ does not require maintenance of which of the following records …………
(A) All sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place
(B) All sales and purchases of goods and sendees by the company
(C) The assets and liabilities of the company
(D) Cash flow statement
Answer:
(D) Cash flow statement

Question 210.
June 2015: Which of the following is generally used as cost unit in cement industry —
(A) Per tone
(B) Per kilolitre
(C) Per kilogram
(D) Per gallon
Answer:
(A) Per tone

Question 211.
June 2015: Which of the following is not an objective of management accounting —
(A) Formulation of plans and policy
(B) Assisting in decision making
(C) Preparation of financial statements
(D) Interpretation of financial documents
Answer:
(C) Preparation of financial statements

Question 212.
June 2015: The establishment of budgets, standard costs and actual costs of operations, processes, activities or products and the analysis of variances, profitability or the social use of funds is known as ………
(A) Costing
(B) Cost Accounting
(C) Cost Accountancy
(D) Financial Accounting
Answer:
(B) Cost Accounting

Question 213.
June 2015: Costs which are constant for a given level of output and then increase by a fixed amount at a higher level of output are called
(A) Step costs
(B) Differential costs
(C) Committed costs
(D) Opportunity costs
Answer:
(A) Step costs

Question 214.
June 2015: Interest on internally generated funds is an example of ………..
(A) Differential cost
(B) Joint cost
(C) Common cost
(D) Imputed cost
Answer:
(D) Imputed cost

Question 215.
June 2015: Cost unit applicable to bicycle industry is …………
(A) Per part of bicycle
(B) Per bicycle
(C) Per thousand bicycles
(D) Per day
Answer:
(B) Per bicycle

Question 216.
June 2015: Sunk costs are …………
(A) Opportunity costs
(B) Costs to be incurred in future
(C) Not relevant for decision making
(D) Controllable costs
Answer:
(C) Not relevant for decision making

Question 217.
June 2015: Fixed cost is a cost ……….
(A) Which remains fixed for each unit of output
(B) Which remains fixed in total during a given period despite changes in output
(C) Which is partly fixed and partly variable in relation to the output
(D) Which changes in total in proportion to the changes in output
Answer:
(B) Which remains fixed in total during a given period despite changes in output

Question 218.
June 2015: Which of the following is the social purpose of cost audit …………
(A) Detection and correction of abnormal losses
(B) Detection of errors and frauds
(C) Determination of inventory valuation
(D) Pinpointing areas of inefficiency and mismanagement for the benefit of shareholders and consumers
Answer:
(D) Pinpointing areas of inefficiency and mismanagement for the benefit of shareholders and consumers

Question 219.
June 2015: Rent, rates and insurance of factory and office are examples of …………
(A) Direct expenses
(B) Indirect expenses
(C) Notional expenses
(D) Miscellaneous expenses
Answer:
(B) Indirect expenses

Question 220.
Dec 2015: Management accounting is basically concerned with …………
(A) The problem of choice
(B) Causative relationship
(C) Recording of transaction
(D) Both (A) and (B) above
Answer:
(D) Both (A) and (B) above

Question 221.
Dec 2015: Cost accounting is ………..
(A) Nothing more than a detailed analysis of expenditure
(B) An instrument of management control
(C) Useful only in such organization which has profit as the aim
(D) Not needed if prices are beyond the control of the firm.
Answer:
(B) An instrument of management control

Question 222.
Dec 2015: Conversion cost is the summation of …………
(A) Direct material and direct wages
(B) Direct wages and office overheads
(C) Direct wages, direct charges and works overheads
(D) None of the above
Answer:
(C) Direct wages, direct charges and works overheads

Question 223.
Dec 2015: A cost centre which is engaged in production activity by conversion of raw material into finished product is called ……..
(A) Production cost centre
(B) Impersonal cost centre
(C) Process cost centre
(D) Production unit
Answer:
(A) Production cost centre

Question 224.
Dec 2015: A business unit is known to be a profit centre ……..
(A) If its operations or departments are not directly involved in revenue gen crating activities, but instead focus on elements of cost control
(B) If its management is evaluated not only on revenues and expenses, but also on asset investment
(C) If its management is compensated based on the level of profitability
(D) If its management is held accountable for both revenues and expenses and has the authority to make decision regarding its products, markets and source of supply
Answer:
(D) If its management is held accountable for both revenues and expenses and has the authority to make decision regarding its products, markets and source of supply

Question 225.
Dec 2015:
Statement-I
The activities or operations of every cost centre should be homogeneous so as to ensure uniform basis of charging expenses within the centre.
Statement-II
The activities or operation of each cost centre must he well defined and clearly identifiable.
Select the correct answer from the following —
(A) Both statements are correct
(B) Both statements are incorrect
(C) Statement-I is correct, but Statement – II is incorrect
(D) Statement-I is incorrect, but Statement – II is correct
Answer:
(A) Both statements are correct

Question 226.
Dec 2015: Match the following

Select the correct answer from the options given below ………..

Answer:
(B)

Question 227.
June 2016: A process in which management is looking outward to examine how others achieve their performance
levels and to understand the process they use is called —
(A) Balanced score card
(B) Target costing
(C) Bench marking process
(D) Performance analysis
Answer:
(C) Bench marking process

Question 228.
June 2016: Match the following industry/product with appropriate cost unit:

Select the correct answer using the codes given below —

Answer:
(A)

Question 229.
June 2016: Which one of the following statements is false —
(A) Management accountant uses cost accounting tools and techniques for planning and decision making
(B) Management accounting is mostly historical in its approach and ill projects the past
(C) Cost accounting system can be installed without management accounting
(D) Management accounting focuses on wealth maximization
Answer:
(B) Management accounting is mostly historical in its approach and ill projects the past

Question 230.
June 2016: Identify the cost which is not relevant or useful for decision making —
(A) Shut down cost
(B) Marginal cost
(C) Imputed cost and replacement cost
(D) Sunk cost
Answer:
(D) Sunk cost

Question 231.
June 2016: Cost Accounting Standard is related to bringing uniformity and consistency in the principles and methods of determining the selling and distribution overheads with reasonable accuracy.
(A) 10
(B) 12
(C) 15
(D) 4
Answer:
(C) 15

Question 232.
June 2016: Section of the Companies Act, 2013 gives the cost auditor same power as the financial auditor has under section of the Companies Act, 2013.
(A) 148, 143
(B) 143, 148
(C) 147, 148
(D) 143, 144
Answer:
(A) 148, 143

Question 233.
June 2016: Those fixed costs which continue to be incurred even when there is no production are called —
(A) Period costs
(B) Discretionary costs
(C) Committed costs
(D) Output costs
Answer:
(C) Committed costs

Question 234.
June 2016: A direct cost is a cost which can be classified on the basis of—
(A) Behaviour
(B) Traceability
(C) Controllability
(D) Relevance
Answer:
(B) Traceability

Question 235.
June 2016: Management accounting does not include the function of —
(A) Planning and control
(B) Product costing
(C) Preparation of financial statements
(D) Decision-making
Answer:
(D) Decision-making

Question 236.
Dec 2016: Which of the following is/ are tool(s) and technique(s) of management accounting?
(A) Ratio analysis
(B) Linear programming
(C) Trend analysis
(D) All of the above
Answer:
(D) All of the above

Question 237.
Dec 2016: Match the following:

Select the correct answer from the options given below —

Answer:
(B)

Question 238.
Dec 2016: Statement -1
Sunk cost is one that has already been in-curred and cannot be avoided by decisions in the future.
Statement – II
For decision making, it is required that such cost should be incurred.
Select the correct answer from the options given below ………….
(A) Both statements are correct
(B) Both statements are incorrect
(C) Statement-I is incorrect, but Statement – I is correct
(D) Statement-I is correct, but Statement-II is incorrect
Answer:
(D) Statement-I is correct, but Statement-II is incorrect

Question 239.
Dec 2016: The prime function of management accounting is to ………….
(A) Record business transactions
(B) Interpret financial data
(C) Assist the management in performing its functions effectively
(D) Assist tax authorities.
Answer:
(C) Assist the management in performing its functions effectively

Question 240.
Dec 2016: Multiple costing is followed in………….
(A) Biscuit factory
(B) Steel industry
(C) Brick making
(D) Cycle manufacturing
Answer:
(D) Cycle manufacturing

Question 241.
Dec 2016: The ascertainment of costs after they have been incurred is called ………….
(A) Marginal costing
(B) Historical costing
(C) Differential costing
(D) None of the above
Answer:
(B) Historical costing

Question 242.
Dec 2016: A technique where standardized principles and methods of cost accounting are employed by a number of different companies is termed as —
(A) Uniform costing
(B) Absorption costing
(C) Standard costing
(D) ABC costing
Answer:
(A) Uniform costing

Question 243.
Dec 2016: A cost centre is —
(A) A production or service location, function, activity or item of equipment whose costs may be attributed to cost units
(B) A centre for which an individual budget is drawn-up
(C) A centre where cost is classified on the basis of variability
(D) An amount of expenditure attributable to an activity-
Answer:
(A) A production or service location, function, activity or item of equipment whose costs may be attributed to cost units

Question 244.
Dec 2016: In the management information system (MIS), top level management uses
(A) Operational information
(B) Tactical information
(C) Transactional information
(D) Strategic information
Answer:
(D) Strategic information

Question 245.
Dec 2016: Which of the following is an irrelevant cost —
(A) Sunk cost
(B) Replacement cost
(C) Opportunity cost
(D) All of the above
Answer:
(A) Sunk cost

Question 246.
Dec 2016: Match the following:
List -I List – II
(A) Advertising — (1) Operating costing
(B) Sugar company — (2) Job costing
(C) Readymade — (3) Process costing garments
(D) Transport — (4) Batch costing
Select the correct answer from the options given below —

Answer:
(A)

Question 247.
Dec 2014: In inflationary situation, which system of inventory valuation shows higher profits —
(A) LIFO
(B) FIFO
(C) HIFO
(D) Weighted average
Answer:
(B) FIFO

Question 248.
June 2015: Which of the following method is based on the assumption that costliest materials are issued first and inventory is valued at the lowest possible price ……….
(A) FIFO method
(B) UFO method
(C) Highest-in-first-out method
(D) Weighted average method
Answer:
(C) Highest-in-first-out method

Question 249.
June 2015: Following information is available regarding a product-X:
1st January, 2015:
Opening balance: 50 units @ 14 Receipts:
5th January, 2015: 100 units @ ₹ 5 12th January, 2015: 200 units @ ₹ 5.50 Issues: ‘
2nd January, 2015: 30 units 18th January, 2015:170 units
The value of closing stock according to FIFO method is —
(A) ₹ 660
(B) ₹ 770
(C) ₹ 825
(D) ₹ 860
Answer:
(C) ₹ 825

Question 250.
June 2015: In case of rising prices, FIFO method will provide—
(A) Lowest value of closing stock and profit
(B) Highest value of closing stock and profit
(C) Highest value of closing stock but lowest value of profit
(D) Lowest value of closing stock but highest value of profit
Answer:
(B) Highest value of closing stock and profit

Question 251.
Dec 2015: FIFO method of valuing material issues is suitable in times of —
(A) Rising prices
(B) Falling prices
(C) Price fluctuation
(D) Boom period
Answer:
(B) Falling prices

Question 252.
June 2016: XYZ Ltd. had 4,000 units of inventory in hand on 1st March, 2016, costing ₹ 4 per unit. Purchases and issues of material during the month were as follows:

The cost of inventory as on 31st March, 2016 under FIFO and weighted average cost method will be
(A) ₹ 27,000 and ₹ 24,498
(B) ₹ 27,000 and ₹ 23,625
(C) ₹ 22,000 and ₹ 23,625
(D) ₹ 22,000 and ₹ 24,498
Answer:
(A) ₹ 27,000 and ₹ 24,498

Question 253.
Question June 2016: In a situation of rising prices, profit and tax liability would be lower under method than under method of material issue pricing.
(A) FIFO; LIFO
(B) LIFO; FIFO
(C) LIFO; Average
(D) FIFO; Average
Answer:
(B) LIFO; FIFO

Question 254.
June 2016: The technique of economic order quantity is losing significance since the development of —
(A) Perpetual inventory
(B) Just-in-time
(C) First-in-first-out
(D) ABC analysis
Answer:
(B) Just-in-time

Question 255.
June2016: Which one of the following is the correct sequence of the purchase procedure of inventory —
(A) Indenting for material, issuing tenders, receiving quotations, and placing order
(B) Issuing tenders and receiving quotations, indenting for material, and placing order
(C) Placing order, issuing tenders and receiving quotations, and indenting for material
(D) Indenting for material and placing order
Answer:
(A) Indenting for material, issuing tenders, receiving quotations, and placing order

Question 256.
Dec 2016: Amaze Ltd. had an opening inventory of 5,000 units costing ₹ 5 per unit on 1st April, 2016. Following receipts and issues took place in April, 2016:
5th April, 2016: Purchased 800 units @ ₹ 8 per unit
12th April, 2016: Purchased 200 units @ ₹ 8 per unit
15th April, 2016: Issued 3,000 units 25th April, 2016: Purchased 1,000 units @ ₹ 9 per unit .
Cost of inventory as on 30th April, 2016 under weighted average basis will be —
(A) ₹ 25,500
(B) ₹ 27,000
(C) ₹ 20,000
(D) ₹ 23,500
Answer:
(A) ₹ 25,500

Question 257.
Dec 2014: Which of the following is not a method used for time booking —
(A) Daily time sheets
(B) Weekly time sheets
(C) Job cards
(D) Pay roll
Answer:
(D) Pay roll

Question 258.
June 2015: Which of the following is not an objective of time-booking —
(A) Apportionment of overheads against jobs
(B) Preparation of payrolls
(C) Ascertaining idle time for the purpose of control
(D) Calculation of labour cost of jobs done
Answer:
(A) Apportionment of overheads against jobs

Question 259.
June 2016: Which of the following is/ are not a purpose of time keeping —
(i) Ascertaining labour cost of a job/ product/ activity
(ii) Evaluating labour performance by comparing actual and budgeted time
(iii) Providing internal check against dummy workers.
Select the correct answer from the options given below —
(A) (i) and (ii)
(B) (ii) and (iii)
(C) (i) and (iii)
(D) (ii) only
Answer:
(A) (i) and (ii)

Question 260.
June 2016: Direct labour cost will include —
(A) All labour cost attributable to a production department
(B) Labour cost of production and production support services
(C) Cost of direct labour engaged in converting raw materials into manufactured articles
(D) Cost of labour recruited directly by the management and through contractors
Answer:
(C) Cost of direct labour engaged in converting raw materials into manufactured articles

Question 261.
Dec 2016:
Statement -1
Low time wages do not necessarily mean low cost of production and high wages mean high cost of product.
Statement – II
Time and motion study, which is a function of engineering department, is useless for the determination of wages.
Select the correct answer from the options given below ………..
(A) Both statements are correct
(B) Both statements are incorrect
(C) Statement-I is incorrect, but Statement-I is correct
(D) Statement-I is correct, but Statement-II is incorrect
Answer:
(D) Statement-I is correct, but Statement-II is incorrect

Question 262.
Dec 2014: Rent, rates and taxes paid for the building are apportioned on the basis of ………..
(A) Floor area
(B) Capital value
(C) No. of employees
(D) Direct labour hours
Answer:
(A) Floor area

Question 263.
Dec 2014: If the actual expenses fall short of the amount absorbed, it is known as ………..
(A) Under absorption
(B) Over absorption
(C) Allocation
(D) Apportionment
Answer:
(B) Over absorption

Question 264.
Dec 2014: The budgeted fixed over-heads amounted to ₹ 84,000. The budgeted and actual production amounted to 20,000 units and 24,000 units respectively. This means that there will be an —
(A) Under-absorption of ₹ 16,800
(B) Under-absorption of ₹ 14,000
(C) Over-absorption of ₹ 16,800
(D) Over-absorption of ₹ 14,000
Answer:
(A) Under-absorption of ₹ 16,800
Actual overheads based on budgeted rate = \(\frac{84,000}{20,000} \times 24,000\)
20,000
Since budgeted overheads are less than actual overheads there is under absorption.
1,00,800- 84,000= 16,800.

Question 265.
June 2015: The following data is available for Akhil Ltd. for the year ended 31st March 2015:
Administrative overheads: ₹ 2,50,000 Production overheads: ₹ 2,74,200 Factory cost: ₹ 3,42,800 Work-in-progress: ₹ 74,000 Machine hour: 4,000 hours. The absorption rate for production over-heads is —
(A) ₹ 68.55
(B) ₹ 216.75
(C) ₹ 235.25
(D) ₹ 198.25
Answer:
(A) ₹ 68.55

Question 266.
June 2015: The budgeted fixed over-heads amounted to ₹ 75,000. The budgeted and Actual production amounted to 15,000 units and 20,000 units respectively. This means that there will be an —
(A) Under-absorption of ₹ 25,000
(B) Under-absorption of ₹ 18,750
(C) Over-absorption of ₹ 25,000
(D) Over-absorption of ₹ 18,750
Answer:
(C) Over-absorption of ₹ 25,000
Absorption Rate = \(\frac{\text { Budgeted Overheads }}{\text { Budgeted Units }}=\frac{75,000}{15,000}=5 \text { per units }\)
Overhead absorbed = 20,000 units × 5 = 1,00,000. If it is assumed that actual overheads are same to that of budgeted figure then 1,00,000 – 75,000 = 25,000. Since absorbed overhead are more than actual overheads this is case of over absorption.

Question 267.
June 2015: The following data relates to two activity levels of production:
Level I Level II
No. of units 4,000 5,500
Overheads (₹) 2,80,000 3,50,000
Variable cost per unit would be —
(A) ₹ 46.67
(B) ₹ 133.33
(C) ₹ 70
(D) ₹ 64
Answer:
(A) ₹ 46.67
Variable Overhead Rate = \(\frac{\text { Change in Overheads }}{\text { Change in unit }}=\frac{70,000}{1,500}=46.67 \text { per unit }\)

Question 268.
June 2015: A product whose direct material costs and direct labour costs are ₹ 200 and ₹ 100 would consume 3 hours, 4 hours and 5 hours in department A, B & C respectively. Overheads absorption rate is – A: ₹ 4.5 per hour, B: ₹ 5 per hour and C: ₹ 10.5 per hour. The total cost of the product is —
(A) ₹ 486
(B) ₹ 386
(C) ₹ 214
(D) ₹ 500
Answer:
(B) ₹ 386

Question 269.
Dec 2015: The following particulars relate to production department of a factory:
Material used : ₹ 20,000
Direct labour : ₹ 10,000
Overheads : ₹ 7,500
On an order carried out in the department, material consumed was ₹ 4,000 and direct wages paid amounted to ₹ 2,000. The amount of overheads chargeable to this order on the basis of prime cost would be –
(A) ₹ 1,500
(B) ₹ 1,510
(C) ₹ 1,700
(D) ₹ 1,710
Answer:
(A) ₹ 1,500

Question 270.
Dec 2015: Allotment of the entire costs to a cost centre or unit is known as —
(A) Cost apportionment
(B) Cost allocation
(C) Cost absorption
(D) Machine hour rate
Answer:
(B) Cost allocation

Question 271.
June 2016: Following information is given for an order:
Materials (direct) : ₹ 25,000
Wages (direct) : ₹ 20,000
Factory : 75% of wages (direct)
overheads
Sales : ₹ 85,800
Profit : 10% on cost of production
Office overheads are charged as a percentage of factory cost. The amount of office overheads and its percentage to factory cost will be —
(A) ₹ 78,000 and 30%
(B) ₹ 18,000 and 30%
(C) ₹ 25,800 and 43%
(D) ₹ 33,000 and 55%
Answer:
(B) ₹ 18,000 and 30%

60,000 + x + 6,000 + 0.1 = 85,800
66,000+ 1.1x = 85,800
1.1x = 19,800
x =18,000
% of factory overheads to factory cost = \(=\frac{18,000}{60,000} \times 100=30 \%\)

Question 272.
June 2016: Which of the following statements are true —
(i) Conversion costs and overheads are interchangeable terms
(ii) Notional cost and imputed cost means the same thing
(iii) Cost accounting is not needed by a non-profit organization
(iv) Rent on owned building is included in cost accounts.
Select the correct answer from the options given below —
(A) (i) and (ii)
(B) (iii) and (iv)
(C) (ii) and (iv)
(D) All of the above
Answer:
(A) (i) and (ii)

Question 273.
June 2016: Classify the following expenses as direct (D) and indirect (I) —
(i) Royalties charged as a rate per unit
(ii) Cost of making a design, pattern for a specific job
(iii) Salesman’s commission
(iv) Power, fuel, lighting of factory and office.
Select the correct answer using the codes given below —

Answer:
(D)

Question 274.
Dec 2016: When the amount of overheads absorbed is less than the amount of overheads incurred, it is called —
(A) Under-absorption of overheads
(B) Over-absorption of overheads
(C) Proper absorption of overheads
(D) None of the above
Answer:
(A) Under-absorption of overheads

Question 275.
Dec 2016:
Statement -1
Production departments and service departments are equally important for manufacturing industry.
Statement – II
To calculate cost of a product, service department cost should be redistributed among production department on a reasonable basis.
Select the correct answer from the options given below —
(A) Both statements are correct
(B) Both statements are incorrect
(C) Statement-I is incorrect, but Statement-II is correct
(D) Statement-I is correct, but Statement-II is incorrect
Answer:
(A) Both statements are correct

Question 276.
Dec 2016: Following information has been collected from cost records of Bright Ltd.:
Direct material: ₹ 5,00,000 Direct labour: ₹ 3,00,000
Factory overheads: 20% of factory cost The amount of factory overheads will be:
(A) ₹ 1,60,000
(B) ₹ 2,00,000
(C) ₹ 1,80,000
(D) ₹ 1,96,000
Answer:
(B) ₹ 2,00,000
20% of factory cost means 2596 of prime cost (5,00,000 + 3,00,000) × 2596 = 2,00,000.

