CS Executive

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

Marginal Costing – Corporate and Management Accounting MCQs

Question 1.
Dec 2014: Which of the following formula cannot be used for calculating P/V ratio —
(A) (Sales value minus variable cost)/ Sales value
(B) (Fixed cost plus profit)/Sales value
(C) Change in profits/Change in sales
(D) Profit/Sales value
Answer:
(D) Profit/Sales value

Question 2.
Dec 2014: For a given product, the sales of a company @ ₹ 200 per unit is ₹ 20,00,000. Variable cost is ₹ 12,00,000 and fixed cost is ₹ 6,00,000. The capacity of the factory is 15,000 units. Capacity utilization at break-even point level is —
(A) 40%
(B) 50%
(C) 60%
(D) 100%
Answer:
(B) 50%
Sales – Variable Cost = Contribution
20,00,0000 – 12,00,000 = 8,00,000

Question 3.
Dec 2014: The costing method in which fixed factory overheads are added to inventory is known as
(A) Direct Costing
(B) Marginal costing
(C) Absorption costing
(D) Activity based costing
Answer:
(C) Absorption costing

Question 4.
Dec 2014: For a given product, selling price per unit is ₹ 15, variable cost per unit is ₹ 10, total fixed cost is ₹ 1,50,000 and units sold during the period are 35,000. The margin of safety is —
(A) ₹ 25,000
(B) ₹75,000
(C) ₹ 15,000
(D) ₹ 5,000
Answer:
(B) ₹75,000

Question 5.
Dec 2014: When the volume is 3,000 units, the average cost is ₹ 4 per unit. When the volume is 4,000 units, the average cost is ₹ 3.50 per unit. The break-even point is 5,000units. What is the P/V ratio of the firm —
(A) 35%
(B) 37.5%
(C) 40%
(D) 32.5%
Answer:
(B) 37.5%
Total cost at 3,000 units = 3,000 × 4 = 12,000
Total cost at 4,000 units = 4,000 × 3.5 14,000

Question 6.
Dec 2014: Which of the following formula cannot be used for calculating contribution —
(A) Fixed cost plus profit
(B) Fixed cost minus loss
(C) Sales minus variable cost
(D) Fixed cost plus loss
Answer:
(D) Fixed cost plus loss

Question 7.
Dec 2014: A product is sold at a price of ₹ 120 per unit and its variable cost is ₹ 80 per unit. The fixed expenses of the business are ₹ 8,000 per year. Break-even point is —
(A) ₹ 24,000
(B) ₹ 20,000
(C) ₹ 16,000
(D) ₹ 28,000
Answer:
(A) ₹ 24,000

Question 8.
Dec 2014: The following information relates to a product:
Direct labour: 1 hour 30 minutes @ ₹ 4 per hour
Variable overheads: 1 hour 30 minutes @ ₹ 1 per hour
Fixed overheads @ ₹ 2 per hour (based on a budgeted production volume of 90,000 direct labour hours for the year)
Selling price per unit: ₹ 17 The break-even point is —
(A) 40,000 units
(B) ₹ 40,000
(C) 20,000 units
(D) 7,200 units
Answer:
(A) 40,000 units
Total variable cost per unit (10 × 0.50) + (1.5 × 4) + (1.5 × 1) = 12.5
Total fixed cost = 90,000 × 2 = 1,80,000

Question 9.
Dec 2014: A company sells its product at ₹ 15 per unit. In a period, if it produces and sells 8,000 units, it incurs a loss of ₹ 5 per unit. If the volume is raised to 20,000 units, it earns a profit of ₹ 4 per unit. The break-even point of the company in rupee terms will be —
(A) ₹ 1,60,000
(B) ₹ 2,00,000
(C) ₹ 1,80,000
(D) ₹ 2,20,000
Answer:
(C) ₹ 1,80,000

Question 10.
Dec 2014: A company which has a margin of safety of ₹ 4,00,000 makes a profit of ₹ 1,00,000. If its fixed cost is ₹ 5,00,000, then break even sales is:
(A) ₹ 20 lakh
(B) ₹ 25 lakh
(C) ₹ 12.5 lakh
(D) ₹ 15 lakh
Answer:
(A) ₹ 20 lakh
Margin of safety is 4,00,000 that means actual sales are more than BEP sales by 4,00,000.
At BEP profit is Nil. At actual profit is 1,00,000

Question 11.
Dec 2014: Which of the following costs are treated as product cost under variable costing —
(A) Only direct costs
(B) Only variable production costs
(C) Only material and labour costs
(D) All variable and fixed manufacturing costs
Answer:
(B) Only variable production costs

Question 12.
Dec 2014: What is the margin of safety, if profit is equal to ₹ 40,000 and P/V ratio is 25% —
(A) ₹ 1,60,000
(B) ₹ 1,00,000
(C) ₹ 16,000
(D) ₹ 10,000
Answer:
(A) ₹ 1,60,000

Question 13.
June 2015: The costing method in which fixed factory overheads are added to inventory is —
(A) Activity based costing
(B) Marginal costing
(C) Direct costing
(D) Absorption costing
Answer:
(D) Absorption costing

Question 14.
June 2015: A company has annual fixed cost of ₹ 1,68,000. In the year 2013-2014, sales amounted to ₹ 6,00,000 as compared to ₹ 4,50,000 in the preceding year 2012 – 2013. The profit in the year 2013-2014 was ₹ 42,000 more than that in year 2012-2013. The break-even sales of the company is
(A) 6,00,000
(B) 6,20,000
(C) 5,60,000
(D) 4,08,000
Answer:
(A) 6,00,000

Question 15.
June 2015: Sunny Ltd. makes product-A which sells at ₹ 80 per unit. Total fixed costs are ₹ 28,000 and marginal cost ₹ 42 per unit. The sales level (in units) that will provide a profit of ₹ 10,000 is —
(A) 1,200 Units
(B) 1,500 Units
(C) 1,250 Units
(D) 1,000 Units
Answer:
(D) 1,000 Units
Let the sales unit be ‘x’

Net Profit + Fixed Cost Contribution
28000+ 10,000 = 38,000
Hence, 38x = 38,000
x= No.of units= 1,000

Question 16.
June 2015: When the sales increase from ₹ 45,000 to ₹ 60,000, the profit increases by ₹ 5,000. P/V Ratio would be—
(A) 20%
(B) 30%
(C) 33.33%
(D) 66.67%
Answer:
(C) 33.33%

Question 17.
June 2015: Margin of safety can be calculated using the formula —
(A) Total sales – Break-even sales
(B) Fixed cost 4 ÷ P/V ratio
(C) P/V ratio 4 ÷ Profit
(D) Fixed cost 4 ÷ Contribution
Answer:
(A) Total sales – Break-even sales

Question 18.
June 2015: A product is sold at ₹ 150 per unit and its variable cost is ₹ 70 per unit. The fixed expenses of the business are ₹ 8,000 per year. Break-even point (in units) is —
(A) 200 units
(B) 50 units
(C) 115 units
(D) 100 units
Answer:
(B) 50 units
Sale Price – Variable Cost = Contribution
150 – 70 = 80

Question 19.
June 2015: Profit-Volume ratio can be improved by –
(A) Increasing selling price per unit
(B) Reducing the direct and variable costs
(C) Switching the production to products showing higher profit-volume ratio
(D) All of the above
Answer:
(D) All of the above

Question 20.
June 2015: Selling price of a product is ₹ 550 per unit, variable cost ₹ 50 per unit and fixed cost ₹ 10,000. The number of units required to be sold to earn a profit of ₹ 10,000 will be –
(A) 400
(B) 40
(C) 36
(D) 220
Answer:
(B) 40
Sale Price – Variable Cost = Contribution
550 – 50 = 500
Net Profit + Fixed Cost = Total Contribution
10,000 + 10,000 = 20,000
No. of unit to sold to earn profit of 10,000 \(\frac{20,000}{500}\) = 40 units

Question 21.
June 2015: Make or buy decisions are made by comparing cost with outside purchase price.
(A) Fixed
(B) Variable
(C) Sunk
(D) Joint
Answer:
(B) Variable

Question 22.
June 2015: Selling price of a product-X is ₹ 50 per unit, variable cost ₹ 20 per unit and 2 kg of raw material is needed to produce a unit of product-X. The contribution per kg of raw material will be –
(A) ₹30
(B) ₹ 15
(C) ₹60
(D) ₹ 50
Answer:
(B) ₹ 15
Sale Price – Variable Cost = Contribution
50 – 20 = 30
Contribution per kg= \(\frac{30}{2}\)= 15 per kg

Question 23.
Dec 2015: Following data is given for Gopal Ltd. which produces and sells three products X, Y and Z:
Product Units sold Selling price per unit (T) Marginal cost per unit (T)

Overall P/V ratio of the company will be:
(A) 42.5%
(B) 37.5%
(C) 42.8%
(D) 46.7%
Answer:
(B) 37.5%

Question 24.
Dec 2015: Z Ltd. recorded sales of ₹ 60 lakh in 2014 as compared to ₹ 45 lakh in 2013. Profit for 2014 was ₹ 5 lakh higher than that in 2013. If the annual fixed costs amount to ₹ 12 lakh, the profit on projected sales of ₹ 90 lakh will be —
(A) ₹ 15 lakh
(B) ₹ 14 lakh
(C) ₹ 12 lakh
(D) ₹ 18 lakh
Answer:
(D) ₹ 18 lakh
Profit in 2014 is higher by ₹ 5 lakhs than profit of 2013. That mean change in profit is ₹ 5 lakhs.
60 – 45 = 15 (change in sales)

Question 25.
Dec 2015:
Statement-I:
The contribution concept is based on the theory that the fixed expenses of a business is not a joint cost.
Statement-II:
Fixed expenses can be equitably apportioned to different segments of business.
(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:
(B) Both statements are incorrect

Question 26.
Dec 2015: The following information is given about Zac Ltd. dealing in musical instruments:
P/V ratio 50%
Margin of safety 40%
If the sales volume is ₹ 50,00,000 the net profit will be —
(A) ₹ 15,00,000
(B) ₹ 10,00,000
(C) ₹ 20,00,000
(D) ₹ 5,00,000
Answer:
(B) ₹ 10,00,000
If actual sales assumed at 100% then BEP must be at 60% as Margin of safety is 40%.
BEP Sales = 50,00,000 × 60% = 30,00,000
Contribution at BEP = 30,00,000 × 50% = 15,00,000
At BEP Contribution = Fixed cost hence Fixed Cost is also ₹ 15,00,000

Question 27.
Dec 2015:
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.
Select the correct answer from the option 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 28.
Dec 2015: Manoj Ltd. manufactures three products
P,Q and R. The unit selling price of these products are ₹ 100, ₹160 and ₹ 75 respectively. The corresponding unit variable costs are ₹ 50, ₹ 80 and ₹ 30. The proportions (quantity-wise) in which these products are manufactured and sold are 20%, 30% and 50% respectively. Total fixed costs are ₹ 14,80,000. Overall break-even quantity is —
(A) 26,195 Units
(B) 27,195 Units
(C) 27,165 Units
(D) 28,165 Units
Answer:
(A) 26,195 Units

Total equivalent contribution = 10 + 24 + 22.5 = 56.5
Composite BEP = \(\frac{14,80,000}{56.5}=26,194.69 \text { say } 26,195 \text { units }\)

Question 29.
Dec 2015: Profits in a company can be increased by:
(1) Decreasing the selling price per unit
(2) Increasing the selling price per unit
(3) Decreasing the volume of sales
(4) Increasing the volume of sales
(5) Decreasing the fixed or variable expenses
(6) Increasing the fixed or variable expenses
(7) Giving more weightage for products having higher P/V ratio
(8) Giving less weightage for products having higher P/V ratio
Select the correct answer from the options given below —
(A) (1), (3), (5) and (7)
(B) (2), (4), (6) and (8)
(C) (2), (4), (5) and (7)
(D) (1), (3), (6) and (8)
Answer:
(C) (2), (4), (5) and (7)

Question 30.
Dec 2015:
Assertion (A):
The business earns a surplus of sale re venue over variable costs, which is called contribution.
Reason (R):
Once fixed costs are fully recovered such excess contribution is termed as profit.
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 31.
Dec 2015: A manufacturer produces 2,00,000 units of a product at a cost of ₹ 3.25 per unit. Later on, he produces 2,75,000 units at a cost of ₹ 3.20 per unit, when its fixed overheads have increased by 10%. Marginal cost per unit and original fixed overheads will be:
(A) ₹ 2 and ₹ 45,000 respectively
(B) ₹ 4 and ₹ 47,000 respectively
(C) ₹ 3 and ₹ 50,000 respectively
(D) ₹ 5 and ₹ 45,000 respectively
Answer:
(C) ₹ 3 and ₹ 50,000 respectively
Total cost at 2,00,000 units = 2,00,000 × 3.25 = 6,50,000
Total cost at 2,75,000 units = 2,75,000 X 3.20 = 8,80,000
Check the given option and apply the variable cost and fixed cost as given in option and verify whether it fits the cost structure as given problem. Select the option.
Data given in Option (C) fits the cost structure as given problem.

Question 32.
Dec 2015: The following data is obtained from the records of Mayur Ltd:

Break-even-point in rupees is —
(A) ₹ 45,000
(B) ₹ 52,000
(C) ₹ 55,000
(D) ₹ 55,500
Answer:
(C) ₹ 55,000

Question 33.
Dec 2015:
Assertion (A):
Profit volume ratio is considered to be the best indicator of the profitability of the business.
Reason (R):
If profit volume ratio is improved, it will result in better profits.
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 34.
Dec 2015:Which of the following are advantages of marginal costing:
(1) Pricing decision
(2) True profit
(3) Difficulty to classify
(4) Ignores time value
(5) Break-even analysis
(6) Contribution is not final
(7) Control over expenditure
Select the correct answer from the options given below —
(A) (1), (2), (5) and (7)
(B) (1), (3), (5) and (7)
(C) (3), (4), (6) and (7)
(D) (1), (2), (6) and (7)
Answer:
(A) (1), (2), (5) and (7)

Question 35.
Dec 2015: If sales revenue at 60% capacity is ₹ 4,50,000, sales revenue at 70% capacity on a fall in selling price by 5% would be —
(A) ₹ 4,98,750
(B) ₹ 7,50,000
(C) ₹ 5,25,000
(D) ₹ 7,12,000
Answer:
(A) ₹ 4,98,750

Question 36.
Dec 2015: Match the following:
List-I — List-II
P. Classification of costs into fixed and variable costs — 1. Contribution
Q. Difference between sales and variable costs — 2. P/V ratio
R. Both fixed and variable costs are charged to product costing — 3. Marginal
S. Relative profitability — 4. Absorption
Select the correct answer from the following options given below—

Answer:
(C)

Question 37.
Dec 2015:
Statement-I:
Margin of safety represents the difference between sales at break-even point and total sales.
Statement-II:
Margin of safety can be expressed as a percentage of total sales or in value or in terms of quantity.
Select the correct answer from the options given below —
(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 38.
Dec 2015: Match the following:
List-I — List-II
P. Excess of actual sales over breakeven sale profit analysis volume — 1. Contribution
Q. Sum of fixed cost and profit — 2. Cost-volume
R. Break-even analysis — 3. No profit, no loss
S. Break-even point — 4. Margin of safety
Select the correct answer from the following options given below—

Answer:
(A)

Question 39.
Dec 2015: Match the following:
List-I — List-II
P. Absorption costing — 1. Ls a logical extension of marginal costing
Q. Fixed expenses — 2. Relationship of change in cost and change in profit
R. Marginal costing — 3.Contribution = —– + Profit
S. Break-even analysis — 4. Uses classification of costs according to their functions
Select the correct answer from the following options given below—

Answer:
(D)

Question 40.
Dec 2015: A company sells its product at ₹ 15 per unit. In a period, it produces and sells 8,000 units and incurs a loss of ₹ 5 per unit. If the sales volume were to be raised to 20,000 units, it could earn a profit of ₹ 4 per unit. Breakeven point (in units) will be —
(A) 24,000 Units
(B) 12,000 Units
(C) 16,000 Units
(D) 30,000 Units
Answer:
(B) 12,000 Units

Question 41.
Dec 2015:
Statement-I:
At the time of replacement of plant, according to marginal cost technique, the proposal which yields lowest contribution is to be selected.
Statement-II:
According to total cost technique, the proposal which involves the highest costs is to be selected.
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:
(B) Both statements are incorrect

Question 42.
Dec 2015: Choose the correct statements from the following:
(1) Marginal costing and absorption costing are the same
(2) For decision making, absorption costing is more suitable than marginal costing
(3) Cost-volume-profit relationship also denotes break-even point
(4) Marginal costing is based on the distinction between fixed and variable costs.
Correct answer option is —
(A) (1) and (2)
(B) (2) and (3)
(C) (3) and (4)
(D) (2) and (4)
Answer:
(C) (3) and (4)

Question 43.
Dec 2015: The sales and profit during the two periods were as follows:

Sales required to earn a profit of ₹ 5,00,000 is —
(A) ₹ 30 lakh
(B) ₹ 40 lakh
(C) ₹ 35 lakh
(D) ₹ 28 lakh
Answer:
(C) ₹ 35 lakh

Question 44.
Dec 2015: Match the following:
Select the correct answer from the options given below —

Answer:
(B)

Question 45.
Dec 2015: Cost-volume-profit (CVP) analysis is based on several assumptions. Which one of the following is not relevant for such an analysis —
(A) Inventory quantity changes in the year
(B) Sales mix of the products is constant
(C) Material price and labour rates do not change
(D) Behaviour of both sales and variable cost is linear throughout the year
Answer:
(A) Inventory quantity changes in the year

Question 46.
Dec 2015: The fixed expenses are 4,000 and break-even point is 10,000. New breakeven point, if selling price is reduced by 20% is —
(A) ₹ 14,000
(B) ₹ 15,000
(C) ₹ 16,000
(D) ₹ 17,000
Answer:
(C) ₹ 16,000

Question 47.
June 2016: There are two similar plants under the same management. The management desires to merge these two plants. The following particulars are.

The capacity of the merged plant to be operated for the purpose of break-even will be —
(A) 45.14%
(B) 48.12%
(C) 50.76%
(D) 46.15%
Answer:
(D) 46.15%

Question 48.
June 2016: Which of the following statements is /are false?
(i) Product can be sold below marginal cost in certain special circumstances
(ii) Cost per unit of key factor is the basis of ranking products on profitability
(iii) When there are no inventories, profit figures under marginal and absorption costing are identical.
Select the correct answer from the options given below —
(A) (ii) only
(B) (i) and (ii)
(C) (i) and (iii)
Answer:
(A) (ii) only

Question 49.
June 2016: Following data are given:

Direct labour hours available 72,000 hours. What should be the number of units of A and B to be produced to maximize profit of the company —
(A) A-10,000 units, B-5,500 units
(B) B-10,000 units, A-5,500 units
(C) B-10,000 units, A-6,400 units
(D) 10,000 units of each A and B
Answer:
(C) B-10,000 units, A-6,400 units

Total hours for producing 10,000 units of Product B = 10,000 × 4 40,000
Hours available for producing Product A = 72,000 – 40,000 = 32,000
Possible production of Product A = \(\frac{32,000}{5}\)=6,400

Question 50.
June 2016: Margin of safety is 8,000 which represents 40% of sales. P/V ratio is 50%. Fixed cost will be —
(A) ₹ 6,000
(B) ₹ 5,500
(C) ₹ 6,500
(D) ₹ 7,000
Answer:
(A) ₹ 6,000

Question 51.
June 2016: Cost-Volume-Profit analysis is based on several assumptions. Which one of the following is not one of these assumptions —
(A) Sales mix of the products is constant
(B) The behaviour of both sales and variable cost is linear throughout the relevant range
(C) Variable cost per unit will remain constant
(D) Productivity and operational efficiency will change according to output
Answer:
(D) Productivity and operational efficiency will change according to output

Question 52.
June 2016: Under marginal costing, unit product cost would most likely be increased by —
(A) A decrease in the number of units produced
(B) An increase in the number of units produced
(C) An increase in the commission paid to salesman for each unit sold
(D) A decrease in the commission paid to salesman for each unit sold
Answer:
(A) A decrease in the number of units produced

Question 53.
June 2016: A company producing three products, viz,, X,Y and Z has sales mix in the ratio of 2:1:3. The profit volume ratio of the products X, Y and Z are 15%, 30% and 20% respectively. The total fixed cost of the company is ₹ 3,50,000. The break-even point of the company will be —
(A) ₹ 16,15,390
(B) ₹ 17,50,000
(C) ₹ 23,33,333
(D) ₹ 11,66,667
Answer:
(B) ₹ 17,50,000

Question 54.
Dec 2016: From the following particulars, calculate the selling price per unit, if the break-even point is brought down to 10,000 units :
Selling price per unit: ₹ 20 Variable cost per unit: ₹ 16 Fixed expenses: ₹ 60,000 Choose the correct option —
(A) ₹ 25
(B) ₹ 20
(C) ₹ 22
(D) ₹ 32
Answer:
(C) ₹ 22

Question 55.
June 2016: Aman Ltd. sells its products at ₹ 16 per unit. In a period, if it produces and sells 20,000 units, it incurs a loss of ₹ 2 per unit. If the volume is doubled, it earns a profit of ₹ 2.20 per unit. The amount of fixed cost and breakeven point (in units) will be —
(A) ₹ 1,68,000 and 26,250 units
(B) ₹ 8,000 and 53,333 units
(C) ₹ 1,60,000 and 25,000 units
(D) ₹ 1,70,000 and 42,500 units
Answer:
(A) ₹ 1,68,000 and 26,250 units

Question 56.
June 2016:
Profit : — ₹ 50,000
Contribution : — ₹ 70,000
Sales : — ₹7,00,000
The amount of margin of safety will be —
(A) ₹ 4,00,000
(B) ₹ 5,00,000
(C) ₹ 2,50,000
(D) ₹ 1,45,000
Answer:
(B) ₹ 5,00,000

Question 57.
June 2016: The ratio of variable cost to sales is 75%. The break-even point occurs at 64% of the capacity sales when fixed cost is ₹1,20,000. The 100% capacity sales will be—
(A) ₹ 4,80,000
(B) ₹ 2,50,000
(C) ₹ 7,50,000
(D) None of the above
Answer:
(C) ₹ 7,50,000

Question 58.
Dec 2016: Raj Ltd. furnishes the following information:
Production : 10,000 units
Sales : 5,000 units
Selling price : ₹ 12 per unit
Variable cost : ₹ 6 per unit
Fixed costs : ₹ 40,000 p.a.
Profit/loss under marginal costing method will be —
(A) ₹ 10,000 (Profit)
(B) ₹ 10,000 (Loss)
(C) ₹ 20,000 (Profit)
(D) ₹ 20,000 (Loss)
Answer:
(B) ₹ 10,000 (Loss)

Question 59.
Dec 2016: A radio manufacturer finds that while it costs ₹ 6.25 per unit to make a component, the same is available in the market at ₹5.75 each. Continuous supply is also fully assured. The break-up of costs per unit is as follows:
Materials : ₹ 2.75
Labour :₹ 1.75
Other variable expenses : ₹ 0.50
Depreciation & other fixed costs : ₹ 1.25
The best option for the manufacturer will be —
(A) To make
(B) To buy
(C) To sell
(D) None of the above
Answer:
(A) To make
In ‘make or buy’ decisions, it is profitable to buy from outside only when the
supplier’s price is below the firm’s own variable cost
Buying cost = 5.75
Making variable cost = 2.75 + 1.75 + 0.50 5
A radio manufacturer is advised to make the component.

Question 60.
Dec 2016: Following data is obtained from the cost records of Moon Ltd.:

P/V ratio will be —
(A) 40%
(B) 46%
(C) 52%
(D) 50%
Answer:
(D) 50%

Question 61.
Dec 2016: In a purely competitive market, 10,000 pocket transistors can be manufactured and sold and certain profit is generated. It is estimated that 2,000 pocket transistors need to be manufactured and sold in a monopoly market to earn the same profit. Profit under both the conditions is targeted at ₹ 2,00,000. The variable cost per transistor is ₹ 100 and total fixed costs are ₹ 37,000. Unit selling price per transistor under monopoly condition will be —
(A) ₹ 218.50
(B) ₹ 234.50
(C) ₹ 267.25
(D) ₹ 274.35
Answer:
(A) ₹ 218.50

Question 62.
Dec 2016: Following information is related to Product-A:
In 2015, variable cost was ₹ 200 per unit and fixed cost ₹ 40 per unit. Production was 1,20,000 units. It is expected that production in 2016 will increase to 1,60,000 units. The variable cost will increase by 25% and fixed cost by 10% in 2016. The amount of fixed cost in 2016 will be —
(A) ₹ 52,80,000
(B) ₹ 70,40,000
(C) ₹ 64,00,000
(D) ₹ 48,00,000
Answer:
(A) ₹ 52,80,000
1,20,000 × 40 × 110% = 52,80,000

Question 63.
Dec 2016: Following information is given for a product of a manufacturing company:
Material ₹ 18 per unit; other variable cost ₹ 22 per unit; and fixed expenses ₹ 18 per unit. Selling price is ₹ 75 per unit. Company is presently producing 80,000 units at 80% capacity. The company received an offer for 20,000 units from a foreign customer. The minimum price to be accepted from foreign customer, if the company wants to earn 20% on foreign sales will be —
(A) ₹ 50
(B) ₹ 58
(C) ₹ 72.50
(D) ₹ 69.60
Answer:
(A) ₹ 50

x= 10,00,000
Price per unit = 10,00,000/20,000 = 50

Question 64.
Dec 2016: Margin of safety in a company can be improved by:
(1) Reducing the fixed cost and variable cost
(2) Increasing sales volume and price of sales
(3) Increasing stock of material in the expectation of price rise
(4) Expanding business to fulfill the demand of market
(5) Changing the product mix to increase contribution.
Select the correct answer from the options given below —
(A) (1), (2) and (3)
(B) (1), (2) and (5)
(C) (1), (3) and (4)
(D) (2), (3) and (5)
Answer:
(B) (1), (2) and (5)

Question 65.
Dec 2016:
Statement -1
When there are no inventories, profit figure under marginal costing and absorption costing is identical.
Statement – II
Inventories are valued at cost of production in absorption and marginal costing systems.
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:
(D) Statement-I is correct, but Statement-II is incorrect

Question 66.
Dec 2016: The P/V ratio of Akhil & Co. is 50% and margin of safety is 40%. The company sold 500 units for ₹ 5,00,000. The break-even point sales will be —
(A) ₹ 2,50,000
(B) ₹ 3,00,000
(C) ₹ 3,50,000
(D) ₹ 4,00,000
Answer:
(B) ₹ 3,00,000
66. Margin of safety = Actual sales – Break even sales 40% = 100% – Break even sales
Break even sales = 60%
5,00,000 × 60% = 3,00,000

Question 67.
June 2017: Ramya Ltd. furnishes the following information:
Production 10,000 units,
Sales 10,000 units,
Selling price ₹ 12 per unit,
Variable cost ₹ 6 per unit,
Fixed costs ₹ 40,000 per annum (normal capacity of 10,000 units)
Profit/Loss under marginal costing method will be:
(A) ₹ 10,000
(B) ₹ 30,000
(C) ₹ 20,000
(D) ₹ 25,000
Answer:
(C) ₹ 20,000

Question 68.
June 2017: A manufacturer produces 2,00,000 units of a product at a cost of ₹ 3.25 per unit. Later on he produces 2,75,000 units at a cost of ₹ 3.20 per unit, when its fixed overheads have increased by 10%. The original fixed overheads will be:
(A) ₹ 50,000
(B) ₹ 55,000
(C) ₹ 30,000
(D) ₹ 40,000
Answer:
(A) ₹ 50,000
Simple way to solve this MCQ is to apply the figures of given option in following ways:
Let’s take the figure of Option (A) ₹ 50,000 as fixed overhead.

Since. variable overhead per unit remains same, Option (A) is correct.

Question 69.
June 2017: Mr. Mahesh has a sum of ₹ 3,00,000 which invested in a business. He wishes 15% return on his fund. It is revealed from the present cost data analysis that variable cost of operation are 60% of sales and fixed costs are ₹ 1,50,000 p.a. On the basis of this information, you are required to find out the sales volume to earn 15% return.
(A) ₹ 4.875 Lakhs
(B) ₹ 4.675 Lakhs
(C) ₹ 4.775 Lakhs
(D) ₹ 5.875 Lakhs
Answer:
(A) ₹ 4.875 Lakhs
Required return = 3,00,000 × 15% = 45,000

Question 70.
June 2017: A radio manufacturer finds the while it costs ₹ 6.25 per unit to make component M-140 and the same is available in the market at ₹ 5.75 each. Continuous supply is also fully assured. The breakdown cost per unit as follows: Materials i 2.75, Labour ₹ 1.75 other variable expenses ₹ 0.50, Depreciation and other fixed cost ₹ 1.25. What would be your decision, if the supplier offered the component at ₹ 4.85 per unit?
(A) Make
(B) Buy
(C) Sell
(D) None of the above
Answer:
(B) Buy
The present MCQ is based on “make or buy”.
Variable cost of making = 2.75 + 1.75 + 0.50 = 5.00

Question 71.
June 2017: In a purely competitive market, 10,000 pocket transistors can be manufactured and sold and certain profit is generated. It is estimated that 2,000 pocket transistors need to be manufactured and sold in a monopoly market to earn the same profit. Profit under both the conditions is targeted at ₹ 2,00,000. The variable cost per transistor is ₹ 100 and the total fixed costs are ₹ 37,000. You are required to find out unit selfing price per transistor under competitive condition.
(A) ₹ 125.70
(B) ₹ 123.70
(C) ₹ 128.70
(D) ₹ 228.70
Answer:
(B) ₹ 123.70

Question 72.
June 2017: A firm has given the following data:
Fixed expenses at 50% ₹ 15,000, Fixed expenses when factory is close down ₹ 10,000, Additional expenses in closing down ₹ 1,000, Production at 50% capacity 5,000 units, contribution per unit ₹ 1. Advise whether to run the factory or close it down:
(A) Close
(B) Run
(C) Continue
(D) None of the above
Answer:
(B) Run

Question 73.
June 2017: From the following data, P/V ratio will be:

(A) 50%
(B) 10%
(C) 20%
(D) 40%
Answer:
(C) 20%

Question 74.
June 2017: You are requested to report to top management of Eastern India Engineering Company the point of sales in terms of rupee to break-even. For the purpose, you obtain that:
Fixed overheads remain constant at ₹ 12,000
Variable costs will rise zero to ₹ 12,000
Selling price is ₹ 600 per ton
The tonnage produced and sold is 30 tons.
(A) ₹ 36,000
(B) ₹ 32,000
(C) ₹ 30,000
(D) ₹ 38,000
Answer:
(A) ₹ 36,000

Question 75.
June 2017: In a period sales amount to ₹ 2,00,000, net profit ₹ 20,000 and Fixed overheads are ₹ 30,000. If sales ₹ 3,00,000 profit will be:
(A) ₹ 48,000
(B) ₹ 50,000
(C) ₹ 40,000
(D) ₹ 45,000
Answer:
(D) ₹ 45,000

Question 76.
June 2017: Reliance Furniture House places before you the following trading results:

Fixed cost will be:
(A) ₹ 15,000
(B) ₹ 10,000
(C) ₹ 30,000
(D) ₹ 60,000
Answer:
(C) ₹ 30,000

Question 77.
June 2017: A factory engaged in manufacturing plastic buckets is working at 40% capacity and produces 10,000 buckets per annum. The present cost- break-up for one bucket is as under:
Materials — ₹10
Labour — ₹3
Overheads — ₹ 5 (60% fixed)
The selling price per bucket ₹ 20. If factory operates 90% of capacity the profit will be:
(A) ₹ 75,000
(B) ₹ 80,000
(C) ₹ 82,500
(D) ₹ 92,500
Answer:
(C) ₹ 82,500

Question 78.
June 2017: A company has fixed costs of ₹ 90,000 with sales of ₹ 3,00,000 and profit of ₹ 60,000. Margin of safety will be:
(A) ₹ 1,00,000
(B) ₹ 1,20,000
(C) ₹ 1,50,000
(D) ₹ 1,30,000
Answer:
(B) ₹ 1,20,000

Question 79.
June 2017: A company sells its product at ₹ 15 per unit. In a period if it produces and sells 8,000 units, it incurs a loss of ₹ 5 per unit. If the volume is raised to 20,000 units, it earns a profit of ₹ 4 per unit. Breakeven point in units will be:
(A) 13,000 units
(B) 12,000 units
(C) 14,000 units
(D) 10,000 units
Answer:
(B) 12,000 units

Question 80.
June 2017: The cost accountant of M Ltd. has ascertained the selling price of a product is ₹ 20 per unit. Variable cost is ₹15 per unit and break-even point is 21,600 units. Management has decided to treat 12,000 units of B.E.R because production department cannot produce more than this at the moment. The selling price for 12,000 units B.E.R will be:
(A) ₹ 20 per unit
(B) ₹ 24 per unit
(C) ₹ 26 per unit
(D) ₹ 28 per unit
Answer:
(B) ₹ 24 per unit

Question 81.
June 2017: Yadhav Co. has annual fixed cost of ₹ 1,20,000. In 2015 sales amounted to ₹ 6,00,000 as compared to ₹ 4,50,000 in 2014 and profit in 2015 was ₹ 50,000 higher than in 2014. If there is not need to expand the company’s capacity. The profit or loss in 2016 on a forecasted sales of ₹ 9,00,000 will be:
(A) ₹ 1,80,000
(B) ₹ 1,90,000
(C) ₹ 1,70,000
(D) ₹ 1,85,000
Answer:
(A) ₹ 1,80,000

Question 82.
June 2017: A company manufactures and sells three types of product namely A, B and C. Total sales per month is ₹ 80,000 in which the share of these three products are 50%, 30% and 20% respectively. Variable cost of these products are 60%, 50% and 40% respectively. The combined P/V Ratio will be:
(A) 49%
(B) 48%
(C) 47%
(D) 50%
Answer:
(C) 47%

Question 83.
June 2017: A plant is operating at 60% capacity. The fixed costs are ₹ 30,000, the variable costs are ₹ 1,00,000 and the sales amount to ₹ 1,50,000. The percentage of capacity at which the plant should operate to earn a profit of ₹40,000 will be:
(A) 80%
(B) 84%
(C) 90%
(D) 94%
Answer:
(B) 84%

Question 84.
June 2017: When margin of safety is 20% and P/V ratio is 60%, the profit will be:
(A) 30%
(B) 33.3333%
(C) 12%
(D) None of the above
Answer:
(C) 12%

Question 85.
June 2017: If the total cost of producing 20,000 units of a product is ₹ 90,000 and if 25.000 units will be produced, then the total cost will be ₹ 1,05,000 and the selling price is ₹ 8 per unit. The break-even point will be:
(A) 10,000 units
(B) 8,000 units
(C) 6,000 units
(D) 5,000 units
Answer:
(C) 6,000 units
Profit at 20,000 units = 1,60,000 – 90,000 = 70,000
Profit at 25,000 units = 2,00,000 – 1,05,000 = 95,000

Question 86.
June 2017: P/V ratio 25%, Sales ₹ 1,20,000 and Fixed costs ₹ 17,500, Profit will be:
(A) ₹ 12,500
(B) ₹ 30,000
(C) ₹ 17,500
(D) ₹ 20,000
Answer:
(A) ₹ 12,500

Question 87.
June 2017: Under marginal costing system, product costs are:
(A) Equal to fixed cost plus variable costs
(B) Equal to only marginal costs
(C) Equal to semi-variable costs
(D) None of the above
Answer:
(B) Equal to only marginal costs

Question 88.
June 2017: Prime cost plus variable overheads gives:
(A) Cost of sales
(B) Marginal costs
(C) Works cost
(D) Cost of production
Answer:
(B) Marginal costs

Question 89.
Which of the following is not true?

Answer:
(C)

Question 90.
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 91.
June 2017:
Assertion (A):
Profit volume ratio is considered to be the best indicator of the profitability on the business.
Reason (R):
If profit volume ratio improved, it will result in better profits.
Codes:
(B) A is true, but R is false
(B) A is false, but R is true
(C) Both A & R are true but R is not the correct explanation of A
(D) Both A & R are true and R is the correct explanation of A
Answer:
(C) Both A & R are true but R is not the correct explanation of A

Question 92.
June 2017:
Statement I:
Margin of safety represents the difference between the sales at break-even point and the total sales.
Statement II:
Margin safety can be expressed as a percentage of total sales or in value or in terms of quantity.
Codes:
(A) Statement I is correct but statement II is incorrect
(B) Statement I is incorrect but statement II is correct
(C) Both statements are correct
(D) Both statements are incorrect
Answer:
(C) Both statements are correct

Question 93.
June 2017: Match the following:
List I — List II
(a) Classification of costs into fixed and variable cost — (1) Contribution
(b) Difference between sales and variable cost — (2) P/V ratio
(c) Both fixed and variable cost are charged to product — (3) Marginal Costing
(d) Relative profitability — (4) Absorption


Answer:
(B)

Question 94.
June 2017: Consider the following statements:
(1) Marginal costing and absorption costing are the same.
(2) For decision-making, absorption costing is more suitable than marginal costing.
(3) Cost-volume-profit relationship also denotes break-even point.
(4) Marginal costing is based on the distribution between fixed and variable costs.
Which of the statements given above are correct ?
(A) 4 and 2
(B) 2 and 3
(C) 3 and 4
(D) 1 and 2
Answer:
(C) 3 and 4

Question 95.
June 2017: Which of the following are advantages of marginal costing?
(1) Pricing decision
(2) True profit
(3) Difficulty to classify
(4) Ignores time value
(5) Break-even analysis
(6) Contribution is not final
(7) Control over expenditure
Codes:
(A) 1,3, 5 and 7
(B) 1,2, 5 and 7
(C) 3,4, 6 and 7
(D) 1, 2,6 and 7
Answer:
(B) 1,2, 5 and 7

Question 96.
Dec 2017: Marginal Costing in America is called as:
(A) Differential costing
(B) Out-of-pocket costing
(C) Direct costing
(D) Variable costing
Answer:
(C) Direct costing

Question 97.
Dec 2017:
Statement-I:
Break-even analysis has gradually become a popular service tool for modem financial management.
Statement-II:
No concrete limitations have been raised anywhere against the utility of break-even analysis.
Select the correct answer from the option given below:
(A) Both statements are correct
(B) Both statements are wrong
(C) Statement I is correct but statement II is not correct
(D) Statement I is not correct but statement II is correct
Answer:
(C) Statement I is correct but statement II is not correct

Question 98.
Dec 2017: When fixed costs are ₹ 90,000, ratio of variable cost to sales is 75% and the break-even point occurs at 60% of the capacity sales, the capacity sales is:
(A) ₹ 4,50,000
(B) ₹ 5,60,000
(C) ₹ 6,00,000
(D) ₹ 7,50,000
Answer:
(C) ₹ 6,00,000

Question 99.
Dec 2017: The P/V ratio of a company is 40%. If the company reduces its selling price by 20%, the required percentage of increase in sales value to maintain the same profit is:
(A) 20%
(B) 40%
(C) 60%
(D) 75%
Answer:
(C) 60%
Following data is assurneth
Selling price per unit 20: No. of units 500: Fixed cost = 1,000.