Question 277.
Dec 2016: Labour hour rate Administrative overheads are absorbed on the basis of —
(A) Direct materials
(B) Direct wages
(C) Prime cost
(D) Works cost
Answer:
(D) Works cost

Question 278.
Dec 2016: Following information relates to the production department of a factory:
Materials used : ₹ 80,000
Direct labour : ₹ 60,000
Overheads : ₹ 40,000
On an order carried out in the department, materials consumed amounted to ₹ 16,000. The overheads chargeable to this order on the basis of direct materials will be —
(A) ₹ 8,000
(B) ₹ 9,000
(C) ₹ 8,500
(D) ₹ 9,800
Answer:
(A) ₹ 8,000
Overhead absorption rate = \(\frac{\text { Overheads }}{\text { Material }} \times 100=\frac{40,000}{80,000} \times 100=50 \%\)
Overheads to be absorbed for given order = 16,000 × 5096 = 8,000

Question 279.
Dec 2014: If selling price of a product is ₹ 85,800 and the profit margin on cost is 10%, the amount of profit will be —
(A) ₹ 7,800
(B) ₹ 8,580
(C) ₹ 7,200
(D) ₹ 9,533
Answer:
(A) ₹ 7,800
Profit is 1096 on cost means 1 /11th of sale price.
Cost + Profit = Sales
100+10= 110
Profit = 85,800 \(\frac{10}{110}\) = 7,800

Question 280.
Dec 2014: Which of the following is to be included while preparing a cost sheet —
(A) Interest paid
(B) Goodwill written-off
(C) Income-tax paid
(D) Salesman commission
Answer:
(D) Salesman commission

Question 281.
Dec 2014: Cost of production plus opening stock of finished goods minus closing stock of finished goods is equal to—
(A) Cost of goods sold
(B) Cost of sales
(C) Sales
(D) Prime cost
Answer:
(A) Cost of goods sold

Question 282.
Dec 2014: Which of the following is not a type of job costing —
(A) Terminal costing
(B) Contract costing
(C) Batch costing
(D) Operation costing
Answer:
(D) Operation costing

Question 283.
June 2015:
Net works cost: ₹ 3,00,000 Administrative overheads: ₹ 1,00,000 Opening stock of finished goods: Nil Closing stock of finished goods: ₹ 20,000 Selling overheads: ₹ 10,000. From the above information, the cost of sales will be —
(A) 4,30,000
(B) 3,90,000
(C) 3,70,000
(D) 4,10,000
Answer:
(B) 3,90,000

Question 284.
June 2015: Following information is available regarding an organization:
Direct material purchased: ₹ 1,50,000 Direct material consumed: ₹ 80,000 Direct labour: ₹ 50,000 Direct expenses: ₹ 30,000 Manufacturing overheads: ₹ 20,000 The prime cost for the organization is—
(A) 1,60,000
(B) 2,90,000
(C) 2,30,000
(D) 1,80,000
Answer:
(A) 1,60,000

Question 285.
June 2015: If the sales of a product is ₹ 94,080 and the profit margin on cost 12%, the amount of profit will be ………………
(A) ₹ 7,800
(B) ₹ 11,290
(C) ₹ 8,580
(D) ₹ 10,080
Answer:
(D) ₹ 10,080
Cost + Profit = Sales
100 +12 = 112
Profit = 94,080 × \(\frac{12}{112}\) = 10,080

Question 286.
Dec 2015: Item(s) excluded from cost sheet are —
(A) Direct material
(B) Administrative overheads
(C) Provision for taxation
(D) All of the above
Answer:
(C) Provision for taxation

Question 287.
Dec 2015: The following information is extracted from the job ledger in respect of Job No. 404:
Material: ₹ 3,400
Wages: 80 hours @ ₹ 2.50 per hour
Variable overheads incurred for all jobs: ₹ 5,000 for 4,000 labour hours
If the job is billed for ₹ 4,200 the profit will be —
(A) ₹ 600
(B) ₹ 500
(C) ₹ 700
(D) ₹ 650
Answer:
(B) ₹ 500

Question 288.
June 2016: From the following particulars relating to Job No. 555, ascertain the total cost:
Direct materials 16,000
Direct labour 8,000
Direct expenses 1,600
Works overheads are recovered on the basis of 50% on prime cost and administrative overheads at 10% of works cost. Choose the correct option —
(A) 45,000
(B) 45,240
(C) 42,240
(D) 43,000
Answer:
(C) 42,240

Question 289.
June 2016: Direct material cost ₹ 45,000; Direct labour cost is 40% of direct material cost; Royalties on production ₹ 4,000; Other direct expenses are 20% of prime cost. Prime cost will be —
(A) ₹ 78,750
(B) ₹ 83,750
(C) ₹ 80,400
(D) None of the above-
Answer:
(B) ₹ 83,750

45,000 + 18,000 + 4,000 + 0.2
67,000+ 0.2x=x
67,000 = 0.8x
x = 83,750

Question 290.
June 2016:
Cost of production for 10,000 units: ₹ 1,60,000
Opening stock of finished goods (1,000 units) : ₹ 18,000
Closing stock of finished goods (FIFO) : 2,000 units
Selling & distribution overheads : ₹ 2 per unit sold
Profit mark-up on selling : 20% price
The amount of profit will be —
(A) ₹ 39,800
(B) ₹ 40,500
(C) ₹ 41,000
(D) ₹ 40,800
Answer:
(C) ₹ 41,000

Question 291.
Dec 2016: Following information is given:
Direct material purchased : 6,00,000
Direct material consumed : 7,00,000
Direct labour : 3,00,000
Direct expenses : 2,50,000
Manufacturing overheads : 3,00,000
Prime cost will be —
(A) ₹ 14,50,000
(B) ₹ 11,50,000
(C) ₹ 12,50,000
(D) ₹ 15,50,000
Answer:
(C) ₹ 12,50,000

Question 292.
Dec 2016: Which of the following is not a part of job order cost sheet —
(A) Direct material
(B) Direct labour
(C) Actual factory overheads
(D) Applied factory overheads
Answer:
(C) Actual factory overheads

Valuation of Goodwill & Shares – Corporate and Management Accounting MCQ

March 27, 2023March 27, 2023 by Prasanna

Going through the Valuation of Goodwill & Shares – Corporate and Management Accounting CS Executive MCQ Questions with Answers you can quickly revise the concepts.

Valuation of Goodwill & Shares – Corporate and Management Accounting MCQs

Question 1.
…………. may be described as the aggregate of those intangible attributes of a business which contribute to its superior earning capacity over a normal return on investment.
(A) Image of firm
(B) Goodwill
(C) Work quality
(D) Value
Answer:
(B) Goodwill

Question 2.
Which of the following factor generally contribute to the value of goodwill of a firm?
(A) Efficiency of management
(B) Risk involved in the business
(C) Location of the business
(D) All of above
Answer:
(D) All of above

Question 3.
Following are the factors affecting goodwill except:
(A) Nature of business
(B) Efficiency of management
(C) Technical knowhow
(D) Location of the customers
Answer:
(D) Location of the customers

Question 4.
Which of the following formula is used to calculate goodwill under simple average profit method?
(A) Goodwill = Weighted average profit × No. of year purchase
(B) Goodwill = Average profit × No. of year purchase
(C) Goodwill = Super profit × No. of years purchases
(D) Goodwill = Super profit × Annuity factor
Answer:
(B) Goodwill = Average profit × No. of year purchase

Question 5.
Under average profit basis goodwill is calculated by –
(A) No. of years purchased multiplied with average profits.
(B) No. of years purchased multiplied with super profits.
(C) Summation of the discounted value of expected future benefits.
(D) Super profit divided with expected rate of return.
Answer:
(A) No. of years purchased multiplied with average profits.

Question 6.
Which of the following formula is used to calculate goodwill under super profit method?
(A) Goodwill = Weighted average profit × No. of year purchase
(B) Goodwill = Average profit × No. of year purchase
(C) Goodwill = Super profit × No. of years purchases
(D) Any of the above
Answer:
(C) Goodwill = Super profit × No. of years purchases

Question 7.
Weighted average method of calculating goodwill should be followed when –
(A) Profits are uneven
(B) Profits has increasing trend
(C) Profits has decreasing trend
(D) Either (B) or (C)
Answer:
(B) Profits has increasing trend

Question 8.
Under annuity basis goodwill is calculated by –
(A) No. of years purchased multiplied with average profits.
(B) No. of years purchased multiplied with super-profits.
(C) Summation of the discounted value of expected future benefits.
(D) Super profit divided with expected rate of return.
Answer:
(C) Summation of the discounted value of expected future benefits.

Question 9.
Under capitalization basis goodwill is calculated by:
(A) No. of years purchased multiplied with average profits
(B) No. of years purchased multiplied with super profits
(C) Summation of the discounted value of expected future benefits
(D) Super profit divided with expected rate of return
Answer:
(D) Super profit divided with expected rate of return

Question 10.
Goodwill is …………..
(A) An intangible asset
(B) A fixed asset
(C) Realizable assets
(D) All of the above
Answer:
(D) All of the above

Question 11.
Good will is paid for obtaining
(A) Future benefit
(B) Present benefit
(C) Past benefit
(D) None of the above
Answer:
(A) Future benefit

Question 12.
Super profit is …………
(A) Excess of average profit over normal profit
(B) Extra profit earned
(C) Average profit earned by similar companies
(D) Profit earned in abnormal circumstance
Answer:
(A) Excess of average profit over normal profit

Question 13.
Normal profit is …………….
(A) Profit earned by similar companies in the same industry
(B) Average profit earned
(C) Excess of average profit over super profit
(D) Profit earned in abnormal circumstance
Answer:
(A) Profit earned by similar companies in the same industry

Question 14.
Normal profit depends on -………….
(1) Normal Rate of Return
(2) Leverage
(3) Average capital employed
(4) Beta
(5) Dividend policy.
Select the correct answer from the options given below.
(A) (3) and (5) only
(B) (1), (4) and (5) only
(C) (1) and (3) only
(D) (1), (2) and (3) only
Answer:
(C) (1) and (3) only

Question 15.
While calculating capital employed –
(A) Tangible trading assets should be considered
(B) Fictitious assets should be considered
(C) Unrecorded assets should be ignored
(D) Assets written off should be considered at original book value
Answer:
(A) Tangible trading assets should be considered

Question 16.
At the time of valuation of goodwill, any non-trading income included in the profit should be
(A) Considered
(B) Added
(C) Ignored
(D) Given special consideration
Answer:
(C) Ignored

Question 17.
Net asset value is also called as –
(A) Asset backing value
(B) Intrinsic value
(C) Liquidation value
(D) All of the above
Answer:
(D) All of the above

Question 18.
Net asset value method of share valuation is based on the assumption that the company is………….
(A) A going concern
(B) Going to be liquidated
(C) Risk-free
(D) Both (A) & (B)
Answer:
(B) Going to be liquidated

Question 19.
Yield value depends on -………………
(A) Future maintainable profit
(B) Paid-up equity capital
(C) Normal rate of return
(D) None of the above
Answer:
(D) None of the above

Question 20.
FMP for yield valuation is …………..
(A) Future profit
(B) Profit that would be available to equity shareholders
(C) Past profit
(D) None of the above
Answer:
(B) Profit that would be available to equity shareholders

Question 21.
Yield value is based on the assumption that –
(A) The company is a going concern
(B) The company will be liquidated
(C) The company is sick
(D) None of the above
Answer:
(A) The company is a going concern

Question 22.
Value of a partly paid equity share is equal to:
(A) Value of fully paid share divided by face value and multiplied by paid-up value per share
(B) Value of fully paid share less Calls unpaid per share
(C) Value of fully paid share less Calls unpaid per share divided by face value and multiplied by paid-up value per share
(D) None of the above
Answer:
(B) Value of fully paid share less Calls unpaid per share

Question 23.
Yield basis valuation of shares may take the form of valuation based on rate of return and
(A) Inflation factor
(B) Productivity factor
(C) Risk free factor
(D) Beta factor
Answer:
(B) Productivity factor

Question 24.
When only a few shares are sold basis will be appropriate to value share under yield method.
(A) Rate of dividend
(B) Rate of earning
(C) Benchmark rate
(D) Any of the above
Answer:
(A) Rate of dividend

Question 25.
Which of the following intangibles is/ are prohibited from being recognized as an asset?
(a) Self-generated goodwill
(b) Separately acquired intangible
(c) Internally generated intangibles
(d) Goodwill acquired as part of an on-going business
Select the correct answer from the options given below.
(A) (b) & (d)
(B) (a) & (c)
(C) (c) & (d)
(D) (a) & (b)
Answer:
(B) (a) & (c)

Question 26.
If the intrinsic value of a share of common stock is less than its market value, which of the following is the most reasonable conclusion?
(A) The stock has a low level of risk.
(B) The stock offers a high dividend payout ratio.
(C) The market is undervaluing the stock.
(D) The market is overvaluing the stock.
Answer:
(D) The market is overvaluing the stock.

Question 27.
Market based methods of valuation should not be adopted when –
(A) When business is too small
(B) When assets are less than liabilities of the business
(C) In case of significant and unusual fluctuations in market price
(D) It is difficult to estimate the realizable value in case of going concern.
Answer:
(C) In case of significant and unusual fluctuations in market price

Question 28.
Market value method is generally the most preferred method in case of –
(A) Frequently traded shares of companies fisted on stock exchanges having nationwide trading
(B) Valuation of a division of a company
(C) Where the share are not listed or are thinly traded
(D) Where there is an intention to liquidate it and to realize the assets and distribute the net proceeds.
Answer:
(A) Frequently traded shares of companies fisted on stock exchanges having nationwide trading

Question 29.
Which of the following is required to be taken into consideration while valuing equity shares of the company?
(A) Size of the block of shares
(B) Restricted transferability aspect
(C) Dividends
(D) All of the above
Answer:
(D) All of the above

Question 30.
Which of the following shall not be taken into consideration while calculating Capital Employed?
(A) Discount on issue of debentures
(B) Preliminary expenses
(C) Fictitious assets
(D) All of the above
Answer:
(D) All of the above

Question 31.
Goodwill is –
(A) Intangible asset
(B) Valuable asset
(C) Non-current asset
(D) All of the above
Answer:
(D) All of the above

Question 32.
Net asset value per share is also known as –
(A) Internal value per share
(B) Intrinsic value per share
(C) Economic value per share
(D) Recoverable value per share
Answer:
(B) Intrinsic value per share

Question 33.
Which of the following is deducted while calculating net assets available to equity shareholders?
(A) Proposed preference dividend
(B) Share suspense account
(C) Know-how
(D) Non-trading investment
Answer:
(A) Proposed preference dividend

Question 34.
Statement I:
Net Asset Method can be fairly used to value shares when the firm is liquidated.
Statement II:
This method does not give any weight to earning capacity of the company.
Select the correct answer from the options given below:
(A) Statement I is correct but Statement II is incorrect
(B) Statement I is incorrect but Statement II is correct
(C) Both Statement I and Statement II are incorrect
(D) Both Statement I and Statement II are correct
Answer:
(D) Both Statement I and Statement II are correct

Question 35.
In which of the following cases valuation is essential?
(A) Conversion of debt instruments into shares.
(B) On directions of Tribunal orAuthonty or Arbitration Tribunals.
(C) When issuing shares to public either through an Initial Public Offer or by offer for sale.
(D) All of the above
Answer:
(D) All of the above

Question 36.
While deciding net asset value, fictitious assets –
(A) Should be considered
(B) Should not be considered
(C) Added to total assets
(D) Valued separately
Answer:
(B) Should not be considered

Question 37.
For which one or more of the following reasons is the recognition as an asset of an internally generated intangible prohibited?
(a) Because there may not be an active market for that asset.
(b) Because its cost is usually relatively insignificant.
(c) Because it is difficult to reliably identify the related costs
(d) Because it is difficult to establish the probability of flow of economic benefits
Select the correct answer from the options given below.
(A) (a) & (b)
(B) (c) & (d)
(C) (b) & (c)
(D) (b) & (d)
Answer:
(B) (c) & (d)

Question 38.
When controlling shares are to be sold then which of the following will be the appropriate base for valuation of shares:
(A) Rate of dividend
(B) Rate of earning
(C) Rate of gross profit
(D) Rate of risk free return
Answer:
(B) Rate of earning

Question 39.
Fair value is the average of the –
(A) Intrinsic value and yield value
(B) Internal value and external value
(C) Capitalized value and earning value
(D) Notional value and book value
Answer:
(A) Intrinsic value and yield value

Question 40.
As per valuation of equity shares based on price-earnings ratio, the shares are valued on the basis of multiplied by price earnings ratio.
(A) Dividend per share
(B) Earnings per share
(C) Bonus per share
(D) Interest per share
Answer:
(B) Earnings per share

Question 41.
Market value of share =
(A) DPS × EPS
(B) P/E Ratio × DPS
(C) P/E Ratio × EPS
(D) (P/E Ratio 4 ÷ EPS) × 100
Answer:
(C) P/E Ratio × EPS

Question 42.
Which of the following Accounting Standard deals with Intangible Assets?
(A) AS-22
(B) AS-24
(C) AS-26
(D) AS-28
Answer:
(C) AS-26

Question 43.
As per AS-26, there is a rebuttable presumption that the useful life of an intangible asset will not exceed from the date when the asset is available for use.
(A) Ten years
(B) Five years
(C) Eight years
(D) Six years
Answer:
(A) Ten years

Question 44.
If control over the future economic benefits from an intangible asset is achieved through legal rights that have been granted for a finite period, the useful life of the intangible asset should not exceed the period of the legal rights unless:
(A) The legal rights are renewable and
(B) Renewal is virtually certain.
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)

Question 45.
As per AS-26, intangible asset can be recognized at -………..
(A) Research phase
(B) Development Phase
(C) Both (A) and (B)
(D) Either (A) or (B)
Answer:
(B) Development Phase

Question 46.
As per AS-26, expenditure on research or on the research phase of an internal project should be recognized as when
it is incurred.
(A) An Asset
(B) An expense
(C) Profit
(D) Liability
Answer:
(B) An expense

Question 47.
Which of following is NOT the method of valuation of Goodwill?
(A) Average profit Method
(B) Super profit Method
(C) Capitalization Method
(D) Straight line Method
Answer:
(D) Straight line Method

Question 48.
Super profit means – …………..
(A) Future maintainable profit minus normal return
(B) Weighted Average Profit
(C) Future maintainable profit minusnet profit earned by business
(D) Normal return plus PAT
Answer:
(A) Future maintainable profit minus normal return

Question 49.
In balance sheet shares appears at –
(A) Face value
(B) Adjusted market value
(C) Market price
(D) Paid-up value
Answer:
(D) Paid-up value

Question 50.
Which of the following is not required while calculating yield value per share?
(A) Expected return rate
(B) Normal return rate
(C) Super profit
(D) Paid-up value per share
Answer:
(C) Super profit

Question 51.
The profits of last 5 years are ₹ 60,000; ₹ 67,500; ₹ 52,500; ₹75,000 & ₹ 60,000. Find the value of goodwill, if it is calculated on average profits of last 5 years on the basis of 3 years of purchase.
(A) ₹ 63,750
(B) ₹ 1,91,250
(C) ₹ 1,89,000
(D) ₹ 2,13,750
Answer:
(C) ₹ 1,89,000
Average Profit =\(\frac{60,000+67,500+52,500+75,000+60,000}{5}\) = 63,000
Goodwill = Average Profit × No. of years purchases
= 63,000 × 3
= 1,89,000

Question 52.
It is agreed that goodwill of the company is to be valued at 3 years purchase of average profits for the last 5 years.