If the company reduces its selling price by 20°o the required percentage of increase in sales value to maintain the same profit is as shown below.

Question 100.
Dec 2017: Mr. R’s sales and profit in 2015 were respectively ₹ 1,20,000 and ₹ 8,000. His sales & profit in 2016 were ₹ 1,40,000 & ₹ 13,000 respectively. In this case his margin of safety in 2016 was:
(A) ₹ 32000
(B) ₹ 52,000
(C) ₹ 88,000
(D) ₹ 1,36,000
Answer:
(B) ₹ 52,000

Question 101.
Dec 2017: Z Ltd. has a margin of safety of 4,000 units and break-even sales at 1,000 units. If its margin of safety sales is ₹ 2,00,000, total sales shall be:
(A) ₹ 8,00,000
(B) ₹ 6,00,000
(C) ₹ 4,00,000
(D) ₹ 2,50,000
Answer:
(D) ₹ 2,50,000

Question 102.
Dec 2017: R.V. Ltd., made a sale for ₹ 4,50,000 in the first half and for ₹ 5,00,000 in the second half of 2016. In this year the total cost for the first and the second half of the year were respectively ₹ 4,00,000 and ₹ 4,30,000. If there is no change in selling price and variable cost and, that the fixed expenses are incurred equally, the breakeven sales for the whole year is:
(A) ₹6,50,000
(B) ₹ 6,00,000
(C) ₹ 5,00,000
(D) ₹ 4,50,000
Answer:
(A) ₹6,50,000

Question 103.
Dec 2017: Following are the particulars relating to products P and Q:

Which product is more profitable when?
(a) Material is the key factor.
(b) Labour hour is the key factor.
(c) Sales potential in units is the key factors.
(d) Sales potential in rupees is the key factors.

Answer:
(B)

(a) Material Is key factor: Product Q is better as contribution per kg is high.
(b) Labour hour is key factor: Product P is better as contribution per labour hour is high.
(c) Saies potential in units is the key factor: Product is better as contribution per unit is high.
(d) Sales potential In rupee is the key factor: Product Q is better as contribution per rupee is high.

Question 104.
June 2018: If the P / V ratio of a product is 25% and selling price is ₹ 25 per unit, the marginal cost of the product would be:
(A) ₹ 18.75
(B) ₹16
(C) ₹ 15
(D) ₹ 20
Answer:
(A) ₹ 18.75
P/v ratio is 25%. This means variable cost ratio is 75%.
Variable cost per unit = 25 × 75% 18.75

Question 105.
June 2018: Contribution is the difference between:
(A) Selling price and Fixed cost
(B) Selling price and Total cost
(C) Selling price and Variable cost of sales
(D) Selling price and Profit
Answer:
(C) Selling price and Variable cost of sales

Question 106.
June 2018: Which of the statement is not true in respect of cost-volume-profit analysis?
(A) In order to forecast profit accurately, it is essential to know the relationship between profits and costs on the one hand and volume on the other.
(B) Cost-volume-analysis is not suitable for setting up flexible budgets which indicates costs at various levels of activity.
(C) Cost-volume-profit analysis is of assistance in performance evaluation for the purpose of control.
(D) Analysis of cost-volume-profit relationship may assist in formulating price policies to suit particular circumstances by projecting the effect which different price structures have on costs and profits.
Answer:
(C) Cost-volume-profit analysis is of assistance in performance evaluation for the purpose of control.

Question 107.
June 2018: Total cost of a product: ₹ 10,000; Profit: 25% on Selling Price; Profit is:
(A) ₹ 2,500
(B) ₹ 3,000
(C) ₹ 3,333
(D) ₹ 2,000
Answer:
(C) ₹ 3,333
Profit is 25% on selling price which means it is 33.33% on cost.
10,000 × 33.33% = 3,333

Question 108.
June 2018: A manufacturing company provides you the following information for the coming month:
Budgeted sales revenue ₹ 7,50,000 Budgeted contribution ₹ 3,00,000 Budgeted profit ₹ 75,000 What will be the budgeted break-even sales volume?
(A) ₹ 9,37,500
(B) ₹ 5,25,000
(C) ₹ 5,62,500
(D) ₹ 6,75,000
Answer:
(A) ₹ 9,37,500

Question 109.
even sales of the company would be:
(A) ₹ 15,00,000
(B) ₹ 12,50,000
(C) ₹ 10,00,000
(D) ₹ 20,00,000
Answer:
(B) ₹ 12,50,000

Question 110.
June 2018:The P/V ratio of a company is 50% and margin of safety is 40%. If present sales is ₹ 30,00,000 then Break Even Point will be:
(A) ₹ 9,00,000
(B) ₹ 18,00,000
(C) ₹ 5,00,000
(D) None of the above
Answer:
(B) ₹ 18,00,000
Margin of safety is 40%; this means BEP will occur at 60%.
30,00,000 × 60% = 18,00,000

Question 111.
June 2018: When the sales increase from ₹ 40,000 to ₹ 60,000 and profit increases by ₹ 5,000, the P/V ratio is:
(A) 20%
(B) 30%
(C) 25%
(D) 40%
Answer:
(C) 25%

Question 112.
June 2018:
Assertion (A):
Marginal costing furnishes a better and more logical basis for fixation of sales prices as well as tendering for contracts.
Reason (R):
Marginal cost provides management with the information regarding the behaviour of costs and incidence of such cost on the profitability of an undertaking.
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 113.
June 2018: Actual overheads for the year ending 31 st March, 2017 were ₹ 21,000, whereas the overhead absorbed shows an over absorption of ₹ 1,000 for the same period. If the direct labour cost is ₹ 1,00,000, then overhead absorption rate based on direct wages would be:
(A) 20%
(B) 21%
(C) 22%
(D) 25%
Answer:
(C) 22%
Overhead Absorbed 21000 + 1000 = 22,000

Question 114.
June 2018: If the sales of a product is ₹ 94,080 and the profit margin on cost 1296, the amount of profit will be:
(A) ₹ 7,800
(B) ₹ 11,290
(C) ₹ 8,580
(D) ₹10,080
Answer:
(D) ₹10,080
94,080× 12/112=10,080

Question 115.
June 2018: ABC Ltd. shows break even sales ₹ 40,500 and budgeted sales ₹ 50,000. Compute the margin of safety ratio?
(A) 1996
(B) 8196
(C) 1.8196
(D) Require more data to calculate
Answer:
(A) 1996
[(50,000- 40,500)/50.000] × 100 = 19%

Question 116.
Dec 2018: P/V Ratio 4096; Sales ₹ 65,00,000 and BEP ₹ 47,50,000. Profit will be:
(A) ₹ 26,00,000
(B) ₹ 19,00,000
(C) ₹ 45,00,000
(D) ₹ 7,00,000
Answer:
(D) ₹ 7,00,000

Question 117.
Dec 2018: If standard output for 8 hours is 200 units and actual output in 10 hours is 350 units, the efficiency level will be:
(A) 175%
(B) 140%
(C) 57.14%
(D) 71.42%
Answer:
(B) 140%
For 8 hrs – 200 units
For 10 hrs -?
(10 × 200)/8 = 250 units

Question 118.
Dec 2018: From the following data, P/V Ratio will be:

(A) 12%
(B) 25%
(C) 20%
(D) 33.33%
Note: This MCQ is not properly drafted; for further clarification please see the hints.
None of the given option is correct; see the calculation below:

Question 119.
Dec 2018: Given, Sales ₹ 80 Lakh; Net Profit ₹ 8 Lakh and Fixed Cost ₹ 12 Lakh. On the basis of the data, if sales is ₹ 120 Lakh, then the profit will be:
(A) ₹ 18 Lakh
(B) ₹ 12 Lakh
(C) ₹ 10 Lakh
(D) ₹ 6 Lakh
Answer:
(A) ₹ 18 Lakh

Question 120.
Dec 2018: A factory engaged in manufacturing LED Lamps is working at as under:
Direct Material — 10
Direct Labour — 16
Overheads (60% fixed) — 20
Selling Price — 60
If the factory operates its 90% capacity, then profit will be:
(A) ₹ 16,80,000
(B) ₹ 32,40,000
(C) ₹ 25,20,000
(D) ₹ 67,20,000
Answer:
(B) ₹ 32,40,000

Question 121.
Dec 2018: The production cost of 1,000 units of an article is as follows:
Cost — ₹
Direct Material — 4,00,000
Direct Wages — 3,00,000
Fixed & Variable Overheads — 2,00,000
The company produced 5,000 units and sold at 1,000 per unit and earned a profit of 10,00,000. The amount of variable overhead per unit is:
(A) ₹ 200
(B) ₹ 75
(C) ₹ 100
(D) ₹ 120
Answer:
(B) ₹ 75

Question 122.
Dec 2018: p/V Ratio for the firm is 60%, Total fixed costs are 10,40,000 and variable cost per unit is 720. If the sales are 20,000 units, then selling price per unit will be:
(A) 1,200
(B) 772
(C) 1,930
(D) 1,800
Answer:
(D) 1,800

Question 123.
Dec 2018: If the P/V Ratio is 30%, Margin of Safety is 40% and BEP is ₹ 48 Lakh, then profit will be:
(A) ₹ 9.60 Lakh
(B) ₹ 14.40 Lakh
(C) ₹ 5.76 Lakh
(D) ₹ 24 Lakh
Note: This MCQ is not properly drafted; for further clarification please see the hints.

Question 124.
Dec 2018: Fixed costs ₹ 45 Lakh, Variable costs ₹ 120 Lakh and Profit ₹ 35 Lakh, then P/V Ratio is:
(A) 29.17%
(B) 37.5%
(C) 66.67%
(D) 40%
Answer:
(D) 40%

Question 125.
Dec 2018: Which of the following techniques of costing is also known as out-of-pocket costing?
(A) Standard Costing
(B) Historical Costing
(C) Marginal Costing
(D) Uniform Costing
The company produced 5,000 units and sold at ₹ 1,000 per unit and earned a profit of ₹ 10,00,000. The amount of variable overhead per unit is:
(A) ₹ 200
(B) ₹ 75
(C) ₹ 100
(D) ₹ 120
Answer:
(C) ₹ 100

Question 126.
Dec 2018: Sales increased from ₹ 750 Lakh to ₹ 875 Lakh. If P/V Ratio is 30%, then increase in the contribution will be:
(A) ₹ 262 Lakh
(B) ₹ 225 Lakh
(C) ₹ 37.50 Lakh
(D) ₹ 125 Lakh
Answer:
(C) ₹ 37.50 Lakh

Question 127.
June 2019: The following information is given:
Selling price ₹ 20 per unit, Variable cost ₹ 15 per unit and Fixed cost ₹ 48,000. What will be BEP sales (in X) and Profit if actual sales is 40% more than BEP sales?
(A) ₹1,92,000 and 20,800
(B) ₹ 1,80,000 and ₹ 18,000
(C) ₹ 96,000 and ₹ 9,600
(D) ₹ 1,92,000 and ₹ 19,200
Answer:
(D) ₹ 1,92,000 and ₹ 19,200

Question 128.
June 2019:
Statement I:
When a factory operates at full capacity, Fixed cost also becomes relevant for make or buy decision.
Statement II:
Margin of safety is the difference of actual sales and standard sales.
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:
(D) Statement I is correct, but Statement II is incorrect

Question 129.
June 2019: The total cost and profit dining two periods are as follows:

Profit volume ratio will be:
(A) 15%
(B) 25%
(C) 20%
(D) 33.33%
Answer:
(C) 20%
Sales of Period 1 = 4,50,000 + 50,000 5,00,000
Sales of Period 2 6,50,000 + 1.00,000 = 7,50,000

Question 130.
June 2019: If profit, fixed cost and margin of safety are ₹ 19,20,000; ₹ 25,60,000 and ₹ 64,00,000 respectively, then break¬even point will be:
(A) ₹ 44,80,000 .
(B) ₹ 85,33,333
(C) ₹ 38,40,000
(D) ₹ 48,00,000
Answer:
(B) ₹ 85,33,333

Question 131.
June 2019: Selling price per unit ₹ 20, Trade discount 5% of selling price, cash discount 2% on sales. Material cost ₹ 3, Labour cost ₹ 4, Fixed overheads ₹ 22,000 and variable overheads 80% of labour cost. What would be the net profit if sales are 10% above the BEP?
(A) ₹ 2,000
(B) ₹ 2,500
(C) ₹ 2,200
(D) ₹ 1,850
Answer:
(C) ₹ 2,200
Trade discount = 20 × 5% 1
Variable cost = 3 + 4 + 3.2 10.2
Cash discount is not considered in cost accounts.

Question 132.
June 2019: A firm manufactures 15.000 units per annum, each taking 1.5 direct labour hours. The direct labour rate is ₹ 8 per hour and pay rise of 1596 is awarded half way through the year. What is the total annual direct labour budget amount?
(A) ₹ 1,20,000
(B) ₹ 1,93,500
(C) ₹ 1,80,000
(D) ₹ 2,07,000
Answer:
(B) ₹ 1,93,500

Question 133.
June 2019: A factory is presently working at 50% capacity and producing 4.000 units. The cost data are as follows: Material and labour cost per unit ₹ 15, Factory overheads (40% variable) ₹ 30,000. What will be the works cost for 60% capacity?
(A) ₹ 1,04,400
(B) ₹ 1,12,400
(C) ₹ 1,18,600
(D) ₹ 1,22,200
Answer:
(A) ₹ 1,04,400

Question 134.
June 2019: Based on cost accounting information, which is the tool of Manage¬ment Accounting for decision-making?
(A) Marginal Costing
(B) Standard Costing
(C) Differential Costing
(D) All of the above
Answer:
(D) All of the above

Question 135.
June 2019: The effect of sale price reduction always reduces the P/V ratio to raise ………… and to shorten the …………
(A) BEP and Margin of Safety
(B) Fixed Cost and BEP
(C) Margin of Safety and BEP
(D) Profit and BEP
Answer:
(A) BEP and Margin of Safety

Question 136.
June 2019: ABC Ltd. had a marginal costing profit of ₹ 1,25,500 in April, 2018.
Opening stock were 1,800 units and closing stock were 1,260 units. The company is considering changing to absorption costing system. Fixed overhead absorption rate is ₹ 6 per unit. Profit under absorption costing will be:
(A) ₹ 1,28,740
(B) ₹ 1,22,260
(C) ₹ 1,14,700
(D) ₹ 1,33,060
Answer:
(B) ₹ 1,22,260
Difference in profit = change m inventory level × fixed overhead per unit
=(1,800- 1,260)×6= 3,240
The inventory level decreased during the period therefore the absorption costing
profit is less than the marginal costing profit.
Profit as per absorption costing profit = 1,25,500 -3,240 = 1.22,260.

Question 137.
June 2019: The following information is given:

Answer:
(C)

Question 138.
June 2019: P/V Ratio is 25% and margin of safety is ₹ 6,00,000, the amount of profit is:
(A) ₹ 2,00,000
(B) ₹ 1,60,000
(C) ₹ 1,50,000
(D) ₹ 1,20,000
Answer:
(C) ₹ 1,50,000

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

Strategic Analysis and Planning – Strategic Management MCQ

Question 1.
……….. refers to the process of conducting research on a company and its operating environment to formulate a strategy.
(A) Strategic management
(B) Strategic analysis
(C) Sensitive analysis
(D) Simulation analysis
Answer:
(B) Strategic analysis

Question 2.
Strategic analysis involves:
(A) Identifying and evaluating data relevant to the company’s strategy.
(B) Defining the internal and external environments to be analyzed.
(C) Using several analytic methods such as Porter’s five forces analysis, SWOT analysis etc.
(D) All of the above
Answer:
(D) All of the above

Question 3.
ADL matrix has been propounded by:
(A) Arthur D. Lowey
(B) Arthur D. Little
(C) Arthur D. Levin
(D) Arthur D. Louise
Answer:
(B) Arthur D. Little

Question 4.
Purpose of a strategic analysis is to -……….
(A) Analyze an organization’s external and internal environment
(B) Assess current strategies
(C) Generate and evaluate the most successful strategic alternatives.
(D) All of the above
Answer:
(D) All of the above

Question 5.
Arrange the Strategic Analysis Process in proper sequence:
I. Formulate plans.
II. Recommend and implement the most viable strategy.
III. Determine the effectiveness of existing strategies.
IV. Perform an environmental analysis of current strategies.
Select the correct answer from the options given below.
(A) iv,ii,i,iii
(B) iv,iii,i,ii
(C) ii,iii,i,iv
(D) iv,i,iii,ii
Answer:
(B) iv,iii,i,ii

Question 6.
………… is the process we use to gain understanding and insight into our present situation.
(A) Situational analysis
(B) Sensitive analysis
(C) Simulation analysis
(D) All of the above
Answer:
(A) Situational analysis

Question 7.
Which of the following is NOT ‘internal environment considerations’?
(A) Operational inefficiencies
(B) Changes in consumer taste
(C) Employee morale
(D) Constraints from financial issues
Answer:
(B) Changes in consumer taste

Question 8.
Which of the following is NOT ‘external environment considerations?
(A) Political trends
(B) Economic shifts
(C) Operational inefficiencies
(D) Changes in consumer taste
Answer:
(C) Operational inefficiencies

Question 9.
Strategists must ask themselves question such as:
(A) Is our strategy failing or succeeding?
(B) Will we meet our stated goals?
(C) Does our strategy align with our vision, mission, and values
(D) All of the above
Answer:
(D) All of the above

Question 10.
Potential strategic alternatives include -………
(A) Changes in capital structure
(B) Changes in supply chain management
(C) Changes in business process
(D) All of the above
Answer:
(D) All of the above

Question 11.
‘Build,’ ‘Hold,’ ‘Harvest,’ and ‘Divest’ are the strategies pursued in:
(A) Boston Consulting Group Growth Share Matrix
(B) Value chain Analysis
(C) Managerial Grid Matrix
(D) Ansoff’s Product Matrix Growth Matrix
Answer:
(A) Boston Consulting Group Growth Share Matrix

Question 12.
A situation analysis should be conducted -………
(A) After developing a strategy.
(B) At the beginning of any program or project
(C) Before company is incorporated
(D) At a later stage in quality management
Answer:
(B) At the beginning of any program or project

Question 13.
Which of the following is NOT element of Situation Analysis?
(A) Product Situation
(B) Competitive Situation
(C) Distribution Situation
(D) Profit Situation
Answer:
(D) Profit Situation

Question 14.
The low growth, low share businesses in BCG matrix are:
(A) Cows
(B) Dogs
(C) Cats
(D) Question Marks
Answer:
(B) Dogs

Question 15.
Identification of opportunities and avoiding or mitigating losses is called -………
(A) Risk management
(B) Stress management
(C) Change management
(D) Co-ordination
Answer:
(A) Risk management

Question 16.
Environment scanning applies to –
1. External scanning processes
2. Motivational scanning processes
3. Internal scanning processes
4. Lead scanning processes
Select the correct answer from the options given below -………
(A) None of the given
(B) Except 4 all other
(C) Both 1 and 3
(D) 1 only
Answer:
(C) Both 1 and 3

Question 17.
In SWOT analysis the ‘O’ stands for -………
(A) Objections
(B) Openings
(C) Opportunities
(D) Obstacles
Answer:
(C) Opportunities

Question 18.
SWOT analysis Originated by –
(A) Heinz Weirich
(B) United States Navy
(C) Albert S Humphrey
(D) James E. Kelley
Answer:
(C) Albert S Humphrey

Question 19.
An organization that has a low relative market share position and competes in a slow growth industry is referred to as a -………
(A) Dog
(B) Question Mark
(C) Star
(D) Cash Cows
Answer:
(A) Dog

Question 20.
Which of the following SWOT elements are internal factors for a business?
(A) Strengths and Weaknesses
(B) Opportunities and Threats
(C) Strengths and Opportunities
(D) Weaknesses and Threats
Answer:
(A) Strengths and Weaknesses

Question 21.
………generally relate to external factors.
(A) Strengths and weaknesses
(B) Opportunities and threats
(C) Weaknesses and Threats
(D) Strengths and Opportunities
Answer:
(B) Opportunities and threats

Question 22.
Which section of the SWOT Matrix involves matching internal strengths with external opportunities?
(A) The WT cell
(B) The SW cell
(C) The SO cell
(D) The ST cell
Answer:
(C) The SO cell

Question 23.
The process by which an organization deals with a major event that threatens to harm the organization, its stakeholders, or the general public is known as -……..
(A) Stress management
(B) Crisis management
(C) TQM
(D) None of the above
Answer:
(B) Crisis management

Question 24.
Which of the following is element of Situation Analysis?
(A) Environmental Factors
(B) Distribution Situation
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)

Question 25.
Which of the following is not a limitation of SWOT (Strengths, Weaknesses, Opportunity, Threats) analysis?
(A) Organizational strengths may not lead to competitive advantage
(B) SWOT gives a one-shot view of a moving target
(C) SWOT’s focus on the external environment is too broad and integrative
(D) SWOT over emphasizes a single dimension of strategy
Answer:
(C) SWOT’s focus on the external environment is too broad and integrative

Question 26.
In the PESTEL framework for environmental analysis what does the letter S stand for?
(A) Superior
(B) Surroundings
(C) Society
(D) Socio-cultural
Answer:
(D) Socio-cultural

Question 27.
Assessment of competitive rivalry does NOT include an understanding of:
(A) The extent to which competitors are in balance
(B) Market growth rates
(C) Fixed costs, exit barriers and operational efficiency
(D) The management structure of an organization
Answer:
(D) The management structure of an organization

Question 28.
The most probable time to pursue a harvest strategy is in a situation of
(A) High growth
(B) Decline in the market life cycle
(C) Strong competitive advantage
(D) Mergers and acquisitions
Answer:
(B) Decline in the market life cycle

Question 29.
Which of the following is first step in market assessment?
(A) Analysis of the situation
(B) Competitive rivalry
(C) Suppliers power
(D) Defining the problem
Answer:
(D) Defining the problem

Question 30.
Which of the following is FALSE regarding why a SWOT Analysis is used?
(A) To build on the strengths of a business
(B) To minimize the weaknesses of a business
(C) To reduce opportunities available to a business
(D) To counteract threats to a business
Answer:
(C) To reduce opportunities available to a business

Question 31.
Assertion (A):
SWOT analysis is not used for ranking of organizations.
Reason (R):
SWOT analysis is a tool for organizational and environmental appraisal necessary for formulating effective strategies.
Select the correct answer from 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
(D) Both A and R are false
Answer:
(C) Both A and R are true

Question 32.
Geographical Diversification, Product diversification and Entry Mode Eire the domains of:
(A) Functional Strategy
(B) Business Strategy
(C) Corporate Strategy
(D) All of the Above
Answer:
(C) Corporate Strategy

Question 33.
Which of the following is a detailing process in the mission, objectives, strategies, and policies?
(A) Strategy formulation
(B) Strategy implementation
(C) Strategic strategy
(D) Strategy achievement
Answer:
(A) Strategy formulation

Question 34.
………. widely is used for the evaluation of the organization’s product portfolio in marketing and sales planning.
(A) SWOT analysis
(B) BCG Matrix
(C) Ansoff’s matrix
(D) TOWS matrix
Answer:
(B) BCG Matrix

Question 35.
As per BCG Matrix, ‘Stars’ sire –
(A) Low-growth, high market share businesses or products.
(B) Sometimes called problem children or wildcats.
(C) Generates enough cash to maintain themselves, but do not have much future
(D) Products or Strategic Business Units that are growing rapidly.
Answer:
(D) Products or Strategic Business Units that are growing rapidly.

Question 36.
Competitive landscape requires the application of-
(A) Competitive advantage
(B) Competitive strategy
(C) Competitive acumen
(D) Competitive intelligence
Answer:
(D) Competitive intelligence

Question 37.
Which of the following could be strength as per SWOT Analysis?
(A) Weather
(B) A new international market
(C) A price that is too high
(D) The location of a business
Answer:
(D) The location of a business

Question 38.
The acronym TOWS was developed by the American international business professor
(A) Albert S Humphrey
(B) Heinz Weirich
(C) James E. Kelley
(D) United States Navy
Answer:
(B) Heinz Weirich

Question 39.
‘Determinants Analysis’ falls in the purview of -………..
(A) External competitive strategy analysis
(B) Internal competitive strategy analysis
(C) Strategic risk
(D) Competitive landscape
Answer:
(A) External competitive strategy analysis

Question 40.
SWOT analysis starts with , the TOWS Matrix starts with
(A) external environment analysis; internal analysis
(B) internal analysis; Strategy identification
(C) internal analysis; external environment analysis
(D) Strategy identification; internal analysis
Answer:
(C) internal analysis; external environment analysis

Question 41.
Project Evaluation & Review Technique PERT developed by the in the 1950s.
(A) Gary Hamel
(B) United States Navy
(C) Heinz Weirich
(D) James E. Kelley
Answer:
(B) United States Navy

Question 42.
The concept of ‘core competence’ has been advocated by –
(A) Gary Hamel and Peter Drucker
(B) C. K Prahlad and Gary Hamel
(C) C. K Prahlad and Michael Porter
(D) C. K. Prahlad and Peter Druck
Answer:
(B) C. K Prahlad and Gary Hamel

Question 43.
Which of the following could be a weakness as per SWOT Analysis?
(A) A developing market such as the Internet
(B) Competitors with access to better channels of distribution
(C) Poor quality of goods and services
(D) Special marketing expertise
Answer:
(C) Poor quality of goods and services

Question 44.
…………. is the minimum possible time required to accomplish an activity or a path, assuming everything proceeds better than is normally expected
(A) Expected Time
(B) Most Likely Time
(C) Pessimistic Time
(D) Optimistic Time
Answer:
(D) Optimistic Time

Question 45.
Corporate level strategy is concerned with the following –
(A) How do we want to compete?
(B) Where do we want to compete?
(C) How to support the strategy imple-mentation?
(D) All of the above
Answer:
(B) Where do we want to compete?

Question 46.
As per BCG Matrix, ‘Cash Cows’ –
(A) are low-growth, high market share businesses or products.
(B) need heavy investment to maintain their position and finance their rapid growth potential.
(C) represent best opportunities for expansion
(D) are low-growth, low-share businesses and products.
Answer:
(A) are low-growth, high market share businesses or products.

Question 47.
The BCG growth-share matrix -……….
(A) is a project technique used to manage uncertain activities.
(B) is an analytical tool that helps build over your strengths and make the best use of available opportunities while also minimizing the threats.
(C) is the simplest way to portray a corporation’s portfolio of investments.
(D) is an algorithm for scheduling a set of project activities.
Answer:
(C) is the simplest way to portray a corporation’s portfolio of investments.

Question 48.
‘Customer Analysis’ and ‘Market Analysis’ are the part of –
(A) Internal analysis
(B) Strategy identification and selection
(C) External Analysis
(D) None of the above
Answer:
(C) External Analysis

Question 49.
The BCG Growth-Share Matrix consists of the following four major elements?
(A) Sales, Cash cows. Question marks, Dogs
(B) Stars, Cash cows, Question marks, Dogs
(C) Stars, Cash cows, Question marks, Doors
(D) Stars, Computer clouds, Question marks. Dogs
Answer:
(B) Stars, Cash cows, Question marks, Dogs

Question 50.
Which of the following could be an opportunity as per SWOT Analysis?
(A) Having quality processes and procedures
(B) Moving into new market segments that offer improved profits
(C) Damaged reputation
(D) A new competitor in your home market
Answer:
(B) Moving into new market segments that offer improved profits

Question 51.
‘Strategic group mapping’ involves -………..
(A) Identifying the strongest rival companies
(B) Identifying weakest rival companies
(C) Identifying weakest and strongest rival companies
(D) None of the above
Answer:
(C) Identifying weakest and strongest rival companies

Question 52.
BCG in BCG matrix stands for
(A) Boston Calmette Group
(B) British Consulting Group
(C) Boston Corporate Group
(D) Boston Consulting Group
Answer:
(D) Boston Consulting Group

Question 53.
What does Dog symbolize in BCG matrix?
(A) Introduction
(B) Growth
(C) Maturity
(D) Decline
Answer:
(D) Decline

Question 54.
‘Attractiveness of firms’ while conducting industry analysis should be seen in –
(A) Relative terms
(B) Absolute terms
(C) Comparative terms
(D) All of the above
Answer:
(A) Relative terms

Question 55.
…………… is the maximum possible time required to accomplish an activity or a path, assuming everything goes wrong.
(A) Optimistic Time.
(B) Pessimistic Time
(C) Most Likely Time
(D) Expected Time
Answer:
(B) Pessimistic Time

Question 56.
The Critical Path Method (CPM) is a project modelling technique developed in the late 1950s by -………..
(A) Morgan R.Walker & James E.Kelley.
(B) C. K. Prahlad and Gary Hamel
(C) Gary Hamel and Peter Drucker
(D) All of the above
Answer:
(A) Morgan R.Walker & James E.Kelley.

Question 57.
Which of the following is true of a transnational Corporation?
(A) They have subsidiaries but do not have centralized management system
(B) They have no subsidiaries but have centralized management system
(C) They do not have subsidiaries and do not have centralized management system
(D) They have subsidiaries and have a centralized management system
Answer:
(C) They do not have subsidiaries and do not have centralized management system

Question 58.
Consider following two statements:
(I) A strength is an inherent capacity of an organization.
(II) A core competence is a unique strength of an organization which may not be shared by others.
Select false statement from the above statements.
(A) (I) only
(B) (II) only
(C) Both (I) and (II)
(D) Neither (I) nor (II)
Answer:

(D) Neither (I) nor (II)

Question 59.
PERT is –
(A) Activity oriented
(B) Event oriented
(C) Profit oriented
(D) System oriented
Answer:
(B) Event oriented

Question 60.
Entering into a ‘contract’ by MNCs is an example of:
(A) Partial Ownership Alliance
(B) Joint Venture Alliance
(C) Non-Equity Alliance
(D) Joint Ownership Alliance
Answer:
(C) Non-Equity Alliance

Question 61.
PERT is technique -……….
(A) of planning and control of time.
(B) to control cost and time
(C) used in profit analysis
(D) of controlling losses
Answer:
(A) of planning and control of time.

Question 62.
In BCG Matrix, are low-growth, low-share businesses and products.
(A) Cows
(B) Lion
(C) Dogs
(D) Hen
Answer:
(C) Dogs

Question 63.
“Competitor’sDifferentiation’, Customer Value’ and ‘Application of Competitiveness’ are the three important areas of:
(A) Value Chain Analysis
(B) Business Process Re-engineering
(C) Competitor Analysis
(D) Core Competence Concept
Answer:
(D) Core Competence Concept

Question 64.
What does “Question Mark (₹)” symbolize in BCG matrix?
(A) Remain Diversified
(B) Invest
(C) Stable
(D) Liquidate
Answer:
(A) Remain Diversified

Question 65.
Which of the following could be a Threat as per SWOT Analysis?
(A) Changes in technology
(B) A market vacated by an ineffective competitor
(C) Location of your business
(D) Lack of marketing expertise
Answer:
(A) Changes in technology

Question 66.
Arrange the steps in BCG Matrix in proper sequence:
1. Choose the Unit
2. Define the Market
3. Calculate Relative Market Share
4. Calculate Market Growth Rate
5. Draw Circles on the Matrix
Select the correct answer from options given below.
(A) 1,3, 2, 4, 5
(B) 1, 4, 3, 2, 5
(C) 1,2, 3, 4, 5
(D) 1,4, 3, 2, 5
Answer:
(D) 1,4, 3, 2, 5

Question 67.
Brand extension strategies are often used to delay the onset of the:
(A) Decline phase of the product life cycle
(B) Introduction phase of the product life cycle
(C) ‘Cash Cow’phase of the Boston Matrix
(D) Maturity phase of the product life cycle growth phase of the product life cycle
Answer:
(A) Decline phase of the product life cycle

Question 68.
Which of the following bases of competitive advantage is/are more sustainable?
(A) Benefit-based competitive advantage
(B) Price-based competitive advantage
(C) Cost-based competitive advantage
(D) All of the above
Answer:
(A) Benefit-based competitive advantage

Question 69.
The Boston Matrix essentially supports:
(A) An unbalanced portfolio of product
(B) A concentration on question marks
(C) Product specialization
(D) A balanced portfolio of products
Answer:
(D) A balanced portfolio of products

Question 70.
As per Ansoff Growth Matrix, market penetration refers to –
(A) A growth strategy where the business seeks to sell its existing products into new markets.
(B) A growth strategy where the business focuses on selling existing products into existing markets.
(C) A growth strategy where business aims to introduce new products into existing markets.
(D) A growth strategy where a business markets new products in new markets.
Answer:
(B) A growth strategy where the business focuses on selling existing products into existing markets.

Question 71.
The ADL matrix categorizes every segment of company according to its position which can be –
(A) embryonic, growth, strong, mature and aging
(B) dominant, growth, favourable, tenable and decline
(C) dominant, strong, favourable, tenable and weak
(D) embryonic, mature, strong, favourable and aging
Answer:
(C) dominant, strong, favourable, tenable and weak

Question 72.
A leading producer of tooth paste, advises its customers to brush teeth twice a day to keep breath fresh. In the context of Ansoff’s Product-Market Growth Matrix, identify, the type of growth strategies followed for the given case.
(A) Market Development
(B) Diversification
(C) Market Penetration
(D) Product Development
Answer:
(B) Diversification

Question 73.
In consulting engagement with General Electric Company in the 1970’s McKinsey & Company developed a cell portfolio matrix as a tool for screening GE’s large portfolio of strategic business units (SBU).
(A) Ten
(B) Nine
(C) Twelve
(D) Six
Answer:
(B) Nine

Question 74.
The BCG Matrix is based on –
(A) Industry attractiveness & Business Strength
(B) Industry Growth rate & Business strength
(C) Industry Attractiveness & Relative market share
(D) Industry Growth rate & Relative market share
Answer:
(D) Industry Growth rate & Relative market share

Question 75.
GE Matrix was developed by –
(A) General Motor Company
(B) General Product Company
(C) General Electric Company
(D) General Tube Company
Answer:
(C) General Electric Company

Question 76.
Active scanning involves the of continuous resources and, from time to time, supplementing them with existing resources as needed.
(A) Conscious selection
(B) Sub-conscious selection
(C) Analysis of threats to the business
(D) None of the above
Answer:
(A) Conscious selection

Question 77.
Which of the following executes strategy into everyday executions tactics?
(A) Goal setting
(B) Technical planning
(C) Operational planning
(D) None of the above
Answer:
(C) Operational planning

Question 78.
Which of the following refers to a situation where a product generates high profits which can then be invested in developing new products?
(A) Dogs
(B) Cash cows
(C) Question marks
(D) Growth stage
Answer:
(B) Cash cows

Question 79.
A business giant in hotel industry decides to enter into dairy business. In the context of Ansoff’s Product-Market Growth Matrix, identify, the type of growth strategies followed for the given case.
(A) Market Development
(B) Product Development
(C) Diversification
(D) Market Penetration
Answer:
(C) Diversification

Question 80.
As per ADL Matrix, company’s competitive position is determined by –
(A) Cash Cows & Growth Stage
(B) Market Improvement & Strategic Actions
(C) Strategic Actions & Competitor’s Strategies
(D) Strong & Stable Strategies
Answer:
(C) Strategic Actions & Competitor’s Strategies

Question 81.
What does Dogs symbolize in BCG matrix?
(A) Invest
(B) Harvest
(C) Build
(D) Divest
Answer:
(D) Divest

Question 82.
The ADL Matrix or Arthur D Little Strategic Condition Matrix is a Portfolio Management technique that is based on the –
(A) Market Growth Strategy (MGS)
(B) Corporate Portfolio Investment (CPI)
(C) Product Life Cycle (PLC)
(D) Strategic Business Units (SBU)
Answer:
(C) Product Life Cycle (PLC)

Question 83.
One of India’s premier utility vehicles manufacturing company ventures to foray into foreign markets. In the context of Ansoff’s Product-Market Growth Matrix, identify, the type of growth strategies followed for the given case.
(A) Market Development
(B) Product Development
(C) Market Penetration
(D) Market improvement
Answer:
(A) Market Development

Question 84.
What is shown in the Arthur D. Little (ADL) Matrix?
(A) It classifies strategy options according to market coverage and competitive advantage dimensions.
(B) This 5 × 4 model offers strategy prescriptions according to the competitive position of an organization and stage of maturity of its market.
(C) It relates an organization’s competitive position and industry attractiveness to determine appropriate strategies.
(D) It shows the relative market share and market growth rates of the organization’s portfolio of SBUs
Answer:
(B) This 5 × 4 model offers strategy prescriptions according to the competitive position of an organization and stage of maturity of its market.