Value of goodwill will be –
(A) ₹ 28,953 thousand
(B) ₹ 29,673 thousand
(C) ₹ 28,673 thousand
(D) ₹ 29,953 thousand
Answer:
(A) ₹ 28,953 thousand
Average Profit = \(\frac{16,110+11,850+8,145-600+12,750}{5}\)= 9,651 thousand
Goodwill = Average Profit × No. of years purchases
=9,651 × 3
= 28,953 thousand

Question 53.
It is agreed that goodwill of the firm is valued at 2 years purchase of weighted average profits for the last 3 years.

Value of goodwill will be –
(A) ₹ 1,22,000
(B) ₹ 2,22,000
(C) ₹ 1,22,222
(D) ₹ 1 ,20,000
Answer:
(A) ₹ 1,22,000

Question 54.
Find the goodwill of the company from the following information:
Total Capital Employed = ₹ 8,00,000
Reasonable Rate of Return =15%
Profits for the year = ₹ 12,00,000
Use capitalization method.
(A) ₹ 82,00,000
(B) ₹ 12,00,000
(C) ₹ 72,00,000
(D) ₹ 42,00,000
Answer:
(C) ₹ 72,00,000

Question 55.
Find the goodwill from the following information:
Capital employed – ₹ 11,00,000
Rate of normal return – 10%
Future Maintainable profit – ₹ 2,00,000
No. of year purchases – 3 years
(A) ₹ 6,00,000
(B) ₹ 2,70,000
(C) ₹ 9,00,000
(D) ₹ 3,70,000
Answer:
(B) ₹ 2,70,000

Goodwill = Super profit × No. of years purchases
= 90,000 × 3
= 2,70,000

Question 56.
Find the goodwill of the firm using capitalization method from the following information:
Capital employed = ₹ 4,80,000.
Rate of normal return = 15%.
Profits for the year = ₹ 90,000
(A) ₹ 4,20,000
(B) ₹ 3,11,000
(C) ₹ 1,20,000
(D) ₹ 2,20,000
Answer:
(C) ₹ 1,20,000

Question 57.
Average profit of a firm is ₹ 1,20,000. The rate of capitalization is 12%. Assets and liabilities of the company are ₹ 10,00,000 & ₹ 4,25,000 respectively.
(A) ₹ 3,25,000
(B) ₹ 2,25,000
(C) ₹ 5,25,000
(D) ₹ 4,25,000
Answer:
(D) ₹ 4,25,000
Assets – Liabilities = Capital employed
10,00,000 – 4,25,000 = 5,75,000

Question 58.
The profits for 2016-2017 is ₹ 2,000; for 2017 – 2018 is ₹ 26,100 and for 2018-2019 is ₹ 31,200. Closing stock for 2017-2018 and 2018- 2019 includes the defective items of ₹ 2,200 and ₹ 6,200 respectively which were considered as having market value nil. Calculate goodwill on average profit method.
(A) ₹ 23,700
(B) ₹ 17,700
(C) ₹ 13,700
(D) ₹ 17,300
Answer:
(B) ₹ 17,700

Note: Closing stock of one year is opening stock of next year. In next year it will be added
Average profit= \(\frac{2,000+23,900+27,200}{3}\) =17,700
Goodwill = Average profit (As no. of year purchase is not given)

Question 59.
A company has a total capital investment of ₹3,60,000. The company earned net profit during the last four years as ₹ 56,000, ₹ 64,000, ₹ 96,000 & ₹ 80,000. The fair return on the net capital employed is 15%. Value of goodwill if it is based on 3 years purchase of the average super profits of past 4 years.
(A) ₹ 37,500
(B) ₹ 50,000
(C) ₹ 60,000
(D) ₹ 40,000
Answer:
(C) ₹ 60,000

Question 60.
Find the goodwill from the following information:
Capital employed – ₹ 8,25,000
Rate of normal return – 10%
Future Maintainable profit – ₹ 1,50,000
Annuity factor – 3.17
(A) ₹ 4,75,500
(B) ₹ 2,61,525
(C) ₹ 3,13,975
(D) ₹ 2,13,975
Answer:
(D) ₹ 2,13,975

= 67,500 × 3.17
= 2,13,975

Question 61.
The net profits after tax of Z Ltd. for the past 5 years are as follows:

The capital employed is ₹ 16,00,000. Rate of normal return is 15%. Calculate the value of the goodwill on the basis of annuity method on super-profits basis, taking the present value of an annuity of ₹ 1 for the 4 years at 15% as ₹ 2.855.
(A) ₹ 7,65,000
(B) ₹ 8,67,800
(C) ₹ 5,70,000
(D) ₹ 4,06,838
Answer:
(D) ₹ 4,06,838

Question 62.
The following particulars are available in respect of the business carried on by X Ltd.:

You are required to compute the value of goodwill on the basis of 5 years purchase of average profit.
(A) ₹ 1,25,000
(B) ₹ 1,50,000
(C) ₹ 10,000
(D) ₹ 1,20,000
Answer:
(B) ₹ 1,50,000
Goodwill 30,000 × 5=1,50,000

Question 63.
The net profits after tax of NZ & Co. for the past 3 years are as follows:
Year —- Profit (Zr)
2010-2011 — 20,000
2011 -2012 — 2,61,000
2012-2013 — 3,12,000
Closing stock for 2011-2012 and 2012-2013 includes the defective items of ₹ 22,000 and ₹ 62,000 respectively which were considered as having no market value. Calculate goodwill on average profit method.
(A) ₹ 2,37,000
(B) ₹ 1,77,000
(C) ₹ 1,37,000
(D) ₹ 1,73,000
Answer:
(B) ₹ 1,77,000

Note: Closing stock of one year is opening stock of next year. In next year it will be added
Average profit = \(\frac{20,000+2,39,000+2,72,000}{3}\) = 1,77,000
Goodwill Average profit (As no. of year purchase is no given)

Question 64.
Profits & losses for the last years are:
2011-2012 — Losses ₹ 10,000
20 12-2013 — Losses ₹ 2,500
2013-2014 — Profits ₹ 98,000
2014-2015 — Profits ₹ 76,000
The average capital employed in the business is ₹ 2,00,000. The rate of interest expected from capital invested is 12%. The remuneration of partners is estimated to be ₹ 1,000 per month. Calculate the value of goodwill on the basis of four years purchase of super profits based on the annuity of the four years. Take discounting rate as 10%.
(A) ₹ 13,500
(B) ₹ 13,568
(C) ₹ 13,668
(D) ₹ 13,868
Answer:
(D) ₹ 13,868

Question 65.
Following information is available for N Ltd.:

Capital employed is ₹ 5,40,000. Standard rate of return on capital employed in this type of business is 12%. Above net profit included a fixed income on non-trading investment of ₹ 8,000 per year. At the end of year 2008-2009 closing stock was overvalued by ₹ 25,000. Calculate goodwill on weighted average super profit basis at 3 years purchase. Ignore taxation.
(A) ₹ 2,74,671
(B) ₹ 2,47,671
(C) ₹ 2,74,167
(D) ₹ 2,47,716
Answer:
(A) ₹ 2,74,671

Goodwill = Super profìt × No. of years purchases
= 91,557 × 3
= 2,74,671

Question 66.
Profit after tax of Z Ltd. for the 3 financial years are as follows:
2013 — 4,41,000
2014 — 6,45,000
2015 — 4,80,000
Capital employed is ₹ 29,25,000. Normal rate of return is 10%. Tax rate is 40%. 10% of profits for the year 2014 arose from a transaction of non-recurring nature. A provision of ₹ 31,500 on sundry debtors was made in the financial year 2015 which is no longer required. A claim of ₹ 16,500 is to be provided against profit for year 2015. Goodwill may be calculated at 3 times adjusted average profits of 3 years.
(A) ₹ 6,33,000
(B) ₹ 15,10,500
(C) ₹ 7,22,667
(D) ₹ 15,50,100
Answer:
(B) ₹ 15,10,500

Goodwill = Adjusted average profits × No. of years purchases
= 5,03,500 × 3 = 15,10,500

Question 67.
Average net profit before adjustments is ₹ 5,14,000. Profit includes interest at 8% on non-trading investments. Cost of these investments is ₹ 1,98,200 while the face value is ₹ 2,00,000. Expenses amounting to ₹ 7,000 per annum are likely to be discontinued in future. The provision for income-tax to be made at 30%. Normal rate of return may be taken at 10%. Average capital employed in the business (including investments) is ₹ 18,98,200. Assuming 4 years purchase of super-profits, what is the value of goodwill?
(A) ₹ 7,43,000
(B) ₹ 8,34,000
(C) ₹ 7,34,000
(D) ₹ 8,43,000
Answer:
(C) ₹ 7,34,000

Question 68.
Average net profit of a business as adjusted for valuation of goodwill amounted to ₹ 2,35,000. Net tangible assets employed were of the value of ₹ 4,50,000. But upon valuation, they amounted to ₹ 15,00,000. Assuming that 10% represented a fair commercial return, value of goodwill by capitalizing super profits will be –
(A) ₹ 8,75,000
(B) ₹ 8,25,000
(C) ₹ 8,90,000
(D) ₹ 8,50,000
Answer:
(D) ₹ 8,50,000

Question 69.
From the following particulars, calculate goodwill on the basis of 3 years purchase of super profits:
Capital employed : ₹ 50,000 Trading profit (after tax):
2011 : ₹ 12,200
2012 : ₹ 15,000
2013 : ₹ 2,000 (loss)
2014: ₹ 21,000
Normal rate of interest on investment 10% p.a. Remuneration from alternative employment: ₹ 3,600 p.a. (included in above profit).
(A) ₹ 10,250
(B) ₹ 8,850
(C) ₹ 7,450
(D) ₹ 12,350
Answer:
(B) ₹ 8,850

Question 70.
Compute the amount of goodwill based on 3 years purchase of super profit from the following:
Future maintainable profit after tax: ₹ 15,00,000; Normal pre-tax rate of return: 20%; Capital employed: ₹ 60,00,000; Tax rate: 30%
(A) ₹ 12,30,000
(B) ₹ 21,40,000
(C) ₹ 19,80,000
(D) ₹ 14,70,000
Answer:
(C) ₹ 19,80,000

Question 71.
Total assets of X Ltd. are ₹ 10,00,000 and total liabilities are ₹ 4,00,000. Expert valued goodwill of the company at ₹ 2,00,000. The company has two types of equity shares:
50,000 shares of 10 each fully paid-up 50,000 shares of 10 each, 7 paid-up. Intrinsic value per share of 7 paid-up is:
(A) ₹ 3.5
(B) ₹ 4.5
(C) ₹ 6.5
(D) ₹ 7.5
Answer:
(B) ₹ 4.5

Note: In case of ₹ 10 but ₹ 7 paid up shares 100% has been taken as notional call ₹ 3 has been considered while calculating Wet Assets hence shares are fully mid-up.

Question 72.
Profit available for equity shareholder of JK Ltd. is ₹ 1,27,500. The company has two types of equity shares:
50,000 shares of ₹ 10 each fully paid-up
50.000 shares of 10 each, ₹ 7 paid-up.
Other companies in same industries pays dividend @ 20%.
Yield value per share of ₹ 7 paid-up share is –
(A) 4.50 per share
(B) 6.25 per share
(C) 5.25 per share
(D) 3.50 per share
Answer:
(C) 5.25 per share

Question 73.
Total assets of X Ltd. tire ₹23,00,000 and total liabilities are ₹ 12,00,000. Expert valued goodwill of the company at ₹ 6,50,000. The company has two types of equity shares:
25.000 shares of ₹ 10 each fully paid-up
25.000 shares of ₹ 5 each, ₹ 3 paid-up.
Intrinsic value per share of ₹ 3 paid-up is:
(A) ₹ 22 per share
(B) ₹ 8 per share
(C) ₹ 6 per share
(D) ₹ 4 per share
Answer:
(A) ₹ 22 per share

Note: In case of 5 but 2 paid-up shares notional call 2 has been considered while calculating “Net Assets “hence shares are fully paid-up e. 5. However, face of these shares is liait of the /ace values other shares; hence 50% shares in terms of 10 paid-up shares will have to be taken.

Question 74.
Total assets of X Ltd. are ₹ 5,00,000 and total liabilities are ₹ 2,00,000. The company has three types of equity shares:
36.000 shares of ₹ 10 each fully paid-up
18.000 shares of ₹ 10 each, ₹ 8 paid-up.
30.000 shares of ₹ 5 each, ₹ 5 paid-up.
Company has earned ₹ 2,94,300 as profit after tax, which can be considered to be normal for the company. Average EPS for a fully paid share of ₹ 10 of a Company in the same industry in ₹ 2.
Value per share on EPS basis of 30,000 shares of 10 each, ₹ 5 paid-up is –
(A) ₹ 22.5 per share
(B) ₹ 11.25 per share
(C) ₹ 18 per share
(D) ₹ 17.5 per share
Answer:
(B) ₹ 11.25 per share
As there are different types of shares 10, 8 & 5, we have to convert it into 10 shares as follows:

Note: In case of 10 but 8 paid-up shares 80% has been taken as notional call ₹ 2 has not been considered hence shares are partly paid-up.

Question 75.
Capital Structure of SZ Ltd. is as follows:

What is value per share as per yield method for
(a) ₹ 10 fully paid-up shares
(b) ₹ 8 paid- up shares
(c) ₹ 6 paid-up shares?

Answer:
(C)

Question 76.
Following are the details of N Ltd.:
Total assets = ₹ 7,50,450
Outsiders liabilities = ₹ 3,35,100
Details of paid-up capital:
9,000 Equity shares ₹ 10 fully paid-up
4.500 Equity shares ₹ 10, ₹ 8 paid-up
7.500 Equity shares ₹ 5, fully paid-up
Goodwill is valued at ₹ 21,000.
What is value per share as per intrinsic value method for:
(a) ₹ 10 fully paid-up shares
(b) ₹ 8 paid-up shares
(c) ₹ 5 paid- up shares?

Answer:
(C)

Value of partly paid-up share Value of fully paid-up share – Unpaid amount on shares
As there are different types of shares 10 fully Paid-up, 10 but 8 paid-up 5, fully paid-up, we have to convert it into ‘ 10 shares as follows:

Note: In case of ₹ 10 but ₹ 8 paid-up shares 100% has been taken as notional calle ₹ 2 has been considered while calculating “Net Asset” hence shares are fully paid-up.

Question 77.
Following are the details of P Ltd.:
Details of paid-up capital are as follows:
27,000 Equity shares ₹ 10 fully paid-up
13.500 Equity shares ₹ 10, ₹ 8 paid-up
22.500 Equity shares ₹ 5, fully paid-up
Normal rate of dividend in the concerned industry is 15%, whereas P Ltd. has been paying 20% dividend for the least four years and is expected to maintain it in the next few years.
What is value per share on the basis of dividend yield for:
(a) ₹ 10 fully paid-up shares
(b) ₹ 8 paid-up shares
(c) ₹ 5 paid- up shares?

Answer:
(D)

Question 78.
From the following particulars, calculate the value of an equity share:
2,000,9% Preference shares of ₹ 100 each: ₹ 2,00,000
50,000 Equity shares of ₹ 10 each, ₹ 8 per share paid-up: ₹4,00,000
Expected profit per year before tax: ₹ 2,18,000
Rate of tax: 40%
Transfer to general reserve every year: 20% of profit
Normal rate of earning: 15%
(A) ₹ 12.55
(B) ₹ 11.55 per share
(C) ₹ 13.65 per share
(D) ₹ 10.35 per share
Answer:
(B) ₹ 11.55 per share

Question 79.
Balance Sheet of Diamond Ltd. as on 31st March, 2019:

The expert valuer valued the land and building at 240 lakh, goodwill at 160 lakh and plant and machinery at 120 lakh. Out of the total debtors, it is found that debtors for 8 lakh are bad. Intrinsic Value per share ?
(A) 296 per share
(B) 256 pershare
(C) 236 pershare
(D) 226 pershare
Answer:
(B) 256 pershare

Question 80.
Profits of the company are as follows:
For the year 2016-2017 : 92 Lakh
For the year 2017-2018 : ₹ 88Lakh
For the year 2018-2019 : 88 Lakh
Paid-up capital of the company is ₹ 200 lakh (Face value ₹ 100 fully paid-up). Company follows the practice of transferring 25% of profits to general reserve. Similar type of companies earn at 10% of the value of their shares. Plant & machinery and land & building stood at 130 lakh and 110 lakh in balance sheet respectively. However, the expert valuer valued the land & building at ₹ 240 lakh and plant & machinery at ₹ 120 lakh. Plant & machinery and land & building have been depreciated at 15% & 10% respectively. Ignore taxation.
Yield Value per share = ?
(A) ₹ 199.1 per share
(B) ₹ 268.4 per share
(C) ₹ 291.9 per share
(D) ₹ 321.7 per share
Answer:
(C) ₹ 291.9 per share

Question 81.
Dividend declared by the company for last 4 years is 24%, 30%, 36% & 40%. Face value of shares is ₹ 15 but f 10 so far have been called up and paid-up. Rate of market expectation is 24%. As dividend is showing increasing trend it was agreed to assign the weight of 1,2, 3 & 4. Value per share is –
(A) ₹ 11.67 per share
(B) ₹ 12.67 per share
(C) ₹ 13.67 per share
(D) ₹ 14.67 per share
Answer:
(D) ₹ 14.67 per share

Question 82.
Details of the capital employed and profit earned by Piyush Ltd. are given below:

As profit is showing increasing trend it was agreed to assign the weight of 1,2,3 & 4 for the purpose of valuation of shares. Market rate of return is 12% and paid-up value per share is ₹ 10. Value per share is –
(A) ₹ 18.5 per share
(B) ₹ 17.5 per share
(C) ₹ 16.5 per share
(D) ₹ 15.5 per share
Answer:
(A) ₹ 18.5 per share

Weighted average rate of return on capital employed can be treated as expected return.

Question 83.
Capital employed by PQR Ltd. is ₹11,40,000 excluding purchased goodwill that is appearing in balance sheet at ₹ 3,00,000. It is considered reasonable to increase the value of goodwill by an amount equal to average book value and a valuation made at 3 years purchase of average super profit for the last 4 years valuation made 3 years purchase of average rates Eire tabled as follows:
Year — PAT(₹)
2016 — 1,80,000
2017 — 2,10,000
2018 — 240,000
2019 — 1,86,000
Normal expectation in the industry to which the company belongs is 10%.
Increase in value of goodwill = ?
(A) ₹ 2,54,000
(B) ₹ 2,32,000
(C) ₹ 2,46,000
(D) ₹ 1,63,000
Answer:
(C) ₹ 2,46,000

Question 84.
Capital employed by BMW Ltd. is 19,00,000 excluding purchased goodwill that is appearing in balance sheet at ₹ 5,00,000. It is considered reasonable to increase the value of goodwill by ₹ 4,75,000. Paid-up capital of the company is ₹ 16,00,000 (₹ 10 each).

Normal expectation in the industry to which the company belongs is 10%.
Value of share is –

Answer:
(D)

Question 85.
Balance sheet of Himalaya Ltd. disclosed the following position:

On the above mentioned date, the tangible fixed assets were independently valued at ₹ 3,50,000 and goodwill at ₹ 50,000.
Intrinsic value per share is –
(A) ₹ 14.25 per share
(B) ₹ 15.75 per share
(C) ₹ 16.25 per share
(D) ₹ 18.75 per share
Answer:
(A) ₹ 14.25 per share

Question 86.
Net profits for 3 years of YTM Ltd. are: 2013-2014:₹ 1,03,200,2014-2015: ₹ 1,04,000 & 2015-2016: ₹ 1,03,300 of which 20% was transferred to general reserve, this proportion being considered reasonable in the industry in which the company is engaged and where a fair return on investment may be taken at 18%. The company has 40,000 equity shares of ₹ 10 each fully paid-up. Ignore taxation. Value of share as per yield method –
(A) ₹ 10.5 per share
(B) ₹ 15.5 per share
(C) ₹ 11.5 per share
(D) ₹ 12.5 per share
Answer:
(C) ₹ 11.5 per share

Question 87.
Capital structure of H Ltd. is as follows:
14% Pref. shares of ₹ 10 each — 20,00,000
Equity shares of ₹ 10 each — 32,00,000
Reserves and surplus — 16,00,000
10% Debentures — 24,00,000
11% Loans from banks — 28,00,000
Average annual profit before payment of tax and interest is — 24,00,000.
The income-tax rate is assumed to be 40%.
Price-earnings ratio is 9.
Value per share = ?
(A) ₹ 32.38 per share
(B) ₹ 28.33 per share
(C) ₹ 28.83 per share
(D) ₹ 23.38 per share
Answer:
(D) ₹ 23.38 per share

Question 88.
Total assets and liabilities of Raman Ltd. are ₹ 1,84,96,000 and ₹ 23,40,000. It has three types of equity shares details of which Eire as follows:
(a) 4,00,000 shares (₹ 10), fully paid-up
(b) 4,00,000 shares (₹ 10), paid-up ₹ 7.50
(c) 4,00,000 shares (₹ 10), paid-up ₹ 5
Values per share as per asset backing method are –

Answer:
(A)

While calculating Net Assets we have added notional call on ₹ 7.5 & ₹ 5 paid-up
shares, hence all the shares are ₹ 10 fully paid-up.
Total number of shares 4,00,000 + 4,00,000 + 4,00,000 = 12,00,000

Value of equity share of 10 each fully paid-up 15.96
Value of equity share of ₹ 10 each, ₹ 7.5 paid-up = 15.96 – 2.5 13.46
Value of equity share of ₹ 10 each, ₹ 5 paid-up 15.96 – 5 = 10.96

Question 89.
Shashi Ltd. has three types of equity shares details of which are as follows:
(a) 4,00,000 shares (₹ 10), fully paid-up
(b) 4,00,000 shares (₹ 10), paid-up ₹ 7.50
(c) 4,00,000 shares (₹ 10), paid-up ₹ 5
Normal average profit after tax for the company is estimated to be ₹ 21,60,000. Applicable capitalization rate is 12%.
Values per share as per earning capacity method are –

Answer:
(B)
For 12% Capitalization rate – Earning is ₹ 21,60,000
For 100%
Capitalized value \(\frac{21,60,000}{12}\) × 100 = 1,80,00,000

Note: Under this method notional call is not considered and hence Z5 paid-up shares are taken at 75% and 5 paid-up shares are taken at 50% in terms ₹ 10 paid-up shares.

Question 90.
Balance sheet of Super Sound Ltd. as at is given below:

Building was revalued at ₹ 3,00,000; machinery at ₹ 3,75,000 and sundry debtors include ₹ 10,000 as irrecoverable. Goodwill was valued at ₹ 2,72,800. You are required to value the company’s share ex-dividend.
(A) ₹ 160.87 per share
(B) ₹ 150.87 per share
(C) ₹ 158.08 per share
(D) ₹ 157.80 per share
Answer:
(B) ₹ 150.87 per share

Note: Generally proposed dividend’ is not deducted but since share has to be valued ‘ex-dividend’ it is deducted to calculate ‘net assets’.

Question 91.
Profit after tax of Bahubali Ltd. was ₹ 10,00,000. The capital structure of company consists of following types of shares:
12% Preference capital — ₹ 10,00,000
(shares of ₹ 100 each)
Equity capital — ₹ 50,00,000
(shares of ₹ 10 each)
Market expectation is 15% & 80% profit is distributed. If only few shares are to be acquired of this company then what is the maximum price per share that buyer would pay?
(A) ₹ 9.40 per share
(B) ₹ 11.73 per share
(C) ₹ 10.13 per share
(D) ₹ 12.67 per share
Answer:
(A) ₹ 9.40 per share

Question 92.
Take the data of above question. What is the maximum price per share that buyer would pay if controlling shares are to be acquired?
(A) ₹ 9.40 per share
(B) ₹ 11.73 per share
(C) ₹ 10.13 per share
(D) ₹ 12.67 per share
Answer:
(B) ₹ 11.73 per share

Question 93.
Following details related to Best Ltd.

It has ₹ 10,00,000 equity share capital (face value of ₹ 100) and ₹ 3,00,000, 10% preference share capital (face value of ₹ 100). Company has investments worth ₹ 3,00,000 (market value), the yield in respect of which has been excluded in arriving at adjusted taxed profit. It is usual in similar type of companies to set aside 25% of taxed profit for rehabilitation purposes. Net worth (excluding investments) amounts to ₹ 24,00,000. Normal return expected is 10%. Company pays dividend within a range of 10% to 12% and expects to maintain it. Consider weights -1,2 & 3. Value per share = ?
(A) ₹ 171.11 per share
(B) ₹ 161.87 per share
(C) ₹ 151.08 per share
(D) ₹ 184.53 per share
Answer:
(A) ₹ 171.11 per share
Since both profits and net.worth of the company are showing a steady growth, it would be reasonable to attach due weight for valuation purposes.

Question 94.
Profits & weights for the past four years are as follows:

On scrutiny of the books of account, the following matters were revealed:
(i) On 1st December, 2017, a major repair was made in respect of the plant incurring ₹ 75,000 which was charged to revenue. Depreciation rate is 10% p.a. on reducing balance method. (ii) The closing stock for the year 2016-2017 was overvalued by ₹ 30,000. (iii) To cover management costs, an annual charge of ₹ 60,000 should be made. Goodwill = ?
(A) ₹ 13,24,000
(B) ₹ 13,20,500
(C) ₹ 13,50,200
(D) ₹ 12,30,500
Answer:
(B) ₹ 13,20,500

Weighted average profit =\(\frac{26,41,000}{10}\)= 2,64,100
Goodwill = Weighted average profit X No. of years purchases
= 2,64,100 × 5
= 13,20,500
Note:

Question 95.
Following details are available for two companies:

X Ltd. has 9 lakh Equity Shares of ₹ 150 each, ₹ 135 paid-up.
Y Ltd. has 40 lakh Equity Shares of ₹ 75 paid-up.
What is the intrinsic value per share of these companies?
(A) ₹ 185.10 & ₹ 180 per share
(B) ₹ 118.50 & ₹ 102 per share
(C) ₹ 181.50 & ₹ 108 per share
(D) ₹ 185.10 & ₹ 102 per share
Answer:
(C) ₹ 181.50 & ₹ 108 per share

Consolidation of Accounts – Corporate and Management Accounting MCQ

March 21, 2023March 21, 2023 by Prasanna

Going through the Consolidation of Accounts – Corporate and Management Accounting CS Executive MCQ Questions with Answers you can quickly revise the concepts.

Consolidation of Accounts– Corporate and Management Accounting MCQs

Question 1.
Holding company, in relation to one or more other companies, means a company of which such companies are –
(A) Associate Companies
(B) Subsidiary Companies
(C) Both (A) and (B)
(D) Either (A) or (B)
Answer:
(B) Subsidiary Companies

Question 2.
Which of the following would qualify a company to be regarded as a parent of another
(A) A parent should control the majority of the votes at subsidiary’s shareholders’ meetings.
(B) A parent should own majority shares in the subsidiary.
(C) A parent and its subsidiary both must be in the same line of business.
(D) A parent and the subsidiary both should have the same persons as their directors.
Answer:
(A) A parent should control the majority of the votes at subsidiary’s shareholders’ meetings.

Question 3.
Subsidiary company in relation to any other company (that is to say the holding company), means a company in which the holding company -…………….
(A) Controls the composition of the Board of Directors
(B) Exercises or controls more than 50% of the total voting power either at its own or together with one or more of its subsidiary companies
(C) Both (A) or (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) or (B)

Question 4.
Pre-acquisition profit in subsidiary company is considered as:
(A) Revenue profit
(B) Capital profit
(C) Goodwill
(D) Cost of control
Answer:
(B) Capital profit

Question 5.
Which section of the Companies Act, 2013 requires the preparation of consolidated financial statements
(A) Section 127
(B) Section 128
(C) Section 130
(D) Section 129
Answer:
(D) Section 129

Question 6.
Associate company in relation to another company, means –
(A) A company which cannot be classified as subsidiary company or joint venture company
(B) A company which is a subsidiary company of the company having significant influence
(C) A company which is originally formed as associate company as such.
(D) A company in which that other company has a significant influence
Answer:
(D) A company in which that other company has a significant influence

Question 7.
Holding company holds more than ………….. voting power in subsidiary company.
(A) 25%
(B) 40%
(C) 50%
(D) 75%
Answer:
(C) 50%

Question 8.
In associate companies, one company holds ………… of share capital.
(A) more than 20% but less than 50%
(B) more than 10% but less than 25%
(C) more than 25% but less than 50%
(D) more than 50% but less than 75%
Answer:
(A) more than 20% but less than 50%

Question 9.
Term ‘subsidiary company’ is defined in:
(A) Section 2(4)
(B) Section 2(5)
(C) Section 2(6)
(D) Section 2(7)
Answer:
(C) Section 2(6)

Question 10.
The company shall attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in as per Companies (Accounts) Rules, 2014.
(A) Form No. AOC-1
(B) Form No. AOC-2
(C) Form No. AOC-4
(D) Form No. AOC-3
Answer:
(A) Form No. AOC-1

Question 11.
Minority interest represents –
(A) Shares owned by minor persons in a consolidated financial statement of holding company.
(B) Shares owned by persons who can be classified as small shareholders in a consolidated financial statement of holding company.
(C) Shares owned by third parties in a consolidated financial statement of holding company.
(D) Shares owned by creditors in a total debt in preparation of consolidated financial statement of holding company.
Answer:
(C) Shares owned by third parties in a consolidated financial statement of holding company.

Question 12.
Term ‘associate company’ is defined in -………….
(A) Section 2(6)
(B) Section 2(7)
(C) Section 2(5)
(D) Section 2(4)
Answer:
(A) Section 2(6)

Question 13.
Holding company’s share in revenue profits of subsidiary company is adjusted in:
(A) Cost of control
(B) Shown on assets side of balance sheet
(C) Profit and loss account of holding company
(D) Capital profits of holding company
Answer:
(C) Profit and loss account of holding company

Question 14.
Which of the following statements are correct with regard to preparation of consolidated financial statements
A. To be a subsidiary a parent should hold 100% of its equity shares.
B. Consolidation is merely addition together of two Statements of financial position.
C. In consolidation a subsidiary and an associate are treated identically.
D. Consolidated balance sheet excludes assets not owned by the group.
Select the correct answer from the options given below.
(A) A & D
(B) B &C
(C) A & B
(D) None
Answer:
(D) None

Question 15.
While preparing a consolidated financial statements, in share capital held by outsider if we add pre-acquisition post-acquisition profits proportionate to share capital held by those outsider resultant figure will be -…….
(A) Goodwill
(B) Cost of control
(C) Minority interest
(D) Capital reserve
Answer:
(C) Minority interest

Question 16.
If cost of acquisition of shares in the subsidiary company is less than intrinsic value of the shares of subsidiary company on the date of acquisition then resultant figure will be:
(A) Minority interest
(B) Capital Reserve
(C) Goodwill
(D) Significant cost
Answer:
(B) Capital Reserve

Question 17.
Issue of bonus shares by the subsidiary company:
(A) Affects the cost of control.
(B) Increases the control percentage in subsidiary company.
(C) Reduces the cost of investment of holding company.
(D) Does not affect the cost of control.
Answer:
(D) Does not affect the cost of control.

Question 18.
Which of the following will affect cost of control
(A) Issue of bonus shares by the subsidiary company out of pre-acquisition profit
(B) Issue of bonus shares by the subsidiary company out of post-acquisition profit
(C) Buyback of shares by subsidiary company from all shareholders in equal proportion
(D) None of the above
Answer:
(D) None of the above

Question 19.
Which of the following statement(s) apply when consolidating statements of financial position
I. All inter-company balances should be cancelled.
II. The group share of the whole of subsidiary’s profit is included within group profit.
III. Inter-company profit should be eliminated unless it is realized by sale to an outsider.
IV. Subsidiary’s asset values need to be updated at the end of each accounting period.
Select the correct answer from the options given below.
(A) I & III
(B) I & IV
(C) II & III
(D) I & II
Answer:
(A) I & III

Question 20.
Issue of bonus shares by subsidiary company out of pre-acquisition profit:
(A) Will reduce the paid-up value shares held by holding company.
(B) Will reduce holding company’s share in pre-acquisition profits of subsidiary company.
(C) Must be debited to General Reserve A/c and credited to Profit & Loss A/c of subsidiary.
(D) Will affect the market capitalization of subsidiary company.
Answer:
(B) Will reduce holding company’s share in pre-acquisition profits of subsidiary company.

Question 21.
Holding company’s share in pre-acquisition losses of subsidiary –
(A) Should be treated as capital loss
(B) Added to the ‘cost of control’
(C) Will increase the goodwill while calculating cost of control
(D) All of the above
Answer:
(D) All of the above

Question 22.
Holding company’s share in pre-acquisition profits of subsidiary –
(A) Should be credited to the profit & loss account of holding company
(B) Deducted from the cost of the ‘cost of control’
(C) Needs separate disclosure in consolidated financial statements.
(D) None of the above
Answer:
(B) Deducted from the cost of the ‘cost of control’

Question 23.
With regard to preparing consolidated statements of financial position which of the following statements is/are correct?
1. The consolidated statement of financial position reports only parent’s goodwill.
2. Any unrealized profit made by a subsidiary should be eliminated from its profit.
3. An amount owed to each other within the group needs to be cancelled.
4. Only the group portion of any unrealized profit need be eliminated.
Select the correct answer from the options given below.
(A) 3
(B) 1
(C) 2 & 3
(D) 3 & 4
Answer:
(C) 2 & 3

Question 24.
Dividend received out of pre-acquisition profits of subsidiary
(A) It should be treated as revenue income and credited to the Profit and Loss A/c.
(B) Added while calculating ‘cost of control’.
(C) Should be treated as capital receipt and credited to Investment A/c
(D) Will increase the Goodwill while calculating cost of control.
Answer:
(C) Should be treated as capital receipt and credited to Investment A/c

Question 25.
If cost of acquisition of shares in the subsidiary company is more than intrinsic value of the shares of subsidiary company on the date of acquisition then resultant figure will be:
(A) Minority interest
(B) Capital Reserve
(C) Goodwill
(D) Significant cost
Answer:
(C) Goodwill

Question 26.
Deduction of outsiders liabilities from total assets then dividing it by number of shares, the resultant figure will be –
(A) Intrinsic value per share
(B) Net asset value per share
(C) Asset backing value per share
(D) All of the above
Answer:
(D) All of the above

Question 27.
Which of the following treatment of ‘Share Capital’ of subsidiary company is correct
(A) Share capital held by the holding company will be added to the cost of control statement.
(B) Share capital held by minority will be deducted in minority statement.
(C) Share capital of subsidiary held by holding company will be deducted from the cost of Investment to find out goodwill/capital reserve.
(D) Share capital of subsidiary will be set-off against the negative net worth of other subsidiary.
Answer:
(C) Share capital of subsidiary held by holding company will be deducted from the cost of Investment to find out goodwill/capital reserve.

Question 28.
If closing balance of general reserve of subsidiary is more than opening balance of general reserve then it can be concluded that –
(A) Capital profits are debited to the General Reserve A/c
(B) Pre-acquisition dividend is declared by the subsidiary company
(C) Some profit must have been transferred to general reserve by debiting profit & loss account by the subsidiary company
(D) Bonus share capital is issued by the subsidiary company
Answer:
(C) Some profit must have been transferred to general reserve by debiting profit & loss account by the subsidiary company

Question 29.
If closing balance of general reserve of subsidiary is less than opening balance of general reserve then it can be concluded that –
(A) Pre-acquisition dividend is declared by the subsidiary company
(B) Bonus share capital is issued by the subsidiary company
(C) Some profit must have been transferred to general reserve by debiting profit & loss account by the subsidiary company
(D) Capital profits are credited to the General Reserve A/c
Answer:
(B) Bonus share capital is issued by the subsidiary company

Question 30.
Unrealized profit on goods sold and included in stock is deducted from:
(A) Capital Profit
(B) Revenue Profit
(C) Fixed Assets
(D) Minority interest
Answer:
(B) Revenue Profit

Question 31.
Which of the following treatment is correct for mutual debts with regard to purchase and sale of goods between holding and subsidiary company
(A) Amount of mutual debt will be added to the Debtors and Creditors on asset side and liability side respectively while preparing the consolidated balance sheet.
(B) Amount of mutual debt will be ignored as it is not asset or liability at ah.
(C) Amount of mutual debt will be deducted from the Debtors and Creditors on asset side and liability side respectively while preparing the consolidated balance sheet.
(D) Amount of mutual debt will require adjustment on debtors figure on asset side only if amount receivable by subsidiary company is more than amount payable to holding company.
Answer:
(C) Amount of mutual debt will be deducted from the Debtors and Creditors on asset side and liability side respectively while preparing the consolidated balance sheet.

Question 32.
Which of the following statements are incorrect with regard to preparation of a consolidated statement of financial position
(a) Gain on fair valuation of a subsidiary’s asset is a pre-acquisition profit.
(b) Non-controlling interest does not deserve any portion of fair valuation gain.
(c) If an asset is not reported in the subsidiary’s ledger it need not be fan valued.
(d) Gain on fair valuation of subsidiary’s asset inflates the cost of goodwill.
Select the correct answer from the options given below.
(A) (b),(c)&(d)
(B) (c)&(d)
(C) (ac)&(d)
(D) (a),(b)&(c)
Answer:
(A) (b),(c)&(d)

Question 33.
On a consolidated balance sheet, if the shares of a company have been bought for more than the balance sheet value then the difference would appear as:
(A) Profit on purchase
(B) Goodwill
(C) Capital reserve
(D) Loss on purchase
Answer:
(B) Goodwill

Question 34.
If less than 100% of a subsidiary’s share capital has been acquired then what is the rule for inclusion of the subsidiary’s assets on the consolidated balance sheet
(A) Only a proportional amount should appear.
(B) All the assets should appear.
(C) None can appear until all the shares have been acquired.
(D) Half the value should appear.
Answer:
(B) All the assets should appear.