Question 85.
There are four categories of industry maturity as per ADL Matrix:
(A) strong, favourable, mature and decline
(B) strong, favourable, tenable and weak
(C) embryonic, growth, mature and aging
(D) embryonic, growth, tenable and weak
Answer:
(C) embryonic, growth, mature and aging

Question 86.
If Industry Attractiveness is ‘High’ and Business Unit Strength is ‘Medium’, then which of the following strategy should be followed as per GE Matrix -……
(A) Invest/grow
(B) Hold/selective
(C) Divest/harvest
(D) Invest/selective
Answer:
(A) Invest/grow

Question 87.
A renowned auto manufacturing company launches ungeared scooters in the market.
In the context of Ansoff’s Product-Market Growth Matrix, identify, the type of growth strategies followed for the given case.
(A) Market Development
(B) Product Development
(C) Diversification
(D) Market Penetration
Answer:
(B) Product Development

Question 88.
Four generic strategies as discussed by Glueck and Jauch are –
(A) Stability Strategies, Expansion Strategies, Retrenchment Strategy & Combination Strategies
(B) Growth Strategies, Stable Strategies, Retrenchment Strategy & Combina-tion Strategies
(C) Stability Strategies, Expansion Strategies, Decline Strategy & Divest Strategies
(D) Corporate Strategies, Business Strategies, Operational Strategies & Functional Strategies
Answer:
(A) Stability Strategies, Expansion Strategies, Retrenchment Strategy & Combination Strategies

Question 89.
If the organization chooses to transform itself into a leaner structure and focuses on ways and means to reverse the process of decline, it adopts a –
(A) Turnaround Strategy
(B) Liquidation Strategy
(C) Divestment Strategy
(D) Differentiation Strategy
Answer:
(A) Turnaround Strategy

Question 90.
……………. is implemented by redefining the business by adding the scope of business substantially increasing the efforts of the current business.
(A) Expansion Strategy
(B) Differentiation Strategy
(C) Retrenchment Strategy
(D) Cost Leadership Strategy
Answer:
(A) Expansion Strategy

Question 91.
Dell Computer has decided to rely exclusively on direct marketing. This is example of –
(A) Differentiation Strategy
(B) Focus Strategy
(C) Cost Leadership Strategy
(D) Diversification Strategy
Answer:
(A) Differentiation Strategy

Question 92.
‘NDTV’, a TV Channel has identified a profitable audience niche in the electronic media. It has further exploited that niche through the addition of new channels like ‘NDTV’ Profit and ‘Image’. According to Porter, this is example of -………….
(A) Differentiation Strategy
(B) Focus Strategy
(C) Cost Leadership Strategy
(D) Diversification Strategy
Answer:
(B) Focus Strategy

Question 93.
In BCG matrix, what is the label of the horizontal axis?
(A) Relative Market share
(B) Business Strength
(C) Industry Growth Rate
(D) Market Growth Rate
Answer:
(A) Relative Market share

Question 94.
If Industry Attractiveness is ‘Low’ and Business Unit Strength is ‘High’, then which of the following strategy should be followed as per GE Matrix –
(A) Hold/selective
(B) Divest/harvest
(C) Invest/selective
(D) Invest/grow
Answer:
(A) Hold/selective

Question 95.
Car manufacturers ‘Maruti’ and ‘Tata Motors’ work on reducing their costs to sell their cars in popular segment at attractive prices. This is example of –
(A) Growth Strategy
(B) Turnaround Strategy
(C) Cost Leadership Strategy
(D) Unique Strategy
Answer:
(C) Cost Leadership Strategy

Question 96.
Another name for GE/McKinsey Matrix is –
(A) Business Making Matrix
(B) Business Planning Matrix
(C) Business Portfolio Matrix
(D) Business Grow Matrix
Answer:
(B) Business Planning Matrix

Question 97.
A business organization can redefine its business by divesting a major product line or market. This is supported by –
(A) Retrenchment Strategy
(B) Combination Strategy
(C) Growth Strategy
(D) Incline Strategy
Answer:
(A) Retrenchment Strategy

Question 98.
Statement I:
Stability strategy is not a ‘do-nothing’ strategy.
Statement II:
Third step in BCG Matrix is to calculate relative market share.
Select the correct answer from options given below.
(A) Statement I is true and II is false
(B) Statement II is true and I is false
(C) Both Statements are true
(D) Both Statements are false
Answer:
(B) Statement II is true and I is false

Question 99.
In BCG Matrix, what is the label of the Vertical axis?
(A) Relative Market share
(B) Business Strength
(C) National Growth Rate
(D) Market Growth Rate
Answer:
(D) Market Growth Rate

Question 100.
TOWS Matrix is an analytical tool that helps build over your and make the best use of available while also minimizing the ………
(A) Threats; Opportunities; Strengths
(B) Strengths; Opportunities; Threats
(C) Opportunities; Strength; Threats
(D) Strengths; Threats; Opportunities
Answer:
(B) Strengths; Opportunities; Threats

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

Capital Budgeting – Financial Management MCQ

Question 1.
Capital budgeting is the process –
(A) which help to make master budget of the organization.
(B) By which the firm decides how much capital to invest in business
(C) by which the firm decides which long-term investments to make.
(D) undertaken to analyze how make available various finance to the business.
Answer:
(C) by which the firm decides which long-term investments to make.

Question 2.
The values of the future net incomes discounted by the cost of capital are called –
(A) Average capital cost
(B) Discounted capital cost
(C) Net capital cost
(D) Net present values
Answer:
(D) Net present values

Question 3.
The decision to accept or reject a capital budgeting project depends on –
(A) an analysis of the cash flows generated by the project
(B) cost of capital that are invested in business/project.
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)

Question 4.
The Internal Rate of Return (IRR) criterion for project acceptance, under theoretically infinite funds is:
Accept all projects which have –
(A) IRR equal to the cost of capital
(B) IRR greater than the cost of capital
(C) IRR less than the cost of capital
(D) None of the above
Answer:
(B) IRR greater than the cost of capital

Question 5.
…………… is a project whose cash flows are not affected by the accept/reject decision for other projects.
(A) Mutually exclusive project
(B) Independent project
(C) Low cost project
(D) Risk free project
Answer:
(B) Independent project

Question 6.
Where capital availability is unlimited and the projects are not mutually exclusive, for the same cost of capital, following criterion is used?
(A) Net present value
(B) Internal Rate of Return
(C) Profitability Index
(D) Any of the above
Answer:
(D) Any of the above

Question 7.
………………. is the discount rate which should be used in capital budgeting.
(A) Cost of capital (K_o)
(B) Risk free rate (R_f)
(C) Risk premium (R_m)
(D) Beta rate (β)
Answer:
(A) Cost of capital (K_o)

Question 8.
Which of the following represents the amount of time that it takes for a capital budgeting project to recover its initial cost?
(A) Maturity period
(B) Payback period
(C) Redemption period
(D) Investment period
Answer:
(B) Payback period

Question 9.
Incorporating flotation costs into the analysis of a project will:
(A) have no effect on the present value of the project.
(B) increase the NPV of the project.
(C) increase the project’s rate of return.
(D) increase the initial cash outflow of the project.
Answer:
(D) increase the initial cash outflow of the project.

Question 10.
A project is accepted when:
(A) Net present value is greater than zero
(B) Internal Rate of Return will be greater than cost of capital
(C) Profitability index will be greater than unity
(D) Any of the above
Answer:
(D) Any of the above

Question 11.
When choosing among mutually exclusive projects, the project with –
(A) Longest payback is preferred
(B) Higher NPV get selected
(C) Quickest payback is preferred
(D) Lower cost of capital will be selected
Answer:
(C) Quickest payback is preferred

Question 12.
With limited finance and a number of project proposals at hand, select that package of projects which has:
(A) The maximum net present value
(B) Internal rate of return is greater than cost of capital
(C) Profitability index is greater than unity
(D) Any of the above
Answer:
(A) The maximum net present value

Question 13.
Statement I:
In case of capital rationing, a company is compelled to invest in projects having shortest payback period.
Statement II:
The shorter the payback period, the less risky is the project. Therefore, it can be considered as an indicator of risk.
Select the correct answer from the options given below:
(A) Statement I is true but Statement II is false.
(B) Statement II is true but Statement I: is false.
(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 14.
A Profitability Index (PI) of 0.92 for a ……….. project means that
(A) the project’s costs (cash outlay) are ?
(is) less than the present value of the project’s benefits.
(B) the project’s NPV is greater than zero.
(C) the project’s NPV is greater than 1.
(D) the project returns 92 cents in present value for each rupee invested.
Answer:
(D) the project returns 92 cents in present value for each rupee invested.

Question 15.
The shorter the payback period –
(A) the more risky is the project.
(B) the less risky is the project.
(C) less will the NPV of the project.
(D) more will the NPV of the project
Answer:
(B) the less risky is the project.

Question 16.
Which of the following statements is incorrect regarding a normal project?
(A) If the NPV of a project is greater than 0, then its PI will exceed 1.
(B) If the IRR of a project is 8%, its NPV, using a discount rate, K₀, greater than 8%, will be less than 0.
(C) If the Plot a project equals 0, then the project’s initial cash outflow equals the PV of its cash flows.
(D) If the IRR of a project is greater than the discount rate, K₀, then its PI will be greater than 1.
Answer:
(C) If the Plot a project equals 0, then the project’s initial cash outflow equals the PV of its cash flows.

Question 17.
Ranking projects according to their ability to repay quickly may be useful to firms:
(A) when experiencing liquidity constraints.
(B) when careful control over cash is required.
(C) to indicate the prospective investors specifying when their funds are likely to be repaid.
(D) All of the above
Answer:
(D) All of the above

Question 18.
Capital budgeting decisions are analyzed with help of weighted average and for this purpose –
(A) Component cost is used I
(B) Common stock value is used
(C) Cost of capital is used
(D) Asset valuation is used
Answer:
(C) Cost of capital is used

Question 19.
What is the difference between economic profit and accounting profit?
(A) Economic profit includes a charge for all providers of capital while accounting profit includes only a charge for debt.
(B) Economic profit covers the profit over the life of the firm, while accounting profit only covers the most recent accounting period.
(C) Accounting profit is based on current accepted accounting rules while economic profit is based on cash flows.
(D) All of the above are correct.
Answer:
(A) Economic profit includes a charge for all providers of capital while accounting profit includes only a charge for debt.

Question 20.
Which of the following is demerit of payback period?
(A) It is difficult to calculate as well as understand it as compared to accounting rate of return method.
(B) This method disregards the initial investment involved.
(C) It fails to take into account the timing of returns and the cost of capital.
(D) None of the above
Answer:
(C) It fails to take into account the timing of returns and the cost of capital.

Question 21.
A project whose acceptance does not prevent or require the acceptance of one or more alternative projects is referred to as
(A) Mutually exclusive project
(B) Independent project
(C) Dependent project
(D) Contingent project
Answer:
(B) Independent project

Question 22.
Which of the following is demerit of payback period?
(A) It does not indicate whether an investment should be accepted or rejected, unless the payback period is compared with an arbitrary managerial target.
(B) The method ignores cash generation beyond the payback period and this can be seen more a measure of liquidity than of profitability.
(C) This method makes no attempt to measure a percentage return on the capital invested and is often used in conjunction with other methods.
(D) All of the above
Answer:
(D) All of the above

Question 23.
When operating under a single-period capital-rationing constraint, you may first want to try selecting projects by descending order of their ……… in order to give yourself the best chance to select the mix of projects that adds most to firm value.
(A) Profitability Index (PI)
(B) Net Present Value (NPV)
(C) Internal Rate of Return (IRR)
(D) Payback Period (PBP)
Answer:
(A) Profitability Index (PI)

Question 24.
What is the idea behind project-specific required rates of return for a firm or division?
(A) Different projects should have different required rates of return because they are not alike with respect to risk.
(B) Each firm should have a different required rate of return because firms are not alike with respect to risk and have been created historically by projects taken that differ with regards to risk.
(C) A division of the firm will always have a required rate of return different from the firm’s overall weighted average cost of capital because the risk of the division always differs from that of the firm.
(D) All of the above
Answer:
(A) Different projects should have different required rates of return because they are not alike with respect to risk.

Question 25.
Which of the following statements is correct regarding the internal rate of return (IRR) method?
(A) Each project has a unique internal rate of return.
(B) As long as you are not dealing with mutually exclusive projects, capital rationing, or unusual projects having multiple sign changes in the cash-flow stream, the internal rate of return method can be used with reasonable confidence.
(C) The internal rate of return does not consider the time value of money.
(D) The internal rate of return is rarely used by firms today because of the ease at which net present value is calculated.
Answer:
(B) As long as you are not dealing with mutually exclusive projects, capital rationing, or unusual projects having multiple sign changes in the cash-flow stream, the internal rate of return method can be used with reasonable confidence.

Question 26.
Which of the following method of capital budgeting ignores the time value of money?
(A) Discounted payback period
(B) Net present value
(C) Internal rate of return
(D) None of the above
Answer:
(D) None of the above

Question 27.
Which of the following is not a potential for a ranking problem between two mutually exclusive projects?
(A) The projects have unequal lives that differ by several years.
(B) The costs of the two projects differ by nearly 30%.
(C) The two projects have cash flow patterns that differ dramatically.
(D) One of the mutually exclusive projects involves replacement while the other involves expansion.
Answer:
(D) One of the mutually exclusive projects involves replacement while the other involves expansion.

Question 28.
As per discounted payback period method, a project with –
(A) more discounted payback period will be selected.
(B) higher NPV will be preferred.
(C) low NPV will be preferred.
(D) less discounted payback period will be selected.
Answer:
(D) less discounted payback period will be selected.

Question 29.
A single, overall cost of capital is often used to evaluate projects because:
(A) it avoids the problem of computing the required rate of return for each investment proposal.
(B) it is the only way to measure a firm’s required return.
(C) it acknowledges that most new investment projects have about the same degree of risk.
(D) it acknowledges that most new investment projects offer about the same expected return.
Answer:
(A) it avoids the problem of computing the required rate of return for each investment proposal.

Question 30.
A project whose acceptance precludes the acceptance of one or more alternative projects is referred to as …………..
(A) Mutually exclusive project
(B) Independent project
(C) Dependent project
(D) Contingent project
Answer:
(A) Mutually exclusive project

Question 31.
The adjusted present value (APV) is best described as being
(A) equal to the discounted value of all cash flows after the discount rate is adjusted upward for additional risk
(B) equal to the discounted value of operating cash flows plus the present value of any tax-shield benefits less any flotation costs
(C) equal to the discounted value of operating cash flows plus the present value of any tax-shield
(D) benefits equal to the discounted value of operating cash flows less any flotation costs.
Answer:
(B) equal to the discounted value of operating cash flows plus the present value of any tax-shield benefits less any flotation costs

Question 32.
Which of the following is correct formula to calculate payback period reciprocal?
(A) (1/payback period) × 100
(B) (100/payback period) × 10
(C) (100/payback period) × β
(D) [(1/payback period) × β]÷ 100
Answer:
(A) (1/payback period) × 100

Question 33.
How ARR is calculated?
(A) (Average PAT/Initial Investment) × 100
(B) (Average NPV/Investment) × 100
(C) (Average PAT/Initial Investment) ÷ 100
(D) (Initial Investment/Average PAT) × 100
Answer:
(A) (Average PAT/Initial Investment) × 100

Question 34.
Some projects that a firm accepts will undoubtedly result in zero or negative returns. In light of this fact, it is best if the firm:
(A) Adjusts its hurdle rate (ie. cost of capital) upward to compensate for this fact.
(B) Adjusts its hurdle rate (ie. cost of capital) downward to compensate for this fact
(C) Does not adjust its hurdle rate up or down regardless of this fact
(D) Raises its prices to compensate for this fact.
Answer:
(C) Does not adjust its hurdle rate up or down regardless of this fact

Question 35.
If we add depreciation and other non cash expenses in profit after tax, the resulting figure is –
(A) Profit available for equity shareholder
(B) CFAT
(C) Net cash flow
(D) Free cash flow
Answer:
(B) CFAT

Question 36.
Lotus Corporation is trying to determine how to assign discount rates to the various projects proposed by its numerous international divisions. The company should put the greatest emphasis on which one of the following when assigning the discount rates?
(A) the geographic location where the project will be undertaken
(B) the currency exchange rate that will apply to the project
(C) the various types of risk associated with the project
(D) the experience of the managers of the division which is proposing the project
Answer:
(C) the various types of risk associated with the project

Question 37.
Which of the following is demer it of accounting rate of return (ARR) method?
(A) It does not take into accounting time value of money.
(B) It fails to measure properly the rates of return on a project even if the cash flows are even over the project life.
(C) It is biased against short-term projects in the same way that payback is biased against longer term ones.
(D) All of the above
Answer:
(D) All of the above

Question 38.
NPV = ?
(A) Project’s cash inflows minus the project’s cash outflows.
(B) Project’s cash inflows after tax minus the project’s cash outflows.
(C) Present value of the project’s cash inflows minus the present value of the project’s cash outflows.
(D) Present value of the project’s cash inflows minus the present value of the project’s cash outflows in initial year ignoring the present value of cash flows in subsequent years.
Answer:
(C) Present value of the project’s cash inflows minus the present value of the project’s cash outflows.

Question 39.
Lower standard deviation indicates –
(A) lower risk
(B) higher risk
(C) no risk at all
(D) highly favorable situation
Answer:
(A) lower risk

Question 40.
Consider following two statements.
I. The NPV decision rule specifies that all independent projects with a positive NPV should be accepted.
II. When choosing among mutually exclusive projects, the project with the largest (positive) NPV should be selected.
Select the true statement.
(A) I only
(B) Neither I nor II
(C) II only
(D) Both I and II
Answer:
(D) Both I and II

Question 41.
Which of the following statistical or mathematical technique of risk evaluation is used in capital budgeting?
(I) Certainty Equivalent Approach
(II) Standard Deviation
(III) Sensitivity Analysis
(IV) Probability Distribution Approach
Select the correct answer from the options given below –
(A) I only
(B) I and II only
(C) I, II and III only
(D) I, II, III and IV
Answer:
(D) I, II, III and IV

Question 42.
Which of the following statement is true in relation to NPV Method?
1. It considers the total benefits arising out of proposals over its lifetime.
2. It recognizes the time value of money.
3. It produces multiple rates, which can be confusing.
4. NPV can never be zero if cash flows are discounted by using risk free rate.
Select the correct answer from the options given below.
(A) 1 & 3
(B) 1,2 & 3
(C) 2,3 & 4
(D) 1 & 2
Answer:
(D) 1 & 2

Question 43.
………… is the ratio of assured cash flows to uncertain cash flows.
(A) Beta Factor (BF)
(B) Contingency Equivalent Factor
(C) Risk Premium Factor (RPF)
(D) Certainty Equivalent Factor (CEF)
Answer:
(D) Certainty Equivalent Factor (CEF)

Question 44.
……………. is an investment appraisal technique calculated by dividing the present value of future cash flows of a project by the initial investment required for the project.
(A) Indexed cost method
(B) Profitability index
(C) Cost benefit ratio
(D) Both (B) and (C)
Answer:
(D) Both (B) and (C)

Question 45.
Accept a project if the profitability index is:
(A) less than 1
(B) positive
(C) greater than 1
(D) negative
Answer:
(B) positive

Question 46.
Profitability index is actually a modification of the –
(A) Payback period method
(B) IRR Method
(C) Net present value method
(D) Risk premium method
Answer:
(C) Net present value method

Question 47.
………….. is a technique used to determine how different values of an independent variable impact a particular dependent variable under a given set of assumptions.
(A) Simulation Analysis
(B) Single Variable Analysis
(C) Sensitivity Analysis
(D) Sensex Analysis
Answer:
(C) Sensitivity Analysis

Question 48.
…………. of a capital budgeting project is the discount rate at which the Net Present Value (NPV) of a project equals zero.
(A) External Rate of Return (ERR)
(B) Risk Free Rate of Return (RFRR)
(C) Price Cost Method (PCM)
(D) Internal Rate of Return (IRR)
Answer:
(D) Internal Rate of Return (IRR)

Question 49.
Which of the following capital budgeting techniques takes into account the incremental accounting income rather than cash flows?
(A) Net present value
(B) Internal rate of return
(C) Accounting/simple rate of return
(D) Cash payback period
Answer:
(C) Accounting/simple rate of return

Question 50.
The IRR decision rule specifies that all independent projects –
(A) with positive NPV should be selected.
(B) with an IRR greater than the cost of capital should be accepted.
(C) having IRR greater economic value added should be selected.
(D) with an IRR greater than the cost of capital should be accepted though it have negative NPV.
Answer:
(B) with an IRR greater than the cost of capital should be accepted.

Question 51.
Which of the following techniques does not take into account the time value of money?
(A) Internal rate of return method
(B) Simple cash payback method
(C) Net present value method
(D) Discounted cash payback method
Answer:
(B) Simple cash payback method

Question 52.
If you are considering two projects namely, Project X & Project Y; NPV of the Project X is higher than Project Y but IRR of Project Y is greater than Project X then you will select –
(A) Project Y
(B) Project X
(C) Some other project
(D) None of the above
Answer:
(B) Project X

Question 53.
The current worth of a sum of money to be received at a future date is called:
(A) Real value
(B) Future value
(C) Present value
(D) Salvage value
Answer:
(C) Present value

Question 54.
The difference between the present value of cash inflows and the present value of cash outflows associated with a project is known as:
(A) Net present value of the project
(B) Net future value of the project
(C) Net historical value of the project
(D) Net salvage value of the project
Answer:
(A) Net present value of the project

Question 55.
Capital rationing refers to a situation –
(A) where a company cannot undertake projects as the cost of capital is less than required rate of return on projects.
(B) where company is confused in selection of more than one projects.
(C) where a company cannot undertake all positive NPV projects, it has identified because of shortage of capital.
(D) where cost of the projects is equal to present value leading NPV to zero.
Answer:
(C) where a company cannot undertake all positive NPV projects, it has identified because of shortage of capital.

Question 56.
If present value of cash outflow is equal to present value of cash inflow, the net present value will be:
(A) Positive
(B) Negative
(C) Zero
(D) Infinite
Answer:
(C) Zero

Question 57.
Generally, a project is considered acceptable if its net present value is:
(A) Negative or zero
(B) Negative or positive
(C) Positive or zero
(D) Negative
Answer:
(C) Positive or zero

Question 58.
An increase in the discount rate will:
(A) Reduce the present value of future cash flows.
(B) Increase the present value of future cash flows.
(C) Have no effect on net present value.
(D) Compensate for reduced risk.
Answer:
(A) Reduce the present value of future cash flows.

Question 59.
Using profitability index, the preference rule for ranking projects is:
(A) the lower the profitability index, the more desirable the project.
(B) the higher the profitability index, the more desirable the project.
(C) the lower the sunk cost, the more desirable the project.
(D) the higher the sunk cost, the more desirable the project.
Answer:
(B) the higher the profitability index, the more desirable the project.

Question 60.
A project whose cash flows are more than capital invested for rate of return then net present value will be
(A) Positive
(B) Independent
(C) Negative
(D) Zero
Answer:
(A) Positive

Question 61.
In mutually exclusive projects, project which is selected for comparison with others must have –
(A) Higher net present value
(B) Lower net present value
(C) Zero net present value
(D) All of the above
Answer:
(A) Higher net present value

Question 62.
Relationship between Economic Value Added (EVA) and Net Present Value (NPV) is considered as
(A) Valued relationship
(B) Economic relationship
(C) Direct relationship
(D) Inverse relationship
Answer:
(C) Direct relationship

Question 63.
In capital budgeting, positive net present value results in –
(A) Negative economic value added
(B) Positive economic value added
(C) Zero economic value added
(D) Percent economic value added
Answer:
(B) Positive economic value added

Question 64.
Cash inflows are revenues of project and are represented by –
(A) Hurdle number
(B) Relative number
(C) Negative numbers
(D) Positive numbers
Answer:
(D) Positive numbers

Question 65.
The process of planning expenditures that will influence the operation of a firm over a number of years is called –
(A) Investment
(B) Capital budgeting
(C) Net present valuation
(D) Dividend valuation
Answer:
(B) Capital budgeting

Question 66.
Which of the following is an example of a capital investment project?
(A) Replacement of worn-out equipment
(B) Expansion of production facilities
(C) Development of employee training programs
(D) All of the above are examples of capital investment projects.
Answer:
(D) All of the above are examples of capital investment projects.

Question 67.
The beta coefficient is associated with –
(A) Capital asset pricing model
(B) Dividend valuation model
(C) Risk-free rate plus premium model
(D) Tax-adjusted cost of debt
Answer:
(A) Capital asset pricing model

Question 68.
The term mutually exclusive investments mean:
(A) Choose only the best investments
(B) Selection of one investment pre-eludes the selection of an alternative
(C) The elite investment opportunities will get chosen.
(D) There are no investment options available.
Answer:
(B) Selection of one investment pre-eludes the selection of an alternative

Question 69.
Which method provides more confidence, the payback method or the net present value method?
(A) Payback because it provides a good timetable.
(B) Payback because it tells you when you break even.
(C) Net present value because it considers all inflows and outflows and the time value of money.
(D) Net present value because it does not need to use cost of capital.
Answer:
(C) Net present value because it considers all inflows and outflows and the time value of money.

Question 70.
To estimate an unknown number that lies between two known numbers is knows as –
(A) Capital rationing
(B) Capital budgeting
(C) Interpolation
(D) Amortization
Answer:
(C) Interpolation

Question 71.
Capital budgeting is the process of identifying analyzing and selecting investments project whose returns are expected to extend beyond –
(A) 3 years
(B) 2 years
(C) 1 year
(D) Months
Answer:
(C) 1 year

Question 72.
Indifference criteria whenBCR(Benifit Cost Ratio)?
(A) BCR > 1
(B) BCR = 1
(C) BCR < 1
(D) None of the above
Answer:
(B) BCR = 1

Question 73.
Criterion for IRR (Internal Rate of Return)?
(A) Accept, if IRR > Cost of capital
(B) Accept, if IRR < Cost of capital
(C) Accept, if IRR = Cost of capital
(D) None of the above
Answer:
(A) Accept, if IRR > Cost of capital

Question 74.
The categories of cash flows includes –
(A) Net initial investment
(B) Cash flow from operations after paying taxes
(C) Cash flow from terminal disposal after paying taxes
(D) All of the above
Answer:
(D) All of the above

Question 75.
The concept which explains that a money received in present time is more valuable than money received in future is classified as –
(A) Lead value of money
(B) Storage value of money
(C) Time value of money
(D) Cash value of money
Answer:
(C) Time value of money

Question 76.
The method which calculates the time to recoup initial investment of project in form of expected cash flows is classified as –
(A) Net value cash flow method
(B) Payback method
(C) Single cash flow method
(D) Lean cash flows method
Answer:
(B) Payback method

Question 77.
The rate of return to cover risk of investment and decrease in purchasing power as a result of inflation is classified as –
(A) Nominal rate of return
(B) Accrual accounting rate of return
(C) Real rate of return
(D) Required rate of return
Answer:
(A) Nominal rate of return

Question 78.
The payback period is multiplied to constant increase in yearly future cash flows to calculate –
(A) Cash value of money
(B) Net initial investment
(C) Net future value
(D) Time value of money
Answer:
(B) Net initial investment

Question 79.
The rate of return which is made up of risk free element and business risk element is classified as –
(A) Nominal rate of return
(B) Accrual accounting rate of return
(C) Real rate of return
(D) Required rate of return
Answer:
(C) Real rate of return

Question 80.
The project’s expected monetary loss or monetary gain by discounting all cash outflows and inflows using required rate of return is classified as –
(A) Net present value
(B) Net future value
(C) Net discounted value
(D) Net recorded cash value
Answer:
(A) Net present value

Question 81.
The decrease in purchasing power of any monetary unit such as euro, dollars etc. is classified as…
(A) Net investment parity
(B) Inflation
(C) Purchasing parity
(D) Buying parity
Answer:
(B) Inflation

Question 82.
When using the expected value criterion, it is assumed that the individual wants to
(A) Maximize return for a given level of risk
(B) Maximize return for maximum level of risk
(C) Maximize return irrespective of the level of risk
(D) All of the above
Answer:
(B) Maximize return for maximum level of risk

Question 83.
The profitability index may be used in investment decisions where capital rationing exists. In this context, when selecting investments for an optimal portfolio, the use of the profitability index is appropriate only where:
1. Projects are divisible.
2. Capital rationing occurs within a single investment period.
Which one of the following combinations (true/false) relating to the above statements is correct?

Answer:
(A)

Question 84.
Which of the following statements is true about mutually exclusive projects?
(A) They are not in direct competition with each other.
(B) They are in direct competition with each other.
(C) They are not evaluated based on shareholder wealth.
(D) They are never evaluated.
Answer:
(B) They are in direct competition with each other.

Question 85.
Why are projects with negative net present values (NPVs) unacceptable to a firm?
(A) Returns lower than the cost of capital result in firm failure.
(B) Returns with negative NPVs cause an equal profit ratio.
(C) Returns with negative NPVs are acceptable to a firm.
(D) Returns lower than the cost of capital result in higher profit ratios
Answer:
(A) Returns lower than the cost of capital result in firm failure.

Question 86.
Internal Rate of Return is defined as –
(A) The discount rate which causes the payback to equal one year.
(B) The discount rate which causes the NPV to equal zero.
(C) The ROE when the NPV equals 0.
(D) The ROE associated with project maximization.
Answer:
(B) The discount rate which causes the NPV to equal zero.

Question 87.
What are the two drawbacks associated with the payback period?
(A) The time value of money is ignored. It ignores cash flows beyond the payback period.
(B) The time value of money is considered. It ignores cash flows beyond the payback period.
(C) The time value of money is considered. It includes cash flows beyond the payback period.
(D) The time value of money is ignored. It includes cash flows beyond the payback period.
Answer:
(A) The time value of money is ignored. It ignores cash flows beyond the payback period.

Question 88.
Which of the following cash flows should not be considered relevant in calculating project cash flows?
(A) Opportunity costs
(B) Any effects caused by cannibalization
(C) Investments in net working capital as a result of making the investment
(D) Sunk costs
Answer:
(D) Sunk costs

Question 89.
Cash flows that should be considered for decision in hand are classified as –
(A) Relevant cash flows
(B) Irrelevant cash flows
(C) Marginal cash flows
(D) Transaction cash flows
Answer:
(A) Relevant cash flows

Question 90.
Nominal interest rates and nominal cash flows are usually reflected the –
(A) Inflation effects
(B) Opportunity effects
(C) Equity effects
(D) Debt effects
Answer:
(A) Inflation effects

Question 91.
In cash flow estimation and risk analysis, real rate will be equal to nominal rate if there is –
(A) No inflation
(B) High inflation
(C) No transactions
(D) No acceleration
Answer:
(A) No inflation

Question 92.
Real interest rate and real cash flows do not include –
(A) Equity effects
(B) Debt effects
(C) Inflation effects
(D) Opportunity effects
Answer:
(C) Inflation effects

Question 93.
Which of the following is not used in capital budgeting?
(A) Time value of money
(B) Sensitivity analysis
(C) Net assets method
(D) Cashflows
Answer:
(C) Net assets method

Question 94.
Which of the following is not incorporated in Capital Budgeting?
(A) Tax Effect
(B) Time Value of Money
(C) Required Rate of Return
(D) Rate of Cash Discount
Answer:
(D) Rate of Cash Discount

Question 95.
Which of the following is not applied in capital budgeting?
(A) Cash flows be calculated in incremental terms
(B) All costs and benefits are measured on cash basis
(C) All accrued costs and revenues be incorporated
(D) All benefits are measured on after tax basis.
Answer:
(C) All accrued costs and revenues be incorporated

Question 96.
A proposal is not a capital budgeting proposal if it:
(A) is related to Fixed Assets
(B) brings long-term benefits
(C) brings short-term benefits only
(D) has very large investment
Answer:
(C) brings short-term benefits only

Question 97.
Risk of a capital budgeting can be incorporated:
(A) Adjusting the Cash flows
(B) Adjusting the Discount Rate
(C) Adjusting the life
(D) All of the above
Answer:
(D) All of the above

Question 98.
In Certainty Equivalent Approach, the CE Factors for different years are:
(A) Generally increasing
(B) Generally decreasing
(C) Generally same
(D) None of the above
Answer:
(B) Generally decreasing

Question 99.
Which of the following is correct for Risk Adjusted Discount Rate (RADR)?
(A) Accept a project if NPV at RADR is negative
(B) Accept a project if IRR is more than RADR
(C) RADR is overall cost of capital plus risk-premium
(D) All of the above
Answer:
(C) RADR is overall cost of capital plus risk-premium

Question 100.
Expected Value of Cash flow, EVCF, is:
(A) Certain to occur
(B) Most likely cash flows
(C) Arithmetic average cash flow
(D) Geometric average cash flow
Answer:
(B) Most likely cash flows

Question 101.
Concept of joint probability is used in case of:
(A) Independent cash flows
(B) Uncertain cash flows
(C) Dependent cash flows
(D) Certain cash flows
Answer:
(C) Dependent cash flows

Question 102.
Decision-tree approach is used in:
(A) Proposals with longer life
(B) Sequential decisions
(C) Independent Cash flows
(D) Accept-Reject Proposal
Answer:
(B) Sequential decisions

Question 103.
Situation in which company replaces existing assets with new assets is classified as
(A) Replacement projects
(B) New projects
(C) Existing projects
(D) Internal projects
Answer:
(A) Replacement projects

Question 104.
The investment proposal with the greatest relative risk would have:
(A) Highest standard deviation of net present value.
(B) Highest coefficient of variation of net present value.
(C) Highest expected value of net present value.
(D) Lowest opportunity loss.
Answer:
(B) Highest coefficient of variation of net present value.

Question 105.
Probability-tree analysis is best used when cash flows are expected to be:
(A) Independent over time.
(B) Risk-free.
(C) Related to the cash flows in previous periods.
(D) Known with certainty.
Answer:
(C) Related to the cash flows in previous periods.

Question 106.
You are considering two mutually exclusive investment proposals, project A and project B. B’s expected value of net present value is $1,000 less than that for A and A has less dispersion. On the basis of risk and return, you would say that:
(A) Project A dominates project B.
(B) Project B dominates project A.
(C) Project A is more risky and should offer greater expected value.
(D) Each project is high on one variable, so the two are basically equal.
Answer:
(A) Project A dominates project B.

Question 107.
If two projects are completely independent (or unrelated), the measure of correlation between them is:
(A) 0
(B) 0.5
(C) 1.0
(D) -1.0
Answer:
(A) 0

Question 108.
Consider following two statements.
(I) Capital budgeting decisions are reversible in nature.
(II) An expansion decision is not a capital budgeting decision.
Select the correct answer from the options given below.

Answer:
(D)

Question 109.
Match List-I with List-II:

Select the correct answer from the options given below.

Answer:
(C)

Question 110.
Money Discount Rate is equal to:
(A) (1 + IR) × (1 + RDR) – 1
(B) (1 + IR) – (1 + RDR) -1
(C) (1 +RDR) – (1 + IR) -1
(D) (1 + RDR) + (1 + IR) -1
Answer:
(A) (1 + IR) × (1 + RDR) – 1

Question 111.
Real Discount Rate is equal to:
(A) (1 + IR) (1 + MDR) -1
(B) (1 + MDR) + (1 + IR) – 1
(C) (1 +MDR) ÷ (1 + IR) – 1
(D) (1 + MDR) – (1 + IR) – 1
Answer:
(C) (1 +MDR) ÷ (1 + IR) – 1

Question 112.
Consider following statements:
(1) Expected value of cash flows is equal to the arithmetic average of the cash flows.
(2) In case of capital budgeting, higher the standard deviation better the project is.
(3) In case of dependent cash flows, the risk is measured with reference to joint probabilities.
Select the correct statement.
(A) (1) False (2) False (3) False
(B) (1) False (2) True (3) True
(C) (1) True (2) True (3) False
(D) (1) False (2) False (3) True
Answer:
(D) (1) False (2) False (3) True

Question 113.
In the open-ended lease –
(A) The seller of an asset leases back the same asset from the purchaser.
(B) The lease arrangement is made immediately after the sale of the asset with the amount of the payments and the time period specified.
(C) The lessee has the option of purchasing the assets at the end of lease period.
(D) None of the above
Answer:
(C) The lessee has the option of purchasing the assets at the end of lease period.

Question 114.
Assume that a firm has accurately calculated the net cash flows relating to two mutually exclusive investment proposals. If the net present value of both proposals exceed zero and the firm is not under the constraint of capital rationing, then the firm should
(A) calculate the IRRs of these investments to be certain that the IRRs are greater than the cost of capital.
(B) compare the profitability index of these investments to those of other possible investments.
(C) calculate the payback periods to make certain that the initial cash outlays can be recovered within a appropriate period of time.
(D) accept the proposal that has the largest NP V since the goal of the firm is to maximize shareholder wealth and, since the projects are mutually exclusive, we can only take one.
Answer:
(D) accept the proposal that has the largest NP V since the goal of the firm is to maximize shareholder wealth and, since the projects are mutually exclusive, we can only take one.

Question 115.
Which of the following statements is correct regarding the risk-adjusted discount rate (RADR) approach?
(A) Under the RADR approach, we should accept a project if its net present value (NPV) calculated using a risk-adjusted discount rate is positive.
(B) Adjusting the firm’s overall cost of capital upward is required if the project or group are of higher than average risk.
(C) Under the RADR approach, we would still compare a project’s internal rate of return (IRR) to the firm’s overall weighted-average cost of capital in order to decide acceptance/rejection.
(D) Adjusting the firm’s overall cost of capital downward is required if the project or group are of lower than average risk.
Answer:
(A) Under the RADR approach, we should accept a project if its net present value (NPV) calculated using a risk-adjusted discount rate is positive.

Question 116.
Which one of the following projects – A, B, C or D – should be accepted? The expected return on the market is 16% and the risk-free rate is 6%.
(A) Project A, which has a beta of 0.50 and expected return of 11.2%.
(B) Project B, which has a beta of 2.50 and expected return of 25.4%.
(C) Project C, which has a beta of 1.25 and expected return of 18.2%.
(D) Project D, which has a beta of 1.00 and expected return of 15.8%.
Answer:
(A) Project A, which has a beta of 0.50 and expected return of 11.2%.

Question 117.
Damodhar is evaluating two conventional, independent capital budgeting projects (X & Y) by making use of the risk-adjusted discount rate (RADR) method of analysis. Projects X & Y have internal rates of return of 16% & 12%, respectively. RADR appropriate to Project X is 18%, while Project Y’sRADRisonly 10%. The company’s overall, weighted-average cost of capital is 14%. Damodhar should –
(A) Accept Project X and accept Project Y
(B) Accept Project X and reject Project Y
(C) Reject Project X and accept Project Y
(D) Reject Project X and reject Project Y
Answer:
(C) Reject Project X and accept Project Y

Question 118.
Two mutually exclusive projects are being considered. Neither project will be repeated again in the future after their current lives are complete. There-exists a potential problem though – the expected life of the first project is one year and the expected life of the second project is three years. This has caused the NPV and IRR methods to suggest different project preferences. What technique can be used to help make a better decision in this scenario?
(A) Rely on the NPV method and make your choice as it will tell you which one is best.
(B) Use the common-fife technique to replicate the one-year project three times and recalculate the NPV and IRR for the one-year project.
(C) Ignore the NPV technique and simply choose the highest IRR since managers are concerned about maximizing returns.
(D) In this situation, we need to rely on the profitability index (PI) method and choose the one with the highest PI.
Answer:
(A) Rely on the NPV method and make your choice as it will tell you which one is best.

Question 119.
In Certainty Equivalent Approach, the first step is to Convert uncertain cash flows to certain cash flows by multiplying it with the CE Factor and step two is –
(A) Discount the certain cash flows at the IRR to arrive at NP.
(B) Discount the certain cash flows at WACC rate to arrive at NP.
(C) Discount the certain cash flows at the risk free rate to arrive at NP.
(D) Discount the certain cash flows at the market rate of return to arrive at NP
Answer:
(C) Discount the certain cash flows at the risk free rate to arrive at NP.

Question 120.
Which of the following is correct formula to calculate risk-adjusted discount rate?

Answer:
(A)

Question 121.
You are considering two projects namely Project X and Project Y. Project X has low standard deviation but high coefficient of variation as compared to Project Y. Project Y has high standard deviation but low coefficient of variation as compared to Project X. Which project will you select?
(A) Project X only
(B) Both Project X & Project Y
(C) Neither Project nor & Project Y
(D) Project Y only
Answer:
(D) Project Y only

Question 122.
The coefficient of variation of net present value measures the ………
(A) Total risk of the project
(B) Relative risk of the project
(C) Highest expected value of net present value
(D) Market risk of the project
Answer:
(B) Relative risk of the project

Question 123.
Vayu’ Ltd. uses the Net Present Value (NPV) method, the Internal Rate of Return (IRR) method and Discounted Payback Period (DPP) to appraise its new investment. An investment opportunity was recently appraised using each of these methods and was estimated to provide a positive NPV of ₹ 1.5 million, an IRR of 15% and a DPP of 3 years. Later, it was discovered that the cost of capital of the company was lower than had been previously estimated. What would be the effect on the figures provided by each investment appraisal method of taking account of the lower cost of capital?

Answer:
(C)

Question 124.
A risk averse investor is considering four mutually exclusive investments, which have the following characteristics:

Which two of the above investments will the investor immediately reject?
(A) Alpha & Beta
(B) Alpha & Gamma
(C) Gamma & Delta
(D) Beta & Delta
Answer:
(C) Gamma & Delta

Question 125.
A approach to examining project risk occurs when the manager applies a probability distribution to factors such as market size, selling price, fixed and variable costs, and the useful life of the project. The manager then runs a computer program to determine the project worth by randomly selecting values for each variable, within the limits assigned. This is done numerous times to generate a complete risk-return analysis.
(A) Simulation
(B) Probability-tree
(C) Firm-portfolio
(D) Market risk
Answer:
(A) Simulation

Question 126.
A ……….. approach to examining project risk occurs when cash flows are arranged such that a cash flow in one period leads to several possible cash flow outcomes in the subsequent period. Each individual cash flow in the subsequent period then leads to several possible cash flow outcomes in its subsequent period. This process continues numerous times to generate a complete risk-return graphic.
(A) Simulation
(B) Probability-tree
(C) Firm-portfolio
(D) Market risk
Answer:
(B) Probability-tree

Question 127.
The probability in subsequent periods that is conditioned on what has occurred earlier is referred to as the –
(A) Initial probability
(B) Conditional probability
(C) Joint probability
(D) None of the above
Answer:
(B) Conditional probability

Question 128.
A firm that ignores risk differences (does not adjust for risk) when choosing new investment projects will generally –
(A) Reduce the overall risk of the firm overtime
(B) Not change the overall risk of the firm over time
(C) Increase the overall risk of the firm over time
(D) None of the above
Answer:
(C) Increase the overall risk of the firm over time

Question 129.
If two projects are completely and positively linearly dependent (or positively related), the measure of correlation between them is …………..
(A) 0
(B) +0.5
(C) +1
(D) -1
Answer:
(C) +1

Question 130.
The probability associated with the first portion of a complete branch of the probability tree is referred to as the……………..
(A) Initial probability
(B) Conditional probability
(C) Joint probability
(D) None of the above
Answer:
(A) Initial probability

Question 131.
The probability that a particular sequence of cash flows might occur is referred to as the………..
(A) Initial probability
(B) Conditional probability
(C) Joint probability
(D) None of the above
Answer:
(C) Joint probability

Question 132.
What technique is best used when cash flows are related to cash flows in previous periods?
(A) Cash flow analysis
(B) Risk aversion analysis
(C) Probability-tree analysis
(D) None of the above
Answer:
(C) Probability-tree analysis

Question 133.
When evaluating the risk and return of a project using the probability tree approach, what is the appropriate rate to discount each sequence of cash flows in the tree?
(A) Zero
(B) Risk-free rate
(C) Cost of capital
(D) Firm’s historical return on its stock
Answer:
(B) Risk-free rate

Question 134.
Consider the following two statements concerning finance leasing.
Statement I:
The lessor is responsible for the maintenance and servicing of the asset.
Statement II:
The period of the lease will cover all, or substantially all, of the useful economic life of the leased asset.
Select the correct answer from the options given below:

Answer:
(C)

Question 135.
Which of the following relate to finance leases as opposed to operating leases?
1. At the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.
2. Ownership of the asset remains with the lessor for the entire lease period.
3. Asset acquired under finance lease is shown as asset in the balance sheet of the lessee.
Select the correct answer from the options given below:
(A) 2 only
(B) 1 and 3 only
(C) 1 and 2 only
(D) 2 and 3 only
Answer:
(B) 1 and 3 only

Question 136.
AB Ltd. is considering either leasing an asset or borrowing to buy it, and is attempting to analyze the options by calculating the NPV of each. When comparing the two, AB Ltd. is uncertain whether they should include interest payments in their option to ‘borrow and buy’ as it is a future, incremental cash flow associated with that option. They are also uncertain which discount rate to use in the NPV calculation for the lease option. How should AB Ltd. treat the interest payments and what discount rate should they use?
Include interest — ₹ Discount Rate
(A) Yes — After tax cost of the loan if they borrow and buy
(B) Yes — AB Ltd.’s WACC
(C) No — After tax cost of the loan if they borrow and buy
(D) No — AB Ltd.’s WACC
Answer:
(C) No — After tax cost of the loan if they borrow and buy

Question 137.
Consider following two statements:
1. Risk analysis gives management better information about the possible outcomes that may occur so that management can use their judgment and experience to accept an investment or reject it.
2. In relation to capital budgeting, sensitivity analysis deals with the consideration of sensitivity of the NPV to different variables contributing to the NPV.
Select correct answer from the options given below:
(A) Both Statements are false
(B) Statement 1 is true while Statement 2 if false.
(C) Statement 2 is true while Statement 1 if false.
(D) Both Statements are true
Answer:
(D) Both Statements are true

Question 138.
Which of the following is advantage of sensitivity analysis?
(A) It compels the decision maker to identify the variables which affect the cash flow forecasts. This helps him in understanding the investment project in totality.
(B) It indicates the critical variables for which additional information may be obtained. The decision maker can consider actions which may help in strengthening the “weak spots” in the project
(C) It helps to expose inappropriate forecasts and thus guides the decision maker to concentrate on relevant variables.
(D) All of the above
Answer:
(D) All of the above

Question 139.
Which of the following is correct formula to calculate coefficient of variation?
(A) Standard deviation ÷ Expected NPV
(B) Standard deviation × Expected NPV
(C) Correlation × SD ÷ Expected NP
(D) None of the above
Answer:
(A) Standard deviation ÷ Expected NPV

Question 140.
Select odd one ……………
(A) Certainty Equivalent Approach
(B) Expected Net Present Value
(C) Simulation
(D) ARR
Answer:
(D) ARR

Question 141.
A project requires initial investment of ₹ 2,00,000 and estimated to generate cash flow after tax of ₹ 1,00,000,₹ 80,000, ₹ 40,000,₹ 20,000 &₹ 10,000 in next 5 years. What is the payback period of the project?
(A) 3 years and 4 months
(B) 2 years and 6 months
(C) 4 years and 2 months
(D) 2 years and 8 months
Answer:
(B) 2 years and 6 months

Question 142.
Y Ltd. is considering a project which requires initial investment of ₹ 6,75,000. Its cost of capital is 10%. Estimated cash flow after tax are as follows:
Year 1 — …………
Year 2 — 1,50,000
Year 3 — 6,60,000
Year 4 — 4,20,000
Year 5 — 4,20,000
What is projects discounted payback period?
(A) 3 years & 7.58 months
(B) 4 years & 4.12 months
(C) 3 years & 2.32 months
(D) 4 years & 8.11 months
Answer:
(C) 3 years & 2.32 months

Question 143.
Rakesh Ltd. is considering to invest in one of four projects for which an analyst has calculated ‘payback period reciprocal’ as 25%, 40%, 50% & 75% respectively for Project P, Q, R & S. Which project will be selected on ‘payback period’ method of capital budgeting?
(A) Project R
(B) Project P
(C) Project S
(D) Project Q
Answer:
(D) Project Q
Payback period reciprocal \(=\frac{1}{\text { Payback Period }} \times 100\)
Payback period of the Project P, Q, R & S project will be 4 years, 2.5 years, 2 years & 1.33 years. Since payback period of Project S is minimum; it will get selected.

Question 144.
Ramsey Ltd. wants to select one of machine out of two. Data for machines are given below:

Machine has to be written off over the period of 5 years by SLM.
The company will select –
(A) Machine A because its ARR is 15% while that of Machines B is 14%
(B) Machine B because it has higher average CFAT
(C) Machine A because it has higher average CFAT
(D) Machine B because its ARR is 16% while that of Machines A is 14%
Answer:
(D) Machine B because its ARR is 16% while that of Machines A is 14%

Question 145.
Following data is available for Project A whose initial investment is ₹ 50,000 and salvage value after 5 years is ₹ 3,750.

What is the NPV of the Project A if the Ke of the company is 10%? Ignore taxation.
(A) ₹ 5,710
(B) ₹ 6,690
(C) ₹ 6,800
(D) ₹ 7,216
Answer:
(B) ₹ 6,690

Question 146.
A Machine requires initial investment of ₹ 40,000 and expected to generate cash flow of ₹ 8,400,₹ 14,300 & ₹ 32,800 in next 3 years. Applicable tax rate is 30% and WACC of the company is 12%. The company will select machine because –
(A) It has positive NPV of ₹ 2,522
(B) It profitability index is 1.653 which is more than 1.
(C) Its IRR is between 14% to 15% which is more than WACC of the company.
(D) All of the above
Answer:
(C) Its IRR is between 14% to 15% which is more than WACC of the company.

Question 147.
Profitability index of Project ₹ is 1.20167 when its cash flow is discounted at 12%. Initial investment on project was ₹ 1,50,000. This project generates equal cash flow over the five years time. How much cash flow will be generated by the project each year?
(A) ₹ 50,000
(B) ₹ 40,000
(C) ₹ 60,500
(D) ₹ 40,897
Answer:
(A) ₹ 50,000

Question 148.
LMN Corporation is considering an investment that will cost ₹ 80,000 and have a useful life of 4 years. During the first 2 years, the net incremental after-tax cash flows are ₹ 25,000 per year and for the last 2 years they are ₹ 20,000 per year. What is the payback period for this investment?
(A) 3.2 year
(B) 3.5 year
(C) 4.0 year
(D) Cannot be determined with this information.
Answer:
(B) 3.5 year

Question 149.
Bhaskar Ltd. estimated that a proposed project’s 8-year net cash benefit will be ₹ 4,000 per year for years 1 to 8, with an additional terminal benefit of ₹ 8,000 at the end of the eighth year. Assuming that these cash inflows satisfy exactly required rate of return of 8 percent, the project’s initial cash outflow is closest to which of the following four possible answers?
(A) ₹ 27,308
(B) ₹ 25,149
(C) ₹ 14,851
(D) ₹ 40,000
Answer:
(A) ₹ 27,308

Question 150.
A project has the following cash inflows ₹ 34,444, ₹ 39,877, ₹ 25,000 & ₹ 52,800 for years 1 to 4, respectively. The initial cash outflow is ₹ 1,04,000. Which of the following four statements is correct concerning the project internal rate of return (IRR)?
(A) The IRR is less than 10%.
(B) The IRR is greater than 10%, but less than 14%.
(C) The IRR is greater than 14%, but less than 18%.
(D) The IRR is greater than or equal to 18%.
Answer:
(C) The IRR is greater than 14%, but less than 18%.

Question 151.
You must decide between two mutually exclusive projects.
Project X has cash flows of — ₹ 10,000, ₹ 5,000, ₹ 5,000 & ₹ 5,000, for years 0 through 3, respectively.
Project Y has cash flows of — ₹ 20,000, ₹ 10,000, ₹ 10,000 & ₹ 10,000; for years 0 through 3, respectively.
The firm has decided to assume that the appropriate cost of capital is 10% for both projects. Which project should be chosen? Why?
(A) X; Project X’s NPV > ProjectY’s NPV.
(B) X or Y; Makes no difference which you choose because the IRR for X is identical to the IRR for Y and both IRRs are greater than 10%, the cost of capital
(C) Y; Project Y’s NPV > Project X’s NPV
(D) Neither X nor Y; The NPVs of both projects are negative.
Answer:
(C) Y; Project Y’s NPV > Project X’s NPV

If you calculate R then it is same for both projects but when NPV and IRR gives conflicting results then NPV method is preferred and hence Project Y will be selected as its NPV is higher than Project X.

Question 152.
There are two mutually exclusive projects that have different lives. Project A has a 4-year life and Project B has a 5-year life. In replacement chain analysis, the earliest common life will occur when
Project A is replicated ………. times and
Project B is replicated ………. times.
(A) 5; 4
(B) 4; 5
(C) 20; 20
(D) Not possible to determine the answer
Answer:
(A) 5; 4

Question 153.
ABC Ltd. is considering investing in a project that costs ₹ 5,00,000 that will continue for next five years. The estimated salvage value is zero, tax rate is 35%. The company uses straight line depreciation for tax purposes and the proposed project has profit before charging depreciation of ₹ 2,20,000. Company’s cost of capital is 10%. What is the total present value for this project?
(A) ₹ 6,74,798
(B) ₹ 6,47,798
(C) ₹ 6,74,987
(D) ₹ 7,64,798
Answer:
(A) ₹ 6,74,798

Question 154.
ABC Ltd. is considering investing in a project that costs ₹ 5,00,000 that will continue for next five years. The estimated salvage value is zero, tax rate is 35%. The company uses straight line depreciation for tax purposes and the proposed project has profit before charging depreciation of ₹ 2,20,000. Company’s cost of capital is 10%. What is the Profitability Index of this project?
(A) 1.25
(B) 1.45
(C) 1.15
(D) 1.35
Answer:
(D) 1.35

Question 155.
ABC Ltd. is considering investing in a project that costs ₹ 5,00,000 that will continue for next five years. The estimated salvage value is zero, tax rate is 35%. The company uses straight line depreciation for tax purposes and the proposed project H has profit before charging depreciation of ₹ 2,20,000. Company’s cost of capital is 10%. What is the Payback Period of this project?
(A) 2.52 years
(B) 2.81 years
(C) 3.24 years
(D) 4.11 years
Answer:
(B) 2.81 years

Question 156.
ABC Ltd. is considering investing in a project that costs ₹ 5,00,000 that will continue for next five years. The estimated salvage value is zero, tax rate is 35%. The company uses straight line depreciation for tax purposes and the proposed project has profit before charging depreciation of ₹ 2,20,000. Company’s cost of capital is 10%. What is the IRR of this project?
(A) Between 10% to 15%
(B) Between 10% to 20%
(C) Between 18% to 19%
(D) Between 22% to 23%
Answer:
(D) Between 22% to 23%

Question 157.
Machine Z purchased at year zero for ₹ 5,00,000 which will be depreciated @25% for 5 years on written down value basis and then will be sold at ₹ 70,000. Capital gain tax rate is 35% while corporate income tax rate is 40%. What is the present value of cash flow of machine at 5th year if cost of capital is 12%?
(A) ₹ 68,326
(B) ₹ 39,690
(C) ₹ 49,345
(D) ₹ 87,028
Answer:
(C) ₹ 49,345

Question 158.
Machine P purchased at year zero at ₹ 10,00,000 which will be depreciated @ 25% for 5 years on written down value basis and then will be sold at ₹ 1,40,000. Tax rate is 35%. Profit before depreciation at 5th year is ₹ 84,000. What is the present value of CFAT at year five if cost of capital is 12%?
(A) ₹ 1,45,346
(B) ₹ 1,54,643
(C) ₹ 1,43,546
(D) ₹ 1,54,463
Answer:
(A) ₹ 1,45,346

Question 159.
Net present value of Machine X is ₹ 29.15 lakh. Cost of capital is 10%. Cash flow after tax for years 1 to 5 is ₹ 35 lakh, ₹ 80 lakh, ₹ 90 lakh, ₹ 75 & ₹ 20 lakh respectively. What is the purchase cost of Machine X?
(A) Not sufficient information is given.
(B) ₹ 150 lakh
(C) ₹ 100 lakh
(D) ₹ 200 lakh
Answer:
(D) ₹ 200 lakh

Question 160.
Following data is collected by the junior of finance department of Maya Ltd.

Both project requires same investment amounting to ₹ 400 lakh. Cost of capital of Maya Ltd. is 10%.
Managing Director (MD) thinks that project D should be selected whereas Company Secretary (CS) suggests to choose Project C. Who is Correct? Select correct answer from the options given below.
(A) MD as NPV @ 20% of Project D is more than Project C.
(B) CS as IRR of Project C is less than Project D.
(C) MD as IRR of Project D is more than Project C.
(D) CS as NPV 10% of Project C is more than Project D.
Answer:
(D) CS as NPV 10% of Project C is more than Project D.

Company’s cost of capital is 10% and NPV of Project C at that cost of capital is higher so it will get selected even though IRR of the Project D is higher because when NPV and IRR gives conflicting results; preference should be given to NPV Method.

Question 161.
A company is considering whether it should spend ₹ 10 lakhs on a project to manufacture and sell a new product. Unit variable cost of the product is ₹ 15. It is expected that the new product can be sold at ₹ 25 per unit. The annual fixed costs are ₹ 50,000. The project will have a life of 6 years with scrap value of ₹ 50,000. Cost of capital is 15%. The only uncertain factor is the volume of sales. Ignore taxation. Minimum volume of sales required to justify the project is -……….
(A) 30,852 units
(B) 33,487 units
(C) 28,453 units
(D) 34,741 units
Answer:
(A) 30,852 units

Question 162.
A project whose useful life is 4 years has IRR of 15% and will save cost of ₹ 1,60,000 annually. What is the project cost i.e. initial investment?
(A) ₹ 10,66,667
(B) ₹ 4,60,000
(C) ₹ 5,32,800
(D) ₹ 4,56,800
Answer:
(D) ₹ 4,56,800
Annual cost saving = Cash inflow = 1,60,000
Useful life = 4 years
IRR = 15%
At 15% IRR, total present value of cash inflow is equal to initial cash outlay.
Total present value of cash inflow @ 15% for 4 years is 2.855 = 1,60,000×2.855
= 4,56,800
Thus, Project cost = 4,56,800.
PV Table and annuity table will be provided in exam.

Question 163.
A professional kitchen is attempting to choose between gas and electricity for its main heat source. Once a choice is made, the kitchen intends to keep to that source indefinitely. Each gas oven has a net present value (NPV) of ₹ 50,000 over its useful life of 5 years. Each electric oven has an NPV of ₹ 68,000 over its useful life of 7 years. The cost of capital is 8%. Which should the kitchen choose and why?
(A) Gas because its average NPV per year is higher than electric
(B) Electric because its NPV is higher than gas
(C) Electric because its equivalent annual benefit is higher
(D) Electric because it lasts longer than gas
Answer:
(C) Electric because its equivalent annual benefit is higher
Equivalent NPV of gas oven = \(\frac{50,000}{3.9927}=12,523\)
Equivalent NPV of electric oven = \(\frac{68,000}{5.2064}=13,061\)

Question 164.
Universe Ltd. has an investment budget of ₹ 250 lakhs. The management wants to complete the financial appraisal before making the investment.

Company follows straight line method of will charging depreciation. Tax rate is 50%. Estimate life = 10 years (both projects).
You will advise to select – 2;
(A) Project B, as its payback period is less as compared to Project A
(B) Project B, as its payback period and ARR are higher than Project A.
(C) Project B, as its ARR is 10.35% where as ARR of Project A is 10.20%
(D) Project A, as its payback period is less and ARR is higher than Project B.
Answer:
(D) Project A, as its payback period is less and ARR is higher than Project B.

Question 165.
James Co. is considering a project with an initial cost of ₹ 6.2 Million. The project will produce cash inflows of ₹ 1.8 Million a year for 5 years. Firm uses the subjective approach to assign discount rates to projects. For this project, the subjective adjustment is +2%. Firm has a pre-tax cost of debt of 6.7% and a cost of equity of 9.4%. The debt-equity ratio is 0.6 and the tax rate is 35%. What is the NPV of the project?
(A) ₹ 8,11,000
(B) ₹ 7,90,900
(C) ₹ 7,42,060
(D) ₹ 7,10,200
Answer:
(D) ₹ 7,10,200

Subjective adjustment is +2%; thus rate will be 9.51% (7.51% + 2%).
18.00,000 × 3.839 = 69,10,200.
NPV = 69,10,200 – 62,00,000 = 7,10,200

Question 166.
Yogesh Ltd. has to make a choice between two identical machines, in terms of capacity, A and B. They have been designed differently, but do exactly the same job. Machine A costs ₹ 1,87,500 and will last for 3 years. It costs ₹ 50,000 p.a. to run. Machine B is an economy model costing only ₹ 1,25,000, but will last for only 2 years. It costs ₹ 75,000 p.a. to run. The cash flows of Machine A and B are real cash flows. The costs are forecasted in rupees of constant purchasing power. Ignore taxes. The opportunity cost of capital is 9%. Which machine the Yogesh Ltd. should buy?
(A) Machine B as its present value of cash outflow is less than Machine A.
(B) Machine A as its present value of cash outflow is less than Machine B.
(C) Machine B as it is cheaper than Machine A.
(D) Machine A as its equivalent present value of cash outflow is less than Machine B.
Answer:
(D) Machine A as its equivalent present value of cash outflow is less than Machine B.


Analysis: Company should buy Machine A since equivalent annual cash outflow is less than that of Machine B.

Question 167.
The net present value of a proposed project is ₹ 20,000 at a discount rate of 5% and (₹ 28,000) at 10%. What is the internal rate of return of the project, to the nearest one decimal place?
(A) 7.08%
(B) 7.05%
(C) 2.03%
(D) 8.06%
Answer:
(A) 7.08%

Question 168.
Monika Ltd. is considering investing in two competing projects: Delta & Gamma. Delta has NPV of ₹ 16,500 and IRR of 17%. Details of the estimated cash flows of Gamma are as follows:

The business has a cost of capital of 10%. Which of the following combinations is correct concerning the NPV and IRR of the two projects?

Answer:
(C)

Question 169.
ABC Ltd. wishes to undertake a project requiring an investment of ₹ 7,32,000 which will generate equal annual inflows of ₹ 1,46,400 in perpetuity. What is the IRR of the project?
(A) 20%
(B) 25%
(C) 400%
(D) 500%
Answer:
(A) 20%

Question 170.
A company purchases a non-current asset with a useful economic life of ten years for ₹ 12,50,000. It is expected to generate cash flows over the 10 year period of ₹ 2,50,000 p.a. before depreciation. The company charges depreciation over the life of the asset on SLM. At the end of the period it will be sold for ₹ 2,50,000. What is the ARR for the investment (based on average profits & average investment)? Ignore Taxation.
(A) 20%
(B) 15%
(C) 33%
(D) 25%
Answer:
(C) 33%

Question 171.
Tanishka is considering an investment in a new process. The new process will require an increase in stocks of ₹ 30,000 during the first year. There will also be an increase in debtors outstanding of ₹ 40,000 and an increase of creditors outstanding of ₹ 35,000 during the first year. The new process will use machinery that was purchased immediately before the first year of operations at a cost of ₹ 3,00,000. The machinery is depreciated using SLM and has an estimated life of 5 years and no residual value. During the first year, the net operating profit before depreciation from the new process is expected to be ₹ 1,80,000. The business uses the NPV method when evaluating investment proposals. When undertaking the NPV calculations, what would be the estimated net cash flow during the first year of the project? (Ignore taxation)
(A) ₹ 85,000
(B) ₹ 2,15,000
(C) ₹ 1,45,000
(D) ₹ 1,55,000
Answer:
(C) ₹ 1,45,000
Cash outflow = 30,000 + 40,000 – 35,000 = 35,000; Cash inflow = 1,80,000 – 35,000 = 1,45,000

Question 172.
LW Co. has a half empty factory on which it pays ₹ 5,000 p.a. If it takes on a new project, it will have to move to a new bigger factory costing ₹ 17,000 p.a. and it could rent the old factory out for ₹ 3,000 p.a. until the end of the current lease. What is the rental cost to be included in the project appraisal?
(A) ₹ 14,000
(B) ₹ 17,000
(C) ₹ 9,000
(D) ₹ 19,000
Answer:
(A) ₹ 14,000

Question 173.
The one year rate of inflation is expected to be 3%. The one year money discount rate is 6-3%. The one year real rate of discount is:
(A) 3-30%
(B) 3-20%
(C) 9-30%
(D) 9-49%
Answer:
(B) 3-20%
(1 + MDR) = (1 + RDR) × (1 + IR)
(1 + 0.063) = (1 + RDR) × (1 + 0.03)
1.063 = 1 + RDR × 1.03
1.032 = 1 + RDR
RDR = 0.032 i..e. 3.2%

Question 174.
The one year rate of inflation is expected to be 5%. The one year real discount rate is 10%. The one year money rate of discount is:
(A) 10%
(B) 13%
(C) 13.3%
(D) 15.5%
Answer:
(D) 15.5%
(1 + MDR) = (1 + RDR) × (1 + IR)
1 + MDR = (1 + 0.10) × (1 + 0.05)
1 + MDR = 1.1 × 1.05
1 + MDR = 1.155
MDR = 0.155 i..e. 15.5%

Question 175.
A company has 31 December as its accounting year end. On 1.1.2014 a new machine costing ₹ 2,00,000 is purchased. The company expects to sell the machine on 31.12.2015 for ₹ 3,50,000. The rate of corporation tax for the company is 30% and the same rate is applicable for capital profit/loss. Tax-allowable depreciation is obtained at 25% on the reducing balance basis. The company makes sufficient profits to obtain relief for capital allowances as soon as they arise. If the company’s cost of capital is 15%, what is the NPV?
(A) Positive ₹ 32,290
(B) Negative ₹ 32,290
(C) Positive ₹ 1,78,445
(D) Negative ₹ 1,78,445
Answer:
(A) Positive ₹ 32,290

Question 176.
A company has 31 December as its accounting year end. On 1.1.2014 a new machine costing ₹ 20,00,000 is purchased. The company expects to sell the machine on 31.12.2015 for ₹ 3,50,000. The rate of corporation tax for the company is 30% and the same rate is applicable for capital profit/loss. Tax-allowable depreciation is obtained at 25% on the reducing balance basis, and a balancing allowance is available on disposal of the asset. The company makes sufficient profits to obtain relief for capital allowances as soon as they arise. If the company’s cost of capital is 15%, what is the NPV?
(A) Negative ₹ 13,48,040
(B) Negative ₹ 13,44,080
(C) Positive ₹ 13,48,040
(D) Positive ₹ 13,44,080
Answer:
(B) Negative ₹ 13,44,080

Question 177.
A project has the following estimated cash inflows.
Year 1: — ₹ 1,00,000
Year 2: — ₹ 1,25,000
Year 3: — ₹ 1,05,000
Working capital is required to be in place at the start of each year equal to 1096 of the cash inflow for that year. The cost of capital is 1096. What is the present value of the working capital?
(A) Nil
(B) (30,036)
(C) (2,735)
(D) 33,000
Answer:
(B) (30,036)
Year 0 10,000 × 1.000 = 10,000
Year 1 = 12,500 × 0.909 = 11,363
Year 2 = 10,500 × 0.826 = 8,673
10,000 + 11,363 + 8,673 = 30,036

Question 178.
A company has to make a choice between two machines X and Y. The two machines are designed differently, but have identical capacity and do exactly the same job. Machine X cost ₹ 5,50,000 and will last for 3 years. It costs ₹ 1,25,000 per year to run. Machine Y is an economy model costing ₹ 4,00,000, but will last for 2 years and costs ₹ 1,50,000 per year to run. These are real cash flows. The costs are forecasted in rupees of constant purchasing power. Cost of capital is 12%. Ignore Taxes. Which machine company should buy?
(A) Machine X
(B) Machine Y
(C) Any Machine
(D) Any machine other than X and Y
Answer:
(A) Machine X

Question 179.
A Ltd. is considering the purchase of a machine which will perform some operations which are at present performed by workers. Machines X and Y are alternative models. The following details are available for year:

Depreciation will be charged on straight line basis. Tax rate is 30%. Cost of capital is 10%. A Ltd. will select –
(A) Machine X as it has higher NP V than Machine Y
(B) Machine Y as it has higher profitability index
(C) Machine X as it has higher profitability index
(D) Machine Y as it has higher ARR than Machine X
Answer:
(C) Machine X as it has higher profitability index

Question 180.
ANP Ltd. is providing the following information:
Annual cost of saving — ₹ 48,000
Useful life — 5 years
Salvage value Zero
Internal rate of return — 15%
Profitability index — 1.05
What is projects initial investment?
(A) ₹ 1,60,900
(B) ₹ 1,60,896
(C) ₹ 1,60,494
(D) ₹ 1,60,499
Answer:
(B) ₹ 1,60,896
Annual cost saving = Cash inflow = 48,000
Useful life = 5 years
IRR = 15%
At 15% IRR, total present value of cash inflow is equal to initial cash outlay.
Total present value of cash inflow @ 15% for 5 years is 3.353
= 48,000 × 3.352 = 1,60,896.
Thus, Project cost = 1,60,896.

Question 181.
Using the data of above question calculate payback period.
(A) 3.35 years
(B) 3.43 years
(C) 3.53 years
(D) 3.76 years
Answer:
(A) 3.35 years
1,60,896/48,000 = 3.35 year

Question 182.
GOL Ltd. is providing the following. What is cost of capital of GOL Ltd.?
(A) 12%
(B) 13%
(C) 14%
(D) 15%
Answer:
(B) 13%
Annual cost saving = Cash inflow = 96,000
Useful life = 5 years
IRR = 15%
At 15% IRR, total present value of cash inflow is equal to initial cash outlay.
Total present value of cash inflow @ 15% for 5 years is 3.353
= 96,000 × 3.353 = 3,21,888
Thus, Project cost = 3,21,888.
Calculation of cost of capital:

96,000x = 3,37,982
x = 3.521
Looking at present value table, discount factor for 5 years is 3.521
Hence, Cost of capital = 13%
Net present value = 3,37,982 – 3,21,888 = 16,094

Question 183.
Using the data of above question calculate NPV.
(A) ₹ 16,940
(B) ₹ 16,409
(C) ₹ 16,094
(D) ₹ 16,904
Answer:
(C) ₹ 16,094
Annual cost saving = Cash inflow = 96,000
Useful life = 5 years
IRR = 15%
At 15% IRR, total present value of cash inflow is equal to initial cash outlay.
Total present value of cash inflow .
15% for 5 years is 3.353 = 96,000 × 3.353 = 3,21,888
Thus, Project cost = 3,2 1,888.
calculation of cost of capitaL

96,000x = 3,37,982
x = 3.521
Looking at present value table, discount factor for 5 years is 3.521
Hence, Cost of capital 13%
Net present value = 3,37,982 – 3,2 1,888 = 16,094

Question 184.
In a capital rationing situation (investment limit ₹ 25 lakhs), suggest the most desirable feasible combination on the basis of the following data:

Suggest which combination of project should be selected.
(A) A & C
(B) B & D
(C) C & D
(D) A & B
Answer:
(D) A & B

From the above analysis it is observed that Project A & B combination gives highest NPV; hence projects A & B combination should be adopted as it will maximize wealth.

Question 185.
S Ltd. has ₹ 10,00,000 allocated for capital budgeting purposes. Following proposals and associated profitability indexes have been determined:

Which of the above investments should be undertaken? Assume that projects are indivisible and there is no alternative use of the money allocated for capital budgeting
(A) 1, 2 & 6
(B) 3, 4 & 5
(C) 2, 4 & 6
(D) 1, 3 & 5
Answer:
(B) 3, 4 & 5

Selection of Projects:
(1) Profitability Index Method: Assuming the projects are indivisible and there is no alternative use of unutilized amount, S Ltd. is advised to undertake investment in Projects 1, 3 & 5, which will give NPV of Rs. 1,76,000 and unutiized amount will be Rs. 1,50,000.
(2) Net Present Value Method: As per this method Projects 3,4 & 5 can be undertaken which will Rs. 1,91,000 and no money will remain unspent.
Suggestion: From the above analysis, we can observe that, selection of Projects under NP’ Method will maximize S Ltd. net cash inflow by Rs. 15,000 (1,91,000 – 1,76,000). Hence, it is suggested to undertake Projects 3, 4 & 5.

Question 186.
Calculate payback period for following two machines.

Answer:
(A)
Net cash inflow of Machine X and Y are 4,500 and 6,000 respectively.
Machine X = 4,000/4,500 = 0.88 year
Machine Y = 18,000/6,000 = 3 year

Question 187.
PT Ltd. is a manufacturer of plastic products. Company is considering computerizing the company’s ordering, inventory and billing procedures. The annual savings from computerization include a reduction of 4 clerical employees with annual salaries of ₹ 50,000 each. ₹ 30,000 from reduced production delays caused by raw materials inventory problems. ₹ 25,000 from lost sales due to inventory stock-outs and ₹ 18,000 associated with timely billing procedures. The purchase price of the system is ₹ 2,50,000 and installation costs are ₹ 50,000. These outlays will be capitalized (depreciated) on SLM basis to a zero salvage value, which is also its market value at the end of 5 years. New system requires two computer specialists with annual salaries of ₹ 80,000 per person. Also annual operating (cash) expenses of ₹ 22,000 are estimated to be required. Tax rate is 40% and cost of capital is 12%. Calculate cash flow after tax likely to be generated per year by this project.
(A) ₹ 76,800
(B) ₹ 78,600
(C) ₹ 75,700
(D) ₹ 77,500
Answer:
(B) ₹ 78,600

Question 188.
Take the data of above question and calculate Payback Period.
(A) 4.87 year
(B) 3.56 year
(C) 3.82 year
(D) 4.51 year
Answer:
(C) 3.82 year

Question 189.
Take the data of above question and calculate PI.
(A) 0.945
(B) 0.495
(C) 0.549
(D) 0.954
Answer:
(A) 0.945

Question 190.
Project X involves an initial outlay of Rs. 16.2 million. Its life span is expected to be 3 years. The cash streams generated by it are expected to be as follows:

IRR = ?
(A) 14.33%
(B) 15.79%
(C) 12.40%
(D) 15.30%
Answer:
(D) 15.30%

Question 191.
The initial outlay of the project is ₹ 1,00,000 and it generates cash inflow of ₹ 50,000, ₹ 40,000, ₹ 30,000 & ₹ 20,000 in the 4 years of its life span. Cost of capital is 10%. You are required to calculate Cost Benefit Ratio.
(A) 1.147
(B) 1.474
(C) 1.389
(D) 1.578
Answer:
(A) 1.147

Question 192.
Software Enterprise is considering the purchase of computer system for its research and development division. The operating cost excluding depreciation are expected to be ₹ 7,00,000 p.a. It is estimated that the useful life of the system would be 6 years, at the end of which the disposal value is expected to be ₹ 1,00,000. Tangible benefit expected from the system in the form of reduction in design and draftsmanship costs would be ₹ 12,00,000 p.a. Gain arising from disposal of used assets may be considered tax-free. Corporate tax rate is 35%. CFAT = ?
(A) ₹ 5,66,667
(B) ₹ 6,17,444
(C) ₹ 5,23,333
(D) ₹ 7,34,222
Answer:
(C) ₹ 5,23,333

Question 193.
Nishce Ltd. is an all equity financed company. The current market price of the share is ₹ 180. It had just paid a dividend of ₹ 15 per share and expected future growth in dividends is 12%. Currently, it is the evaluating a proposal requiring funds of ₹ 20,00,000 with annual inflow of ₹ 10,00,000 for 3 years. Find out the NPV of the proposal if it is financed from retained earnings.
(A) ₹ 64,300
(B) ₹ 63,400
(C) ₹ 66,400
(D) ₹ 63,600
Answer:
(B) ₹ 63,400

Question 194.
Narayan Ltd. is an all equity financed company. The current market price of the share is ₹ 180. It had just paid a dividend of ₹ 15 per share and expected future growth in dividends is 12%. Currently, it is the evaluating a proposal requiring funds of ₹ 20,00,000 with annual inflow of ₹ 10,00,000 for 3 years. Find out the NPV of the proposal if it is financed by issuing fresh equity (floatation costs 5%).
(A) ₹ 47,400
(B) ₹ 47,900
(C) ₹ 46,488
(D) ₹ 42,445
Answer:
(B) ₹ 47,900

Question 195.
Xpert Engineering Ltd. is considering buying one of the following two mutually exclusive investment projects:
Project A: Buy a machine that requires an initial investment outlay of ₹ 1,00,000 and will generate CFAT of ₹ 30,000 per year for 5 years.
Project B: Buy a machine that requires an initial investment outlay of ₹ 1,25,000 and will generate CFAT of ₹ 27,000 per year for 8 years.
The company uses 10% cost of capital to evaluate the projects.
The company will select –
(A) Project B as its NPV is high than Project A.
(B) Project B as its equivalent NPV is high than Project A.
(C) Project A as its equivalent NPV is high than Project B.
(D) Project A as its NPV is high than Project B.
Answer:
(C) Project A as its equivalent NPV is high than Project B.

Question 196.
Electrofast Ltd. is manufacturing electronic equipments in which Component-X is used, which is purchased from a local supplier at a cost of ₹ 40 each. In order to bring down cost and improve its competitiveness, the company has a proposal to install a machine for the manufacture of Component-X. It has the following two options:
Installation of semi-automatic machine involving annual fixed expenses of ₹ 22 lakh and a variable cost of ₹ 18 per component manufactured.
Installation of automatic machine involving an annual fixed cost of ₹ 40 lakh and a variable cost of ₹ 15 per component manufactured. Calculate components required to be produced to justify the installation of the machine
(A) 1,00,000 units & 1,60,000 units
(B) 50,000 units & 80,000 units
(C) 1,50,000 units & 1,00,000 units
(D) 1,40,000 units & 1,80,000 units
Answer:
(A) 1,00,000 units & 1,60,000 units

Question 197.
The management of Techno Craft Ltd. is evaluating the following data of a capital project:
Annual cost saving (₹) — 80,000
Useful life (Years) — 5
Internal rate of return (%) — 12
Profitability index (PI) — 1.2705
Project Cost = ?
(A) ₹ 2,44,800
(B) ₹ 2,84,800
(C) ₹ 2,88,400
(D) ₹ 2,48,400
Answer:
(C) ₹ 2,88,400

Question 198.
Take the data from above question and calculate payback period.
(A) 3.605 years
(B) 3.642 years
(C) 4.605 years
(D) 4.208 years
Answer:
(A) 3.605 years

Question 199.
Take the data from above question and calculate cost of capital.
(A) 8%
(B) 6%
(C) 5%
(D) 3%
Answer:
(D) 3%

Question 200.
A company is considering three methods of attracting customers to expand its business by undertaking – (A) advertising campaign; (B) display of neon signs; and (C) direct delivery service. The initial outlay for each alternative is as under:
A ₹ 1,00,000
B ₹ 1,50,000
C ₹ 1,50,000
If A is carried out, but not B, it has an NPV of ₹ 1,25,000. If B is done, but not A, B has an NPV of ₹ 45,000. However, if both are done, then NPV is ₹ 2,00,000. The NPV of the delivery system C is ₹ 90,000. Its NPV is not dependent on whether A or B is adopted and the NPV of A or B does not depend on whether C is adopted. Which of the investments should be made by the company if Firm has no budget constraint?
(A) The firm should adopt mode A + C only. The outlay would be ₹ 2,50,000 & total NPV would be ₹ 2,15,000.
(B) The firm should adopt mode B + C only. The outlay would be ₹ 3,00,000 & total NPV would be ₹ 1,35,000
(C) The firm should adopt mode A only. The outlay would be ₹ 1,00,000 & total NPV would be ₹ 1,25,000
(D) The firm should adopt all the three modes of attracting customers. Its outlay would be ₹ 4,00,000 and the expected NPV would be ₹ 2,90,000.
Answer:
(D) The firm should adopt all the three modes of attracting customers. Its outlay would be ₹ 4,00,000 and the expected NPV would be ₹ 2,90,000.