Question 35.
What is the term used to describe dividends paid by one company in the group to another in the same group
(A) Inter-group dividends
(B) Intra-group dividends
(C) Group dividends
(D) Interim dividends
Answer:
(B) Intra-group dividends

Question 36.
Which of the following is true
(A) Minority shareholders share of pre-acquisition losses should be added to the amount of Minority Interest.
(B) Holding company’s share of pre-acquisition losses must be debited to Profit & Loss A/c
(C) Dividend received out of pre-acquisition profits of subsidiary should be credited to Investment A/c.
(D) Dividend received out of post-acquisition profits of subsidiary should be debited to Investment A/c.
Answer:
(C) Dividend received out of pre-acquisition profits of subsidiary should be credited to Investment A/c.

Question 37.
How is a negative goodwill reported on the consolidated statement of financial position
(A) As a negative asset ie. shown on the asset side but as a deduction.
(B) A tenth of it is included in consolidated reserves and the remainder reported as a reserve.
(C) Included fully in the consolidated retained earnings.
(D) As a reserve, which may preferably be titled a capital reserve
Answer:
(D) As a reserve, which may preferably be titled a capital reserve

Question 38.
If stock is sold for a profit from one group member to another, how should this be dealt with in the final accounts
(A) Stock should appear at the original cost.
(B) The profits should be included but stock would appear at the value sold for.
(C) Profit on sale should be eliminated and stock appears at original cost.
(D) Profits on the sale should be eliminated.
Answer:
(C) Profit on sale should be eliminated and stock appears at original cost.

Question 39.
The claim by outsiders to assets featured on a consolidated balance sheet is known as:
(A) Subsidiary
(B) Negative goodwill
(C) Minority interest
(D) Wholly owned subsidiary
Answer:
(C) Minority interest

Question 40.
On consolidation, if the total of the fair value of the assets acquired is less than the whole purchase consideration then the differences should be treated as:
(A) Negative goodwill
(B) Goodwill
(C) Profit on acquisition
(D) Loss on acquisition
Answer:
(B) Goodwill

Question 41.
When dealing with consolidated balance sheets, the expression cost of control could be used instead of:
(A) Acquisition expenditure
(B) Goodwill
(C) Intangible investments
(D) Negative goodwill
Answer:
(B) Goodwill

Question 42.
Which of the following is not normally considered the right of an ordinary shareholder
(A) An interest in the profits earned by the company.
(B) An interest in the day-to-day running of the company.
(C) An interest in the net assets of the company.
(D) Voting rights at meetings.
Answer:
(B) An interest in the day-to-day running of the company.

Question 43.
Y Company has a receivable from its parent, X Company. Should this receivable be separately reported on Y’s balance sheet and in X’s consolidated balance sheet=

Answer:
(A)

Question 44.
Which of the following is the best theoretical justification for consolidated financial statements
(A) In form the companies are one entity; in substance they are separate.
(B) In form the companies are separate; in substance they are one entity.
(C) In form and substance the companies are on entity.
(D) In form and substance the companies are separate.
Answer:
(B) In form the companies are separate; in substance they are one entity.

Question 45.
Which of the following statement is false
(A) Minority interest shown in the consolidated balance sheet is the equity held by the outsiders in the subsidiary company.
(B) Cost of control is the excess price paid for investment over and above proportionate share of net assets acquired by the holding company.
(C) Profit on revaluation of fixed assets is a capital profit and depreciation on such amount is a revenue loss.
(D) For calculating cost of control there is no need to distinguish between capital and revenue profits of the subsidiary.
Answer:
(D) For calculating cost of control there is no need to distinguish between capital and revenue profits of the subsidiary.

Question 46.
Preparation of consolidated Balance Sheet of holding company and its subsidiary company is as per
(A) AS-11
(B) AS-20
(C) AS-21
(D) AS-23
Answer:
(C) AS-21

Question 47.
Pre-acquisition dividend received by Holding company is credited to:
(A) Profit & Loss A/c
(B) Capital Profit
(C) Investment A/c
(D) None of the above
Answer:
(C) Investment A/c

Question 48.
Post acquisition dividend received by Holding Company is:
(A) Debited to Profit & Loss A/c & Credited to Bank A/c
(B) Debited to Bank A/c and Credited to Investment A/c
(C) Debited to Investment A/c and Credited to Bank A/c
(D) Debited to Bank A/c and Credited to Profit & Loss A/c
Answer:
(D) Debited to Bank A/c and Credited to Profit & Loss A/c

Question 49.
Which exchange rate will be considered for conversion of share capital of subsidiary company
(A) Closing rate
(B) Opening Rate
(C) Actual rate on date of share acquisition
(D) Average Rate
Answer:
(C) Actual rate on date of share acquisition

Question 50.
The group’s share of the pre-acquisition reserves of a subsidiary form part of the:
(A) Goodwill calculation
(B) Group’s capital reserves
(C) Group’s revenue reserves
(D) Group’s share capital
Answer:
(A) Goodwill calculation

Question 51.
As per AS-21, a Consolidated Financial Statement will not be prepared by the parent company when-
(A) Control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future.
(B) Subsidiary company operates under severe long-term restrictions, which significantly impair its ability to transfer funds to the parent.
(C) Both (A) and (B)
(D) None of the above
Answer:
(C) Both (A) and (B)

Question 52.
In which of the following case the C Ltd. will be subsidiary of A Ltd.
(A) If A Ltd. holds 75% shares in B Ltd. and B Ltd. holds 25% shares in C Ltd.
(B) If A Ltd. holds 75% shares in B Ltd. and 25% shares in C Ltd.
(C) If A Ltd. holds 75% shares in B Ltd. and A Ltd. and B Ltd. holds 25% & 30% shares in C Ltd.
(D) If A Ltd. holds 75% shares in B Ltd. and C Ltd. holds 25% shares in B Ltd.
Answer:
(C) If A Ltd. holds 75% shares in B Ltd. and A Ltd. and B Ltd. holds 25% & 30% shares in C Ltd.
A Ltd. holds 75% shares in B Ltd., then B Ltd. is subsidiary of A Ltd., in other words A Ltd. is the parent company. If A Ltd. is holding 25% shares in C Ltd., then there is no holding-subsidiary relationship between them. But if along with A Ltd., B Ltd. also holds 30% shares in C Ltd., then A Ltd. holding in C Ltd. is 55%, though indirectly, and A Ltd. is parent company of both B Ltd. and C Ltd.

Question 53.
If A Ltd. is proved to be a subsidiary company of B Ltd., C Ltd. & D Ltd., then which company is liable to prepare Consolidated Financial Statement?
(A) B Ltd.
(B) C Ltd.
(C) D Ltd.
(D) All companies excluding A Ltd.
Answer:
(D) All companies excluding A Ltd.

Question 54.
Goodwill = ?
(A) Cost of Investment less Parent’s share in the equity of the subsidiary on date of investment less Minority interest
(B) Cost of Investment less Parent’s share in the equity of the subsidiary on date of investment.
(C) Parent’s share in the equity of the subsidiary on date of investment less Cost of investment
(D) Cost of Investment add Parent’s share in the equity of the subsidiary on date of investment add Minority interest
Answer:
(B) Cost of Investment less Parent’s share in the equity of the subsidiary on date of investment.

Question 55.
H Ltd. acquires 70% of the equity shares of S Ltd. on 1.1.2019. On that date, paid-up capital of S Ltd. was 10,000 equity shares of ₹ 10 each; accumulated reserve balance was ₹ 1,00,000. H Ltd. paid ₹ 1,60,000 to acquire 70% interest in the S Ltd. Assets of S Ltd. were revalued on 1.1.2019 and a revaluation loss of ₹ 20,000 was ascertained. Which of the following is correct in relation to cost of control of group consolidated financial statement
(A) Capital Reserve — ₹ 34,000
(B) Goodwill — ₹ 34,000
(C) Capital Reserve — ₹ 1,26,000
(D) Goodwill — ₹ 1,26,000
Answer:
(B) Goodwill — ₹ 34,000
H Ltd. paid a positive differential of ₹ 34,000 Le. ₹ (1,60,000 – 1,26,000). This differential is also called goodwill and is shown in the balance sheet under the head intangibles.

Question 56.
H Ltd. holds 7,500 shares of S Ltd. Total shares of S Ltd. are 10,000 of ₹ 10 each. General Reserve and Profit & Loss balance of S Ltd. are ₹ 35,000 & ₹ 27,500 respectively out of which 40% relates to post-acquisition period. Minority Interest = ?
(A) ₹ 40,625
(B) ₹ 34,375
(C) ₹ 50,525
(D) ₹ 40,925
Answer:
(A) ₹ 40,625

Question 57.
Balance Sheet of S Ltd. is as follows:

H Ltd. holds 80% shares of S Ltc
Minority Interest?
(A) ₹ 32,500
(B) ₹ 32,100
(C) ₹ 40,125
(D) ₹ 38,450
Answer:
(B) ₹ 32,100

Question 58.
Balances of S Ltd. on 31.3.2019 are:
General Reserve ₹ 70,000
Profit & Loss Account ₹ 1,40,000
Balances of general reserve and profit and loss account on 1.4.2018 of S Ltd. were ₹ 10,000 and ₹ 50,000 respectively. Profit earned by S Ltd. during the year 2018-2019 = ?
(A) ₹ 90,000
(B) ₹ 1,20,000
(C) ₹ 1,50,000
(D) ₹ 80,000
Answer:
(C) ₹ 1,50,000

Question 59.
Following are the balances of S Ltd. on 31.3.2019:
General Reserve — ₹ 1,75,000
Profit & Loss Account — ₹ 3,50,000
H Ltd. acquired 60% shares on 30th June, 2018 . Balances of general reserve and profit and loss account on 1.4.2018 of S Ltd. were ₹ 25,000 and ₹ 1,25,000 respectively. Share of H Ltd. in post-acquisition profit will be –
(A) ₹ 1,68,750
(B) ₹ 1,46,250
(C) ₹ 1,12,500
(D) ₹ 2,81,250
Answer:
(A) ₹ 1,68,750

Alternatively,
Prepare General Reserve A/c & Profit & Loss A/c and find out the profit made during the year.
Share of H Ltd. in post-acquisition profit will be = 3,75,000 × 9/12 × 60% = 1,68,750

Question 60.
Following are the balances of S Ltd. on 31.3.2019:
Equity Share Capital — ₹ 10,00,000
General Reserve — ₹ 3,50,000
Profit & Loss Account — ₹ 7,00,000
H Ltd. acquired 80% shares on 31st July,
2018. Balances of general reserve and profit and loss account on 1.4.2018 of S Ltd. were ₹ 50,000 and ₹ 2,50,000 respectively. Share of Minority in post-acquisition profit will be –
(A) ₹ 1,10,000
(B) ₹ 1,00,000
(C) ₹ 5,00,000
(D) ₹ 2,70,000
Answer:
(B) ₹ 1,00,000

Share of Minority in post-acquisition profit will be = 7,50,000 × 8/12 × 20% = 1,00,000

Question 61.
Following are the balances of S Ltd. on 31.3.2019:
Equity Share Capital — ₹ 20,00,000
General Reserve — ₹ 7,00,000
Profit & Loss Account — ₹ 14,00,000
H Ltd. acquired 70% shares on 1.1.2019 Balances of general reserve and profit and loss account on 1.4.2018 of S Ltd. were ₹ 1,00,000 and ₹ 5,00,000 respectively. Minority Interest = ?
(A) ₹ 12,90,000
(B) ₹ 5,20,000
(C) ₹ 7,00,000
(D) ₹ 12,30,000
Answer:
(D) ₹ 12,30,000
20,00,000 + 7,00,000 + 14,00,000 × 30% = 12,30,000.

Question 62.
H Ltd. holds 75% Shares in S Ltd. In January, 2019 S Ltd. sold to its parent company H Ltd. goods costing ₹ 15,000 for ₹ 20,000. On 31st March, 2019 half of these goods were lying as unsold in godowns of H Ltd. Which of the following is correct treatment for unrealized profit on stock while preparing consolidated financial statement of H Ltd. & S Ltd.?
(A) Stock reserve of ₹ 5,000 will be reduced from ‘Stock’ on asset side in balance sheet and ₹ 5,000 will be added to the profit & loss account of H Ltd.
(B) ₹ 15,000will be reduced from current asset & current liabilities
(C) Stock reserve of ₹ 5,000 will be reduced from ‘Stock’ on asset side in balance sheet and capital reserve of H Ltd.
(D) Stock reserve of ₹ 2,500 will be reduced from ‘Stock’ on asset side in balance sheet and ₹ 2,500 will be debited to profit & loss account of H Ltd.
Answer:
(D) Stock reserve of ₹ 2,500 will be reduced from ‘Stock’ on asset side in balance sheet and ₹ 2,500 will be debited to profit & loss account of H Ltd.

Question 63.
General reserve of S Ltd. on 31.3.2020 was ₹ 90,000. Break-up of its profit and loss account is given below.

On 1.7.2019, H Ltd. acquired interest in S Ltd. by acquiring 72,000 fully paid equity shares of ₹ 10 each for ₹ 8,00,000. Total paid-up share capital of S Ltd. is ₹8,00,000. H Ltd. credited the entire amount of interim dividend received to its profit and loss account. How much goodwill or capital reserve will be shown in consolidated balance sheet?
(A) Goodwill 2 46,000
(B) Capital reserve ₹ 10,000
(C) Goodwill ₹ 80,000
(D) Capital reserve ₹ 46,000
Answer:
(D) Capital reserve ₹ 46,000

Question 64.
Following are the balances of H Ltd. & S Ltd. on 31.3.2019:

Bills accepted by S Ltd. were all shown by H Ltd. and H Ltd. had got bills amounting to ₹ 30,000 discounted with bank. On 31.3.2019, S Ltd. owed ₹ 30,000 to H Ltd. for goods purchased from it. After setting-off mutual debts
(a) Net Account Receivables and
(b) Net Account Payables will appear in consolidated financial statement at –

Answer:
(C)

Question 65.
S Ltd. is subsidiary of H Ltd. S Ltd. remitted a cheque for ₹ 5,000 to H Ltd. on 30th March, 2018, which was received by H Ltd. on 1st April, 2019. Accounting year of both companies closed on 31 st March
2019. Which of the following treatment is correct in consolidated financial statement for cheque in transit
(A) Bank balance of S Ltd. will be added by ₹ 5,000 and cheque in transit of ₹ 5,000 will be separately shown in balance sheet on asset side.
(B) Really no treatment is required for cheque in transit as it does not affect the aggregate bank balance of the group if proper entries are passed by the parent company and subsidiary company as and when cheque is received or paid.
(C) Bank balance of H Ltd. will be increased by 5,000 and cheque in transit of ₹ 5,000 will be separately shown in balance sheet on asset side
(D) All of the above are correct
Answer:
(B) Really no treatment is required for cheque in transit as it does not affect the aggregate bank balance of the group if proper entries are passed by the parent company and subsidiary company as and when cheque is received or paid.

Question 66.
A parent owns two third of the subsidiary’s equity. As at a year end the subsidiary’s inventory includes goods sent to it by the parent invoiced at ₹ 3,60,000. Parent has purchased these goods for ₹ 3,00,000. Which of the following are the correct entries for eliminating unrealized profit₹
(A) Debit the parent’s retained earnings and credit the subsidiary’s inventory with ₹ 60,000.
(B) Debit the subsidiary’s retained earnings and credit the subsidiary’s inventory with ₹ 45,000.
(C) Debit the subsidiary’s retained earnings and credit the subsidiary’s inventory with ₹ 60,000.
(D) Debit the parents retained earnings and credit subsidiary’s inventory with ₹ 45,000.
Answer:
(A) Debit the parent’s retained earnings and credit the subsidiary’s inventory with ₹ 60,000.

Question 67.
What is the amount of the unrealized profit to be eliminated if the parent’s year- end inventory includes at ₹ 5,40,000 goods invoiced to it by its 60% owned subsidiary at cost plus 25%.
(A) ₹ 35,000
(B) ₹ 1,08,000
(C) ₹ 64,800
(D) ₹ 81,000
Answer:
(B) ₹ 1,08,000

Question 68.
Subsidiary’s inventory at the year end included ₹ 1,80,000 purchased from its parent. Further goods invoiced by the parent at ₹ 45,000 were in transit. The parent invoices the subsidiary at cost plus 20%. The amount of unrealized profit that needs to be eliminated from the parent’s retained earnings would be:
(A) ₹ 37,500
(B) ₹ 36,000
(C) ₹ 38,333
(D) ₹ 30,000
Answer:
(A) ₹ 37,500
(1,80,000 + 45,000) × 1/6 = 37,500

Question 69.
Any amount owed by one member of a group to another need to be cancelled when preparing the consolidated statement of financial position. As at the year end the parent’s receivable includes ₹ 90,000 due from the subsidiary; whereas the subsidiary reports that it owes only ₹ 60,000 to the parent. Difference has arisen because of cash in transit. Which is the correct way of dealing with the situation when preparing the consolidated statement of financial position
(A) Cancel ₹ 90,000 from both Receivable and Payable.
(B) Cancel ₹ 90,000 from parent’s Receivable, ₹ 60,000 from subsidiary’s Payable and include 30,000 with Cash.
(C) Cancel ₹ 90,000 from Receivable and ₹ 60,000 from Payable.
(D) Cancel ₹ 60,000 from both Receivable and Payable
Answer:
(B) Cancel ₹ 90,000 from parent’s Receivable, ₹ 60,000 from subsidiary’s Payable and include 30,000 with Cash.

Question 70.
As at the year end the parent’s statement of financial position reports rent receivable as an asset at ₹ 60,000 and this includes ₹ 15,000 due from the subsidiary. Subsidiary reports rent payable as ₹ 15,000. Which of the following will be included in the consolidated statement of financial position₹
(A) Rent receivable as an asset at ₹ 45,000 and rent payable as a current liability at ₹ 15,000.
(B) Rent receivable as an asset at ₹ 60,000 and report nothing as current liability.
(C) Rent receivable as an asset at ₹ 45,000 and report nothing within Current liabilities as rent payable.
(D) Rent receivable as an asset at ₹ 60,000 and rent payable as a current liability at ₹ 15,000.
Answer:
(C) Rent receivable as an asset at ₹ 45,000 and report nothing within Current liabilities as rent payable.