No Budget Constraint: The firm should adopt all the three modes of attracting customers. Its outlay in this case would be ₹ 4,00,000 and the expected NPV would be ₹ 2,90,000.
Budget Constraint: If the budget constraints are limited to ₹ 2,50,000 then the firm should adopt mode A + C only. In this case, the outlay would be ₹ 2,50,000 and the total NPV would be ₹ 2,15,000

Question 201.
A company is considering three methods of attracting customers to expand its business by undertaking – (A) advertising campaign; (B) display of neon signs; and (C) direct delivery service. The initial outlay for each alternative is as under:
A ₹ 1,00,000
B ₹ 1,50,000
C ₹ 1,50,000
If A is carried out, but not B, it has an NPV of ₹ 1,25,000. If B is done, but not A, B has an NPV of ₹ 45,000. However, if both are done, then NPV is ₹ 2,00,000. The NPV of the delivery system C is ₹ 90,000. Its NPV is not dependent on whether A or B is adopted and the NPV of A or B does not depend on whether C is adopted. Which of the investments should be made by the company if the budgeted amount is only ₹ 2,50,000?
(A) The firm should adopt mode. A + B only. The outlay would be ₹ 2,50,000 & total NPV would be ₹ 2,00,000
(B) The firm should adopt mode B + C only. The outlay would be ₹ 3,00,000 & total NPV would be ₹ 1,35,000
(C) The firm should adopt mode A + C only. The outlay would be ₹ 2,50,000 & total NPV would be ₹ 2,15,000.
(D) None of the above
Answer:
(C) The firm should adopt mode A + C only. The outlay would be ₹ 2,50,000 & total NPV would be ₹ 2,15,000.

No Budget Constraint: The firm should adopt all the three modes of attracting customers. Its outlay in this case would be ₹ 4,00,000 and the expected NPV would be ₹ 2,90,000.
Budget Constraint: If the budget constraints are limited to ₹ 2,50,000 then the firm should adopt mode A + C only. In this case, the outlay would be ₹ 2,50,000 and the total NPV would be ₹ 2,15,000

Question 202.
A company is faced with decision to purchase or acquire on lease a machine. Cost of the machine is ₹ 2,53,930. The asset can be financed by taking loan on which interest is payable @15% and loan will be paid in 5 equal installments inclusive of interest. Tax rate is 40%. Assume loan instalment is payableat the end of each year. What will be the loan instalment amount for each year?
(A) ₹ 75,800
(B) ₹ 65,278
(C) ₹ 67,800
(D) ₹ 66,824
Answer:
(A) ₹ 75,800

Question 203.
X Ltd. faced with decision to purchase or acquire on lease a machine. Cost of the machine is ₹ 5,07,860. The asset can be financed by taking loan on which interest is payable @15% and loan will be paid in 5 equal instalments inclusive of interest. Tax rate is 40%. Assume loan instalment is payable at the beginning of the year. What will be the loan instalment amount for each year?
(A) ₹ 1,19,778
(B) ₹ 1,29,580
(C) ₹ 1,31,570
(D) ₹ 1,45,452
Answer:
(C) ₹ 1,31,570

Question 204.
A company can obtain an asset on lease by paying 5 equal lease rentals annually. Such lease rentals are payable at the end of the year. The leasing company desires a return of 10% on the gross value of the asset. Tax rate is 40%. Cost of capital is 9%. The cost of the asset is ₹ 7,61,790. Calculate the lease rental payable by the company each year.
(A) ₹ 2,01,000
(B) ₹ 1,95,833
(C) ₹ 1,98,563
(D) ₹ 2,10,000
Answer:
(A) ₹ 2,01,000

Question 205.
A company can obtain an asset on lease by paying 5 equal lease rentals annually. Such lease rentals are payable at the beginning of the year. The leasing company desires a return of 10% on the gross value of the asset. Tax rate is 40%. Cost of capital is 9%. The cost of the asset is ₹ 7,61,790. Calculate the lease rental payable by the company each year.
(A) ₹ 1,79,667
(B) ₹ 1,80,600
(C) ₹ 1,87,504
(D) ₹ 1,82,683
Answer:
(D) ₹ 1,82,683

Question 206.
Z Ltd. can acquire a machine by taking 15% loan or on lease basis from leasing company. Cost of machine is ₹ 1,26,965. Tax rate is 40%. The leasing company desires a return of 10% on the gross value of the asset. The present value of cash flow under buying option is ₹ 87,528. What should be the annual lease rental to be charged by the leasing company to match the loan option?
(A) ₹ 37,900
(B) ₹ 37,805
(C) ₹ 37,424
(D) ₹ 37,501
Answer:
(D) ₹ 37,501
PV Factor = 15 (1 – 0.4) = 9%
Let the lease rental be ‘*’

O.6x × 3.89 = 87,528
2.334x = 87,528
x = 37501

Question 207.
Agrani Ltd. is in the business of manufacturing bearings. Some more product lines are being planned to be added to the existing system. The cost of machine is ₹ 40,00,000 having a useful life of 5 years with the salvage value of ₹ 8,00,000. The full purchase value of machine can be financed by 20% loan repayable in 5 equal instalments falling due at the end of each year. Calculate the figure of interest payable at the end of 5th year.
(A) ₹ 4,08,831
(B) ₹ 2,08,138
(C) ₹ 2,21,813
(D) ₹ 3,12,318
Answer:
(C) ₹ 2,21,813

Question 208.
Following data are furnished by Lalita Leasing Ltd.:
Investment cost — ₹ 1,250 lakhs
Primary lease term — 5 years
Residual value — Nil
Pre-tax required rate return — 24%
Company wants to charge equated lease rentals Le. equal amount of lease rental per year. Lease rental payable at the end of each year = ?
(A) ₹ 437.35 lakh
(B) ₹ 457.53 lakh
(C) ₹ 453.73 lakh
(D) ₹ 455.37 lakh
Answer:
(D) ₹ 455.37 lakh

Question 209.
Following data are furnished by XY Leasing Ltd.:
Investment cost — ₹ 1,250 lakhs
Primary lease term — 5 years
Residual value — Nil
Pre-tax required rate of return — 25%
Company wants to charge stepped lease rentals (annual increase of 15%).
Lease rental for the 3rd year = ?
(A) ₹ 436.26 lakh
(B) ₹ 501.68 lakh
(C) ₹ 379.36 lakh
(D) ₹ 225.25 lakh
Answer:
(A) ₹ 436.26 lakh

Question 210.
Apple Ltd. has decided to invest in earth-moving equipment which costs ₹ 5,50,000. The company can take it on lease for 7 years at ₹ 90,000 p.a. payable in advance. Alternatively, it can borrow at 20%. Asset can be written-off over 6 years under straight line method of depreciation. Asset’s useful life is ₹ years. In the terminal year the asset will be sold for ₹ 40,000. Tax rate is 30%. At 6th year principle amount contained in loan installment amount will be –
(A) ₹ 88,265
(B) ₹ 1,05,918
(C) ₹ 1,27,323
(D) ₹ 1,08,426
Answer:
(B) ₹ 1,05,918

Question 211.
A company buys a machine for ₹ 10,000 and sells it for ₹ 2,000 at the end of year 3. Running costs of the machine are:
Year 1 = ₹ 3,000
Year 2 = ₹ 5,000
Year 3 = ₹ 7,000
If a series of machines are brought, run and sold on an infinite cycle of replacements, what is the equivalent annual cost of the machine if the discount rate is 10%?
(A) ₹ 22,114
(B) ₹ 8,288
(C) ₹ 246
(D) ₹ 7,371
Answer:
(B) ₹ 8,288

Question 212.
T Ltd. is considering an investment in one of two mutually exclusive projects. Company is committed to maximizing the wealth of its shareholders. Details of each project, which have the same level of risk, are as follows:

Which project should be selected and for what reason?
(A) Project Alpha because it has the shorter discounted payback period
(B) Project Alpha because it has the higher net present value
(C) Project Beta because it has the higher profitability index
(D) Project Beta because it has the higher internal rate of return
Answer:
(B) Project Alpha because it has the higher net present value

Question 213.
Taxmann is considering to take a new project. Management use Certainty Equivalent (CE) approach to evaluate the projects. The project is expected to generate cash flow of ₹ 57,500 for next 5 years. CE Factors are 0.90, 0.85, 0.75, 0.70 & 0.65. Projects requires initial investment of ₹ 1,50,000. Company’s cost of capital is 12% and risk free borrowing rate is 7%. What is the NPV of this project?
(A) ₹ 24,486
(B) ₹ 38,103
(C) ₹ 33,603
(D) ₹ 27,542
Answer:
(C) ₹ 33,603

Question 214.
Present value at year 3 is ₹ 35,190 by using CE Approach. CE Factor is 0.75. Risk free rate is 7%. Cost of capital is 11%. What is the cash flow of year 3?
(A) ₹ 57,500
(B) ₹ 55,500
(C) ₹ 52,500
(D) ₹ 56,500
Answer:
(A) ₹ 57,500
PV factor at 7% for year 3 is 0.816.
Cash flow 35,190 ± 0.8 16 ÷ 0.75 = 57,500

Question 215.
A company has ₹ 5,00,000 available for investment and is considering the following four divisible, but not repeatable, projects to invest in:

What is the maximum net present value the company can generate from its investment?
(A) ₹ 1,95,000
(B) ₹ 1,45,000
(C) ₹ 1,35,000
(D) ₹ 1,10,000
Answer:
(C) ₹ 1,35,000

Question 216.
X Ltd. is considering to start a new project for which it has gathered following data:
Cash Flow — Probability
1,08,000 — 0.1
2,16,000 — 0.4
4,32,000 — 0.4
5,40,000 — 0.1
Calculate the expected cash flow.
(A) ₹ 3,42,000
(B) ₹ 3,18,000
(C) ₹ 3,24,000
(D) ₹ 3,32,000
Answer:
(C) ₹ 3,24,000

Question 217.
X Ltd. is considering to start a new project for which it has gathered following data:

Compute the risk associated with the project.
(A) 89.88
(B) 9.30
(C) 11.62
(D) 8.97
Answer:
(B) 9.30

Question 218.
A company is considering Projects X and Y with following information:

Which project will you recommend and why?
(A) Project Y as its higher expected NPV.
(B) Project X as its coefficient of variation is high.
(C) Project Y as its coefficient of variation is less.
(D) Project X as its risk ie. standard deviation is less.
Answer:
(C) Project Y as its coefficient of variation is less.
On the basis of information about standard deviation of Project X & Y, the Project X is better as it has lower standard deviation (i.e. risk). However, the coefficient of variation for these projects may be found as follows:

Project Y = \(\mathrm{Y}=\frac{3,600}{11,000}=0.327\)
Project Y is better as its CV is lesser than Project X.

Question 219.
Laxmi Ltd. is considering a proposal to buy one of the two machines. Each machine requires investment of ₹ 34,375 and has useful life of 12 years. Estimates associated with these two machines are as follows:

(A) The company will select Machine X as its NP V is high in optimistic scenario
(B) The company will select Machine Y as its NPV is high in optimistic scenario
(C) Purchasing Machine Y will be more risky as NPV is negative as high as ₹ 7,523 while if Machine X is purchased, the NPV can be negative only ₹ 2,980.
(D) Purchasing Machine Y will be more risky as NPV is negative as high as ₹ 28,954 while if Machine X is purchased, the NPV can be negative only ₹ 4,560.
Answer:
(D) Purchasing Machine Y will be more risky as NPV is negative as high as ₹ 28,954 while if Machine X is purchased, the NPV can be negative only ₹ 4,560.

Analysis: Purchasing Machine Y will be more risky as XPV is negative as high as 28,954 while if Machine X is purchased, the NPV can be negative only 4,560. Hence, it advised to purchase Machine X.

Question 220.
Following data is available for Project Q:

Project requires initial investment of ₹ 180 Crore. Calculate the profitability index of the Project P.
(A) 0.25
(B) 1.25
(C) 1.35
(D) 1.45
Answer:
(B) 1.25
Expected NPV (15 × 0.2) + (30 × 0.3) + (60 × 0.3) + (75 × 0.2) = 45
Total present value 45 Crore + 180 Crore = 225 Crore
Profitability Index 225/180 = 1.25

Question 221.
Following data is available for Project P:
NPV ( in Crore) — Probability
15 — 0.1
30 — 0.4
60 — 0.4
75 — 0.1
Calculate co-efficient of variation for the Project P.
(A) 0.42
(B) 0.43
(C) 0.44
(D) 0.45
Answer:
(A) 0.42

Question 222.
B Ltd. is considering the renovation of its one of department. The renovation will cost 10 lakh. Its CFAT sensitive to various events as show below:

Company estimates that the probability distribution of incremental CFAT will exists for 4 years. The company’s cost of capital is 10%. What is the project expected NPV?
(A) ₹ 3,41,300
(B) ₹ 3,13,400
(C) ₹ 3,31,400
(D) ₹ 3,00,340
Answer:
(C) ₹ 3,31,400

Question 223.
A project is expected to generate CFAT of ₹ 3,56,000. Other data relating to project are as follows:
Useful life = 6 years.
Risk free rate = 8%
Certainty factor = 0.9
Tax rate = 35%
Initial investment = ₹ 12,00,000.
Depreciation Method = SLM.
Calculate risk adjusted IRR of the project using rates of 8% & 16%.
(A) 14.62%
(B) 18.51%
(C) 16.47%
(D) 15.49%
Answer:
(D) 15.49%

Question 224.
Raja & Co. desires to take a project whose cost is ₹ 12,000 and useful life is 4 years. Expected annual cash flows are ₹ 4,500 p.a. Cost of capital is 14%. Calculate the sensitivity of the project cost in percentage given that:
PVAF_(14%,4): 2.9137
(A) 10%
(B) 8.72%
(C) 12.56%
(D) 9.27%
Answer:
(D) 9.27%

Question 225.
Following forecasts are made about a proposal which is being evaluated by a firm:
Initial outlay : ₹ 1,50,000
Life: 4 years
CFAT: ₹ 56,250
PVAF_(14%,3): 2.3216
PVAF_(14%,4): 2.9137
Calculate the sensitivity of the annual cash flows.
(A) 8.48%
(B) 9.32%
(C) 7.77%
(D) 8.84%
Answer:
(A) 8.48%

2.9137x – 1,50,000 = 0
2.9137x = 1,50,000
= 51,481
The CFAT can decrease from the present level of ₹ 56,250 to ₹ 51,481 before NPV becomes zero. So, the CFAT have a margin of ₹ 4,769.
Margin for CFAT = \(\frac{4,769}{56,250} \quad \times 100=8.48 \%\)

Question 226.
Rani & Co. desires to take a project whose cost is ₹ 12,000 and useful life is 4 years. Expected annual cash flows are ₹ 4,500 p.a. Cost of capital is 14%. Calculate the sensitivity of the ‘cost of capital’ in percentage given that:
PVAF_(14%,4) : 2.9137
PVAF _(18%,4): 2.6667
(A) 29%
(B) 22%
(C) 22%
(D) 64%
Answer:
(A) 29%

4,500x- 12000=0
4,500x= 12,000
x = 2.6667
The PVAF 26667 is found for 4 years in 18% column in the PVAF table. Thus, the discount rate can increase from the present level of 14% to 18% before the NPV becomes zero. Therefore, there is margin of 4% (18% – 14%) or 2996 (Le. 4/14 ×100).

Question 227.
X Ltd. is considering a project with following cash flow:
Cost of the plant: 70,000

The cost of capital is 8%. Measure the sensitivity of the project to the change in level of plant cost.
PVAF_(8%1): 0.926
PVAF_(8%2): 0.857
(A) 8. 92%
(B) 7. 50%
(C) 9. 16%
(D) 8. 00%
Answer:
(D) 8. 00%

If the present value of running cost increases by 5,605 the NPV will become zero. Therefore sensitivity for running cost is.
\(\frac{5,605}{39,945} \times 100=14.03 \%\)
If the present value of savings decreases by 5,605 the NPV will become zero. Therefore sensitivity for savings is –
\(\frac{5,605}{1,15,550} \times 100=4.85 \%\)

Question 228.
Y Ltd. is considering a project with following cash flow:
Cost of the plant: 70,000

The cost of capital is 8%. Measure the sensitivity of the project to the change in level of running cost.
PVAF_(8%1): 0.926
PVAF_(8%2): 0.857
(A) 15.06%
(B) 13.07%
(C) 14.03%
(D) 12.08%
Answer:
(C) 14.03%

If the present value of running cost increases by 5,605 the NPV will become zero. Therefore sensitivity for running cost is.
\(\frac{5,605}{39,945} \times 100=14.03 \%\)
If the present value of savings decreases by 5,605 the NPV will become zero. Therefore sensitivity for savings is –
\(\frac{5,605}{1,15,550} \times 100=4.85 \%\)

Question 229.
Z Ltd. is considering a project with following cash flow:
Cost of the plant: 70,000

The cost of capital is 8%. Measure the sensitivity of the project to the change in level of savings.
PVAF_(8%1): 0.926
PVAF_(8%2): 0.857
(A) 3.58%
(B) 4.85%
(C) 8.54%
(D) 6.78%
Answer:
(B) 4.85%

If the present value of running cost increases by 5,605 the NPV will become zero. Therefore sensitivity for running cost is.
\(\frac{5,605}{39,945} \times 100=14.03 \%\)
If the present value of savings decreases by 5,605 the NPV will become zero. Therefore sensitivity for savings is –
\(\frac{5,605}{1,15,550} \times 100=4.85 \%\)

Question 230.
A project has expected NPV of 1,22,000. Its coefficient of variation is 0.7377. Risk free rate is 8% and cost of capital is 10%. What is the standard deviation of project?
(A) 1,00,000
(B) 80,000
(C) 90,000
(D) 88,889
Answer:
(C) 90,000
1,22,000 × 0.7377 = 89,999
i.e 90,000

Question 231.
Following data is available for Project A:
Net cash outlay — 11,00,000
Project life 5 Years
Annual cash inflow — ₹ 30,000
Coefficient of variation — 0.4
Company selects the risk adjusted rate of discount on the basis of coefficient of variation.

Determine the risk adjusted net present value of the Project A.
(A) 6,550
(B) 7,940
(C) 8,150
(D) 9,340
Answer:
(C) 8,150

Question 232.
Following financial information relates to an investment project:


What is the sensitivity of the net present value of the investment project to a change in sales volume?
(A) 7.1%
(B) 2.6%
(C) 5.1%
(D) 5.3%
Answer:
(B) 2.6%
If the present value of sales decreases by 1,300 the NPV will become zero. Therefore sensitivity for sales is-
\(\frac{1,300}{50,025} \times 100=2.6 \%\)

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

Working Capital Management – Financial Management MCQ

Question 1.
Working capital is also known
(A) Operation capital
(B) Operating capital
(C) Current assets capital
(D) Capital relating to main projects of the company
Answer:
(B) Operating capital

Question 2.
A positive working capital means that –
(A) the company is able to pay-off its long-term liabilities.
(B) the company is able to select profitable projects.
(C) the company is unable to meet its short-term liabilities.
(D) the company is able to pay-off its short-term liabilities.
Answer:
(D) the company is able to pay-off its short-term liabilities.

Question 3.
Working capital =………….
(A) Core current assets less current liabilities
(B) Core current assets less core current liabilities
(C) Liquid assets less current liabilities
(D) Current assets less current liabilities
Answer:
(D) Current assets less current liabilities

Question 4.
Other things remaining constant, if the debtors increases as compared to last year it means –
(A) Company has poor credit policy
(B) Company has positive working capital
(C) Company has negative working capital
(D) Company has no working capital
Answer:
(B) Company has positive working capital

Question 5.
Which of the following will be considered while calculating working capital?
(1) Short Term Advances
(2) Stock of WIP
(3) Short Term Investments
(4) Perpetual inventory policy
Select the correct answer from the options given below.
(A) (2) & (3)
(B) (1) & (3)
(C) (1), (2) & (3)
(D) All of the above except (4)
Answer:
(D) All of the above except (4)

Question 6.
Contingencies are – ………..
(A) Added to gross working capital
(B) Deducted from gross working capital
(C) Contingencies are not considered in financial management; it is considered in accounts only
(D) None of the above
Answer:
(A) Added to gross working capital

Question 7.
For reducing and controlling working capital requirement which of the following step is required to be taken –
(A) Increase in manufacturing cycle
(B) Increase of credit period allowed by creditors to the extent that do not affect the production.
(C) Increase in credit period given to customers
(D) All of the above
Answer:
(B) Increase of credit period allowed by creditors to the extent that do not affect the production.

Question 8.
Working capital is a highly effective barometer of a company’s efficiency and effectiveness.
(A) operational and servicing
(B) long term
(C) operational and financial
(D) positive and negative
Answer:
(C) operational and financial

Question 9.
Statement I:
Maintaining adequate working capital is not just important in the short-term. Sufficient liquidity must be maintained in order to ensure the survival of the business in the long-term as well.
Statement II:
Even a profitable business may fail if it does not have adequate cash flow to meet its liabilities as they fall due.
Select the correct answer from the options given below.
(A) Statement I is correct while Statement II is incorrect.
(B) Statement II is correct while Statement I is incorrect.
(C) Both Statement I and Statement II are correct.
(D) Both Statement I and Statement II are incorrect.
Answer:
(C) Both Statement I and Statement II are correct.

Question 10.
While calculating working capital based on cash cost –
(A) Depreciation is ignored
(B) Non-cash items are not considered
(C) Debtors are calculated on the basis of cost of goods sold and not on sale price
(D) All of the above
Answer:
(D) All of the above

Question 11.
A negative working capital means that -………..
(A) the company has no current assets at all
(B) the company currently is unable to meet its short-term liabilities
(C) the company has negative earnings before interest and tax
(D) the company currently is able to meet its short-term liabilities
Answer:
(B) the company currently is unable to meet its short-term liabilities

Question 12.
Which of the following analyzes the accounts receivable, inventory and accounts payable cycles in terms of number of days?
(A) Operation cycle
(B) Current asset cycle
(C) Operating cycle
(D) Business cycle
Answer:
(C) Operating cycle

Question 13.
Which of the following method is not used for calculating working capital cycle?
(A) Percentage of sales method
(B) Regression analysis method
(C) Operating cycle approach
(D) Trial and error method
Answer:
(D) Trial and error method

Question 14.
Which of the following is correct formula to calculate WIP Conversion Period?

Answer:
(C)

Question 15.
Initial Working Capital -…………
(A) supplies the funds necessary to meet the current working expenses.
(B) is used to raise the volume of production by improvement or extension of machinery.
(C) is required at the time of the commencement of business
(D) represents the amount utilized at the time of contingencies.
Answer:
(C) is required at the time of the commencement of business

Question 16.
Which of the following is determinant of working capital?
(1) Nature and size of business
(2) Manufacturing cycle
(3) Credit policy
(4) Production policy
Select the correct answer from the options given below.
(A) (1) only
(B) (1) and (2) only
(C) (1), (2) and (3) only
(D) (1), (2), (3) and (4)
Answer:
(D) (1), (2), (3) and (4)

Question 17.
Which of the following statement is correct?
(A) A desire to maintain an established dividend policy may affect the volume of working capital.
(B) Changes in working capital may bring about an adjustment of dividend policy.
(C) Payment of dividend may reduce cash in current assets considerably which in turn may reduce the available working capital for the company.
(D) All of the above
Answer:
(D) All of the above

Question 18.
Regular Working Capital –
(A) supplies the funds necessary to meet the current working expenses ie. for purchasing raw material and supplies, payment of wages, salaries and other sundry expenses.
(B) refers to the firm’s investment in current assets.
(C) is amount over and above the permanent level of working capital.
(D) refers to the difference between current asset and Current liabilities.
Answer:
(A) supplies the funds necessary to meet the current working expenses ie. for purchasing raw material and supplies, payment of wages, salaries and other sundry expenses.

Question 19.
Which of the following is correct formula to calculate working capital leverage?

Answer:
(D)

Question 20.
One of the important objective(s) of working capital management is/are –
(A) To maintain the optimum levels of investment in current assets.
(B) To reduce the levels of current liabilities.
(C) Improve the return on capital employed.
(D) All of the above
Answer:
(D) All of the above

Question 21.
Fluctuating Working Capital is also called as —
(A) Reserve Margin Working Capital
(B) Temporary Working Capital
(C) Permanent Working Capital
(D) Variable working capital
Answer:
(D) Variable working capital

Question 22.
Operating cycle is also called as –
(A) Working cycle
(B) Business cycle
(C) Current asset cycle
(D) Working capital cycle
Answer:
(D) Working capital cycle

Question 23.
For reducing and controlling working capital requirement which of the following step is required to be taken –
(i) Reduction of manufacturing cycle.
(ii) Increase of credit period allowed by creditors to the extent that do not affect the production.
(iii) Reduction in credit period given to customers.
Select the correct answer from the options
given below
(A) (i) &(iii)
(B) (ii) & (iii)
(C) (i) & (ii)
(D) All of the above
Answer:
(D) All of the above

Question 24.
Capital which is needed to meet the seasonal requirements of the business –
(A) Gross Working Capital
(B) Reserve Margin Working Capital
(C) Net working capital
(D) Fluctuating Working Capital
Answer:
(D) Fluctuating Working Capital

Question 25.
A higher current assets/fixed assets ratio indicates –
(A) Hedging Approach
(B) Conservative Approach
(C) Matching/hedging Approach
(D) Aggressive Approach
Answer:
(B) Conservative Approach

Question 26.
Aggressive approach covers those policies –
(A) where the firm relies heavily on short term bank finance.
(B) seeks to increase dependence on long term financing.
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(A) where the firm relies heavily on short term bank finance.

Question 27.
Gross working capital refers to –
(A) the amount utilized at the time of contingencies.
(B) the firm’s investment in current assets.
(C) the capital which is required at the time of the commencement of business.
(D) the working capital which is necessary on a continuous and uninterrupted basis.
Answer:
(B) the firm’s investment in current assets.

Question 28.
A conservative policy implies –
(A) greater liquidity and lower risk
(B) greater risk and lower liquidity
(C) negligible risk
(D) no risk at all with low liquidity
Answer:
(A) greater liquidity and lower risk

Question 29.
If a firm has insufficient working capital and tries to increase sales, it can easily over-stretch the financial resources of the business. This is called –
(A) Overrating
(B) Over trading
(C) Overcoming
(D) Overtone
Answer:
(B) Over trading

Question 30.
Which of the following represents the amount utilized at the time of contingencies?
(A) Reserve Working Capital
(B) Net working capital
(C) Extra working capital
(D) Fixed working capital
Answer:
(A) Reserve Working Capital

Question 31.
Permanent Working Capital is also known as –
(A) Fixed working capital
(B) Temporary working capital
(C) Long term funds
(D) Gross margin working capital
Answer:
(A) Fixed working capital

Question 32.
A lower current assets/fixed assets ratio means –
(A) Matching/hedging Approach
(B) Aggressive current assets policy
(C) Riskier current assets policy
(D) Conservative current assets policy
Answer:
(B) Aggressive current assets policy

Question 33.
Any amount over and above the permanent level of working capital is known as working capital.
(A) Temporary
(B) Fluctuating
(C) Variable
(D) All of the above
Answer:
(D) All of the above

Question 34.
Current assets are those assets –
(A) Which can be sold by the companies.
(B) Which are less important from production angle.
(C) Which are held by the companies to pay-off current liabilities.
(D) Which are converted in to cash within a period of one year.
Answer:
(D) Which are converted in to cash within a period of one year.

Question 35.
Current assets are usually financed through –
(A) equity capital, preference capital, debentures, bonds and long term bank loans.
(B) (A) and (C)
(C) mode of overdraft, cash credit, public deposits etc.
(D) money market instrument and long term securities.
Answer:
(C) mode of overdraft, cash credit, public deposits etc.

Question 36.
To carry on a business, a certain minimum level of working capital is necessary on a continuous and uninterrupted basis. This requirement is referred to as –
(A) Permanent working capital
(B) Long term working capital
(C) Fixed working capital
(D) Both (A) and (C)
Answer:
(D) Both (A) and (C)

Question 37.
Which of the following is/are method of maximum permissible bank finance as recommended by the Tandon Committee?
(A) 75% of (Current Assets – Current Liabilities)
(B) 50% of (Current Assets – Current Liabilities)
(C) 75%of(CoreCurrentAssets-Current Liabilities)
(D) 50% of (Core Current Assets-Current Liabilities)
Answer:
(A) 75% of (Current Assets – Current Liabilities)

Question 38.
………… varies inversely with profitability.
(A) Liquidity
(B) Risk
(C) Gross profit
(D) None of the above
Answer:
(A) Liquidity

Question 39.
………….. refers to the difference between current asset and current liabilities.
(A) Differential working capital
(B) Net working capital
(C) Operation working capital
(D) None of the above
Answer:
(B) Net working capital

Question 40.
Permanent working capital -…………
(A) varies with seasonal needs.
(B) includes fixed assets.
(C) is the amount of current assets required to meet a firm’s long-term minimum needs.
(D) includes accounts payable.
Answer:
(C) is the amount of current assets required to meet a firm’s long-term minimum needs.

Question 41.
Financing a long-lived asset with short-term financing would be
(A) an example of “moderate risk-moderate (potential) profitability” asset financing.
(B) an example of “low risk-low (potential) profitability” asset financing.
(C) an example of “high risk – high (potential) profitability” asset financing.
(D) an example of the “hedging approach” to financing.
Answer:
(C) an example of “high risk – high (potential) profitability” asset financing.

Question 42.
Hard core working capital is also known as –
(A) Hard current assets
(B) Core current assets
(C) Core current liabilities
(D) Hard current liabilities
Answer:
(B) Core current assets

Question 43.
An aggressive policy indicates –
(A) higher liquidity and poor risk
(B) higher risk and poor liquidity
(C) higher risk and higher liquidity
(D) lower risk with lower liquidity
Answer:
(B) higher risk and poor liquidity

Question 44.
Tandon Committee Report on Working Capital relates to norms for ………….
(A) inventory and receivables
(B) gross profit and inventory
(C) receivable, gross profit and inventory
(D) net profit and receivables
Answer:
(A) inventory and receivables

Question 45.
In deciding the appropriate level of current assets for the firm, management is confronted with –
(A) Trade-off between profitability and risk.
(B) Trade-off between liquidity and marketability.
(C) Trade-off between equity and debt.
(D) Trade-off between short-term versus long-term borrowing.
Answer:
(A) Trade-off between profitability and risk.

Question 46.
Which of the following is not correct with matching strategy?
(A) All assets should be financed with permanent long term capital.
(B) Temporary current assets should be financed with temporary working capital.
(C) Long term assets should be financed from long term capital.
(D) Permanent current assets should be financed with permanent working capital.
Answer:
(A) All assets should be financed with permanent long term capital.

Question 47.
Paucity of working capital may lead to a situation where –
(A) the firm may not be able to its long term finance
(B) the firm may not be able to meet its liabilities
(C) the firm may not be able to achieve its sale target
(D) the firm may taken some different project with low internal rate of return.
Answer:
(B) the firm may not be able to meet its liabilities

Question 48.
Which of the following is/are method of maximum permissible bank finance as recommended by the Tandon Committee?
(A) [50% of (Current Assets – Core Current Assets)] – Current Liabilities
(B) [75% of (Core Current Assets – Current Assets)] – Current Liabilities
(C) [75% of (Current Assets – Core Current Assets)] – Current Liabilities
(D) [80% of (Current Assets – Core Current Assets)] – Current Liabilities
Answer:
(C) [75% of (Current Assets – Core Current Assets)] – Current Liabilities

Question 49.
What is difference between current ratio and quick ratio?
(A) The current ratio includes inventory and quick ratio does not.
(B) The current ratio does not include inventory and quick ratio does.
(C) The current ratio includes physical capital and quick ratio does not.
(D) The current ratio does not include physical capital and quick ratio does.
Answer:
(A) The current ratio includes inventory and quick ratio does not.

Question 50.
It is understood that a current ratio of ……….. for a manufacturing firm implies that the firm has an optimum amount of working capital.
(A) 1 (one)
(B) 2 (two)
(C) 3 (three)
(D) 2.5 (two and half)
Answer:
(B) 2 (two)

Question 51.
Which of the following is relevant while planning for working capital requirement?
(A) Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.
(B) Identify the level of inventory which allows for uninterrupted production.
(C) Identify the appropriate credit policy.
(D) All of the above
Answer:
(D) All of the above

Question 52.
A conservative policy means –
(A) lower return and risk.
(B) higher return and risk.
(C) lower return but very high risk.
(D) higher return and higher risk.
Answer:
(A) lower return and risk.

Question 53.
An aggressive policy produces –
(A) higher return and risk
(B) lower return and risk
(C) lower return and very low risk
(D) none of the above
Answer:
(A) higher return and risk

Question 54.
Accounts receivable are analyzed by –
(A) the average number of days it takes to make sale.
(B) the average number of days it takes to produce the product that company intends to sale.
(C) the average number of days it takes to collect an account.
(D) Any of the above
Answer:
(C) the average number of days it takes to collect an account.

Question 55.
Which of the following would not be financed from working capital?
(A) Cash float.
(B) Accounts receivable.
(C) Credit sales.
(D) A new personal computer for the office
Answer:
(D) A new personal computer for the office

Question 56.
Which of the following is/are method of maximum permissible bank finance as recommended by the Tandon Committee?
(A) 60% of Current Assets – Current Liabilities
(B) 7596 of Current Assets – Current Liabilities
(C) 5096 of Current Assets – Current Liabilities
(D) 4096 of Current Assets – Current Liabilities
Answer:
(B) 7596 of Current Assets – Current Liabilities

Question 57.
Net working capital refers to –
(A) total assets minus fixed assets.
(B) current assets minus current liabilities.
(C) current assets minus inventories.
(D) current assets.
Answer:
(B) current assets minus current liabilities.

Question 58.
Which of the following is correct formula to calculate debtor’s collection period?


Answer:
(C)

Question 59.
Which of the following working capital strategies is the most aggressive?
(A) Making greater use of short term finance and maximizing net short term asset.
(B) Making greater use of long term finance and minimizing net short term asset.
(C) Making greater use of short term finance and minimizing net short term asset.
(D) Making greater use of long term finance and maximizing net short term asset.
Answer:
(C) Making greater use of short term finance and minimizing net short term asset.

Question 60.
Working capital is also known as –
(A) Current capital or circulating capital
(B) Work-in-progress capital
(C) Day-to-day capital
(D) Trading capital
Answer:
(A) Current capital or circulating capital

Question 61.
Inventory is listed as a part of current assets. Stock or inventory in an organization means
(A) Goods that are readily available for sale
(B) All the assets available for sale
(C) All the raw material, Semi-finished and the finished goods in the organization
(D) Goods that can be sold within a short span of time
Answer:
(C) All the raw material, Semi-finished and the finished goods in the organization

Question 62.
What are the aspects of working capital management?
I. Inventory management
II. Receivable management
III. Cash management
Select the correct answer from the options given below.
(A) I
(B) II
(C) III
(D) All of the above
Answer:
(D) All of the above

Question 63.
Working Capital Turnover measures the relationship of Working Capital with:
(A) Fixed Assets
(B) Sales
(C) Purchases
(D) Stock
Answer:
(B) Sales

Question 64.
Accounts payable are analyzed by the –
(A) average number of days it takes to pay a supplier fixed assets.
(B) average number of days it takes to pay a supplier invoice.
(C) average number of days it takes to pay a salary of employee.
(D) Any of the above
Answer:
(B) average number of days it takes to pay a supplier invoice.

Question 65.
Which of the following is correct formula to calculate credit period availed?

Answer:
(B)

Question 66.
In Current Ratio. Current Assets are compared with:
(A) Current Profit
(B) Current Liabilities
(C) Fixed Assets
(D) Equity Share Capital
Answer:
(B) Current Liabilities

Question 67.
There is deterioration in the management of working capital of XYZ Ltd. What does it refer to?
(A) That the Capital Employed has reduced
(B) That the Profitability has gone up
(C) That debtors collection period has increased
(D) That Sales has decreased.
Answer:
(C) That debtors collection period has increased

Question 68.
…………… refers to the length of time allowed by a firm for its customers to make payment for their purchases.
(A) Holding period
(B) Pay-back period
(C) Average collection period
(D) Credit period
Answer:
(D) Credit period

Question 69.
Working capital management is primarily concerned with the management and financing of:
(A) Cash & inventory
(B) Current assets & current liabilities
(C) Current assets
(D) Receivables and payables
Answer:
(B) Current assets & current liabilities

Question 70.
Operating cycles period equals:
(A) Collection period+Inventory holding period – Creditor Payment Period
(B) Collection period-Inventory holding period + Creditor Payment Period
(C) Creditor Payment Period-(-Inventory holding period – Collection period
(D) Any of the above
Answer:
(A) Collection period+Inventory holding period – Creditor Payment Period

Question 71.
Which of the following is not a metric to use for measuring the length of the cash cycle?
(A) Acid test days
(B) Accounts receivable days
(C) Accounts payable days
(D) Inventory days
Answer:
(A) Acid test days

Question 72.
Decrease in current assets means –
(A) Increase in working capital
(B) Decrease in inventories
(C) Decrease in working capital
(D) Increase in accounts payable days.
Answer:
(C) Decrease in working capital

Question 73.
Which of the following is not considered while calculating accounts receivable period?
(A) Bills receivable
(B) Cash sales
(C) Debtors
(D) Credit sales
Answer:
(B) Cash sales

Question 74.
Which of the following will not be considered while calculating working capital on cash cost basis?
(A) Depreciation
(B) Prepaid expenses
(C) Raw material consumed
(D) Bills receivable
Answer:
(A) Depreciation

Question 75.
Which of the following assets is not a quick current asset?
(A) Short term bills receivables
(B) Cash
(C) Stock
(D) Debtors less provision for bad and doubtful debts
Answer:
(C) Stock

Question 76.
………… is also known as working capital ratio.
(A) Current ratio
(B) Quick ratio
(C) Liquid ratio
(D) Working capital turnover ratio
Answer:
(A) Current ratio

Question 77.
What does the accounts receivable turnover ratio tell us?
(A) How often account receivable received
(B) How many time account receivable is collected
(C) Account receivable balance at the end of the period
(D) Bad debt balance at the year end
Answer:
(B) How many time account receivable is collected

Question 78.
The best ratio to evaluate short-term liquidity is:
(A) Working capital turnover ratio
(B) Current ratio
(C) Creditors velocity
(D) All of the above
Answer:
(B) Current ratio

Question 79.
Which best describes the gross margin ratio?
(A) Leverage ratio
(B) Liquidity ratio
(C) Coverage ratio
(D) Profitability ratio
Answer:
(D) Profitability ratio

Question 80.
Inventory turnover ratio evaluates:
(A) Company’s ability to move inventory
(B) Company’s inventory purchasing efficiency
(C) Both (A) & (B)
(D) None of the above
Answer:
(C) Both (A) & (B)

Question 81.
All of the following statements are true regarding ratios that measure a company’s ability to pay current liabilities except
(A) Working Capital = Current Assets – Current Liabilities
(B) A higher current ratio is always preferred to a lower current ratio.
(C) Inventory and prepaid expense are included in the numerator of the current ratio, but not in the numerator of the acid-test ratio.
(D) In most industries, a current ratio of 2.0 is considered adequate.
Answer:
(B) A higher current ratio is always preferred to a lower current ratio.

Question 82.
Which of the following would NOT improve the current ratio?
(A) Borrow short term to finance additional fixed assets.
(B) Issue long-term debt to buy inventory
(C) Sell common stock to reduce current liabilities
(D) Sell fixed assets to reduce accounts payable
Answer:
(A) Borrow short term to finance additional fixed assets.

Question 83.
If the trend of the current ratio is increasing, while the trend of the acid-test ratio is decreasing over a period of time, this could be a warning that the firm is:
(A) Depleting its inventories
(B) Having trouble collecting its receivables
(C) Purchasing too much treasury stock
(D) Carrying excess inventories
Answer:
(D) Carrying excess inventories

Question 84.
What relationship exists between the average collection period and accounts receivable turnover?
(A) As average collection period increases (decreases) the accounts receivable turnover decreases (increases)
(B) There is a direct and proportional relationship
(C) Both ratios are expressed in number of days
(D) Both ratios are expressed in number of times receivables are collected per year
Answer:
(A) As average collection period increases (decreases) the accounts receivable turnover decreases (increases)

Question 85.
Which of the following statements is most correct?
(A) If a company increases its current liabilities by ₹ 1,000 and simultaneously increases its inventories by ₹ 1,000, its current ratio must rise.
(B) If a company increases its current liabilities by ₹ 1,000 and simultaneously increases its inventories by ₹ 1,000, its quick ratio must fall.
(C) A company’s quick ratio never exceed its current ratio.
(D) (B) & (C) is correct.
Answer:
(D) (B) & (C) is correct.

Question 86.
Purchase of stock for cash will current ratio.
(A) Reduce
(B) Improve
(C) Not change
(D) Can’t say
Answer:
(C) Not change

Question 87.
Explain the important ratio that would be used in following situation:
A bank is approached by a company for a loan of ₹ 50 lakh for working capital purposes.
(A) Capital Structure /Leverage Ratios
(B) Profitability Ratios
(C) Liquidity Ratios
(D) Activity Ratios
Answer:
(C) Liquidity Ratios

Question 88.
Instead of “Annual Factory Cost” WIP Conversion Period can be calculated taking “ ……….” as base.
(A) Annual Sales
(B) Cost of Production
(C) Cost of Goods Sold
(D) Cost of Sales
Answer:
(B) Cost of Production

Question 89.
If annual sales figure is not available then which of the following figure will be taken as base for calculation of debtors?
(A) Factory Cost
(B) Cost of Production
(C) Cost of Goods Sold
(D) Cost of Sales
Answer:
(B) Cost of Production

Question 90.
If current assets increases by 20% and current liabilities decreases by 20% as compared to last year figures then –
(A) Working capital decreases as compared to last year
(B) Working capital increases as compared to last year
(C) There will be no change in working capital
(D) Without figures it is impossible to tell whether working capital will increase or decrease
Answer:
(B) Working capital increases as compared to last year

Question 91.
If raw material consumed is ₹ 8,42,000; cost of production is ₹ 14,25,000; Stock of raw material & WIP is ₹ 1,24,000 and 1,72,000 respectively then Raw Material Conversion period will be –
Note: 1 Year = 365 days
(A) 54 days
(B) 18 days
(C) 29 days
(D) 49 days
Answer:
(A) 54 days
Raw material conversion period

Question 92.
Calculate the working capital from the following data:
Particulars — X
Raw Material Stock — 11,70,000
WIP Stock — 9,58,750
Finished Goods Stock — 26,65,000
Debtors — 55,12,000
Cash & Bank — 6,00,000
Creditors — 17,55,000
Outstanding expenses — 14,95,000
(A) 76,75,550
(B) 76,55,750
(C) 75,65,750
(D) 77,55,650
Answer:
(B) 76,55,750
Working capital = 11,70,000 + 9,58150 + 26,65,000 + 55,12,000 + 6,00,000 – 17,55,000 – 14,95,000 = 76,55,750

Question 93.
Annual credit sales Cash sales Debtors Bills receivable Finished goods Collection Period = ?
Note: 1 Year = 360 days
(A) 29 days
(B) 30 days
(C) 49 days
(D) Data given is not sufficient
Answer:
(C) 49 days
Debtors Collection Period:

Question 94.
Financial statement of A Ltd. shows the following data:
Opening stock ₹ 1,75,000, Total purchase ₹ 10,75,000 including cash purchase ₹ 1,75,000, total sales ₹ 15,00,000 out of which 20% are on cash basis. Closing stock is ₹ 1,50,000. Stock turnover ratio = ?
(A) 7.67
(B) 6.77
(C) 7.76
(D) 7.66
Answer:
(B) 6.77

Question 95.
WIP Conversion Period =18 days
Raw Material Consumed = ₹ 8,42,000
Stock of WIP = ₹ 72,000
Cost of Production = ?
(A) ₹ 14,00,000
(B) ₹ 22,67,000
(C) ₹ 5,83,000
(D) ₹ 14,60,000
Answer:
(D) ₹ 14,60,000

x = Annual Cost of Production 14,60,000

Question 96.
A Ltd. financial statement shows the following data:
Equity ₹ 5,67,500, Reserve & surplus ₹ 3,87,850, total debt ₹ 5,88,778 out of which ₹ 2,88,778 are long term debt, fixed assets are ₹ 11,44,128.
Current Ratio = ?
(A) 2.48
(B) 1.92
(C) 3.68
(D) 1.33
Answer:
(D) 1.33
Current liabilities = 5,88,778 – 2,88,778 = 3,00,000
Total assets = 5,67,500 + 3,87,850 + 5,88,778 = 15,44,128
Current assets = 15,44,128 – 11,44,128 = 4,00,000
Current ratio =\( \frac{4,00,000}{3,00,000}=1.33\)

Question 97.
Total sales of OLX Ltd. are ₹ 31,248 out of which 25% are cash sales. Closing balance of debtors are ₹ 9,468. Debtors collection period = ?
Note: 1 Year — 365 days
(A) 4.2 months
(B) 157 days
(C) 148 days
(D) 4.43 month
Answer:
(C) 148 days

Question 98.
Raw material consumption= ₹ 6,48,000 Raw material purchase = ₹ 8,42,000 Annual cost of production = ₹ 14,42,000 Creditors = ₹ 75,000
Bills payable = ₹ 25,000 Creditors Payment Period = ?
Note: 1 Year = 360 days
(A) 34 days
(B) 43 days
(C) 40 days
(D) 39 days
Answer:
(B) 43 days
Creditors Payment Period

Question 99.
The following information is available for your calculation.

Level of activity 1.56,000 units
Raw materials are in stock on average two month and Materials are in process, on average half month.
Calculate value of ‘Raw Material Stock’ for working capital purpose.
(A) ₹ 26,65,000
(B) ₹ 23,40,000
(C) ₹ 6,45,250
(D) ₹ 9,58,750
Answer:
(B) ₹ 23,40,000

Question 100.
From the following data calculate finished goods conversion period for the years 2019 & 2020.

Note: 1 Year = 360 days
(A) 29 days & 39 days
(B) 39 days & 29 days
(C) 25 days & 35 days
(D) 35 days & 25 days
Answer:
(A) 29 days & 39 days

Question 101.
Maximum permissible bank finance as per first method of Tandon Committee norms was ₹ 57,41,813 while current liabilities are reported at 32,50,000. Current assets = ?
(A) ₹ 1,09,05,750
(B) ₹ 81,79,313
(C) ₹ 1,09,07,550
(D) ₹ 1,05,09,750
Answer:
(A) ₹ 1,09,05,750
Maximum permissible bank finance as per first method = 75% of
(Current Assets – Current Liabilities)
57,41,813 = 0.75 × (x – 32,50,000)
57,41,813 = 0.75x – 24,37,500
0.75x = 81,79,313
x = Current Assets = 1,09,05,750

Question 102.
Current assets of Z Ltd. are ₹ 3,70,000 which includes stock ₹ 1,00,000 and prepaid expense ₹ 70,000. Its current liability are ₹ 1,60,000 which includes provision for tax ₹ 60,000.
Liquid Ratio = ?
(A) 1.25
(B) 1.52
(C) 1.22
(D) 0.95
Answer:
(A) 1.25

Question 103.
Following information is provided by the DPS Ltd. for the year ending 31st March 2019.
Raw material storage period — 55 days
WW conversion period — 18 days
Finished goods storage period — 22 days
Debt collection period — 45 days
Creditor’s payment period — 60 days
Annual operating cost including depreciation of ₹ 2,10,000 was ₹ 21,00,000.
[1 Year =360 days]
You are required to calculate working capital on cash cost basis.
(A) ₹ 4,20,000
(B) ₹ 4,66,667
(C) ₹ 7,35,000
(D) ₹ 8,16,667
Answer:
(A) ₹ 4,20,000

Question 104.
KT Ltd. opening stock was ₹ 2,50,000 and closing stock was ₹ 3,75,000. Sales during the year was ₹ 13,00,000 and gross profit ratio was 25% on sales. Average accounts payable are ₹ 80,000. Creditors Turnover Ratio = ?
(A) 13.75
(B) 14.33
(C) 13.33
(D) 14.44
Answer:
(A) 13.75

2,50,000 + Cost of production/purchase – 3,75,000 = 9,75,000
Cost of production/purchase = 11,00,000
Creditors Turnover Ratio =\(\frac{11,00,000}{80,000}\) = 13.75

Question 105.
Raw material conversion period is 36 days. Raw material consumed and cost of goods sold in the year is ₹ 1,80,000 & ₹ 2,16,000 respectively. How much raw material stock will appear in working capital statement?
Note: 1 Year = 360 days
(A) ₹ 18,000
(B) ₹ 20,000
(C) ₹ 21,600
(D) ₹ 19,800
Answer:
(A) ₹ 18,000

Question 106.
Creditors payment period = 60 days Material consumed = ₹ 1,20,000 Material purchased in cash = ₹ 10,000 Material purchased on credit = ₹ 90,000 Creditors that will appear in balance sheet and working capital statement = ?
Note: 1 Year = 360 days
(A) ₹ 16,667
(B) ₹ 15,000
(C) ₹ 20,000
(D) ₹ 36,667
Answer:
(B) ₹ 15,000

Question 107.
Opening and closing balance of creditors are ₹ 2,00,000 & ₹ 2,40,000 respectively. Raw material purchased on credit was ₹ 11,00,000. Creditors payment period for the purpose of working capital statement will be –
[1 Year = 360 days]
(A) 72 days
(B) 32 days
(C) 65 days
(D) 78 days
Answer:
(A) 72 days
Creditors payment period

Question 108.
N Ltd. gives the following information:
Current Ratio — 2.8
Total assets — ₹ 60,00,000
Fixed assets — ₹ 32,00,000
Current liabilities = ?
(A) ₹ 28,00,000
(B) ₹ 10,00,000
(C) ₹ 18,00,000
(D) ₹ 12,00,000
Answer:
(B) ₹ 10,00,000
Current assets = 60,00,000 – 32,00,000 = 28,00,000
\(2.8=\frac{28,00,000}{x}\)
x = Current liabilities = 10,00,000

Question 109.
N Ltd. gives the following information:
Liquid ratio — 1.6
Current Assets — ₹ 28,00,000
Current Liabilities — ₹ 10,00,000
Stock = ?
(A) ₹ 28,00,000
(B) ₹ 10,00,000
(C) ₹ 18,00,000
(D) ₹ 12,00,000
Answer:
(D) ₹ 12,00,000

Question 110.
S Ltd. gives the following information:
Net working capital ₹ 2,80,000
Current ratio — 2.4
Liquid ratio — 1.6
Current Assets ?
(A) ₹ 2,00,000
(B) ₹ 2,80,000
(C) ₹ 4,80,000
(D) ₹ 3,60,000
Answer:
(C) ₹ 4,80,000
Current Ratio = \(\frac{x}{y}\)
2.4 = \(\frac{x}{y}\)
2.4y = x
Working Capita] = CA – CL
2,80,000 = 2.4y – y
2,80,000 = 1.4y
y = 2,00,000
x = Current Assets = 2,00,000 × 2.4 = 4,80,000

Question 111.
Debtors as per working capital
statement = ₹ 3,00,000
Debtors collection period = 45 days
Gross profit ratio = 20%
Cash sales = ₹ 5,00,000
1 year = 365 days
Total sales = ?
(A) ₹ 24,00,000
(B) ₹ 19,00,000
(C) ₹ 29,00,000
(D) ₹ 25,00,000
Answer:
(C) ₹ 29,00,000

Credit Sales = 24,00,000
Total sales = 24,00,000 + 5,00,000 = 29,00,000

Question 112.
Operating cycle days of Ramji Ltd. is 167 days. Other details are as follows:
Raw material stock velocity — 79 days
Debtors collection period — 70 days
WIP conversion period — 36 days
Finished goods conversion — 29 days period
Creditors payment period = ?
(A) 47 days
(B) 94 days
(C) 52 days
(D) 59 days
Answer:
(A) 47 days
Let the creditors payment period be ‘x’.
79 + 70 + 36 + 29 – x = 167
– x = – 47
x = Creditors payment period = 47

Question 113.
Operating cost is ₹ 18,90,000.
Current assets Eire ₹ 5,20,000
Current liabilities are ₹ 1,00,000
Operating cycle days = ?
(Assume a 360 days year.)
(A) 80 days
(B) 99 days
(C) 19 days
(D) 70 days
Answer:
(A) 80 days

Question 114.
NS Ltd. gives the following information:
Current Ratio = 2.4
Quick Ratio =1.0
Stock = ₹ 5,60,000
Current Assets = ?
(A) ₹ 9,60,000
(B) ₹ 6,90,000
(C) ₹ 4,00,000
(D) ₹ 4,60,000
Answer:
(A) ₹ 9,60,000

Question 115.
Gross profit ratio = 20%.
Stock velocity = 6 month
Gross profit for the year ended amounts to ₹ 5,00,000. Stock of the year is ₹ 20,000 more than what it was at the beginning of the year
Closing stock = ?
(A) ₹ 10,00,000
(B) ₹ 9,90,000
(C) ₹ 10,10,000
(D) ₹ 10,20,000
Answer:
(C) ₹ 10,10,000

Question 116.
No. of operating cycle in a year = 4.5
No. of days in year = 360 days
Working capital = 8,40,000
Operating cost = ?
(A) ₹ 35,00,000
(B) ₹ 37,80,000
(C) ₹ 36,40,000
(D) ₹ 38,80,000
Answer:
(B) ₹ 37,80,000

Question 117.
If current assets are ₹ 1,09,05,750 and current liabilities are ₹ 32,50,000 then maximum permissible bank finance as per first method of Tandon Committee norms is –
(A) ₹ 57,41,813
(B) ₹ 49,29,313
(C) ₹ 52,29,813
(D) ₹ 49,41,813
Answer:
(A) ₹ 57,41,813
Maximum permissible bank finance as per Tandon Committee norms:
Method 1: 75% of (Current Assets – Current Liabilities)
= 0.75 × (1,09,05,750 – 32,50,000)
= 57,41,813

Question 118.
Debtors velocity = 3 months
Sales = ₹ 25,00,000
Bills receivable & Bills payable were ₹ 60,000 and ₹ 36,667 respectively.
Sundry debtors = ?
(A) ₹ 6,25,000
(B) ₹ 5,25,000
(C) ₹ 5,65,000
(D) ₹ 6,65,000
Answer:
(C) ₹ 5,65,000

x = Account Receivable = 6,25,000
Debtors + Bills Receivable = Account Receivable
x + 60,000 = 6,25,000
x = Debtors = 5,65,000

Question 119.
Creditors velocity = 2 months.
Cost of goods sold = ₹ 20,00,000
Opening stock = ₹ 9,90,000
Closing stock = ₹ 10,10,000
Bills receivable & Bills payable were ₹ 60,000 and ₹ 36,667 respectively.
Creditors = ?
(A) 3,36,667
(B) 3,66,333
(C) 3,30,367
(D) 3,00,000
Answer:
(D) 3,00,000
Opening stock + Purchase – Closing stock = Cost of goods sold
9,90,000 + x – 10,10,000 = 20,00,000
x Purchase = 20,20,000

x = Accounts Payable = 3,36,667
Creditors + Bifis Payable Account Payable
x + 36,667 = 3,36,667
x = Creditors = 3,00,000

Question 120.
If current assets are ₹ 1,09,05,750 and current liabilities are ₹ 32,50,000 then maximum permissible bank finance as per second method of Tandon Committee norms is –
(A) ₹ 57,41,813
(B) ₹ 49,29,313
(C) ₹ 52,29,813
(D) ₹ 49,41,813
Answer:
(B) ₹ 49,29,313
Maximum permissible bank finance as per Tandon Committee norms:
Method 2: 75% of Current Assets – Current Liabilities = (0.75 × 1,09,05,750) – 32,50,000
= 49,29,313

Question 121.
When the current ratio is 2:5, and the amount of current liabilities is ₹ 25,000, what is the amount of current assets?
(A) ₹ 62,500
(B) ₹ 12,500
(C) ₹ 10,000
(D) None of these
Answer:
(C) ₹ 10,000

Question 122.
Total ‘cost of sales’ and ‘sales’ of Gama Ltd. is ₹ 3,19,80,000 and ₹ 4,13,40,000 respectively. It makes 20% sales on cash basis. Debtors are allowed 2 months credit period. If company calculates working capital on cash cost basis then debtors are –
(A) ₹ 55,12,000
(B) ₹ 42,12,000
(C) ₹ 42,64,000
(D) ₹ 55,64,000
Answer:
(C) ₹ 42,64,000

Question 123.
If credit sales for the year is ? 5,40,000 and Debtors at the end of year is ? 90,000 the Average Collection Period will be?
Note: 1 year = 365 days
(A) 30 days
(B) 61 days
(C) 90 days
(D) 120 days
Answer:
(B) 61 days

Question 124.
Total wages for the year of Rakshit Ltd., a listed company are ₹ 64,80,000 out of which ₹ 2,40,000 are paid in cash immediately after they became due. Lag in payment of wages – 1 month. If you are appointed to prepare working capital statement for the company, then how much outstanding wages you will take while preparing working capital statement?
(A) ₹ 5,40,000
(B) ₹ 5,50,000
(C) Not enough data
(D) ₹ 5,20,000
Answer:
(D) ₹ 5,20,000

Question 125.
K Ltd. had sales last year of ₹ 26,50,000, including cash sales of ₹ 2,50,000. If its average collection period was 36 days, its ending accounts receivable balance is closest to (Assume a 365 day year.)
(A) ₹ 2,40,000
(B) ₹ 2,36,712
(C) ₹ 2,63,127
(D) ₹ 2,40,721
Answer:
(A) ₹ 2,40,000

Question 126.
Outstanding overheads appearing in balance sheet are 9,75,000. Lag in payment g of overheads is 30 days. Overheads accrue evenly throughout the year, total overheads incurred by the company are –
(A) ₹ 1,17,00,000
(B) ₹ 32,500
(C) ₹ 2,92,50,000
(D) ₹ 1,92,50,000
Answer:
(A) ₹ 1,17,00,000
Outstanding Overheads = Total Overheads = \(\times \frac{\text { Lag in payment of overheads }}{360}\)
9,75000 = Total Overheads × \(\frac{30}{360}\)
Total Overheads = 1,17,00,000

Question 127.
From the information given below calculate the amount of fixed assets. Fixed assets to proprietors fund = 1.25, Net Working Capital = ₹ 6,00,000.
(A) 20,00,000
(B) 24,00,000
(C) 3,42,857
(D) 8,00,000
Answer:
(B) 24,00,000

Question 128.
If a firm has ₹ 100 in inventories, a current ratio equal to 1.2, and a quick ratio equal to 1.1, what is the firm’s Net Working Capital?
(A) ₹ 10
(B) ₹ 100
(C) ₹ 200
(D) ₹ 1,200
Answer:
(C) ₹ 200

y = 1000
x = Current Assets 1,000 × 1.2= 1,200
Working Capital 1,200 – 1,000 200

Question 129.
A company plans to manufacture and sell 400 units of domestic appliances per month at a price of ₹ 600 each. The ratios of cost to selling price are –
Raw materials — 30%
Packing material — 10%
Direct labour — 15%
Direct expenses — 5%
Fixed overhead are ₹ 4,32,000 p.a.
Finished goods stock = 200 units
Working days in year are taken as 300 days for budget year. Norms maintained for work-in-progress is 7 days. Finished goods stock and WIP stock will appear in balance sheet and working capital of the company at –
(A) ₹ 31,920;₹ 80,000
(B) ₹ 80,000;₹ 31,920
(C) ₹ 90,000; ₹ 67,200
(D) ₹ 90,000;₹ 31,920
Answer:
(D) ₹ 90,000;₹ 31,920

Question 130.
Following is the balance sheet of PBX Ltd. Calculate maximum permissible bank finance by Third Method of Tandon Committee norms. Assume the level of Core Current Assets to be ₹ 60 lakhs.


(A) 450 1akhs
(B) 360 lakhs
(C) 315 Iakhs
(D) 425 lakhs
Answer:
(C) 315 Iakhs
Current Assets = 960 Lakhs; Current Liabilities = 360 Lakhs
Maximum permissible bank borrowing as per 3rd method of Tandon Committee norms:
= [75% of (Current Assets – Core Current Assets)] – Current Liabilities
= [0.75 × (960 – 60)] – 360
= 315 Lakhs

Question 131.
Current assets & current liabilities of Deelip Ltd. are 9,60,000 and 3,60,000 respectively. Maximum permissible bank finance as per Tandon Committee norms is 3,15,000. What are the core current assets of Deelip Ltd?
(A) ₹ 60,000
(B) ₹ 45,000
(C) ₹ 30,000
(D) ₹ 90,000
Answer:
(A) ₹ 60,000
3,15,000 = [75% of (Current Assets- Core Current Assets)] – Current Liabilities
3,15,000 = [0.75 × (9,60,000 – x)] – 3,60,000
3,15,000 = 7,20,000 – 0.75x – 3,60,000
45,000 = – 0.75x
x = Core Current Assets = 60,000

Question 132.
Maximum permissible bank finance as per 1st method of Tandon committee norms is ₹ 3,18,75,000. Long terms loans are ₹ 5,58,80,450. Current liabilities are ₹ 70,00,000. Current assets of the company are –
(A) ₹ 4,25,00,000
(B) ₹ 4,95,00,000
(C) ₹ 3,55,00,000
(D) ₹ 1,10,00,726
Answer:
(B) ₹ 4,95,00,000
3,18,75,000 = 75% of (Current Assets – Current Liabilities)
3,18,75,000 = 0.75 × (x – 70,00,000)
3,18,75,000 = O,75x – 52,50,000
3,71,25,000 = 0.75x
x Current Assets = 4,95,00,000

Question 133.
From the following information calculate the responsiveness of ROCE for changes in current assets ie. Working Capital Leverage.

Current assets are likely to decline by 20%over the existing level
(A) 0.405;0.435
(B) 0.403;0.453
(C) 0.453; 0.404
(D) 0.435; 0.405
Answer:
(D) 0.435; 0.405

Question 134.
MNO Ltd. submit following figures: Current Assets = ₹ 232.5 lakh
Core current assets = ₹ 30 lakh
Maximum permissible bank finance as third method of Tandon Committee norms = ₹ 55.625 lakh
Working capital in this case is –
(A) ₹ 136.25
(B) ₹ 106.05
(C) ₹ 163.25
(D) ₹ 160.05
Answer:
(A) ₹ 136.25
55.625 = [75% of (Current Assets – Core Current Assets)] – Current Liabilities
55.625 = [0.75 × (232.5 – 30)] – x
55.625 = 151.875 – x
x = Current Liabilities 96.25
Working Capital = 232.5 – 96.25 = 136.25

Question 135.
Management of Royal Ltd. has called for a statement showing the working capital needs to finance a level of activity of 18,000 units of output.

Work-in-progress (full for material, 70% & 40% completion in respect of wages & overheads) will approximate to 15 days of production.
1 year = 360 days. Calculate closing stock of WIP.
(A) ₹ 22,125
(B) ₹ 20,652
(C) ₹ 20,562
(D) ₹ 20,875
Answer:
(A) ₹ 22,125
Cost Structure for WIP:

Question 136.
Management of Royal King Ltd. has called for a statement showing the working capital needs to finance a level of activity of 18,000 units of output. Cost structure per unit:

Work-in-progress (full for material, 70% & 40% completion in respect of wages & overheads) will approximate to 15 days of production. 1 year = 360 days. Calculate closing stock of WIP on cash cost basis.
(A) ₹ 22,125
(B) ₹ 19,250
(C) ₹ 19,215
(D) ₹ 20,625
Answer:
(D) ₹ 20,625

Question 137.
Opening and closing stock of SVK Ltd. is ₹ 1,20,000 & ₹ 1,80,000 respectively. Material consumed in income statement is shown at ₹ 3,60,000. Suppliers of material extend 4 week credit. How much of creditors will be shown in preparation of working capital statement?
(A) ₹ 32,380
(B) ₹ 32,830
(C) ₹ 32,308
(D) ₹ 32,803
Answer:
(C) ₹ 32,308
Opening Raw Material + Purchases – Closing Raw Material = Material Consumed
1,20,000 + Purchases – 1,80,000 = 3,60,000
Purchases = 4,20,000
Creditors 4 weeks \(\left(4,20,000 \times \frac{4}{52}\right)\) = 32308

Question 138.
Opening and closing stock of SVK Ltd. is ₹ 1,20,000 & ₹ 1,80,000 respectively. Material consumed in income statement is shown at ₹ 3,60,000. Suppliers of material extend 4 week credit. How much of creditors will be shown in preparation of working capital statement if cash purchase is ₹ 50,000?
(A) ₹ 28,246
(B) ₹ 28,642
(C) ₹ 28,426
(D) ₹ 28,462
Answer:
(D) ₹ 28,462
Opening Raw Material + Purchases- Closing Raw Material = Material Consumed
1,20,000 + Purchases – 1,80,000 = 3,60.000
Purchases = 4,20,000
Credit purchase = 4,20,000 – 50,000 = 3,70,000

Question 139.
The following cost information per unit has been ascertained for annual production of 36,000 units:
Variable manufacturing overheads = ₹ 2 Fixed manufacturing overheads = ₹ 1 Lag in payment of overheads = one month
Expected production and sales are 48,000 units and 35,000 units respectively.
Outstanding overheads will be shown in working capital statement at –
(A) ₹ 11,000
(B) ₹ 11,667
(C) ₹ 12,000
(D) ₹ 12,500
Answer:
(A) ₹ 11,000

Fixed overheads are × 1 per unit at current level of activity i..e. 36,000 packets.
Hence total fixed overheads at current level of activity 36,000 × 1 = 36,000. Fixed
overheads remains same hence even at increased production of 48,000 packets
fixed overheads will remain same i..e. ₹ 36,000.

Question 140.
Calculate the debtors on cash cost basis form the following information for working capital purpose:

Rate of gross profit is 20%.
(A) ₹ 4,70,000
(B) ₹ 4,00,000
(C) ₹ 3,76,000
(D) ₹ 4,76,000
Answer:
(B) ₹ 4,00,000
Calculation of cost of goods sold:

It is stated in the problem that rate of gross profit is 2096 and export sales price 1096 below domestic price. Rate of gross profit for export sale has to be taken 10%. Further export sale has to be made 10096 from 90% for the purpose of calculation of gross profit.

Question 141.
From the following information calculate the working capital:
Equity share capital — 18,00,000
Stock — 3,15,000
Income tax payable — 56,250
Outstanding expenses — 1,40,000
Prepaid expenses — 37,500
Debtors — 4,00,000
Creditors — 1,50,000
The management is of the opinion to make 12% margin for contingencies on computed figure.
(A) ₹ 4,81,250
(B) ₹ 4,59,370
(C) ₹ 4,87,500
(D) ₹ 4,51,370
Answer:
(C) ₹ 4,87,500

Question 142.
From the following information calculate the net working capital:
Current assets — 92,75,000
Current liabilities — 34,62,500
The management is of the opinion to make 20% margin for contingencies on net working capital.
(A) ₹ 69,75,000
(B) ₹ 69,65,625
(C) ₹ 75,75,000
(D) ₹ 72,65,625
Answer:
(D) ₹ 72,65,625

58,12,500 + 0.2.x = x
58,12,500 = 0.8x
x = Net working capital = 72,65,625

Question 143.
The CTC Ltd. is attempting to establish a current assets policy. Fixed assets are ₹ 6,00,000 and the firm plans to maintain a 50% debt-to-assets ratio. The interest rate is 10% on all debts. Three alternative current assets policies are under consideration 40%, 50% and 60% of projected sales. Company expects to earn 15% before interest and taxes on sales of ₹ 30,00,000. The effective tax rate is 40%. What is the expected return on equity if company follows ‘AggressivePolicy’?
(A) 19.71%
(B) 24.00%
(C) 16.50%
(D) 18.67%
Answer:
(B) 24.00%

Question 144.
The CTC Ltd. is attempting to establish a current assets policy. Fixed assets are ₹ 6,00,000 and the firm plans to maintain a 50% debt-to-assets ratio. The interest rate is 10% on all debts. Three alternative current assets policies are under consideration 40%, 50% and 60% of projected sales. Company expects to earn 15% before interest and taxes on sales of ₹ 30,00,000. The effective tax rate is 40%. What is the expected return on equity if company follows ‘Moderate Policy?
(A) 19.71%
(B) 24.00%
(C) 16.50%
(D) 18.67%
Answer:
(A) 19.71%

Question 145.
The CTC Ltd. is attempting to establish a current assets policy. Fixed assets are ₹ 6,00,000 and the firm plans to maintain a 50% debt-to-assets ratio. The interest rate is 10% on all debts. Three alternative current assets policies are under consideration – 40%, 50% and 60% of projected sales. Company expects to earn 15% before interest and taxes on sales of ₹ 30,00,000. The effective tax rate is 40%. What is the expected return on equity if company follows ‘ModeratePolicy}
(A) 19.71%
(B) 24.00%
(C) 16.50%
(D) 18.67%
Answer:
(C) 16.50%

Question 146.
Strong Cement Ltd. has an installed capacity of producing 1.25 lakh tones of cement per annum; its present capacity utilization is 80%. The major raw material to manufacture cement is limestone which is obtained on cash basis from a company located near the plant. The company produces cement in200 kg drum. Calculate the number of drums to be manufactured.
(A) 50,000 drums
(B) 60,000 drums
(C) 80,000 drums
(D) 1,00,000 drums
Answer:
(A) 50,000 drums
Production in tone = 1,25,000 tone X 80% = 1,00,000
Number of drums = \(\frac{1,00,000 \text { tone }}{200 \mathrm{~kg} \text { i.e. } 0.2 \text { tone }}\)= 5,00,000 Drums

Question 147.
M Ltd. is engaged in large scale customer retailing. From the following information, you are required to forecast its working capital requirement:
Projected annual sales — ₹ 65 lakhs
Net profit on cost of sales — 20%
Credit allowed to debtors — 10 weeks
Credit allowed by creditors — 4 weeks
Stock carrying (in terms of 8 weeks cost of sales requirement)
Add 10% company calculates debtors on sales to allow for contingencies.
(A) ₹ 14,33,333
(B) ₹ 15,66,667
(C) ₹ 16,33,333
(D) ₹ 16,66,667
Answer:
(D) ₹ 16,66,667

Question 148.
A company has prepared its annual budget, relevant details of which are reproduced below:
Sales ₹ 46.80 lakh (25% cash sales and balance on credit): 78,000 units
Labour cost: ₹ 6 per unit
Wages are paid as follows:
For 1st & 2nd week: in the 3rd week
For 3rd & 4th week: in the next week.
Assume 1 year = 52 weeks.
How much outstanding wages will appear × in working capital statement?
(A) ₹ 18,000
(B) ₹ 20,000
(C) ₹ 16,000
(D) ₹ 22,000
Answer:
(A) ₹ 18,000
Total wages = 78,000 × 6 = 4,68,000
Wages are paid for 1st and 2nd week in the 3rd week & for 3rd and 4th week in the next week. Thus, wages are paid 3rd & 5th week which shows that lag in payment of wages is 2 week.

Question 149.
Following details are available for Pratik Ltd.
Maximum permissible bank finance as per second method of Tandon Committee norms: ₹ 11,96,188
Current liabilities: ₹ 3,73,750
What will be the amount of maximum permissible bank finance as per first method of Tandon Committee Norms?
(A) ₹ 12,98,625
(B) ₹ 12,89,265
(C) ₹ 12,89,625
(D) ₹ 12,98,265
Answer:
(C) ₹ 12,89,625
11,96,188 = 75% of Current Assets – Current Liabilities
11,96,188 = 0.75 × x – 3,73,750
11,96,188 = 0.75x -3,73,750
x = Current Assets = 20,93,250
Method 1: 75% of (Current Assets – Current Liabilities)
= 75% × (20,93,250 – 3,73,750)
= 12,89,625

Question 150.
Selling price is ₹ 50 per unit and production and sales for the year are 69,000 units and 75,000 units respectively. Direct wages are 10% of selling price. There is regular production and sales cycle, and wages and overheads accrue evenly. Wages & overheads are paid in the next month of accrual. One production process cycle is completed in two month. How much outstanding wages will be shown in working capital statement?
(A) ₹ 28,750
(B) ₹ 57,500
(C) ₹ 31,250
(D) ₹ 28,250
Answer:
(A) ₹ 28,750

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

Introduction to Strategic Management – Strategic Management MCQ

Question 1.
We may define the term ‘strategy’ as a ……… blueprint.
(A) Long range
(B) Short range
(C) Short and medium range
(D) Unlimited range
Answer:
(A) Long range

Question 2.
Strategic management involves the decision-making and the activities in an organization which –
(A) Have wider ramifications
(B) Have a long time perspective
(C) Use critical resources towards perceived opportunities or threats in a changing environment
(D) All of the above
Answer:
(D) All of the above

Question 3.
According to Chandler ‘Strategic Management’ is –
(A) That set of decisions and actions which lead to the development of an effective strategy or strategies to help achieve corporate objectives.
(B) The formulation and implementation of the major goals and initiatives taken by a company’s top management.
(C) Determination of the basic long-term goals and objectives of an enterprise and adoption of course of action and allocation of resources necessary to carry out these goals.
(D) Developing the company’s vision,environmental scanning, strategy formulation, implementation and evaluation and control.
Answer:
(C) Determination of the basic long-term goals and objectives of an enterprise and adoption of course of action and allocation of resources necessary to carry out these goals.

Question 4.
According to Glueck ‘Strategic Management’ is set of decisions and actions which lead to the development of an effective strategy or strategies to help achieve –
(A) Major objectives
(B) Planning objectives
(C) Corporate objectives
(D) National objectives
Answer:
(C) Corporate objectives

Question 5.
According to Hambrick ‘Strategic Management’ Strategic management is the formulation and implementation of the taken by a company’s top management on behalf of owners, based on consideration of resources and an assessment of the internal and external environments in which the organization competes.
(A) Major goals and initiatives
(B) Major plans and process
(C) Major decisions
(D) Product development
Answer:
(A) Major goals and initiatives

Question 6.
Strategic management involves developing the –
I. Company’s vision
II. Training of personnel
III. Environmental scanning
IV. Strategy formulation
V. New software
VI. Strategy implementation
Select the correct answer from the options
given below.
(A) I, III & IV only
(B) IV, III, I & VI
(C) I and IV only
(D) Except V all
Answer:
(B) IV, III, I & VI

Question 7.
Strategic management emphasizes the monitoring and evaluation of external opportunities and threats in the light of a company’s and designing strategies for the survival and growth of the company.
(A) Plans and budget
(B) Asset and liabilities
(C) Strengths and weaknesses
(D) Opportunities and plans
Answer:
(C) Strengths and weaknesses

Question 8.
According to Chandler ‘Strategic Management’ is determination of the basic long-term goals and objectives of an enterprise and adoption of course of action and allocation of …………. necessary to carry out these goals.
(A) Sources
(B) Resources
(C) Assets
(D) Expenses
Answer:
(B) Resources

Question 9.
Arrange the process of strategic management in proper sequence –
R Where we want to be?
Q. How can we ensure arrival?
R. How might we get there?
S. Where are we now?
T. Which way is best?
Select the correct answer from the options given below.
(A) S, P, R, T. Q
(B) S, T, R, P, Q
(C) P, R, S, T, Q
(D) R, S, P, Q, T
Answer:
(A) S, P, R, T. Q

Question 10.
Match the List I with List II with reference to strategic management process:

Answer:
(C)

Question 11.
Out of all the alternatives generated in the earlier stage the organization selects the best suitable alternative. This stage in strategic management process is called as –
(A) Evaluation
(B) Means
(C) Ends
(D) Beginning
Answer:
(A) Evaluation

Question 12.
The strategic management process is defined as the process by which the managers are able to make a choice of a set of strategies for the organization that will enable it to accomplish –
(A) Targeted marketing plans
(B) improved performance
(C) Better debt equity ratio
(D) Government help
Answer:
(B) improved performance

Question 13.
Strategic management –
(A) Is not a static
(B) Is continuous process
(C) Consists of different phases
(D) All of the above
Answer:
(D) All of the above

Question 14.
There are ………….. indispensable phases of every strategic management process.
(A) Five
(B) Four
(C) Six
(D) Three
Answer:
(B) Four

Question 15.
Which of the following is first phase of strategic management process?
(A) Strategy Formulation
(B) Strategy Evaluation
(C) Strategy Implementation
(D) Environmental Scanning
Answer:
(D) Environmental Scanning

Question 16.
Environment scanning is careful monitoring of an organization’s environments for detecting early signs of opportunities and threats that may influence its current and future plans.
(A) Internal
(B) External
(C) Internal and external
(D) Internal or external
Answer:
(C) Internal and external

Question 17.
Which of the following is/are NOT features of business environment?
(I) Uncertainty
(II) Relativity
(III) Static Nature
Select the correct answer from the options given below
(A) (I) only
(B) (II) only
(C) (III) only
(D) None of the above
Answer:
(C) (III) only

Question 18.
Which of the following describes the desired future position of the company?
(A) Vision statement
(B) Mission statement
(C) Planning statement
(D) Forecasting statement
Answer:
(A) Vision statement

Question 19.
Which of these basic questions should a vision statement answer?
(A) What is our business?
(B) Who are our competitors?
(C) Where we are to go?
(D) Why do we exist?
Answer:
(C) Where we are to go?

Question 20.
Which of the following is beginning stage of strategic management process?
(A) Process of goal setting for the organization after it has finalized its vision and mission.
(B) The organization selects the best suitable alternative.
(C) Firm find out its relative market position, corporate image, its strength and weakness and also threats and opportunities.
(D) The organization deals with the various strategic alternatives it has.
Answer:
(C) Firm find out its relative market position, corporate image, its strength and weakness and also threats and opportunities.