Question 71.
The parent paid ₹ 48,000 to acquire 75% of 3,000 ordinary shares of ₹ 10.00 and reserves of the subsidiary were reported as ₹ 35,000 and fair valuation of its assets identified a gain of ₹ 5,000. What is the goodwill/capital reserve of the subsidiary on this date?
(A) Goodwill ₹ 8,000
(B) Capital Reserve ₹ 17,000
(C) Goodwill ₹ 13,000
(D) Capital Reserve ₹ 22,000
Answer:
(D) Capital Reserve ₹ 22,000

Question 72.
On 1.7.2012 H Ltd. acquired 7,500 shares of ₹ 100 each in S Ltd. at a cost of ₹ 160 per share. The total number of shares in S Ltd. is 10,000. In August, 2012 S Ltd. paid a dividend of ₹ 10 per share for the year ending 31.3.2012. In September, 2012 H sold 500 shares in S Ltd. @ ₹ 155. At what figure will be the Investment Account now stands in the books of H Ltd.?
(A) ₹ 10,47,500
(B) ₹ 11,00,000
(C) ₹ 10,00,000
(D) ₹ 10,50,000
Answer:
(D) ₹ 10,50,000
Cost of acquisition = 7,500 × 160 = 12,00,000
Pre-acquisition dividend 7,500 × 10 75,000
Net cost = 12.00,000- 75,000 = 11,25,000
Net cost per share = 11,25,000 ÷ 7.500 = 150 per share
Cost of 500 shares sold = 500 × 150 = 75,000
Cost of remaining 7,000 shares = 11,25,000 – 75,000 10,50,000
OR 7,000 × 150= 10,50,000
lf the Investment A/c is prepared it will appear as Follows:

Question 73.
Total of assets side of subsidiary’s balance sheet is ₹ 8,10,000 which includes preliminary expense ₹ 8,000. Outsider’s liability in balance sheet was ₹ 1,60,000. Holding company holds 75% shares of subsidiary. Minority Interest = ?
(A) ₹ 2,02,500
(B) ₹ 1,62,500
(C) ₹ 1,60,500
(D) ₹ 1,64,500
Answer:
(C) ₹ 1,60,500
(8,10,000 – 8,000 – 1,60,000) × 25% = 160,500

Question 74.
₹ Ltd. acquired 80% equity shares in Y Ltd. on 1st July, 2019 at cost price of ₹ 4,48,000. Total equity share capital of Y Ltd. was ₹ 2,00,000. Share of ₹ Ltd. in pre acquisition profits of Y Ltd. was ₹ 1,27,000. Goodwill = ?
(A) ₹ 1,86,400
(B) ₹ 2,48,000
(C) ₹ 1,58,000
(D) ₹ 1,46,400
Answer:
(A) ₹ 1,86,400

Question 75.
S Ltd. had purchased goods of ₹ 80,000 from its holding company H Ltd. out of which goods invoiced at ₹ 50,000 were in stock on 31st March, 2020. H Ltd. added 25% to cost to arrive at invoice price. Stock reserve to be eliminated from the consolidated balance sheet = ?
(A) ₹ 10,000
(B) ₹ 12,500
(C) ₹ 16,000
(D) ₹ 20,000
Answer:
(A) ₹ 10,000
50,000 ×20% = 10,000

Question 76.
P Ltd. acquired 12,000 shares of ₹ 10 each in S Ltd. at ₹ 1,70,000 on 31st March, 2020 Details of S Ltd. on 31.3.2020 are given below:
Share Capital (₹ 10 each) — 1,50,000
Capital Reserve — 5,000
General Reserve — 1,05,000
Profit & Loss Account — 18,000
Fixed assets — 2,44,700
Interest receivable for the year ended 31.3.2020 amounting to ₹ 100 hr respect of a loan due by P Ltd. has not been credited in the accounts of S Ltd. The’directors decided to value fixed assets of S Ltd. at ₹ 2,39,700. What is the cost of control that will appear in consolidated balance sheet prepared for the year ended 31.3.2020?
(A) Capital Reserve ₹ 48,480
(B) Goodwill ₹ 50,000
(C) Goodwill ₹ 48,480
(D) Capital Reserve ₹ 46,120
Answer:
(A) Capital Reserve ₹ 48,480

Shortcut method lo calculate minority interest:
Minority share capital = 30,000
Share of minority in total profit = 5,000 (Capital Reserve) +1,05,000 (General
Reserve) + 18,000 (Profit & Loss A/c) + 100 (interest). 5,000 (Revaluation loss) × 20% = 24,620
Minority Interest = 30,000 + 24,620 = 54,620

Question 77.
Take the data of above question and calculate Minority Interest
(A) ₹ 54,620
(B) ₹ 56,420
(C) ₹ 54,260
(D) ₹ 52,460
Answer:
(A) ₹ 54,620

Shortcut method lo calculate minority interest:
Minority share capital = 30,000
Share of minority in total profit = 5,000 (Capital Reserve) +1,05,000 (General
Reserve) + 18,000 (Profit & Loss A/c) + 100 (interest). 5,000 (Revaluation loss) × 20% = 24,620
Minority Interest = 30,000 + 24,620 = 54,620

Question 78.
H Ltd. acquired as investment 15,000 shares in S Ltd. for ₹ 1,55,000 on 1.7.2018. Details of S Ltd. on 31.3.2019 are given below:
Share Capital (₹ 10 each) — 2,50,000
General Reserve — 40,000
Profit & Loss Account — 25,000
General reserve of S Ltd. has remained unchanged since 31.3.2018. Profit earned by S Ltd. for the year ended
31.3.2019 amounted to ₹ 20,000. Cost of control = ?
(A) ₹ 25,000 capital reserve
(B) ₹ 25,000 goodwill
(C) ₹ 5,000 goodwill
(D) ₹ 5,000 capital reserve
Answer:
(A) ₹ 25,000 capital reserve

Shortcut method to calculate minority in le rest:
Minority share capital 1,00,000
Share of minority in total profit = (40,000 + 25,000) × 40% = 26,000
Minority Interest 1,00,000 + 26,000 = 1,26,000

Question 79.
Take the data of above question and calculate Minority Interest?
(A) ₹ 1,06,000
(B) ₹ 1,16,000
(C) ₹ 1,26,000
(D) ₹ 1,36,000
Answer:
(C) ₹ 1,26,000

Shortcut method to calculate minority in le rest:
Minority share capital 1,00,000
Share of minority in total profit = (40,000 + 25,000) × 40% = 26,000
Minority Interest 1,00,000 + 26,000 = 1,26,000

Question 80.
Following are the details of S Ltd. on 31.3.2017: Share Capital (₹ 10 each) ₹ 2,00,000 Plant & Machinery ₹ 1,35,000 H Ltd. acquired 80% shares in S Ltd. on 1.10.2016. S Ltd.’s plant and machinery which stood at ₹ 1,50,000 on 1.4.2016 was considered worth ₹ 1,80,000 as on 1.10.2016, this figure is to be considered while consolidating the balance sheets. In consolidation balance sheet Plant & Machinery of S Ltd. will appear at -…………
(A) ₹ 5,06,225
(B) ₹ 5,25,835
(C) ₹ 1,70,625
(D) ₹ 5,40,345
Answer:
(C) ₹ 1,70,625

Capital Structure – Financial Management MCQ

March 21, 2023March 21, 2023 by Prasanna

Capital Structure – CS Executive Financial and Strategic Management MCQ Questions with Answers you can quickly revise the concepts.

Capital Structure – Financial Management MCQ

Question 1.
…………. refers to the mix of a firm’s capitalization and includes long term sources of funds.
(A) Leverage
(B) Capital structure
(C) Debt mix
(D) Owner’s equity
Answer:
(B) Capital structure

Question 2.
The term “capital structure” refers to:
(A) Current assets & current liabilities
(B) Long-term debt, preferred stock, and common stock equity
(C) Total assets minus liabilities
(D) Share holders’ equity
Answer:
(B) Long-term debt, preferred stock, and common stock equity

Question 3.
The decisions regarding the forms of financing, their requirements and their relative proportions in total capitalization known as –
(A) Equity decisions
(B) Equilibrium decisions
(C) Outright decisions
(D) Capital structure decisions
Answer:
(D) Capital structure decisions

Question 4.
Which of the following statement is false?
I. In case the firm wants to grow at a faster pace, it would be required to incorporate debt in its capital structure to a greater extent.
II. If the firm has no long term debt in its capital structure, it means that either it is risk averse or it has cost of equity capital or cost of retained earnings less than the cost of debt.
Select the correct answer from the options given below:
(A) Statement I is true while Statement II is false.
(B) Statement I is false while Statement II is true.
(C) Both Statement I and Statement II are false.
(D) Both Statement I and Statement II are true.
Answer:
(D) Both Statement I and Statement II are true.

Question 5.
While designing a capital structure a finance manager should choose a pattern of capital which –
(A) Minimizes cost of capital
(B) Maximizes the owners return.
(C) Maximizes cost of capital and minimizes the owners return.
(D) Both (A) and (B)
Answer:
(D) Both (A) and (B)

Question 6.
Which of the following changes in capital structure would you recommend for growth at faster rate?
(A) Incorporate more retained earnings out of profit and loss account.
(B) Incorporate debt in its capital structure to a greater extent.
(C) Merge with other companies.
(D) Pay more dividend to equity share-holders.
Answer:
(B) Incorporate debt in its capital structure to a greater extent.

Question 7.
The manner in which an organization’s assets are financed is referred to as its –
(A) Capital structure
(B) Financial structure
(C) Asset structure
(D) Owners structure
Answer:
(B) Financial structure

Question 8.
Optimal capital structure consists of -…………..
(A) Appropriate mix of fixed assets and current assets.
(B) Appropriate mix of long term debts and fixed assets.
(C) Appropriate mix of sales and profit.
(D) Appropriate mix of debt and equity.
Answer:
(D) Appropriate mix of debt and equity.

Question 9.
Which of the following is not included in capital structure?
(A) Long term debt
(B) Preferred stock
(C) Current assets
(D) Retained earnings
Answer:
(C) Current assets

Question 10.
Which of the following shows significance of capital structure?
(A) Capital structure reflects the overall strategy of the firm.
(B) One can get a reasonably accurate broad idea about the risk profile of the firm from its capital structure.
(C) The capital structure acts as a tax management tool.
(D) All of the above
Answer:
(D) All of the above

Question 11.
Financial structure involves creation of –
(1) Long term assets
(2) Short term assets
Select the correct answer from the options given below:
(A) (2) only
(B) Neither (1) nor (2)
(C) (1) only
(D) Both (1) and (2)
Answer:
(D) Both (1) and (2)

Question 12.
Which of the following statement is incorrect?
(1) High debt funds in capital structure increases EPS.
(2) High debt funds increases the operating or business risk.
Select the correct answer from the options given below:
(A) Both Statement 1 and Statement 2 are correct.
(B) Statement 1 is correct while Statement 2 is incorrect.
(C) Statement 2 is correct while Statement 1 is incorrect.
(D) Both Statement 1 and Statement 2 are incorrect.
Answer:
(D) Both Statement 1 and Statement 2 are incorrect.

Question 13.
Financial structure is ……………. concept while capital structure is concept
(A) inappropriate; appropriate
(B) appropriate; inappropriate
(C) narrow; broader
(D) broader; narrow
Answer:
(D) broader; narrow

Question 14.
Assertion (A):
The capital structure should be determined within the debt capacity of the company and this capacity should not be exceeded.
Reason (R):
The debt capacity of a company depends on its ability to generate future cash flows. It should have enough cash to pay creditors’ fixed charges and principal sum.
Select the correct answer from the options given below:
(A) A is true but R is false
(B) A is false but R is true.
(C) Both A and R are true but R is not correct explanation of A.
(D) Both A and Rare true and R is correct explanation of A.
Answer:
(D) Both A and Rare true and R is correct explanation of A.

Question 15.
Which of the following capital structure consist of zero debt components in the structure mix?
(A) Pyramid Shaped Capital Structure
(B) Inverted Pyramid Shaped Capital Structure
(C) Horizontal Capital Structure
(D) Vertical Capital Structure
Answer:
(C) Horizontal Capital Structure

Question 16.
Which of the following statement is false?
(A) The use of excessive debt threatens the solvency of the company.
(B) A firm having operating loss would find it worthwhile to incorporate debt in the capital structure in a greater measure.
(C) The capital structure should be flexible.
(D) None of the above
Answer:
(B) A firm having operating loss would find it worthwhile to incorporate debt in the capital structure in a greater measure.

Question 17.
One can get a reasonably accurate broad idea about the risk profile of the firm from its –
(A) Dividend policy
(B) Capital structure
(C) Debt service ratio
(D) Earning yield
Answer:
(B) Capital structure

Question 18.
A critical assumption of the net operating income (NOI) approach to valuation is that:
(A) Debt and equity levels remain unchanged.
(B) Dividends increase at a constant rate.
(C) Ko remains constant regardless of changes in leverage.
(D) Interest expense and taxes are included in the calculation.
Answer:
(C) Ko remains constant regardless of changes in leverage.

Question 19.
If the debt component in the capital structure is predominant –
(A) The fixed interest cost of the firm will be minimum thereby decreasing its risk.
(B) Earnings per share (EPS) will be very low.
(C) Dividend expectations of equity shareholders are also and P/E Ratio may decrease.
(D) The fixed interest cost of the firm increases thereby increasing its risk.
Answer:
(D) The fixed interest cost of the firm increases thereby increasing its risk.

Question 20.
Capital structure relates to …………. capital deployment for creation of ……… assets.
(A) long term; long term
(B) long term; short term
(C) short term; long term
(D) short term; short term
Answer:
(A) long term; long term

Question 21.
Assertion (A):
The capital structure acts as a tax management tool also.
Reason (R):
Relatively lesser component of equity capital is vulnerable to hostile takeovers.
Select the correct answer from the options given below:
(A) A is true but R is false
(B) A is false but R is true.
(C) Both A and R are true but R is not correct explanation of A.
(D) Both A and Rare true and R is correct explanation of A.
Answer:
(C) Both A and R are true but R is not correct explanation of A.

Question 22.
Select which of the following statement is correct.
Horizontal capital structure -…………
1. is quite stable.
2. is formed by a small amount of equity share capital.
3. there is absence of debt.
4. have increasing component of debt.
Select the correct answer from the options given below:
(A) 1, 2 & 4
(B) 2 & 3
(C) 1 only
(D) 1 & 4 only
Answer:
(C) 1 only

Question 23.
One can design capital structure with proper proportions of equity, preference and debt mix. The choice of the combination of these sources is called –
(A) Structural mix
(B) Policy mix
(C) Capital structure mix
(D) Finance mix
Answer:
(C) Capital structure mix

Question 24.
In horizontal capital structure –
(A) expansion of the firm takes place by issuance of debt securities.
(B) expansion of the firm takes place by issuance of debt securities and preferred stocks.
(C) expansion of the firm takes in a lateral manner, i.e. through equity or retained earning only.
(D) expansion of the firm takes place by issuance of short term and marketable securities.
Answer:
(C) expansion of the firm takes in a lateral manner, i.e. through equity or retained earning only.

Question 25.
According to Cost Principle an ideal pattern or capital structure is one that -…………..
(A) Minimizes cost of capital structure
(B) Maximizes earnings per share (EPS).
(C) Both (A) and (B)
(D) None of the above
Answer:
(C) Both (A) and (B)

Question 26.
In a …………. the base of the structure is formed by a small amount of equity share capital. This base serves as the foundation on which the super structure of preference share capital and debt is built.
(A) horizontal capital structure
(B) vertical capital structure
(C) diagonal capital structure
(D) matrix capital structure
Answer:
(B) vertical capital structure

Question 27.
According to Risk Principle……..
(A) Reliance is placed on excessive use of debt financing for capital requirements than common equity.
(B) Reliance is placed on ability of finance manager than external analyst.
(C) Reliance is placed more on common equity for financing capital requirements than excessive use of debt.
(D) Reliance is placed more on short term finance for financing capital requirements than excessive use of working capital.
Answer:
(C) Reliance is placed more on common equity for financing capital requirements than excessive use of debt.

Question 28.
Match List I with List II:

Select the correct answer from the options given below

Answer:
(D)

Question 29.
Use of more and more debt and preference capital –
(A) affects equity share values and in unfavourable situation equity share prices may consequently drop.
(B) increases value of debt and preference capital and equity share.
(C) Increases the profit after tax (PAT) even though sales pattern shows decreasing trends.
(D) All of the above
Answer:
(A) affects equity share values and in unfavourable situation equity share prices may consequently drop.

Question 30.
Match List – I with List – II:

Answer:
(C)

Question 31.
Business Risk is –
(A) Avoidable risk
(B) Unavoidable risk
(C) Not relevant
(D) Less important than financial risk
Answer:
(B) Unavoidable risk

Question 32.
Which of the following statement is true in relation to vertical capital structure?
(A) The incremental addition in the capital structure is almost entirely in the form of debt.
(B) The absence of debt it results in the lack of financial leverage and hence low financial risk.
(C) Since there is more equity shares EPS is likely to be high.
(D) For this capital structure combined leverage is very low as compared to other firms in industry which have more equity finance.
Answer:
(A) The incremental addition in the capital structure is almost entirely in the form of debt.

Question 33.
The rate of tax affects the –
(A) Cost of retained earning
(B) Cost of debt
(C) Cost of equity
(D) All of the above
Answer:
(D) All of the above

Question 34.
A pyramid shaped capital structure has –
(A) Retained earnings of the firm which are usually lower than the cost of debt.
(B) A large proportion consisting of equity capital and retained earnings which have been ploughed back into the firm over a considerably large period of time.
(C) Incremental addition in the capital structure is almost entirely in the form of debt.
(D) Both (A) and (B)
Answer:
(D) Both (A) and (B)

Question 35.
Assertion A:
While making a choice of the capital structure the future cash flow position should be kept in mind.
Reason R:
Debt capital should be used only if the cash flow position is really good because a lot of cash is needed in order to make payment of interest and refund of capital.
Select the correct answer from the options given below:
(A) A is true and R is false
(B) A is false and R is true
(C) Both A and R are true and R is not correct explanation of A.
(D) Both A and Rare true and R is correct explanation of A.
Answer:
(D) Both A and Rare true and R is correct explanation of A.

Question 36.
To have optimal capital structure the firm must fulfil the following conditions:
I. Return on investment should be greater than cost of investment.
II. There should be minimum financial risk.
III. There is absence of equity finance.
IV. The capital structure should be flexible
V. Cost of investment should be greater than ROI.
Select correct answer from the options given below:
(A) III, I
(B) IV,II & V
(C) II, I & IV
(D) II & IV
Answer:
(C) II, I & IV

Question 37.
Business risk is influenced by –
(A) Revenue
(B) Variable cost
(C) Fixed assets
(D) All of the above
Answer:
(D) All of the above

Question 38.
Capital Structure of a firm –
(A) Is a reflection of the overall investment and financing strategy of the firm.
(B) Shows how much reliance is being placed by the firm on external sources of finance and how much internal accrual is being used to finance expansions
(C) Means the structure or constitution or break-up of the capital employed by a firm.
(D) All of the above
Answer:
(D) All of the above

Question 39.
With the help of Interest Coverage Ratio (ICR) ratio an effort is made to find out –
(A) How many times the profit after tax (PAT) is available to the payment of interest.
(B) How many times the net operating profit after tax (NOPAT) is available to the payment of interest.
(C) How many times the EBIT is available to the payment of interest.
(D) Most suitable bank for negotiation.
Answer:
(C) How many times the EBIT is available to the payment of interest.

Question 40.
Pyramid Shaped Capital Structure –
(A) Have a high proportion of fixed assets and considerably a very low proportion of current assets.
(B) Have a high proportion of debts and considerably a very low proportion of equity.
(C) Have a high proportion of equity and considerably a very low proportion of debt.
(D) Have a high proportion of current assets and considerably a very’ low proportion of liquid assets.
Answer:
(C) Have a high proportion of equity and considerably a very low proportion of debt.

Question 41.
Financial Risk is –
(A) Affected by demand of firm products, variations in prices and proportion of fixed cost in total cost.
(B) Represented by the variability of earnings before interest and tax (EBIT)
(C) Is unavoidable if firm does not use debt in its capital structure.
(D) All of the above
Answer:
(C) Is unavoidable if firm does not use debt in its capital structure.

Question 42.
Inverted Pyramid Shaped Capital Structure –
(A) Has a large component of equity capital.
(B) Is highly stable and permanent.
(C) Is opposite as that of pyramid shaped capital structure.
(D) Has reasonable level of debt but an ever increasing component of retained earnings.
Answer:
(C) Is opposite as that of pyramid shaped capital structure.

Question 43.
Which of the following statement is true?
(0 Flexibility principle states that the management chooses such a combination of sources of financing which it finds easier to adjust according to changes in need of funds in future too.
(ii) Penalty for not meeting financial obligations is bankruptcy.
(iii) Firms with high business risk therefore tend toward less highly leveraged capital structures, and firm with low business risk tend toward more highly leveraged capital structures.
Select correct answer from the options given below:
(A) (i) only
(B) (i) and (iii)
(C) (i) only
(D) All of the above
Answer:
(D) All of the above

Question 44.
Which of the following is vulnerable to hostile takeovers?
(A) Horizontal Capital Structure
(B) Vertical Capital Structure
(C) Pyramid Shaped Capital Structure
(D) All of the above
Answer:
(B) Vertical Capital Structure

Question 45.
Floatation costs are those expenses which are incurred while –
(A) Issuing securities
(B) Repayment of debts
(C) Negotiations for business deal
(D) Repayment of equity and debts
Answer:
(A) Issuing securities

Question 46.
Operating/Business Risk refers to the risk of –
(A) Inability to pay fixed financial payments (e.g., payment of interest, preference dividend, return of the debt capital, etc.)
(B) Inability to discharge permanent operating costs (e.g., rent of the building, payment of salary, insurance instalment, etc.)
(C) Both (A) and (B)
(D) None of the above
Answer:
(B) Inability to discharge permanent operating costs (e.g., rent of the building, payment of salary, insurance instalment, etc.)

Question 47.
Which of the following is floatation cost?
(A) Commission of underwriters
(B) Brokerage paid on issue of securities
(C) Stationery expenses on issue of securities
(D) All of the above
Answer:
(D) All of the above

Question 48.
……….. denotes the level of EBIT for which the firm’s EPS equals zero.
(A) Financial break-even point
(B) Margin of safety
(C) Equilibrium point
(D) Min-max point
Answer:
(A) Financial break-even point

Question 49.
Which of the following is correct formula to calculate EPS?
(A) [(EBIT + I) (1 – T) – D_p]/N₀(B) [EBIT -1 + T – D_p]/N₀(C) [(EBIT -1) (1 – T) – D_p]/N₀(D) [(EBIT -1) (1 – T) + D_p]/N₀Answer:
(C) [(EBIT -1) (1 – T) – D_p]/N₀

Question 50.
If the EBIT is less than the financial 5 breakeven point, then the EPS will be –
(A) Positive
(B) Negative
(C) Zero
(D) Maximum
Answer:
(B) Negative

Question 51.
According to Net Income Approach, capital structure decision –
(A) Is relevant to the value of the firm.
(B) Of the firm are irrelevant.
(C) Will not lead to any change in the total value of the firm and the market price of shares.
(D) Division between debt and equity is irrelevant.
Answer:
(A) Is relevant to the value of the firm.

Question 52.
According to Net Operating Income Approach –
(A) Capital structure decisions of the firm are irrelevant.
(B) Any change in the leverage will not lead to any change in the total value of the firm and the market price of shares, as the overall cost of capital is independent of the degree of leverage.
(C) The division between debt and equity is irrelevant.
(D) All of the above
Answer:
(D) All of the above

Question 53.
According to ……………, the firm can increase its total value by decreasing its overall cost of capital through increasing the degree of leverage.
(A) Net Operating Income Approach
(B) Net Income Approach
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(B) Net Income Approach

Question 54.
As per Net Income Approach the value of the firm will be maximum at a point where –
(A) Average cost of equity is minimum.
(B) Average cost of debt is minimum.
(C) Weighted average cost of equity is maximum.
(D) Weighted average cost of capital is minimum.
Answer:
(D) Weighted average cost of capital is minimum.

Question 55.
Any change in the leverage will not lead to any change in the total value of the firm and the market price of shares, as the overall cost of capital is independent of the degree of leverage. This is as per
(A) Net Operating Income Approach
(B) Net Income Approach
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(A) Net Operating Income Approach

Question 56.
Inability to pay fixed financial payments e.g. payment of interest, preference dividend, return of the debt capital, etc. is called as –
(A) Business risk
(B) Financial risk
(C) Operating risk
(D) (A) and (C)
Answer:
(B) Financial risk

Question 57.
If expected level of EBIT is more than the breakeven point, then the EPS will be –
(A) Minimum
(B) Negative
(C) Positive
(D) Infinite
Answer:
(C) Positive

Question 58.
The overall cost of capital under Net Income Approach is –
(A) EBIT 4 ÷ Value of firm
(B) Net Income 4÷ K_e(C) Value of firm 4 ÷ EBIT
(D) EBIT4 ÷ K_oAnswer:
(A) EBIT 4 ÷ Value of firm

Question 59.
Which formula would you use to calculate market value of equity?
(A) Net Income 4÷K_e(B) K_e ÷ Net Income
(C) Sales 4÷K_e(D) Gross Profit 4÷ K_eAnswer:
(A) Net Income 4÷K_e

Question 60.
Which of the following proposition is made by Modigliani and Miller?
(A) The total market value of a firm and its cost of capital are independent of its capital structure.
(B) The cost of equity (K_e) is equal to capitalization rate of pure equity stream plus a premium for financial risk.
(C) The cut-off rate for investment decision making for a firm in a given risk class is not affected by the manner in which the investment is financed.
(D) All of the above
Answer:
(D) All of the above

Question 61.
Which of the following assumption is valid as per MM Approach?
1. There is imperfect competition in the market.
2. There is no transaction cost.
3. All investors are rational.
4. All information is not freely available. Select the correct answer from the options given below:
(A) 1 & 2
(B) 4 & 1
(C) 1 & 3
(D) 3 & 2
Answer:
(D) 3 & 2

Question 62.
According Modigliani & Miller Approach
(A) Individuals (arbitragers) through the use of personal leverage can alter corporate leverage.
(B) Financial risk increases with more debt content in the capital structure.
(C) The total value of a firm is not affected by its capital structure
(D) All of the above
Answer:
(D) All of the above

Question 63.
A situation where a firm has more capital than it needs is called as –
(A) Over Finance
(B) Over Capitalization
(C) Over Trading
(D) Over Realization
Answer:
(B) Over Capitalization

Question 64.
Which of the following is one of the causes of over capitalization?
(A) Reduction in the market price of shares.
(B) Borrowing huge amount at higher rate than rate at which company can earn.
(C) Reduction in the rate of dividend and interest payments.
(D) Buying of shares in the unleveraged firm.
Answer:
(B) Borrowing huge amount at higher rate than rate at which company can earn.

Question 65.
Which of the following is one of the causes of over capitalization?
(A) Raising more money through issue of shares or debentures than company can employ profitably.
(B) Excessive payment for the acquisition of fictitious assets such as goodwill etc.
(C) Improper provision for depreciation, replacement of assets and distribution of dividends at a higher rate.
(D) All of the above
Answer:
(D) All of the above

Question 66.
The pecking order theory is popularized by-
(A) Franco and Merton
(B) Modigliani and Miller
(C) Myers and Majluf
(D) Myers and Merton
Answer:
(C) Myers and Majluf

Question 67.
Financing comes from three sources, internal funds, debt and new equity. Companies prioritize their sources of financing, first preferring internal financing, and then debt, lastly raising equity as a “last resort”. Hence, internal financing is used first; when that is depleted, then debt is issued; and when it is no longer sensible to issue any more debt, equity is issued. This is as per
(A) Order pecking theory
(B) Sequential theory
(C) Sequential pecking theory
(D) Pecking order theory
Answer:
(D) Pecking order theory

Question 68.
Finance function comprises –
(A) Safe custody of funds only
(B) Expenditure of funds only
(C) Procurement of finance only
(D) Procurement & effective use of funds
Answer:
(D) Procurement & effective use of funds

Question 69.
Finance functions includes –
(A) Planning for funds
(B) Raising of funds
(C) Allocation of resources
(D) All of the above
Answer:
(D) All of the above

Question 70.
Earning Yield computed by
(A) EPS/Current Market Price Per Share
(B) Paid up value of Share/100
(C) EPS/Profit × 100
(D) EPS/Market Price
Answer:
(A) EPS/Current Market Price Per Share

Question 71.
Assertion (A):
High capital gearing leads to greater speculation.
Reason (R):
Proportion of equity share capital in relation to the total capital comprising the other securities is small leading to capitalization being highly geared.
(A) Both A and R are true and R is the correct explanation of A.
(B) Both A and R are true but R is not a correct explanation of A.
(C) A is true but R is false
(D) A is false but R is true
Answer:
(D) A is false but R is true

Question 72.
Which is external source of finance?
(A) Letters of Credit
(B) Advance from customers
(C) Finance from Companies
(D) All of the above
Answer:
(D) All of the above

Question 73.
The traditional approach towards the valuation of a company assumes that –
(A) The cost of capital is independent of the capital structure of the firm.
(B) The firm maintains constant risk regardless of the type of financing employed.
(C) There exists no optimal capital structure.
(D) That management can increase the total value of the firm through the judicious use of financial leverage.
Answer:
(D) That management can increase the total value of the firm through the judicious use of financial leverage.

Question 74.
Which of the following statements regarding the net operating income approach is incorrect?
(A) The overall capitalization rate, Ko is constant.
(B) The cost of debt funds, K is constant.
(C) The required return on equity, Kc, is constant.
(D) The total value of the firm is unaffected by changes in financial leverage.
Answer:
(C) The required return on equity, Kc, is constant.

Question 75.
Two identical companies exist except that Company A uses no debt and Company B uses some debt. The total value of Company A is less than the total value of Company B, but you own 2% of Company B. Based on the arguments by Modigliani and Miller regarding the total value principle, what should you do?
(A) Buy 2% of Company A with funds from “shorting” your shares in Company B. Submit a press release that
the two companies should be worth identical values. This will cause Company A to rise in value and leave you extra funds for investment.
(B) You should borrow enough funds to equal the difference in company value, purchase shares of Company A with these funds, and sell your shares in Company B. This will leave extra funds for an investment of your choice.
(C) Sell your shares, personally borrow 2% of the quantity of company debt, and purchase 2% of Company A. This will leave extra funds for an investment of your choice.
(D) Sell enough of your shares (Company B) to pin-chase 2% of Company A. This will leave extra funds for an investment of your choice.
Answer:
(C) Sell your shares, personally borrow 2% of the quantity of company debt, and purchase 2% of Company A. This will leave extra funds for an investment of your choice.

Question 76.
Which term would most likely be associated with the phrase “actions speak louder than words”?
(A) Incentive signalling
(B) Shareholder wealth maximization
(C) Financial signalling
(D) Optimal capital structure
Answer:
(C) Financial signalling

Question 77.
External sources of finance do not include:
(A) Overdrafts
(B) Leasing
(C) Retained earnings
(D) Debentures
Answer:
(C) Retained earnings

Question 78.
Internal sources of finance do not include:
(A) Retained earnings
(B) Ordinary shares
(C) Better management of working capital
(D) Trade credit
Answer:
(B) Ordinary shares

Question 79.
A firm’s optimal capital structure:
(A) Is the debt-equity ratio that exists at the point where the firm’s weighted after-tax cost of debt is minimized.
(B) Is generally a mix of 40% debt and 60% equity
(C) Is the debt-equity ratio that results in the lowest possible weighted average cost of capital.
(D) Is found by locating the mix of debt and equity which causes the earnings per share to equal exactly ?
Answer:
(C) Is the debt-equity ratio that results in the lowest possible weighted average cost of capital.

Question 80.
M&M Proposition I, without taxes, states that:
(A) Firms should borrow to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.
(B) Financial risk is determined by the debt-equity ratio.
(C) The cost of equity rises when financial leverage rises.
(D) It is completely irrelevant how a firm arranges its finances.
Answer:
(D) It is completely irrelevant how a firm arranges its finances.

Question 81.
Which of the following step would you recommend to avoid the negative consequences of over capitalization?
(A) Company should go for thorough reorganization.
(B) Buyback of shares.
(C) Reduction in claims of debenture-holders and creditors.
(D) All of the above
Answer:
(D) All of the above

Question 82.
Which one of the following statements concerning financial leverage is correct?
(A) If a firm employs financial leverage, the shareholders will be exposed to greater risk.
(B) A firm employing leverage will always have higher earnings per share than a firm which does not employ leverage.
(C) The benefits of leverage are unaffected by changes in a firm’s earnings before interest and taxes.
(D) The earnings per share remain constant even when an all-equity firm switches to a debt-equity ratio of 4.
Answer:
(A) If a firm employs financial leverage, the shareholders will be exposed to greater risk.

Question 83.
Market values are often used in computing the weighted average cost of capital because
(A) This is the simplest way to do the calculation.
(B) This is consistent with the goal of maximizing shareholder value.
(C) This is required in India by the Securities and Exchange Board of India.
(D) This is a very common mistake
Answer:
(B) This is consistent with the goal of maximizing shareholder value.

Question 84.
Two firms that are virtually identical except for their capital structure are selling in the market at different values. According to M & M:
(A) One will be at greater risk of bankruptcy.
(B) The firm with greater financial leverage will have the higher value.
(C) This proves that markets cannot be efficient.
(D) This will not continue because arbitrage will eventually cause the firms to sell at the same value.
Answer:
(D) This will not continue because arbitrage will eventually cause the firms to sell at the same value.

Question 85.
An EBIT-EPS indifference analysis chart is used for –
(A) Evaluating the effects of business risk on EPS.
(B) Examining EPS results for alternative financing plans at varying EBIT levels.
(C) Determining the impact of a change in sales on EBIT.
(D) Showing the changes in EPS quality over time
Answer:
(B) Examining EPS results for alternative financing plans at varying EBIT levels.

Question 86.
EBIT of NS Ltd. is ₹ 4,50,000.
Debt in capital structure – ₹ 9,00,000
Cost of debt (K_d) =12%
Cost of equity (K_e) =15%
Ignore taxation.
Total market value of X Ltd. = ?
(A) ₹ 22,80,000
(B) ₹ 31,80,000
(C) ₹ 21,80,000
(D) ₹ 30,80,000
Answer:
(B) ₹ 31,80,000

Analysis: Capital structure having debts of 4,50,000 is recommended as overall cost of capital is minimum.

Question 87.
EBIT of R Ltd. is ₹ 5,00,000. The company has 10%, ₹ 20,00,000 debentures. The equity capitalization rate i.e. IC is 16%. Calculate market value of firm as per Net Income (NI) Approach. Ignore taxation.
(A) ₹ 20,00,000
(B) ₹ 38,75,000
(C) ₹ 38,57,000
(D) ₹ 20,75,000
Answer:
(B) ₹ 38,75,000

Question 88.
Take the data of above question and calculate the overall cost of capital.
(A) 12.90%
(B) 11.90%
(C) 10.90%
(D) 9.90%
Answer:
(A) 12.90%

Question 89.
EBIT of NS Ltd. is ₹ 4,50,000.
Debt in capital structure = ₹ 6,00,000
Cost of debt (K_d) =10%
Cost of equity (K_e) = 12.5%
Ignore taxation.
Total market value of X Ltd. = ?
(A) ₹ 37,20,000
(B) ₹ 34,72,222
(C) ₹ 32,70,000
(D) ₹ 34,70,000
Answer:
(A) ₹ 37,20,000

Analysis: Capital structure having debts of 4,50,000 is recommended as overall cost of capital is minimum.

Question 90.
A new project under consideration requires a capital outlay of ₹ 300 lakhs. The required funds can be raised either fully by equity shares of ₹ 100 each or by equity shares of the value of ₹ 200 lakhs and by loan of ₹ 100 lakh at 15% interest. Assuming a tax rate of 50%, calculate the figure of profit, before tax that would keep the equity investors indifferent to the two options.
(A) ₹ 4.5 lakh
(B) ₹ 45 lakh
(C) ₹ 450 lakh
(D) ₹ 40.5 lakh
Answer:
(B) ₹ 45 lakh

x = EBIT=45 Lakhs
At EBIT of ₹ 45 Lakhs, EPS under both option will be same i.e. ₹ 7.5 per share.

Question 91.
Capital structure of A Ltd. is as follows:?

Company earns 12% on its employed capital. Tax rate is 35%. It requires a sum of ₹ 25 lakhs to finance its expansion programme for which following plans are available to it:
(i) Issue 20,000 equity shares of ₹ 100 at a premium of ₹ 25 per share or
(ii) Issue 10% preference shares. Calculate indifference point.
(A) EBIT = ₹ 11,21,154
(B) EBIT = ₹ 15,75,154
(C) EBIT = ₹ 16,75,000
(D) EBIT = ₹ 16,00,000
Answer:
(C) EBIT = ₹ 16,75,000

Question 92.
EBIT is of NS Ltd. ₹ 4,50,000.
Debt in capital structure = ₹ 7,50,000
Cost of debt (K_d) =11%
Cost of equity (K_e) = 13.5%
Ignore taxation.
Total market value and overall cost of capital of X Ltd. = ?
(A) 34,72,222; 14.96%
(B) 34,27,222;12.96%
(C) 34,72,222; 12.96%
(D) 32,72,222; 14.96%
Answer:
(C) 34,72,222; 12.96%

Analysis: Capital structure having debts of 4,50,000 is recommended as overall cost of capital is minimum.

Question 93.
Capital structure of Z Ltd. is as follows:

Company earns 12% onits employed capital. Tax rate is 35%. It requires a sum of ₹ 25 lakhs to finance its expansion programme for which following plans are available to it:
(i) Issue 20,000 equity shares of ₹ 100
at a premium of ₹ 25 per share or
(ii) Issue 8% debentures.
What should be EBIT of the company so that EPS under both plans will be same?
(A) ₹ 11, 12, 154
(B) ₹ 11, 21, 514
(C) ₹ 11, 21, 154
(D) ₹ 11, 21, 4 15
Answer:
(C) ₹ 11, 21, 154

Question 94.
X Ltd. is considering the following two alternative financing plans:

The indifference point between the plans is ₹ 2,40,000. Corporate tax rate is 30%. Calculate rate of dividend on preference shares.
(A) 8.00%
(B) 8.04%
(C) 8.40%
(D) 8.80%
Answer:
(C) 8.40%

Question 95.
EBIT is of NS Ltd. ₹ 4,50,000. Which of the following capital structure will you recommend?

Select the correct answer from the options given below:
(A) 1
(B) 2
(C) 3
(D) 4
Answer:
(A) 1

Analysis: Capital structure having debts of 4,50,000 is recommended as overall cost of capital is minimum.