Question 21.
A defines the company’s business, its objectives and its approach to reach those objectives.
(A) Vision statement
(B) Mission statement
(C) Planning statement
(D) Forecasting statement
Answer:
(B) Mission statement

Question 22.
According to Porter, what is usually the most powerful of the five competitive forces?
(A) Rivalry among existing firms
(B) Potential development of substitute products
(C) Bargaining power of buyers and suppliers
(D) Potential entry of new competitor
Answer:
(A) Rivalry among existing firms

Question 23.
Mission and Vision Statements are NOT commonly used to:
(A) Guide management’s thinking on strategic issues, especially during times of significant change
(B) Create wider linkages with customers, suppliers and alliance partners
(C) Help establish a framework for ethical behaviour
(D) Inspire employees to work more productively by providing focus and common goals
Answer:
(B) Create wider linkages with customers, suppliers and alliance partners

Question 24.
A business has absolute control in the …………….. (X), whereas it has no control on the …………….. (Y)
Select the correct answer from the options given below.

Answer:
(C)

Question 25.
What type of organizational structure do most small businesses follow?
(A) Divisional Structure
(B) Functional Structure
(C) Hour Glass Structure
(D) Matrix Structure
Answer:
(D) Matrix Structure

Question 26.
Which of the following contains the owner of the business, the shareholders, the managing director, the non-managers, employees, the customers, the infrastructure of the business organization, and the culture of the organization?
(A) Internal environment
(B) External environment
(C) Outside environment
(D) All of above
Answer:
(A) Internal environment

Question 27.
We may define the term ‘strategy’ as a long range blueprint of an organization’s desired –
A. Image
B. Direction
C. Destination
Select the correct answer from the options given below.
(A) A & C
(B) B & C
(C) A & B
(D) All of the above
Answer:
(D) All of the above

Question 28.
In evaluating strategies, which one of Rumelt’s criteria for evaluating strategies, refers to the need for strategists to examine sets of! rends?
(A) Consistency
(B) Consonance
(C) Feasibility
(D) Advantage
Answer:
(B) Consonance

Question 29.
Your ………. is your ultimate goal, your ………… is how you will get there.
(A) Mission, Vision
(B) Vision, Mission
(C) Vision, Vision
(D) Mission, Mission
Answer:
(B) Vision, Mission

Question 30.
Internal environment includes M’s
(A) 3
(B) 4
(C) 5
(D) 6
Answer:
(D) 6

Question 31.
What can be defined as the art and science of formulating, implementing and evaluating cross-functional decisions that enable an organization to achieve its objectives?
(A) Strategy Formulation
(B) Strategy Evaluation
(C) Strategy Implementation
(D) Strategic Management
Answer:
(D) Strategic Management

Question 32.
Match the List I with List II with reference to strategic management process:
List I ———- List II
A. Where we want to be? — 1. Stage 4
B. Where are we now? — 2. Stage 1
C. How can we ensure arrival? — 3. Stage 5
D. How might we get there? — 4. Stage 2
E. Which way is best? — 5. Stage 3

Answer:
(B)

Question 33.
Where you want your business to be in 10 years time. This can be termed as:
(A) Mission statement
(B) Vision statement
(C) Statement of purpose
(D) Memorandum of understanding
Answer:
(B) Vision statement

Question 34.
The internal factors that contribute to the business environment is/are:
1. Research and Development
2. Company Image
3. Brand Equity
4. Value System
Select the correct answer from the options given below.
(A) 2, 1 & 3 only
(B) 4, 3 & 2 only
(C) 2 & 4 only
(D) 4, 1,2,3
Answer:
(D) 4, 1,2,3

Question 35.
The competencies or skills that a firm employs to transform inputs into outputs are
(A) Tangible resources
(B) Intangible resources
(C) Organizational capabilities
(D) Reputational resources
Answer:
(C) Organizational capabilities

Question 36.
…………… may include inventions and techniques which affect the way of doing things that is, designing, producing and distributing products.
(A) Research and Development
(B) Company Image and Brand Equity
(C) Value System
(D) All of above
Answer:
(A) Research and Development

Question 37.
The principles of right and wrong that are accepted by an individual or organization are what comprise
(A) Research and Development
(B) Company Image and Brand Equity
(C) Value System
(D) All of above
Answer:
(C) Value System

Question 38.
Individual investors are reliant on upon the organization’s managers to……
(A) Maximize short-term returns in the form of dividends.
(B) Add value to their investments in a way that the stockholders could not accomplish on their own.
(C) Achieve risk reduction at a lower cost than stockholders could obtain on their own.
(D) Diversify the stockholder’s investments in order to reduce risk.
Answer:
(B) Add value to their investments in a way that the stockholders could not accomplish on their own.

Question 39.
Competitor analysis involves:
(1) Identifying the actual competitors
(2) Assessing competitors’ objectives, strategies, strengths & weaknesses, and reaction patterns
(3) Selecting the strategies to deal with competitors
Select the correct answer from the options given below –
(A) (1) and (2)
(B) (2) and (3)
(C) (1) and (3)
(D) All of the above
Answer:
(D) All of the above

Question 40.
An organization has little or no control over its –
A. Internal environment
B. Inner environment
C. External environment
Select the correct answer from the options given below –
(A) A and B
(B) B and C
(C) A only
(D) C only
Answer:
(D) C only

Question 41.
Change in company’s ……….. gives rise to problems necessitating a new …………. to be made.
(A) Structure. Strategy
(B) Strategy, Structure
(C) Structure, Structure
(D) Strategy, Strategy
Answer:
(B) Strategy, Structure

Question 42.
To develop caliber professionals facilitating good corporate governance is ………. of ICSL
(A) Mission
(B) Vision
(C) Both (A) and (B)
(D) None of above
Answer:
(A) Mission

Question 43.
To be a global leader in promoting good corporate governance is of ICSI.
(A) Mission
(B) Vision
(C) Both (A) and (B)
(D) None of above
Answer:
(B) Vision

Question 44.
The micro environment is also known as the ……..
(A) Task environment
(B) Operation environment
(C) Task environment and operating environment
(D) None of the above
Answer:
(C) Task environment and operating environment

Question 45.
Feature(s) of strategy is/Eire:
(A) It is a specialized planning to retaliate competitors.
(B) It explains how managers have to respond to the subordinate in providing leadership.
(C) It is one of the way to manage the people in organization.
(D) All of above
Answer:
(A) It is a specialized planning to retaliate competitors.

Question 46.
Formulating strategies is the job of –
(A) Low level management
(B) Top level management
(C) Middle level management
(D) All of above
Answer:
(B) Top level management

Question 47.
Which of the following is concerned with the overall purpose and scope of the business to meet stakeholder expectations?
(A) Operational strategy
(B) Corporate strategy
(C) Business unit strategy
(D) Operation strategy
Answer:
(B) Corporate strategy

Question 48.
Consider following two statements.
(I) Strategic management is a bundle of tricks and magic.
(II) Strategic management is not needed in non-profit organizations.
Select the correct answer from the options given below.
(A) Statement I is true and Statement II is false
(B) Statement II is true and Statement I is false
(C) Both Statement I and Statement II are true
(D) Both Statement I and Statement II are false.
Answer:
(D) Both Statement I and Statement II are false.

Question 49.
Assertion (A):
Success or failure of a strategy is dependent on several extraneous factors.
Reason (R):
Strategic management is much more serious affair and requires some tricks or magic.
Select the correct answer from the options given below.
(A) A is false but R is true
(B) A and R are true and R is correct explanation of A
(C) A and R are true but R is not correct explanation of A
(D) A is true but R is false
Answer:
(D) A is true but R is false

Question 50.
Assertion (A):
Strategy is a substitute for sound, alert and responsible management.
Reason (R):
Strategy can never be perfect, flawless and optimal. Strategies are goal-directed decision and actions in which capabilities and resources are matched with the opportunities and threats in the environment. A good management at the top can steer the organizations by adjusting its path on the basis of the changes in the environment.
Select the correct answer from the options given below.
(A) A and R are true and R is correct explanation of A
(B) A is false but R is true
(C) A and R are true but R is not correct explanation of
(D) A is false and R is true; it explains how A is false
Answer:
(D) A is false and R is true; it explains how A is false

Question 51.
………. is the ability to influence others to voluntarily make decisions that enhance the prospects for the organization’s long – term success while maintaining long-term financial stability.
(A) Marketing leadership
(B) Strategic leadership
(C) Operational leadership
(D) Financial leadership
Answer:
(B) Strategic leadership

Question 52.
The consists of the factors in the company’s immediate environment that affects the performance and working of the company.
(A) Micro environment
(B) Macro environment
(C) Business environment
(D) Outside environment
Answer:
(A) Micro environment

Question 53.
………… is concerned more with how a business competes successfully in a particular market and often described as mission statement.
(A) Operational strategy
(B) Corporate strategy
(C) Business unit strategy
(D) Mix strategy
Answer:
(C) Business unit strategy

Question 54.
Strategic leadership refers to a manager’s potential to –
(A) Articulate the strategic vision for the organization
(B) Motivate, guide and influence his subordinates to attain the objectives g of that vision.
(C) Both (A) and (B)
(D) (B) but not (A)
Answer:
(B) Motivate, guide and influence his subordinates to attain the objectives g of that vision.

Question 55.
Micro environmental factors can be described as close to a business that have a direct impact on its strategy.
(A) Employees relationship
(B) Internal factors
(C) Media relation
(D) Competitive environment
Answer:
(B) Internal factors

Question 56.
Which of the following statement is true?
1. Strategic leaders generate organizational structure, assign resources and communicate strategic vision.
2. Strategic leaders have to work in an certain environment on various strategic issues.
3. The main purpose of strategic leadership
4. Strategist develops a short-range course of action or set of goals to align with the organization’s vision.
Select the correct answer from the options given below
(A) 2 only
(B) 3 and 4 only
(C) 1, 2 and 3 only
(D) 2 and 4 only
Answer:
(D) 2 and 4 only

Question 57.
How you will classify a Strategic Leader who clearly and quickly works through the complexity of key issues, problems and opportunities to affect actions?
(A) Global Thinker
(B) Enterprise Guardian
(C) Navigator
(D) Talent Advocate
Answer:
(C) Navigator

Question 58.
………….. are generally more uncontrollable than micro environment factors.
(A) Macro factors
(B) Micro factors
(C) Estimated factors
(D) Non-business
Answer:
(A) Macro factors

Question 59.
Strategic management facilitates to prepare the organization to face the future and act as –
(A) Leader
(B) Pathfinder
(C) Director
(D) Friend
Answer:
(B) Pathfinder

Question 60.
Strategic management serves as a corporate defense mechanism against –
(A) Right and wrong
(B) Choice and investment
(C) Mistakes and pitfalls
(D) Flawless and optimal
Answer:
(C) Mistakes and pitfalls

Question 61.
Match the following:


Answer:
(D)

Question 62.
Assertion (A):
Strategic management is not needed in non-profit organizations.
Reason (R):
Though non-profit organizations are not working for the profit, they have to have purpose, vision and mission. They also work within the environmental forces and need to manage strategically to stay afloat to accomplish their objectives.
Select the correct answer from the options given below.
(A) Both A and Rare true and R is correct explanation of A.
(B) BothAandRaretruebutR is correct explanation of A
(C) A is true and R is false
(D) A is false and R is true explaining how A is false
Answer:
(D) A is false and R is true explaining how A is false

Question 63.
Match the List I with List II with reference to strategic management process:
List — I List — II
(W) Strategist — 1. Builds passion & commitment toward a common goal
(X) Entre preneur — 2. Identifies and exploits opportunities for new products and markets.
(Y) Captivator — 3. Develops a long range action or set of goals to align with organization’s vision.
(Z) Mobilizer — 4. Proactively builds and aligns stakeholders, capabilities and resources for getting things done quickly and achieving complex objectives.
select the correct answer from the options given below.

Answer:
(D)

Question 64.
The following factors are key drivers of globalization:
(A) Government action, exchange rates,competition and socio demographic factors
(B) Market convergence, competition, exchange rates and cost advantages.
(C) Cost advantages, government action,economic cycles and competition
(D) Market, cost, competition and government policies.
Answer:
(D) Market, cost, competition and government policies.

Question 65.
Which of the following is concerned with how each part of the business is organized to deliver the corporate and business-unit level strategic direction and is concerned with strategic decisions about choice of products, meeting needs of customers etc?
(A) Operational strategy
(B) Corporate strategy
(C) Business unit strategy
(D) All of above
Answer:
(A) Operational strategy

Question 66.
Strategic management helps organizations to be more –
(A) Proactive
(B) Reactive
(C) Turbulence
(D) Uncertain
Answer:
(A) Proactive

Question 67.
Value system of an organization have an impact on its:
I. Objectives
II. Policies
III. Practices
IV. Profit
The correct option is –
(A) I and II only
(B) I, II and III only
(C) II, III and IV only
(D) I, II, III and IV
Answer:
(D) I, II, III and IV

Question 68.
Who attracts, develops, and retains talent to ensure that people with the right skills and motivations to meet business needs are in the right place at the right time is called as -………….
(A) Captivator
(B) Talent Advocate
(C) Change Driver
(D) Enterprise Guardian
Answer:
(B) Talent Advocate

Question 69.
Which of the following can be treated as feature of strategy?
(1) It reflects concern to effectively mobilize resources.
(2) It maximizes chances to achieve objectives.
(3) Formulating strategies is the job of top management.
Select the correct answer from the options given below.
(A) (1) & (3) only
(B) (1), (2) & (3)
(C) (2) & (3) only
(D) (1) & (3) only
Answer:
(B) (1), (2) & (3)

Question 70.
Assertion (A):
Developing annual objectives & short term strategies that are compatible with the selected set of long term objectives are one of the major tasks of strategic management.
Reason (R):
A company’s set of strategic objectives should include both short term and long term performance target. Short term objectives help to focus attention on delivering immediate performance improvements. While long term objectives represent the results expected from pursuing certain strategies.
Select the correct answer from the options given below.
(A) A is false and R is true explaining how A is false
(B) Both A and Rare true and R is correct explanation of A.
(C) A is true and R is false
(D) Both A and R are true but R is correct explanation of A
Answer:
(B) Both A and Rare true and R is correct explanation of A.

Question 71.
Change Driver –
(A) Creates an environment that embraces change
(B) Makes change happen – even if the change is radical
(C) Helps others to accept new ideas
(D) All of the above
Answer:
(D) All of the above

Question 72.
He ensures shareholder value through courageous decision-making that supports enterprise or unit-wide interest called as
(A) Navigator
(B) Entrepreneur
(C) Enterprise Guardian
(D) Talent Advocate
Answer:
(C) Enterprise Guardian

Question 73.
You are appointed as a Strategic Manager by ABC Ltd. Being a strategic manager what should be your tasks to perform?
I. Defining the mission and goals of the organization.
II. Determining what businesses it should be in.
III. To increase the production.
IV. Allocating resources among the different businesses.
V. Discovering a new product method.
Select the correct answer from the options given below.
(A) I, IV and III
(B) II and I only
(C) IV, II and I
(D) V, II, IV and I only
Answer:
(C) IV, II and I

Question 74.
A Company Secretary has to take care ………. of the critical facets of the business ie.
(A) Risk management
(B) Assessing the sustainability of an organization
(C) Contribution towards corporate vision and mission
(D) All of the above
Answer:
(D) All of the above

Question 75.
Which core competencies are required for a Company Secretary to become effective player of strategic management?
1. Thorough knowledge of the company’s business.
2. Specialist as to mathematical and statistical methods and calculation.
3. Sound knowledge of laws relating to company, capital markets, industry related etc.
4. Ability to read and write.
Select the correct answer from the options given below.
(A) 1,2 and 4
(B) 2 and 4 only
(C) 2,3 and 4 only
(D) 1 and 3 only
Answer:
(D) 1 and 3 only

Question 76.
There are mainly two types of business environment –
(A) Internal and external
(B) Internal and operational
(C) Operational and external
(D) Matrix and diagonal
Answer:
(A) Internal and external

Question 77.
Environment is complex. Which of the following supports this?
(A) Customers are the people who pay money to acquire an organization’s products.
(B) The environment consists of a number of factors, events, conditions and influences arising from different sources and it is somewhat easier to understand in parts but difficult to grasp in totality.
(C) A study of the competitive scenario is essential for the marketer, particularly threats from competition.
(D) If a supplier provides a poor service, this could increase timescales or lower product quality.
Answer:
(B) The environment consists of a number of factors, events, conditions and influences arising from different sources and it is somewhat easier to understand in parts but difficult to grasp in totality.

Question 78.
Operational strategy focuses on issues of …………
(A) Resources
(B) Processes
(C) People
(D) All of above
Answer:
(D) All of above

Question 79.
Which of the following is a characteristic of business environment?
(A) Environment is complex.
(B) Environment is dynamic.
(C) Environment is multi-faceted.
(D) All of the above
Answer:
(D) All of the above

Question 80.
Micro environment is also known as –
(A) General Environment
(B) Global Environment
(C) Task Environment
(D) Matrix Environment
Answer:
(C) Task Environment

Question 81.
The Porter’s ………… Forces tool is a simple but powerful tool to evaluate the power of business.
(A) Four
(B) Five
(C) Six
(D) Ten
Answer:
(B) Five

Question 82.
Micro environment has ……… influence on the business.
(A) Indirect
(B) Direct
(C) Negative
(D) Minor
Answer:
(B) Direct

Question 83.
According to Michael Porter, the essence of strategy formulation is
(A) Mapping the Five Forces
(B) Developing core competences
(C) Coping with competition
(D) Balancing stakeholder interests
Answer:
(C) Coping with competition

Question 84.
Which of the following is element of micro environment?
(A) Demographic Environment
(B) Competitors
(C) Socio-cultural factors
(D) Economic terms
Answer:
(B) Competitors

Question 85.
The Porter’s Five Forces tool is a simple but powerful tool to evaluate the power of business. Which of the following is not one of the five?
(A) Bargaining power of suppliers
(B) Bargaining power of customer
(C) Rivalry among current players
(D) None of the above
Answer:
(D) None of the above

Question 86.
Assertion (A);
Porter’s five forces model considers new entrants as a significant source of competition.
Reason (R):
New capacity and product range that the new entrants bring in throw up new competitive pressure. Bigger the new entrant, more severe the competitive effect. New entrants also place a limit on prices and affect the profitability of existing players.
Select the correct answer from the options given below.
(A) A is false and R is true explaining how A is false
(B) Both A and Rare true and R is correct explanation of A.
(C) A is true and R is false
(D) Both A and R are true
Answer:
(B) Both A and Rare true and R is correct explanation of A.

Question 87.
Business strategy focuses on:
(A) Strategies related to functional areas such as Marketing, Production and HRM.
(B) Where a firm is going and the scope of its activities.
(C) How a firm competes within a particular market or industry.
(D) How to allocate resources between different parts of the business
Answer:
(C) How a firm competes within a particular market or industry.

Question 88.
Porter’s notion of a differentiation strategy is best described as one in which firms seek a competitive advantage:
(A) Through having a lower cost than their competitors.
(B) Through establishing their uniqueness.
(C) Through concentrating on a narrow market segment.
(D) Through achieving a match between their internal and external environments
Answer:
(B) Through establishing their uniqueness.

Question 89.
Which of the following is not an element of Porter’s 5 Forces Model?
(A) The bargaining power of suppliers.
(B) The firm’s existing competition.
(C) The firm’s macro-economic environment.
(D) The potential competition from new entrants.
Answer:
(C) The firm’s macro-economic environment.

Question 90.
Porter’s Value Chain is essentially a tool for:
(A) Identifying the competitive forces within an industry.
(B) Advising firms on how to price their products.
(C) Diagnosing and enhancing sources of competitive advantage within an organization.
(D) Calculating what a firm is worth.
Answer:
(C) Diagnosing and enhancing sources of competitive advantage within an organization.

Question 91.
In Porter’s five forces model, conditions are more favourable for firms within an industry if:
(A) Buyer power is high
(B) Supplier power is high
(C) Entry threat is low
(D) Substitute threat is high
Answer:
(C) Entry threat is low

Question 92.
If a firm takes over a competitor then, according to Porter’s 5 forces model:
(A) Buyer power is higher
(B) Supplier power is higher
(C) Substitute threat is higher
(D) Rivalry is lower
Answer:
(D) Rivalry is lower

Question 93.
Which of the following is not a force in the Porter Five Forces model?
(A) Buyers
(B) Suppliers
(C) Complementary products
(D) Industry rivalry
Answer:
(C) Complementary products

Question 94.
According to Porter, suppliers are more able to exercise bargaining power over buyers when:
(A) The supply industry is dominated by a few large firms.
(B) The supply industry is populated by a large number of small firms.
(C) When buyers have the ability to takeover suppliers.
(D) There are few buyers in the market
Answer:
(A) The supply industry is dominated by a few large firms.

Question 95.
Which core competencies are required for a Company Secretary to become effective player of strategic management?
(a) Communication and professional skills, legal skills, management skills and IT skills.
(b) Updated knowledge of legal environment, financial environment & business environment.
(c) Ability to work and achieve a consensus within multidisciplinary settings.
(d) Remaining calm under pressure and not losing sight of perspective.
Select the correct answer from the options given below.
(A) (a) and (b)
(B) (b) and (c)
(C) (a) and (c)
(D) All (a) to (d)
Answer:
(D) All (a) to (d)

Question 96.
Potential rivals will not find it difficult to enter a market where:
(A) Existing firms have long-term contracts with the biggest customers.
(B) Product differentiation is very strong.
(C) Existing firms have the ability to retaliate strongly.
(D) Economies of scale are insignificant
Answer:
(D) Economies of scale are insignificant

Question 97.
According to Porter, which of the following is most important to achieving a competitive advantage?
(A) Serving all customers equally, rather than targeting the most profitable.
(B) Operating at lower cost, commanding a premium price, or both.
(C) Focusing on becoming the most competitive business within the sector/ market.
(D) Outsourcing activities which enhance/refine your competitive advantage
Answer:
(B) Operating at lower cost, commanding a premium price, or both.

Question 98.
Identify which of the following forces does not form part of Porter’s Competitive Position Analysis?
(A) Buyer power
(B) Risk of losses
(C) Threat of new entry
(D) Supplier power
Answer:
(B) Risk of losses

Question 99.
What is likely to happen if many new businesses enter a market?
(A) Barriers to entry will rise.
(B) Industry capacity will fall.
(C) Competitive rivalry will intensify.
(D) Industry profits will increase.
Answer:
(C) Competitive rivalry will intensify.

Question 100.
In Porter’s five forces model, what is meant by the term ‘substitute’?
(A) A substitute refers to an alternative manufacturing process.
(B) A substitute is an alternative product or service that performs the same function for the consumer.
(C) A substitute is a rival firm offering the same products.
(D) A substitute is something else consumers would rather spend their money on.
Answer:
(B) A substitute is an alternative product or service that performs the same function for the consumer.

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

Budgetary Control – Corporate and Management Accounting MCQs

Question 1.
A budget is all of the following, except:
(A) A plan which will ensure the generation of future profits
(B) A system which helps to co-ordinate internal activities
(C) A system to integrate the operations for future activity
(D) A financial plan for the future
Answer:
(D) A financial plan for the future

Question 2.
For a budget to be useful and relevant for performance measurement it should satisfy all of the following, except:
(A) It will be flexible for a range of possible activity volumes
(B) It should have involved subordinate staff in the preparation
(C) Will have been agreed by those being evaluated
(D) It will have been imposed from the highest level of management
Answer:
(D) It will have been imposed from the highest level of management

Question 3.
Which of the following is not a function of budgeting?
(A) Decision making
(B) Controlling
(C) Planning
(D) Motivating
Answer:
(A) Decision making

Question 4.
The term “budgetary period” relates to:
(A) The period in which the budget is finalized
(B) The period for which the budget is prepared
(C) The subdivisions of the main budget
(D) A specific year for which the budget has been prepared
Answer:
(B) The period for which the budget is prepared

Question 5.
A budget is accepted by a manager when they:
(A) Relate it to their own personal objectives
(B) Are consulted by top management
(C) Agree to it verbally
(D) Receive the budget in writing
Answer:
(A) Relate it to their own personal objectives

Question 6.
What functional role do management accountants play in the budgeting process?
(A) They facilitate and co-ordinate the budgeting process
(B) They audit the financial statements
(C) They decide what bonuses should be paid to the staff
(D) They set targets for other managers
Answer:
(A) They facilitate and co-ordinate the budgeting process

Question 7.
A fixed budget is:
(A) A budget that ignores inflation
(B) A budget that is set for a specified level of activity
(C) A budget that never changes
(D) A budget that itemizes the fixed costs of a department
Answer:
(B) A budget that is set for a specified level of activity

Question 8.
A flexible budget is:
(A) A budget that is adjusted to reflect different costs at different activity levels
(B) A budget that will be changed at the end of the month in order to reflect the actual costs of a department
(C) A budget that comprises variable costs only
(D) A budget that is constantly being changed
Answer:
(A) A budget that is adjusted to reflect different costs at different activity levels

Question 9.
If actual output is lower than budgeted output which of the following costs would you expect to be lower than the original budget?
(A) Total variable costs
(B) Total fixed costs
(C) Fixed costs per unit
(D) Variable costs per unit
Answer:
(A) Total variable costs

Question 10.
When a production budget is being prepared the quantity that needs to be produced is calculated by the following equation:
(A) Opening stock less quantity sold plus closing stock
(B) Opening stock less quantity sold
(C) Quantity sold plus closing stock less opening stock
(D) Opening stock plus quantity sold plus closing stock
Answer:
(C) Quantity sold plus closing stock less opening stock

Question 11.
The master budget will comprise:
(A) All the production, selling and cost budgets for the organization.
(B) The budgeted profit and loss account and the budgeted balance sheet.
(C) The cash budget.
(D) The cash budget, the budgeted profit and loss account and the budgeted balance sheet.
Answer:
(D) The cash budget, the budgeted profit and loss account and the budgeted balance sheet.

Question 12.
Which of the following will NOT appear in a cash budget?
(A) Machinery bought on hire purchase
(B) Depreciation of machinery
(C) Sales revenue
(D) Wages
Answer:
(B) Depreciation of machinery

Question 13.
A budget that gives a summary’ of all the functional budgets and projected Profit and Loss Account is known as ….
(A) Capital budget
(B) Flexible budget
(C) Master budget
(D) Discretionary budget
Answer:
(C) Master budget

Question 14.
The fixed-variable cost classification has a special significance in the preparation of
(A) Flexible budget
(B) Master budget
(C) Cash budget
(D) Capital budget
Answer:
(A) Flexible budget

Question 15.
The basic difference between a fixed budget and a flexible budget is that a fixed budget
(A) Includes only fixed costs, and a flexible budget only variable costs
(B) Is a budget for a single level of some measures of activity, while a flexible budget consists of several budgets based on different activity levels
(C) Is concerned with future acquisition of fixed assets, while a flexible budget is concerned with expenses that vary with sales
(D) Cannot be changed after a fiscal period begins, while a flexible budget can be changed after a fiscal period begins
Answer:
(B) Is a budget for a single level of some measures of activity, while a flexible budget consists of several budgets based on different activity levels

Question 16.
When preparing a production budget, the quantity to be produced equals:
(A) Sales Quantity + Opening Stock + Closing Stock
(B) Sales Quantity – Opening Stock + Closing Stock
(C) Sales Quantity – Opening Stock – Closing Stock
(D) Sales Quantity + Opening Stock – Closing Stock
Answer:
(B) Sales Quantity – Opening Stock + Closing Stock

Question 17.
Of the four costs shown below, which would not be included in the cash budget of an insurance firm?
(A) Depreciation of fixed asset
(B) Commission paid to agents
(C) Office salaries
(D) Capital cost of a new computer
Answer:
(A) Depreciation of fixed asset

Question 18.
A master budget comprises
(A) The budgeted profit & loss account
(B) Budgeted cash flow, budgeted profit and loss, budgeted balance sheet
(C) Budgeted cash flow
(D) Entire sets of budgets prepared
Answer:
(B) Budgeted cash flow, budgeted profit and loss, budgeted balance sheet

Question 19.
Which of the information below should be contained in a budget manual?
(A) An organisation chart
(B) Timetable for budget preparation
(C) A list of account codes
(D) All (A), (B) and (C)
Answer:
(D) All (A), (B) and (C)

Question 20.
NSZ Ltd. cash budget forewarns of a short term surplus. Which of the following would be appropriate action to be taken in such a situation?
(A) Increase debtors and stock to boost sales
(B) Purchase new fixed assets
(C) Repay long term loans
(D) All of the above
Answer:
(A) Increase debtors and stock to boost sales

Question 21.
A Ltd. is a manufacturing company that has no production resource limitations for the foreseeable future. The Managing Director has asked the company mangers to coordinate the preparation of their budgets for the next financial year. In what order should the following budgets be prepared?
(1) Sales budget
(2) Cash budget
(3) Production budget
(4) Purchase budget
(5) Finished goods inventory budget
Select the correct answer from the options given below.
(A) (2), (3), (4), (5), (1)
(B) (1), (5), (3), (4), (2)
(C) (1), (4), (5), (3), (2)
(D) (4), (5), (3), (1), (2)
Answer:
(B) (1), (5), (3), (4), (2)

Question 22.
A plan expressed in financial terms may also be known as a:
(A) Budget
(B) Forecast
(C) Balanced scorecard
(D) Final account
Answer:
(A) Budget

Question 23.
Which of the following would not lead to an increase in net cash flow?
(A) Larger sales volume
(B) Reduced materials costs
(C) Lower depreciation charge
(D) Higher selling price
Answer:
(C) Lower depreciation charge

Question 24.
Advantages of maintaining cash budgets would not include one of the following:
(A) Surplus cash can be put to more profitable uses if expected to occur
(B) Debtors can be paid more quickly
(C) Time is available to investigate the possible future sources of finance
(D) Overdrafts can be negotiated in advance of when they are needed
Answer:
(B) Debtors can be paid more quickly

Question 25.
Which of the following would be found in a cash budget?
(A) Capital expenditure
(B) Provision for doubtful debts
(C) Depreciation
(D) Accrued expenditure
Answer:
(A) Capital expenditure

Question 26.
A forecast set of final accounts is also known as:
(A) Capital budget
(B) Cash budget
(C) Master budget
(D) Sales budget
Answer:
(B) Cash budget

Question 27.
Which of the following will not affect preparation of cash budget?
(A) Loan taken by firm
(B) Proceeds from asset disposal
(C) Reduction in provision for doubtful debts
(D) Cash sales
Answer:
(C) Reduction in provision for doubtful debts

Question 28.
Which of the following budgets should be produced first?
(A) Production budget
(B) Purchases budget
(C) Master budget
(D) Sales budget
Answer:
(D) Sales budget

Question 29.
Budgetary control involves all but one of the following:
(A) Modifying future plans
(B) Analyzing differences
(C) Using static budgets
(D) Determining differences between actual and planned results
Answer:
(C) Using static budgets

Question 30.
A static budget is useful in controlling costs when cost behaviour is:
(A) Mixed
(B) Fixed
(C) Variable
(D) Linear
Answer:
(B) Fixed

Question 31.
Responsibility centers include:
(A) Cost centers
(B) Profit centers
(C) Investment centers
(D) All of the above
Answer:
(D) All of the above

Question 32.
Which of the following objective is not primary purpose of preparing budget?
(A) To provide a basis for comparison of actual performance
(B) To communicate the company’s plan throughout the organization and insure co-ordination of activity throughout the organization
(C) To control income and expenditure for a given period
(D) To insure that company expands its operations
Answer:
(D) To insure that company expands its operations

Question 33.
Which of the following statements most clearly describes the master budget?
(A) The master budget is similar to a legal action and must be followed to fulfill company policy.
(B) The master budget is a strategic plan proposed by management and communicated through pro forma financial statements.
(C) The master budget is a set of budgeted financial statements that are sometimes called pro forma statements.
(D) The master budget is not in itself a strategic plan but aids managers in implementing their strategic plans.
Answer:
(D) The master budget is not in itself a strategic plan but aids managers in implementing their strategic plans.

Question 34.
Managers can use feedback from budgets to help them evaluate performance if they initially
(A) Pinpoint fault for operating problems
(B) Focus on whom they should ask and not on whom they should blame
(C) Fix the blame on those who are responsible for actions that do not meet budget expectations
(D) Designate the appropriate responsibility centre to be held accountable for any problems
Answer:
(B) Focus on whom they should ask and not on whom they should blame

Question 35.
A manager who is responsible for receivables and stock would most likely be considered in charge of ……………….
(A) Profit centre
(B) Revenue centre
(C) Cost centre
(D) Investment centre
Answer:
(D) Investment centre

Question 36.
Which of the following represents the normal sequence in which the below budgets are prepared.
(A) Sales, Balance Sheet, Income Statement
(B) Balance Sheet, Sales, Income Statement
(C) Sales, Income Statement, Balance Sheet
(D) Income Statement, Sales, Balance Sheet
Answer:
(C) Sales, Income Statement, Balance Sheet

Question 37.
Operating budgets are:
(A) A forecast of expected operating expenses
(B) A forecast of operating expenses
(C) Concerned with the income generating activities of a firm
(D) Concerned with the inflows and outflows of cash
Answer:
(C) Concerned with the income generating activities of a firm

Question 38.
Which of the following is NOT an advantage of budgeting?
(A) It provides resource information that can be used to improve decision making.
(B) It aids in the use of resources and employees by setting a benchmark that can be used for the subsequent evaluation of performance.
(C) It provides organizational independence.
(D) It improves communication and coordination
Answer:
(C) It provides organizational independence.

Question 39.
Which of the following factors is not a responsibility of the budget committee?
(A) Reviews the budget
(B) Provides policy guidelines
(C) Provides budgeting goals
(D) Prepares actual financial statements
Answer:
(D) Prepares actual financial statements

Question 40.
The difference between fixed cost and variable cost has significance in preparation of
(A) Flexible budget
(B) Master budget
(C) Cash budget
(D) Capital expenditure budget
Answer:
(A) Flexible budget

Question 41.
Which of the following items would have to be included for a company preparing a schedule of cash receipts and disbursements for the calendar year 2015?
(A) The annual depreciation for the year 2015.
(B) Purchase order issued in December 2014 for items to be delivered in February 2015.
(C) Dividends declared in November 2015, to be paid in January 2016 to shareholders of record as of December 2015
(D) Funds borrowed from a bank on a note payable taken out in June 2014 with an agreement to pay the principal and all of the interest owed in December 2015.
Answer:
(D) Funds borrowed from a bank on a note payable taken out in June 2014 with an agreement to pay the principal and all of the interest owed in December 2015.

Question 42.
Individual budget schedules are prepared to develop an annual comprehensive or master budget. The budget schedule that would provide the necessary input data for the direct labour budget would be the:
(A) Sales forecast
(B) Raw materials purchases budget
(C) Schedule of cash receipts and disbursements
(D) Production budget
Answer:
(D) Production budget

Question 43.
In a not-for-profit service firm, the sales budget is replaced by:
(A) The production budget
(B) A budget that identifies the various expenses
(C) A budget that identifies the various services and the associated funds assigned to them
(D) None of the above
Answer:
(C) A budget that identifies the various services and the associated funds assigned to them

Question 44.
Which of the following budgets would not be present for both for-profit and not- for-profit service organizations?
(A) Sales budget
(B) Budgeted income statement
(C) Budgeted balance sheet
(D) Finished goods budget
Answer:
(D) Finished goods budget

Question 45.
In a for-profit service firm, the sales budget is also the:
(A) Merchandise purchase budget
(B) Production budget
(C) Direct materials budget
(D) Overhead budget
Answer:
(B) Production budget

Question 46.
Budgetary control helps the management in…………..
(A) Planning only
(B) Control only
(C) Planning and control
(D) Directing
Answer:
(C) Planning and control

Question 47.
The priorities in functional budget are determined by ………..
(A) Cash resources only
(B) Human resources only
(C) Principle budget factor
(D) None of the above
Answer:
(C) Principle budget factor

Question 48.
The budget designed to furnish budgeted cost any level of activity actual attained is called ……………
(A) Zero base budget
(B) Fixed budget
(C) Flexible budget
(D) Budget manual
Answer:
(C) Flexible budget

Question 49.
Which of the following statement(s) is/are false?
(A) Budget reports comparing actual results with planned objectives should be prepared only once a year.
(B) Certain budget reports are prepared monthly whereas others are prepared more frequently depending on the activities being monitored.
(C) A static budget is one that is geared to one level of activity.
(D) All of the above
Answer:
(A) Budget reports comparing actual results with planned objectives should be prepared only once a year.

Question 50.
Which of the following statement(s) is/are true?
(A) The master budget is not used in the budgetary control process.
(B) A master budget is most useful in evaluating a manager1’s performance in controlling costs.
(C) A flexible budget can be prepared for each of the types of budgets included in the master budget.
(D) All of the above
Answer:
(C) A flexible budget can be prepared for each of the types of budgets included in the master budget.

Question 51.
Which of the following statement(s) is/are false?
(A) A flexible budget is a series of static budgets at different levels of activities.
(B) Flexible budgeting relies on the assumption that unit variable costs will remain constant within the relevant range of activity.
(C) The activity index used in preparing a flexible budget should not influence the variable costs that are being budgeted.
(D) All of the above
Answer:
(C) The activity index used in preparing a flexible budget should not influence the variable costs that are being budgeted.