Question 96.
Operating income of A Ltd. is ₹ 5,00,000. The firms cost of debt is 10% and currently firm employs ₹ 15,00,000 of debt. The overall cost of capital of the firm is 15%. You are required to determine ‘total value of the firm’ and ‘market value of equity’ using Net Operating Income Approach (NOI). Ignore taxation.
(A) ₹ 33,33,333; ₹ 15,00,000
(B) ₹ 33,33,333; ₹ 18,33,333
(C) ₹ 18,33,333; ₹ 15,00,000
(D) ₹ 20,22,222; ₹ 18,22,222
Answer:
(B) ₹ 33,33,333; ₹ 18,33,333

Question 97.
Sun Ltd. has 12% debt of ₹ 30,00,000. It earns 24% before interest and tax on its total assets of ₹ 50,00,000. Tax rate is 40% and capitalization rate is 18%. Calculate the value of the company using Net Income Approach.
(A) ₹ 58,00,000
(B) ₹ 20,00,000
(C) ₹ 55,00,000
(D) ₹ 40,00,000
Answer:
(B) ₹ 20,00,000

Question 98.
Moon Ltd. earns 24% before interest and tax on its total assets of ₹ 50,00,000. It is unlevered company and has no debts in its capital structure. Tax rate is 40% and capitalization rate is 18%. Calculate the value of the company using Net Income Approach.
(A) ₹ 60,00,000
(B) ₹ 40,00,000
(C) ₹ 50,00,000
(D) ₹ 55,00,000
Answer:
(B) ₹ 40,00,000

Question 99.
Sun Ltd. has 12% debt of ₹ 30,00,000. It earns 24% before interest and tax on its total assets of ₹ 50,00,000. Tax rate is 40% and capitalization rate is 18%. Calculate the value of the company using Net Operating Income Approach.
(A) ₹ 58,00,000
(B) ₹ 56,00,000
(C) ₹ 54,00,000
(D) ₹ 52,00,000
Answer:
(D) ₹ 52,00,000

Question 100.
Moon Ltd. earns 24% before interest and tax on its total assets of ₹ 50,00,000. It is unlevered company and has no debts in its capital structure. Tax rate is 40% and capitalization rate is 18%. Calculate the value of the company using Net Operating Income Approach.
(A) ₹ 20,00,000
(B) ₹ 30,00,000
(C) ₹ 40,00,000
(D) ₹ 50,00,000
Answer:
(B) ₹ 30,00,000

Question 101.
Merry Ltd. has EBIT of ₹ 30,00,000 and 40% tax rate. It required rate of return on equity in the absence of borrowing is 18%. In the absence of personal taxes, what is the ‘total value of the company’ and ‘value of equity’ in an MM world with ₹ 40,00,000 in debt.
(A) ₹ 116 lakh; ₹ 46 lakh
(B) ₹ 116 lakh; ₹ 76 lakh
(C) ₹ 161 lakh; ₹ 67 lakh
(D) ₹ 161 lakh; ₹ 64 lakh
Answer:
(B) ₹ 116 lakh; ₹ 76 lakh

According to MM, the value of levered firm would exceed that of the unlevered firm by an amount equal to the levered firms debt multiplied by the tax rate.
Value of unlevered firm + (Value of debt × Tax rate) Total Value of levered firm
Value of the company with 40,00,000 in debt:
1,00,00,000 + (40,00,000 × 40%) = 1,16,00,000
Total value – Value of debt Value of equity
1,16,00,000 – 40,00,000 = 76,00,000
Value of the company with 7000,000 in debt:
1,00,00,000 + (70,00,000 × 40%) = 1,28,00,000
Total value – Value of debt = Value of equity
1,28,00,000 – 70,00,000= 58,00,000

Question 102.
X Ltd. has EBIT of ₹ 30,00,000 and 40% tax rate. It required rate of return on equity in the absence of borrowing is 18%. In the absence of personal taxes, what is the ‘total value of the company’ and ‘value of equity’ in an MM world with ₹ 70,00,000 in debt.
(A) ₹ 128 lakh; ₹ 85 lakh
(B) ₹ 128 lakh; ₹ 58 lakh
(C) ₹ 182 lakh; ₹ 58 lakh
(D) ₹ 182 lakh; ₹ 85 lakh
Answer:
(B) ₹ 128 lakh; ₹ 58 lakh

According to MM, the value of levered firm would exceed that of the unlevered firm by an amount equal to the levered firms debt multiplied by the tax rate.
Value of unlevered firm + (Value of debt × Tax rate) Total Value of levered firm
Value of the company with 40,00,000 in debt:
1,00,00,000 + (40,00,000 × 40%) = 1,16,00,000
Total value – Value of debt Value of equity
1,16,00,000 – 40,00,000 = 76,00,000
Value of the company with 7000,000 in debt:
1,00,00,000 + (70,00,000 × 40%) = 1,28,00,000
Total value – Value of debt = Value of equity
1,28,00,000 – 70,00,000= 58,00,000

Question 103.
Following details are presented by Y Ltd.:

Company earns a profit of ₹ 3,00,000 per annum after meeting its interest liability of ₹ 1,20,000 on 12% Debentures. Calculate return on capital employed.
(A) 10%
(B) 12%
(C) 14%
(D) 16%
Answer:
(C) 14%
EBIT = ₹ 3,00,000 + ₹ 1,20,000 = ₹ 4,20,000

Question 104.
Financing alternatives for obtaining the requisite amount of ₹ 20 Crores are under consideration. It was decided to issue equity shares of ₹ 10 par at a premium of 140 each. Share issue expenses as also under pricing of the issue in comparison to ruling market price result in net proceeds of ₹ 40 for every new share issued. How many equity shares are required to be issued for availing finance of ₹ 20 Crore
(A) 0.5 Crore shares
(B) 0.05 Crore shares
(C) 5 Crore shares
(D) 4 Crore shares
Answer:
(A) 0.5 Crore shares

Question 105.
Financing alternatives for obtaining the requisite amount of ₹ 20 Crores are under consideration.
Alternative I: Equity shares can be issued at ₹ 10 par with a premium of ₹ 40 each. Share issue expenses as also under pricing of the issue in comparison to ruling market price result in net proceeds of ₹ 40 for every new share issued.
Alternative II: Company can borrow the requisite amount at 15% rate of interest per year.
The company decided to borrow ₹ 10 Crore at 15% rate of interest per year and the balance amount obtained by share issue at par terms indicated in the first alternative.
How many equity shares are required to be issued for availing finance of ₹ 20 Crore?
(A) 0.25 Crore shares
(B) 0.025 Crore shares
(C) 2.5 Crore shares
(D) 25 Crore shares
Answer:
(A) 0.25 Crore shares

Question 106.
A company needs ₹ 31,25,000 for the construction of new plant. The following two plans are feasible:
(i) Company may issue 3,12,500 equity shares at ₹ 10 per share.
(ii) Company may issue 1,56,250ordinary equity shares at ₹ 10 per share and 15,625 debentures of ₹ 100 denomination bearing an 8% rate of interest.
Corporate income-tax rate is 40%. Calculate indifference point.
(A) ₹ 2,50,000
(B) ₹ 2,75,000
(C) ₹ 2,25,000
(D) ₹ 3,00,000
Answer:
(A) ₹ 2,50,000

Question 107.
A company needs ₹ 31,25,000 for the construction of new plant. The following two plans are feasible:
(i) Company may issue 3,12,500 equity shares at ₹ 10 per share.
(ii) Company may issue 1,56,250 equity shares at ₹ 10 per share and 15,625 preference shares at ₹ 100 per share bearing an 8% rate of dividend.
Corporate income-tax rate is 40%.
At indifferent point EPS under both plans will be -…….
(A) ₹ 0.75 per share
(B) ₹ 0.95 per share
(C) ₹ 0.60 per share
(D) ₹ 0.80 per share
Answer:
(D) ₹ 0.80 per share

Question 108.
M Ltd. requires ₹ 25,00,000 for a new plant. This plant is expected to yield EBIT of ₹ 5,00,000. The company considers the objectives of maximizing EPS. It has 3 options to finance the project – by raising debt of ₹ 2,50,000 or ₹ 10,00,000 or ₹ 15,00,000 and the balance, in each case, by issuing equity shares. Company’s shares is currently selling at ₹ 150, but it is expected to decline to ₹ 125 in case the funds are borrowed in excess of ₹ 10,00,000. The funds can be borrowed at the rate of 10% up to ₹ 2,50,000 and 15% up to ₹ 10,00,000 and at 20% over ₹ 10,00,000. The tax rate is 50%. Which form of financing should company choose?
(A) Option III containing debt issue of ₹ 15,00,000
(B) Option II containing debt issue of ₹ 10,00,000
(C) Option II containing debt issue of ₹ 2,50,000
(D) None of the above
Answer:
(B) Option II containing debt issue of ₹ 10,00,000

Question 109.
Domino is an all equity firm with a current cost of equity of 18%. The EBIT of the firm is ₹ 2,04,000 annually forever. Currently, the firm has no debt but is in the process of borrowing ₹ 5,00,000 at 9% interest. The tax rate is 34%. What is the value of the unlevered firm?
(A) ₹ 7,23,150
(B) ₹ 6,54,900
(C) ₹ 7,48,000
(D) ₹ 6,09,900
Answer:
(C) ₹ 7,48,000

Question 110.
There are two firms P and Q which are identical except P does not use any debt in its capital structure while Q has ₹ 8,00,000, 9% debentures in its capital structure. Both the firms have EBIT of ₹ 2,60,000 p.a. and the capitalization rate is 10%. Corporate tax is 30%. Calculate the total market value of these firms according to MM Hypothesis.
(A) ₹ 20,60,000; ₹ 18,20,000
(B) ₹ 18,20,000; ₹ 20,60,000
(C) ₹ 18,20,000; ₹ 12,60,000
(D) ₹ 12,60,000; ₹ 20,60,000
Answer:
(B) ₹ 18,20,000; ₹ 20,60,000

According to MM, the value of levered firm would exceed that of the unlevered firm by an amount equal to the levered firms debt multiplied by the tax rate.
Value of unlevered firm + (Value of debt × Tax rate) = Total Value
Value of the company with 8,00,000 In debt (Q Ltd.):
18,20,000 + (8,00,000 × 30%) 20,60,000
Total value – Value of debt Value of equity
20,60,000 – 8,00,000 = 12,60,000

Question 111.
B Ltd. requires ₹ 12 lakh to finance its activities. Its earnings before interest and tax amount to ₹ 2 lakh. The Finance Manager has forwarded three proposals:

The market price of a share of the company is 40 which is expected to come down to 25 a share, if the market borrowings exceeds 7,50,000. Which proposal is most profitable proposal from shareholders point view?
(A) Proposal I
(B) Proposal II
(C) Proposal Ill
(D) None of the above
Answer:
(B) Proposal II

Interest expenses for various proposals:
Proposal-I 2,00,000 × 10% = 20,000
Proposal-II = (2,50,000 × 10%) + (3,50,000 × 14%) = 74,000
Proposal-III = (2,50,000 × 10%) + (3,75,000 × 14%) + (3,75,000 × 16%) = 1,37,500

Analysis: Since, EPS is highest under Proposal-il, the company is advised to go with this proposal.

Question 112.
Skyline Software Ltd. wants to implement a project for which 30 lakhs is required. Following financing options are at hand:
Option 1:
Equity Shares — 30,000
Option 2
Equity Shares — 10,000
12% Preference Shares — 10,000
10% Debentures — 10,000
Calculate the indifference point & EPS at that level of EBIT assuming corporate tax to be 35%.
(A) ₹ 4,26,923; ₹ 12.00
(B) ₹ 4,26,923; ₹ 9.25
(C) ₹ 5,53,846; ₹ 9.25
(D) ₹ 3,00,000; ₹ 6.25
Answer:
(B) ₹ 4,26,923; ₹ 9.25

6.5x = 19.5x – 55,50ß00
– 13x = – 5550,000
x = EBIT = 4,26,923
At EBIT of ₹ 4,26,923, EPS under both option will be same i.e ₹ 9.25 per share.

Question 113.
Alpha Ltd. is contemplating conversion of 500 14% convertible bonds of ₹ 1,000 each. Market price of the bond is ₹ 1,080. Bond indenture provided that 1 bond will be exchanged for 10 shares. P/E ratio before redemption is 20:1 and anticipating price earnings ratio after redemption is 25:1. Number of shares outstanding prior to redemption are 10,000. EBIT amounts to ₹ 2,00,000. The company is in the 35% tax bracket.
Calculate market price –
(i) Pre-redemption and
(ii) Post redemption.
(A) ₹ 169 & ₹ 216.67 per share
(B) ₹ 159 & ₹ 206.67 per share
(C) ₹ 179 & ₹ 226.67 per share
(D) ₹ 170 & ₹ 220 per share
Answer:
(A) ₹ 169 & ₹ 216.67 per share

Question 114.
Following data is available for Company X:
Total Assets : ₹ 15,00,000
1096 Debt : ₹ 9,00,000
EBIT : 2096 of total assets
Tax rate : 50%
Capitalization rate =15%
Calculate market value of equity using Net Income (NT) approach.
(A) ₹ 16,00,000
(B) ₹ 7,00,000
(C) ₹ 10,00,000
(D) ₹ 5,00,000
Answer:
(B) ₹ 7,00,000

Question 115.
Following data is available for Company Y:
Total Assets : ₹ 15,00,000
Debt : Nil
EBIT : 20% of total assets
Tax rate : 50%
Capitalization rate =15%
Calculate market value of equity using Net Income (NI) approach.
(A) ₹ 10,00,000
(B) ₹ 16,00,000
(C) ₹ 12,00,000
(D) ₹ 15,00,000
Answer:
(A) ₹ 10,00,000

Question 116.
Following data is available for P Ltd.:
Total Assets : ₹ 15,00,000
1096 Debt : ₹ 9,00,000
EBIT : 20% of total assets
Tax rate : 50%
Capitalization rate =15%
Calculate total value of the firm using Net Operating Income (NOI) approach.
(A) ₹ 5,50,000
(B) ₹ 14,50,000
(C) ₹ 10,50,000
(D) ₹ 12,50,000
Answer:
(B) ₹ 14,50,000

Question 117.
Following data is available for Q Ltd.:
Total Assets : ₹ 15,00,000
Debt : Nil
EBIT : 20% of total assets
Tax rate : 50%
Capitalization rate =15%
Calculate total value of the firm using Net Operating Income (NOI) approach.
(A) ₹ 8,00,000
(B) ₹ 9,00,000
(C) ₹ 12,00,000
(D) ₹ 10,00,000
Answer:
(D) ₹ 10,00,000

Question 118.
A student studying Financial Management subject is not able to understand when total market value will be the same for Company X and Company Y if both companies have same total assets.
Company X calculates total value under Net Income (NI) approach and Company Y calculates total value under Net Operating
Income (NOI) approach. Help him by selecting correct option.
(A) When tax rate is same for both the companies.
(B) When one company is totally financed by debt and other is totally finance by equity.
(C) When both companies are financed by equity only.
(D) When both companies adopt same selling price.
Answer:
(C) When both companies are financed by equity only.

Question 119.
Trade International is an all-equity firm that has projected earnings before interest and taxes of ₹ 4,97,000 forever. The current cost of equity is 16% and the tax rate is 34%. The company is in the process of issuing ₹ 1.5 million of bonds at par that carry a 6% annual coupon. What is the levered value of the firm?
(A) ₹ 20, 50, 125
(B) ₹ 24, 48, 009
(C) ₹ 21, 13, 609
(D) ₹ 25, 60, 125
Answer:
(D) ₹ 25, 60, 125

According to MM, the value of levered firm would exceed that of the unlevered firm by an amount equal to the levered firms debt multiplied by the tax rate.
Value of unlevered firm + (Value of debt × Tax rate) = Total Value Value of the company with 15,00,000 In debt:
20,50,125 + (15,00,000 × 34%) = 25,60,125

Question 120.
Bharat Cylinders has 15,000 shares of stock outstanding and no debt, as the original founder of the firm did not approve of debt financing. The new CEO is considering issuing ₹ 2,50,000 of debt and using the proceeds to retire 5,000 shares of stock. The interest rate on debt is 7.5%. What is the break-even level of EBIT between these two capital structure options?
(A) ₹ 59,250
(B) ₹ 38,500
(C) ₹ 56,250
(D) ₹ 47,750
Answer:
(C) ₹ 56,250

Question 121.
What is the market value of common equity under the NOI approach? The firm has an expected net operating income of ₹ 5,000 with ₹ 4,000 of debt (market value). Assume that the overall capitalization rate is 20%.
(A) ₹ 5,000
(B) ₹ 20,000
(C) ₹ 21,000
(D) ₹ 24,000
Answer:
(C) ₹ 21,000

Question 122.
Ganesha Ltd. is setting up a project with a capital outlay of ₹ 60,00,000. It has two alternatives in financing the project cost.
Alternative (a): 100% equity finance
Alternative (b): Debt-equity ratio 2:1
The rate of interest payable on the debts is 18% p.a. Corporate tax rate is 40%. Calculate the indifference point between the two alternative methods of financing.
(A) ₹ 10,80,000
(B) ₹ 18,80,000
(C) ₹ 18,00,000
(D) ₹ 10,08,000
Answer:
(A) ₹ 10,80,000

Question 123.
One-third of the total market value of X Ltd. consists of loan stock, which has a cost of 10%. Another company, Y Ltd. is identical in every respect to X Ltd., except that its capital structure is all-equity, and its cost of equity is 16%. According to Modigliani and Miller, if we ignored taxation and tax relief on debt capital, what would be the cost of equity of X Ltd.?
(A) 14%
(B) 17%
(C) 19%
(D) 13%
Answer:
(C) 19%
Miller and Modigliani’s first model argues that no optimal capital structure exists and supports this proposition with arbitrage theory. Therefore, the two companies should have similar WACCs. Because Y Ltd. is all-equity financed, its WACC is the same as its cost of equity finance, i.e. 16%. It follows that X Ltd. should have
WACC equal to 16% also.
Therefore, (1/3 × 10%) + (2/3 × K_e) 16%
3.3333 + 0.6667x =16
06667x = 12.6667
Hence, x = K_e = 19%.

Question 124.
IPL Ltd. has EBIT of ₹ 1,00,000. The company makes use of debt and equity capital. The firm has 10% debentures of ₹ 5,00,000 and the firm’s equity capitalization rate is 15%. You are required to compute: (i) Current value of the firm; (ii) Overall cost of capital.
(A) ₹ 3,33,333; 15%
(B) ₹ 8,33,333; 12%
(C) ₹ 5,33,333; 14%
(D) ₹ 6,33,333; 18%
From the following information answer next 4 questions.
Alpha Ltd. & Beta Ltd. are identical except for capital structures. Alpha has 50% debt and 50% equity, whereas Beta has 20% debt and 80% equity. All percentages are in market-value terms. The borrowing rate for both companies is 8% in a no-tax world, and capital markets Eire assumed to be perfect. Both companies have net operating income of ₹ 3,60,000 and the overall capitalization rate of the company, K_e is 18%.
Answer:
(B) ₹ 8,33,333; 12%

This method to calculate overall cost of capital works i/there is no tax. If tax rate is given in question then overall cost of capital Le. WACC should be calculated as per method shown above.

Question 125.
If you own 2% of the stock of Alpha, what is your return?
(A) ₹ 5,000
(B) ₹ 4,600
(C) ₹ 3,500
(D) ₹ 5,600
Answer:
(D) ₹ 5,600

Implied required equity return (Beta Ltd.) =\(\frac{3,28,000}{10,00,000}=20.5 \%\)

Question 126.
What is the implied required rate of return on equity of Alpha Ltd.?
(A) 22%
(B) 26%
(C) 20%
(D) 28%
Answer:
(D) 28%

Question 127.
What is the market value of equity of Beta Ltd.?
(A) ₹ 16,00,000
(B) ₹ 14,00,000
(C) ₹ 12,00,000
(D) ₹ 10,00,000
Answer:
(A) ₹ 16,00,000

Question 128.
What is the implied required rate of return on equity of Beta Ltd.?
(A) 10.5%
(B) 18,5%
(C) 15.5%
(D) 20.5%
From the following information answer next 4 questions.
RES Ltd. is an all equity financed company with a market value of ₹ 25,00,000 and cost of equity, Ke = 21%. The company wants to buy back equity shares worth ₹ 5,00,000 by issuing and raising 15% perpetual debt of the same amount. Rate of tax may be taken as 30%. After the capital restructuring and applying MM Model (with taxes), you are required to answer next 2 questions:
Answer:
(D) 20.5%

Question 129.
What is the EBIT of the unlevered firm?
(A) ₹ 5,25,000
(B) ₹ 6,70,000
(C) ₹ 7,50,000
(D) ₹ 6,50,000
Answer:
(C) ₹ 7,50,000

Question 130.
What is the PAT of levered firm?
(A) ₹ 5,25,000
(B) ₹ 4,52,700
(C) ₹ 4,72,500
(D) ₹ 4,25,700
Answer:
(C) ₹ 4,72,500

According to MM, the value of levered firm would exceed that of the unlevered firm by an amount equal to the levered firms debt multiplied b’ the tax rate.
Value of unlevered firm + (Value of debt × Tax rate) = Total Value
Value of the company with 5,00,000 In debt:
25,00,000 + (5,00,000 × 30%) 26,50,000
Total value – Value of debt = Value of equity
26,50,000 – 5,00,000 = 21,50,000
\(\mathrm{K}_{e}=\frac{D}{P_{0}}=\frac{4,72,500}{21,50,000}=0.2198 \text { i.e. } 21.98 \%\)
Cost of debt:
K_d =I(1 -t)
K_i = 15(1 -0.30)
K_i = 10.5%
Calculation of overall cost of capital (market value basis):

Question 131.
What is the value of equity of levered firm?
(A) ₹ 26,50,000
(B) ₹ 22,50,000
(C) ₹ 21,50,000
(D) ₹ 24,50,000
Answer:
(C) ₹ 21,50,000

Question 132.
What is the overall cost of capital of levered firm?
(A) 21.98%
(B) 10.50%
(C) 19.81%
(D) 19.18%
Answer:
(C) 19.81%