Question 52.
Which of the following statement(s) is/are true?
(A) A formula used in developing a flexible budget is: Total budgeted cost = fixed cost + (total variable cost per unit X activity level)
(B) Flexible budgets are widely used in production and service departments.
(C) Flexible budgets are widely used in production and service departments.
(D) All of the above
Answer:
(D) All of the above

Question 53.
Which of the following statement(s) is/are false?
(A) Cost centers, profit centers, and investment centers can all be classified as responsibility centers.
(B) The terms “direct fixed costs” and “indirect fixed costs” are synonymous with “traceable costs” and “common costs,” respectively.
(C) Management by exception means that management will investigate areas where actual results differ from planned results if the items are material and controllable.
(D) None of the above
Answer:
(D) All of the above

Question 54.
A major element in budgetary controlis:
(A) The preparation of long-term plans
(B) The comparison of actual results with planned objectives
(C) The valuation of inventories
(D) Approval of the budget by the stock-holders
Answer:
(B) The comparison of actual results with planned objectives

Question 55.
Budget reports should be prepared
(A) Daily
(B) Monthly
(C) Weekly
(D) As frequently as needed
Answer:
(D) As frequently as needed

Question 56.
On the basis of the budget reports
(A) Management analyzes differences between actual and planned results
(B) Management may take corrective action
(C) Management may modify the future plans
(D) All of these
Answer:
(D) All of these

Question 57.
The purpose of the sales budget report is to
(A) Control selling expenses
(B) Determine whether income objectives are being met
(C) Determine whether sales goals are being met
(D) Control sales commissions
Answer:
(C) Determine whether sales goals are being met

Question 58.
A static budget
(A) Should not be prepared in a company
(B) Is useful in evaluating a manager’s performance by comparing actual variable costs and planned variable costs
(C) Shows planned results at the original budgeted activity level
(D) Is changed only if the actual level of activity is different than originally budgeted
Answer:
(C) Shows planned results at the original budgeted activity level

Question 59.
Top management’s reaction to a difference between budgeted and actual sales often depends on
(A) Whether the difference is favorable or unfavorable
(B) Whether management anticipated the difference
(C) The materiality of the difference
(D) The personality of the top managers
Answer:
(C) The materiality of the difference

Question 60.
Assume that actual sales results exceed the planned results for the second quarter. This favourable difference is greater than the unfavourable difference reported for the first quarter sales. Which of the following statements about the sales budget report on June 30 is true?
(A) The year-to-date results will show a favourable difference
(B) The year-to-date results will show an unfavourable difference
(C) The difference for the first quarter can be ignored
(D) The sales report is not useful if it shows a favorable and unfavourable difference for the two quarters
Answer:
(A) The year-to-date results will show a favourable difference

Question 61.
Which one of the following would be the same total amount on a flexible budget and a static budget if the activity level is different for the two types of budgets?
(A) Direct materials cost
(B) Direct labour cost
(C) Variable manufacturing overhead
(D) Fixed manufacturing overhead
Answer:
(D) Fixed manufacturing overhead

Question 62.
In developing a flexible budget within a relevant range of activity,
(A) Only fixed costs are included
(B) It is necessary to relate variable cost data to the activity index chosen
(C) It is necessary to prepare a budget at 1,000 unit increments
(D) Variable and fixed costs are combined and are reported as a total cost
Answer:
(B) It is necessary to relate variable cost data to the activity index chosen

Question 63.
Another name for the static budget is:
(A) Master budget
(B) Overhead budget
(C) Permanent budget
(D) Flexible budget
Answer:
(A) Master budget

Question 64.
If a company plans to sell 16,000 units of product but sells 20,000, the most appropriate comparison of the cost data associated with the sales will be by a budget based on
(A) The original planned level of activity
(B) 18,000 units of activity
(C) 20,000 units of activity
(D) 16,000 units of activity
Answer:
(C) 20,000 units of activity

Question 65.
Within the relevant range of activity, the behaviour of total costs is assumed to be:
(A) Linear and upward sloping
(B) Linear and downward sloping
(C) Curvilinear and upward sloping
(D) Linear to a point and then level off
Answer:
(A) Linear and upward sloping

Question 66.
Sales results that are evaluated by a static budget might show
(1) Favourable differences that are not justified.
(2) Unfavourable differences that are not justified.
Select the correct answer from the options given below.
(A) (1)
(B) (2)
(C) Both (1) & (2)
(D) Neither (1) or (2)
Answer:
(C) Both (1) & (2)

Question 67.
Under management by exception, which differences between planned and actual results should be investigated?
(A) Material and non-controllable
(B) Controllable and non-controllable
(C) Material and controllable
(D) All differences should be investigated
Answer:
(C) Material and controllable

Question 68.
A flexible budget depicted graphically…
(A) Is identical to a CVP graph
(B) Differs from a CVP graph in the way that fixed costs are shown
(C) Differs from a CVP graph in the way that variable costs are shown
(D) Differs from a CVP graph in that sales revenue is not shown
Answer:
(D) Differs from a CVP graph in that sales revenue is not shown

Question 69.
The accumulation of accounting data on the basis of the individual manager who has the authority to make day-to-day decisions about activities in an area is called …….
(A) Static reporting
(B) Flexible accounting
(C) Responsibility accounting
(D) Master budgeting
Answer:
(C) Responsibility accounting

Question 70.
Which of the following would NOT be considered an aspect of budgetary control?
(A) It assists in the determination of differences between actual and planned results.
(B) It provides feedback value needed by management to see whether actual operations are on course.
(C) It assists management in controlling operations.
(D) It provides a guarantee for favourable results
Answer:
(D) It provides a guarantee for favourable results

Question 71.
A flexible budget is appropriate for

Answer:
(B)

Question 72.
A flexible budget requires a careful study of …………
(A) Fixed, semi-fixed and variable expenses
(B) Past and current expenses
(C) Overheads, selling and administrative expenses
(D) None of the above
Answer:
(A) Fixed, semi-fixed and variable expenses

Question 73.
Sales budget is a ……
(A) Expenditure budget
(B) Functional budget
(C) Master budget
(D) None of the above
Answer:
(B) Functional budget

Question 74.
The budget that is prepared first of all is ………….
(A) Master budget
(B) Budget, with key factor
(C) Cash Budget
(D) Capital expenditure budget
Answer:
(D) Capital expenditure budget

Question 75.
Which of the following is a long-term budget?
(A) Master Budget
(B) Flexible Budget
(C) Cash Budget
(D) Capital Budget
Answer:
(D) Capital Budget

Question 76.
Budgets are shown in terms.
(A) Qualitative
(B) Quantitative
(C) Materialistic
(D) Both (B) and (C)
Answer:
(D) Both (B) and (C)

Question 77.
………. may be defined as, “planning and budgeting processes which requires each managers to justify his entire budget request in details from scratch and shifts the burden of proof to each manager to justify why he should spend any money at all.
(A) Zero base budgeting
(B) Past base budgeting
(C) Master budgeting
(D) Performance budgeting
Answer:
(A) Zero base budgeting

Question 78.
……… is a period for which various reports are submitted to take corrective actions by the management.
(A) Control period
(B) Budget period
(C) Accounting period
(D) All of the above
Answer:
(A) Control period

Question 79.
The …. is concerned with estimating the probable output of each product in the forthcoming budget period.
(A) Production budget
(B) Sales budget
(C) Purchase budget
(D) None of the Above.
Answer:
(A) Production budget

Question 80.
………… may be defined as analysis and interpretation of the future conditions in relation to operations of the enterprise.
(A) Budgeting
(B) Value analysis
(C) Control management
(D) Forecasting
Answer:
(D) Forecasting

Question 81.
Budgets are estimate-based on
(A) Probable events
(B) Planned events
(C) Future events
(D) All of the above
Answer:
(B) Planned events

Question 82.
CIMA, London defines as, “the establishment of budgets relating the responsibilities of executives to the requirements of policy, and the continuous comparison of actual with budgeted results, either to secure, by individual action, the objective of that policy or to provide a basis for its revision.”
(A) Management by exception
(B) Budget
(C) Budget reporting
(D) Budgetary control
Answer:
(D) Budgetary control

Question 83.
Section of an organization for which separate budgets can be prepared, and control exercised is known as
(A) Department
(B) Budget Centre
(C) Budget Committee
(D) Master Budget
Answer:
(B) Budget Centre

Question 84.
Which of the following statement is correct about budget manual?
(A) It is a document which sets out interalia the responsibilities of the persons engaged in the routine of and the forms and records required for budgetary control
(B) It is the document which lays down the details of the budgeting organization and procedures.
(C) It is a formal record defining the functions and responsibilities of each executive.
(D) All of the above
Answer:
(D) All of the above

Question 85
……. provide a meaningful relationship between estimated inputs and expected outputs as an integral part of the budgeting system.
(A) Zero base budgeting
(B) Master budgeting
(C) Performance budgeting
(D) Input and output budgeting
Answer:
(C) Performance budgeting

Question 86.
Which of the following formula is correct?
Answer:
(A) Activity Ratio \(=\frac{\text { Budgeted Hours }}{\text { Standard Hours }} \times 100\)
(B) Efficiency Ratio \( =\frac{\text { Standard Hours }}{\text { Budgeted Hours }} \times 100\)
(C) Capacity Ratio \(=\frac{\text { Actual Hours }}{\text { Standard Hours }} \times 100\)
(D) None of the above
Answer:
(D) None of the above

Question 87.
A company has sales in units of 2,600. There are 1,400 units of opening stock while the closing stock is planned to be 1,800units. What production is needed to satisfy sales?
(A) 3,000 units
(B) 2,437 units
(C) 2,600 units
(D) 2,200 units
Answer:
(A) 3,000 units
Sales Units + Closing Stock – Opening Stock = Unit Produced
2,600 + 1,800 – 1,400 = 3,000

Question 88.
Consider the following data for the month of May:

Based on the data, production in May will have to be…….
(A) 110 units
(B) 190 units
(C) 50 units
(D) 150 units
Answer:
(A) 110 units
Try to solve at your own end.

Question 89.
Consider the following data for the month of May:

Based on the data, the opening inventory for April will have to be:
(A) 70 units
(B) 130 units
(C) 50 units
(D) 410 units
Answer:
(B) 130 units
Try to solve at your own end.

Question 90.
Consider the following data for the month of May:

If the closing inventory is 50% higher than the previous month then production will have to be:
(A) 540 units
(B) 700 units
(C) 600 units
(D) 720 units
Answer:
(B) 700 units
Closing Stock = 80 + 50% = 120; Unit Produced = 660 + 120 – 80 = 700

Question 91.
M Ltd. produces & sells laptop computers. It had 2,000 computers in finished goods inventory at the end of the last year. M Ltd. expects to sell 20,000 computers and would like to complete in this year with at least 2,500 completed computers in inventory. There is no ending work-in-process in either year. The laptop computers are sold for ₹ 20,000 each. How many laptop computers would be produced for the next year?
(A) 20,000
(B) 20,500
(C) 22,000
(D) 22,500
Answer:
(B) 20,500
Try to solve at your own end.

Question 92.
A company has made the following budget forecasts for next year:
Opening cash balance 1 Jan. — 24,000
Net profit for the year — 100,000
Payment of tax — 25,000

No other relevant information is available. What is the company’s budgeted cash holding at 31 December next year
(A) ₹ 34,000
(B) ₹ 26,000
(C) ₹ 6,000
(D) ₹ 56,000
Answer:
(D) ₹ 56,000

Question 93.
The budgeted sales for the next four quarters are ₹ 1,92,000, ₹ 2,88,000, ₹ 2,88,000 & ₹ 3,36,000, respectively. It is estimated that sales will be paid for as follows: 75% of the total will be paid in the quarter that the sales were made. Of the balance 50% will be paid in the quarter after the sale was made. The remaining 50% will be paid in the quarter after this. The amount of cash received in quarter 3 will be
(A) ₹ 2,76,000
(B) ₹ 1,44,000
(C) ₹ 3,24,000
(D) ₹ 2,40,000
Answer:
(A) ₹ 2,76,000

Question 94.
A company is preparing the production budget for quarter 2. Projected sales (in units) are as follows:

The company policy is to have finished goods stocks of 20% of the next month’s projected sales. Assuming that there was no opening stock for April, what should be the production quota for May?
(A) 694 units
(B) 680 units
(C) 830 units
(D) 666 units
Answer:
(A) 694 units

Question 95.
A job requires 2,400 actual labour hours for completion and it is anticipated that there will be 20% idle time. If the wage rate is ₹ 10 per hour, what is the budgeted labour cost for the job?
(A) ₹ 19,200
(B) ₹ 24,000
(C) ₹ 28,800
(D) ₹ 30,000
Answer:
(D) ₹ 30,000
\(\begin{gathered}
2,400 \\
\hline 80 \%
\end{gathered}\) × 10 = 30,000

Question 96.
PG Ltd. makes a single product and is preparing its material usage budget for next year. Each unit of product requires 2 kg. of material, and 5,000 units of product are to be produced next year. Opening stock of material is budgeted to be 800 kg. and PG Ltd. budgeted to increase material stock at the end of next year by 20%. The material usage budget for next year is
(A) 8,000 kg.
(B) 9,840 kg.
(C) 10,000 kg.
(D) 10,160 kg.
Answer:
(C) 10,000 kg.
Material Purchases = Material consumed + Closing stock of raw material – Opening stock of raw material
(5,000 × 2 kg) + 960 kg – 800 kg = 10,160; this is not the answer.
Read the question carefully. Question asks to calculate material usage i.e. material consumed.
Material usage = (5,000 ×2 kg) = 10,000 kg.

Question 97.
BDLLtd . is currently preparing its cash budget for the year to 31 March 2014. An extract from its sales budget for the same year shows the following sales values.
March — 60,000
April — 70,000
May — 55,000
June — 65,000
40% of its sales are expected to be for cash. Of its credit sales, 70% are expected to pay in month after sale and take a 2% discount. 27% are expected to pay in the second month after the sale, and the remaining 3% are expected to be bad debts. The value of sales budget to be shown in the cash budget for May 2013 is
(A) ₹ 60,532
(B) ₹ 61,120
(C) ₹ 66,532
(D) ₹ 86,620
Answer:
(A) ₹ 60,532

Question 98.
The actual output of 1,62,500 units and actual fixed costs of ₹ 87000 were exactly as budgeted. However, the actual expenditure of ₹ 300,000 was ₹ 18,000 over budget. What was the budget variable cost per unit?
(A) ₹ 1.20
(B) ₹ 1.31
(C) ₹ 1.42
(D) ₹ 1.50
Answer:
(A) ₹ 1.20
\(\frac{3,00,000-18,000-87,000}{1,62,500}=1.20\)

Question 99.
CA Co. manufactures a single product and has drawn up the following flexed budget for the year.

What would be the total cost in a budget that is prepared at the 77% level of activity?
(A) ₹ 3,30,300
(B) ₹ 3,70,300
(C) ₹ 3,73,300
(D) ₹ 3,77,300
Answer:
(B) ₹ 3,70,300

Question 100.
S produces and sells one product, P, for which the data are as follows:
Selling price — ₹ 28
Variable cost — ₹ 16
Fixed cost — ₹ 4
The fixed costs are based on a budgeted production and sales level of 25,000 units for the next period. Due to market changes both the selling price and the variable cost are expected to increase above the budgeted level in the next period. If the selling price and variable cost per unit increase by 10% and 8% respectively, by how much must sales volume change, compared with the original budgeted level, in order to achieve the original budgeted profit for the period?
(A) 10.1 % decrease
(B) 11.2% decrease
(C) 13.3% decrease
(D) 16.0% decrease
Answer:
(B) 11.2% decrease

Question 101.
At zero direct labour hours in a flexible budget graph, the total budgeted cost line intersects the vertical axis at ₹ 30,000. At 10,000 direct labour hours, a horizontal line drawn from the total budgeted cost line intersects the vertical axis at ₹ 90,000. Fixed and variable costs may be expressed as
(A) ₹ 30,000 fixed plus ₹ 6 per direct labour hour variable
(B) ₹ 30,000 fixed plus ₹ 9 per direct labour hour variable
(C) ₹ 60,000fixed plus ₹ 3 per direct labour hour variable
(D) ₹ 60,000 fixed plus ₹ 6per direct labour hour variable
Use the following information to answer next five questions:
X Ltd. makes Product W. Each Product W is cast from 4 kg. of raw material that costs ₹ 2.50 per kg. The opening stock of raw materials is 4,000 kg and the company wants 6,000 kg with which to begin the following period. Product W takes one- half hour of direct labour at a rate of ₹ 9 per hour. Projected sales of Product W is 1,00,000 units, each unit selling for ₹ 15. Opening stock of finished Product W is 8,000 and the desired closing stock is 12.000 units.
Answer:
(A) ₹ 30,000 fixed plus ₹ 6 per direct labour hour variable
Fixed cost = ₹ 30,000
Variable cost per unit =\(\frac{90,000-30,000}{10,000}=6\)

Question 102.
What is the sales budget for the X Ltd.?
(A) ₹ 15,000
(B) ₹ 15,00,000
(C) ₹ 1,00,000
(D) ₹ 1,50,000
Answer:
(B) ₹ 15,00,000
1,00,000 × 15 = 15,00,000

Question 103.
What would be the production budget in units for X Ltd.?
(A) 1,06,000 units
(B) 1,04,000 units
(C) 98,000 units
(D) 1,10,000 units
Answer:
(B) 1,04,000 units
Sales Units + Closing Stock – Opening Stock = Unit Produced
1,0, 000 + 12,000 – 8,000 = 1,04,000 units

Question 104.
What would be the direct materials purchases budget in kg?
(A) 4,18,000 kg
(B) 4,00,000 kg
(C) 4,14,000 kg
(D) 4,16,000 kg
Answer:
(A) 4,18,000 kg
Material consumed = 1,04,000 × 4 = 4,16,000
Material Purchases=Material consumed + Closing stock of raw material – Opening stock of raw material = 4,16,000 + 6,000 – 4,000 = 4,18,000

Question 105.
What would be the direct labour budget?
(A) ₹ 4,68,000
(B) ₹ 4,50,000
(C) ₹ 9,36,000
(D) ₹ 1,04,000
Answer:
(A) ₹ 4,68,000
1,04,000 × 0.5 × 9 = 4,68,000

Question 106.
If the beginning balance of cash is ₹ 5,000 and the desired closing cash balance is ₹ 10,000, with the only other cash-related items being revenue, direct materials purchases, and cost of direct labour, what would be the surplus or deficit of cash at the end of the period?
(A) Deficit of ₹ 8,000
(B) Surplus of ₹ 18,000
(C) Deficit of ₹ 18,000
(D) No surplus or deficit
Answer:
(C) Deficit of ₹ 18,000
5,000 + 15,00,000 (sales) -10,45,000 (material purchase) – 4,68,000 (labour) -10,000 (desired cash balance) = – 18,000

Question 107.
R Ltd. is budgeting production of 1,00,000 units of Product R for the month of May this year. Production of one unit of Product R requires three units of Material B. For Material B, the actual inventory units at May 1 were 22,000 units and budgeted inventory units at May 31 are 24,000. How many units of Material B is R Ltd. planning to purchase during May?
(A) 3,28,000
(B) 3,02,000
(C) 2,98,000
(D) 2,72,000
Answer:
(B) 3,02,000
Material consumed = 1,00,000 × 3 = 3,00,000
Material Purchases=Material consumed + Closing stock of raw material – Opening stock of raw material = 3,00,000 + 24,000 – 22,000 = 3,02,000

Question 108.
XYZ has forecast sales for the next three months as follows: January, 10,000 units; February, 15,000 units; and March, 20,000 units. Inventory as of January 1 is expected to be 2,000 units. Ending inventories should equal 25% of the coming month’s sales needs. How many units should be produced in February?
(A) 13,750 units
(B) 15,000 units
(C) 16,250 units
(D) 18,000 units
Answer:
(C) 16,250 units

Question 109.
A Ltd. has observed its receivable collection pattern to be as follows: 40% in the month of the sale, 45% in the month following the sale, and 13% in the second month following the sale. Sales for the last 3 months of the year were as follows: October ₹ 3,00,000; November, ₹ 4,50,000 and December, ₹ 6,25,000. Sales for January are budgeted to be ₹ 3,75,000. What are the budgeted cash collections for January?
(A) ₹ 3,75,000
(B) ₹ 4,89,750
(C) ₹ 4,95,750
(D) ₹ 6,25,000
Answer:
(B) ₹ 4,89,750

Question 110.
S Ltd. has forecast sales as follows: July 30,000 units; August 35,000 units; and September 40,000 units. Finished goods inventory as of July 1 is forecast to be 10,000 units. Finished goods inventory of 20% of the following month’s sales needs is desired. Each finished unit requires 5 kg of raw material. The raw materials inventory level on July 1 was 2,02,500 kg and the expected raw materials inventory level on July 31 will be 2,70,000 kg. How many kg of raw material should be purchased in July?
(A) 27,000 kg
(B) 40,500 kg
(C) 1,35,000 kg
(D) 2,02,500 kg
Answer:
(D) 2,02,500 kg

Question 111.
The master budget of Benedict Company shows that the planned activity level for next year is expected to be 50,000 machine hours. At this level of activity, the following manufacturing overhead costs are expected:

A flexible budget for a level of activity of 60,000 machine hours would show total manufacturing overhead costs of ……………..
(A) ₹ 7,41,000
(B) ₹ 6,30,000
(C) ₹ 7,56,000
(D) ₹ 6,81,000
Answer:
(A) ₹ 7,41,000

Question 112.
A department has budgeted monthly manufacturing overhead cost of ₹ 90,000 plus ₹ 3 per direct labour hour. If a flexible budget report reflects ₹ 1,74,000 for budgeted manufacturing cost for the month, the actual level of activity achieved during the month was:
(A) 88,000 direct labour hours
(B) 28,000 direct labour hours
(C) 58,000 direct labour hours
(D) Cannot be determined
Answer:
(B) 28,000 direct labour hours

Question 113.
Z & Co. has budgeted manufacturing costs for 25,000 units are:
Fixed manufacturing costs ₹ 25,000 per month, Variable manufacturing costs ₹ 12.00 per unit. Z & Co. produced 20,000 units during March. How much is the flexible budget for total manufacturing costs for March?
(A) 2,60,000
(B) 3,25,000
(C) 2,40,000
(D) 2,65,000
Answer:
(D) 2,65,000

Question 114.
If indirect repair cost at 6,000 labour hours is 42,000 and ₹ 63,000 at 9,000 labour hours, then it indirect repair cost is in nature.
(A) Variable
(B) Fixed
(C) Semi-fixed
(D) None of the above
Answer:
(A) Variable

Question 115.
The following information is obtained from the books of account of Excellent manufactures.

Which cost is semi-variable in nature?
(A) Repair, shop labour & inspection
(B) Repair, Power, Consumables & inspection
(C) Shop labour & Consumables
(D) Repair, Power & inspection
Answer:
(D) Repair, Power & inspection

Question 116.
Recent budget prepared by G Ltd. show that inspection cost is ₹ 5,000 at a capacity level of 2,500 units out of which 25% is semi-variable. What will be inspection cost at 1,750 level of activity?
(A) ₹ 6,125
(B) ₹ 4,625
(C) ₹ 3,875
(D) ₹ 3,625
Answer:
(B) ₹ 4,625

Question 117.
The budget manager of J Ltd. is preparing a flexible budget. Material costs ₹ 7 per unit. Direct labour averages ₹ 2.5 per hour and requires 1.60 hours to produce one unit. Salesmen are paid commission of ₹ 1 per unit sold.

What will be total cost at 1,40,000 units?
(A) ₹ 26,30,000
(B) ₹ 25,10,000
(C) ₹ 27,70,000
(D) ₹ 28,55,000
Use the following information to answer next 2 questions.
A factory is working at 50% of its capacity and produces 10,000 units. At 60% capacity, the raw materials cost increased by 2%. At 80% capacity, raw material cost increased by 5% and selling price falls by 5%. At 50% capacity, the product costs ₹ 180 per unit and sold at ₹ 200 per unit. The cost of ₹ 180 is made up as follows:

Answer:
(C) ₹ 27,70,000

Question 118.
Estimate the profit of the factory when it works at 60% of its working capacity.
(A) ₹ 3,72,000
(B) ₹ 2,60,000
(C) ₹ 2,72,000
(D) ₹ 3,60,000
Answer:
(B) ₹ 2,60,000

Question 119.
Estimate the profit of the factory when it works at 80% of its working capacity.
(A) ₹ 3,72,000
(B) ₹ 2,60,000
(C) ₹ 2,72,000
(D) ₹ 3,60,000
Answer:
(A) ₹ 3,72,000

Question 120.
Factory overheads of Good-Luck Ltd. at 55% capacity are ₹ 3,10,000 and at 75% capacity ₹ 3,50,000 for the current year. The following increases in cost are expected in next year:

What will be the factory overheads if factory works at 85% capacity next year?
(A) 3,98,500
(B) 2,98,500
(C) 5,98,200
(D) 3,48,250
Answer:
(A) 3,98,500

Question 121.
A single product company estimated its unit to be produced for the next year quarter wise as under:

Each unit of finished output requires 2 kg of raw material. The opening stock of raw materials in the beginning of the year is 10,000 kg and the closing stock at the end of the year is required to be maintained at 5,000 kg. Raw material to be purchased in kg = ?
(A) 3,20,000
(B) 3,25,000
(C) 3,15,000
(D) 3,30,000
Answer:
(C) 3,15,000

Question 122.
P Ltd. has prepared its expense budget for 20,000 units in its factory for the year 2015 as detailed below:


What will be total cost at 18,000 units.
(A) 20,14,000
(B) 23,53,600
(C) 23,14,000
(D) 25,14,600
Answer:
(B) 23,53,600

Question 123.
A company estimated its sales for the next year quarter wise as under:

The opening stock of finished goods is 10,000 units and the company expects to maintain the closing stock of finished goods at 16,250 units at the end of the year. The production pattern in each quarter is based on 80% of the sales of the current quarter and 20% of the sales of the next quarter. How much units will be produced in last quarter?
(A) 48,250
(B) 38,250
(C) 42,000
(D) 48,750
Answer:
(A) 48,250

Question 124.
As per budget of Z Ltd. estimated sales emits for the month of April & May 2015 are 12,000 units & 13,000 units. As a matter of policy, the company maintains the closing balance of finished goods 50% of the estimated sales for the next month. Unit to be produced for the month of April = ?
(A) 12,500
(B) 6,000
(C) 18,500
(D) 11,500
Use the following information to answer next 3 questions:

Answer:
(A) 12,500

Question 125.
Activity Ratio = ?
(A) 85.23%
(B) 125%
(C) 76.25%
(D) 68.18%
Answer:
(A) 85.23%

Question 126.
Efficiency Ratio = ?
(A) 68.18%
(B) 85.23%
(C) 125%
(D) 65.83%
Answer:
(C) 125%

Question 127.
Capacity Ratio = ?
(A) 125%
(B) 68.18%
(C) 85.23%
(D) 110%
Answer:
(B) 68.18%

Question 128.
C Ltd. produced two products, viz. Product A & B. Each unit takes 5 hours and 10 hours respectively as production time. 1,000 units of Product A and 600 units of Product B were produced during March, 2015. Actual man hours spent in the production were 10,000. Monthly budgeted hours are 8,000. Efficiency Ratio = ?
(A) 137.5%
(B) 110%
(C) 125%
(D) 113.5%
Answer:
(B) 110%

Question 129.
If the ‘activity ratio’ and ‘capacity ratio’ of a company is 104% and 96% respectively, fine out its ‘efficiency ratio.’
(a) 108.33%
(b) 92.31%
(c) 91.0596
(d) 78.12596
Answer:
(a) 108.33%

Question 130.
The activity ratio of a concern is 95.696 whereas the capacity ratio is 10596. What is the efficiency ratio?
(A) 108.3396
(B) 92.3196
(C) 91.0596
(D) 78.12596
Answer:
(C) 91.0596

Question 131.
Dec. 2014: The budgeting system designed to change in relation to level of activity actually attained is known as —
(A) Fixed budgeting
(B) Flexible budgeting
(C) Performance budgeting
(D) Functional budgeting
Answer:
(B) Flexible budgeting

Question 132.
Dec. 2014: From the following, which one is a functional budget —
(A) Master budget
(B) Fixed budget
(C) Sales budget
(D) Current budget
Answer:
(C) Sales budget

Question 133.
Dec. 2014: The following information is available:
Wages for January: ₹ 20,000
Wages for February: ₹ 22,000
Delay in payment of wages: 1/2 month
The amount of wages paid during the month of February is —
(A) ₹ 11,000
(B) ₹ 22,000
(C) ₹ 20,000
(D) ₹ 21,000
Answer:
(D) ₹ 21,000

Question 134.
Dec. 2014: In an organization, cash sales is 2596 and credit sales is 7596. Sales for October, 2013 is ₹ 12,00,000, November, 2013 ? 14,00,000, December, 2013 ₹ 16,00,000, January, 2014 ₹ 6,00,000 and February, 2014 ₹ 8,00,000. 6096 of credit sales are collected in the next month after sales, 3096 in the second month and 1096 in the third month. No bad debts are anticipated. The cash collected in the month of February, 2014 from debtors is —
(A) ₹ 15,00,000
(B) ₹ 9,80,000
(C) ₹ 7,35,000
(D) ₹ 80,000
Answer:
(C) ₹ 7,35,000

Question 135.
Dec. 2014: ABC Ltd. produces and sells a single product. Sales budget to the calendar year 2015 for each quarter is as under:
No. of units to be sold:
Quarter – I : 12,000
Quarter – II : 15,000
Quarter – Ill : 16,500
Quarter-IV : 18,000
The year 2015 is expected to open with an inventory of 4,000 units of finished product and close with an inventory of 6,500 units. Production is customarily scheduled to provide for two-thirds of the current quarter’s demand plus one-third of the following quarter’s demand. Production for Quarter – IV would be —
(A) 13,500 units
(B) 15,500 units
(C) 17,000 units
(D) 18,500 units
Answer:
(D) 18,500 units

Question 136.
Dec. 2014: Under which of the following method of budgeting, all activities are re-evaluated each time a budget is set—
(A) Materials budget
(B) Zero base budgeting
(C) Sales budget
(D) Overheads budget
Answer:
(B) Zero base budgeting

Question 137.
June 2015: In Rise Ltd., cash sales is 2596 and credit sales 7596. Sales for November, 2014 is ₹ 15,00,000, December, 2014? 14,00,000, January,2015 ₹ 16,00,000, February, 2015 ₹ 10,00,000 and March, 2015 ₹ 9,00,000.60% of the credit sales are collected in the next month after sales, 30% in the second month and 10% in the third month. No bad debts are anticipated. The cash collected – in the month of March, 2015 from debtors is —
(A) ₹ 14,60,000
(B) ₹ 14,20,000
(C) ₹ 12,20,000
(D) ₹ 9,15,000
Answer:
(D) ₹ 9,15,000

Question 138.
June 2015: A factor which limits the activities of an undertaking and which is taken into account while preparing budget is known as —
(A) Budget manual
(B) Budget controller
(C) Budget key factor
(D) Budget centre
Answer:
(C) Budget key factor

Question 139.
June 2015: A document which sets out the responsibility of the persons engaged in the routine of and the procedures, forms and records required for budgetary control is called—
(A) Budget centre
(B) Budget report
(C) Budget controller
(D) Budget manual
Answer:
(D) Budget manual

Question 140.
June 2015: A budget that gives a summary of all the functional budgets and budgeted statement of profit and loss is called —
(A) Flexible budget
(B) Master budget
(C) Performance budget
(D) Zero base budget
Answer:
(B) Master budget

Question 141.
June 2015: A company estimates its quarter wise sales (in units) for the next year as under:

The opening stock of finished goods is 10,000 units and the company expects to maintain the closing stock of finished goods at 16,250 units at the end of the year. The production pattern in each quarter is based on 80% of the sales of the current quarter and 20% of the sales of the next quarter. The production for quarter IV will be —
(A) 36,000 units
(B) 42,000 units
(C) 48,250 units
(D) 38,250 units
Answer:
(C) 48,250 units

Question 142.
June 2015: Budget which remains unchanged regardless of the actual level of activity is known as –
(A) Fixed budget
(B) Functional budget
(C) Flexible budget
(D) Cash budget
Answer:
(A) Fixed budget

Question 143.
June 2015: Estimated wages for January is ₹ 4,000 and for February ₹ 4,400. If the delay in payment of wages is 1 /2 month, the amount of wages to be considered in cash budget for the month of February will be –
(A) ₹ 4,000
(B) ₹ 4,400
(C) ₹ 4,600
(D) ₹ 4,200
Answer:
(D) ₹ 4,200

Question 144.
June 2015: Which of the following formula is used to calculate efficiency ratio –

Answer:
(B)

Question 145.
June 2015: Crown Ltd. has forecast its sales for the next three months as follows:
April: 12,000 units, May: 15,000 units, June: 17,000 units.
Opening stock as on 1st April is expected to be 3,500 units.
Closing stock should be equal to 20% of the coming month’s sales needs. The number of units required to be produced in May is-
(A) 14,600 units
(B) 11,500 units
(C) 15,400 units
(D) 13,600 units
Answer:
(C) 15,400 units

Question 146.
Dec. 2015: The basic difference between a static budget and a flexible budget is —
(A) A static budget is based on one specific level of production and a flexible budget can be prepared for any production level within a relevant range
(B) A static budget is for an entire production, but a flexible budget is applicable only to a single department
(C) Flexible budget allows management latitude in meeting goals, whereas a static budget is based on a fixed standard
(D) A flexible budget considers only variable costs, but a static budget considers all costs
Answer:
(A) A static budget is based on one specific level of production and a flexible budget can be prepared for any production level within a relevant range

Question 147.
Dec. 2015: Match the following

Select the correct answer from the options given below —

Answer:
(D)

Question 148.
Dec. 2015: X Ltd. has forecast its sales for the next three months as follows:
May : 12,000 units
June : 20,000 emits
July : 25,000 units
Opening stock as on 1 st April is expected to be 5,000 units. Closing stock should equal 20% of the coming month’s sales needs. How many units should be produced in June —
(A) 20,000 Units
(B) 11,000 Units
(C) 21,000 Units
(D) 25,000 Units
Answer:
(C) 21,000 Units

Question 149.
June 2016: PQR Ltd. has prepared the budget for the production of one lakh units of the only commodity manufactured by them for a costing period as follows:

If the actual production during the period was 60,000 units, the revised budget cost per unit will be
(A) ₹ 740
(B) ₹ 800
(C) ₹ 700
(D) ₹ 840
Answer:
(A) ₹ 740

Question 150.
June 2016: A budget in which a responsibility centre manager must justify each planned activity and its budgeted total cost is called —
(A) Traditional budget
(B) Zero based budget
(C) Master budget
(D) Functional budget
Answer:
(B) Zero based budget

Question 151.
June 2016: To produce one unit of ‘A’, two ingredients, ie., 2 kg of X and 3 kg of Y are required:

What will be the quantity of consumption of ingredients X and Y, if 20,000 units of A are sold —
(A) 46,000 kg & 69,000 kg respectively
(B) 49,000 kg & 72,000 kg respectively
(C) 40,000 kg & 60,000 kg respectively
(D) 43,000 kg & 63,000 kg respectively
Answer:
(A) 46,000 kg & 69,000 kg respectively

Question 152.
June 2016: Which one of the following would not form part of master budget —
(A) Cash budget
(B) Statement of profit and loss
(C) Statement of financial position
(D) None of the above
Answer:
(D) None of the above

Question 153.
June 2016: Which one of the following is not advantage of budgetary control?
(A) Maximization of profit through effective planning
(B) Planned approach for expenditure
(C) Create necessary conditions for setting-up of standard costs
(D) Based on quantitative data and represent only an impersonal appraisal to the conduct of business activity
Answer:
(B) Planned approach for expenditure

Question 154.
June 2016: Kriti Ltd. has provided following information for the quarter January to March:

20% of the sales are on cash basis and balance on credit basis. The amount to be collected from debtors in the month of February and March will be —
(A) Zero and ₹ 8,000 respectively
(B) ₹ 8,000 & ₹ 16,000 respectively
(C) ₹ 8,000 & ₹ 24,000 respectively
(D) ₹ 16,000 & ₹ 36,000 respectively
Answer:
(C) ₹ 8,000 & ₹ 24,000 respectively

Question 155.
June 2016: For a department, the standard overheads rate is ? 2.50 per hour and the overheads allowances are as follows:

Calculate the normal capacity level on the basis of which the standard overheads rate has been worked out —
(A) 8,000 Hours
(B) 7,000 Hours
(C) 6,000 Hours
(D) 9,000 Hours
Answer:
(A) 8,000 Hours

Question 156.
Dec. 2016: The budget which usually takes the form of budgeted profit and loss account and balance sheet is known as —
(A) Cash budget
(B) Master budget
(C) Flexible budget
(D) Sales budget
Answer:
(B) Master budget

Question 157.
Dec. 2016: While preparing cash budget, which of the following items would not be included
(A) Interest paid to debenture holders
(B) Salaries and wages
(C) Bonus shares issued
(D) Income-tax paid
Answer:
(C) Bonus shares issued

Question 158.
Dec. 2016: Budgeted standard hours of a factory are 15,000. The capacity utilization ratio for May, 2016 is 85% and efficiency ratio for the month is 120%. The standard hours for actual production in the month will be —
(A) 12,750
(B) 18,000
(C) 15,300
(D) 18,000
Answer:
(C) 15,300

Question 159.
June 2017: A plant produces a product in the quantity of 10,000 units at a cost of ₹ 3 per unit. If 20,000 units are produced, the cost per unit will be ₹ 2.50. Selling price per unit is ₹ 4. The variable cost per unit will be:
(A) ₹ 2
(B) ₹ 3
(C) ₹ 4
(D) ₹ 1
Answer:
(A) ₹ 2

Question 160.
June 2017: When demand forecasting is difficult, budget which is prepared:
(A) Sales Budget
(B) Production Budget
(C) Financial Budget
(D) Flexible Budget
Answer:
(D) Flexible Budget

Question 161.
June 2017: The budget which usually takes the form of profit and loss account and balance sheet is known as:
(A) Cash budget
(B) Master budget
(C) Flexible budget
(D) Labour budget
Answer:
(B) Master budget

Question 162.
June 2017: A fixed budget is one which:
(A) is a plan for capital expenditure in monetary terms
(B) is designed to remain unchanged irrespective of the volume of output or turnover attained
(C) deals with income and expenditure applicable to a particular function
(D) deals with none of these
Answer:
(B) is designed to remain unchanged irrespective of the volume of output or turnover attained

Question 163.
June 2017: One of the most significant tools in cost planning is:
(A) Direct material
(B) Budget
(C) Marginal costing
(D) Direct labour
Answer:
(B) Budget

Question 164.
June 2017: When standard output is 10 units per hour and actual output is 14 units per hour, the efficiency level will be:
(A) 60%
(B) 120%
(C) 140%
(D) None of the above
Answer:
(C) 140%

Question 165.
Dec. 2017: A short term budget, broken down into a quarterly or monthly period and reviewed and modified in the light of changing conditions is:
(A) Current Budget
(B) Flexible Budget
(C) Rolling Budget
(D) Zero Base Budget
Answer:
(B) Flexible Budget

Question 166.
Dec. 2017: While preparing a flexible budget indirect wages was considered as semi-variable expenses. At 50% level of production it was estimated as 1,50,000. If it has a tendency to increase by 10% between 60% to 75% capacity and further will increase by another 5% when production crosses 75%, the amount of indirect wages at 90% level of production is:
(A) ₹ 1,65,000
(B) ₹ 1,72,500
(C) ₹ 1,73,250
(D) None of the above
Answer:
(C) ₹ 1,73,250

Question 167.
Dec. 2017: The units to be sold for different months are as follows:

There will be no WIP at the end of any month. Finished units equal to half the sales for the next month will be in stock at the end of each month. The required production in units for April will be:
(A) 2,800
(B) 2,200
(C) 2,400
(D) 3,200
Answer:
(B) 2,200

Question 168.
Dec. 2017:In budgeting there was a shift from financial classification to objective classification in respect of functions, activities etc.
(A) Programme
(B) Performance
(C) Zero base
(D) None of the above
Answer:
(B) Performance

Question 169.
June 2018 & June 2019: Budget which remain unchanged regardless of the actual level of the activity is known as:
(A) Fixed Budget
(B) Functional budget
(C) Flexible budget
(D) Cash budget
Answer:
(A) Fixed Budget

Question 170.
June 2018: is prepared for the estimation of plant capacity to meet the budgeted production during the budgeted period.
(A) Plant utilization budget
(B) Production budget
(C) Manufacturing overhead budget
(D) Labour budget
Answer:
(A) Plant utilization budget

Question 171.
June 2018: A flexible budget is:
(A) A budget that is designed to furnish budgeted costs at different activity levels
(B) A budget that will be changed at the end of the month in order to reflect the actual costs of a department
(C) A budget that comprises variable costs only
(D) A budget that is designed for a specific planned output level
Answer:
(A) A budget that is designed to furnish budgeted costs at different activity levels

Question 172.
June 2018: ABC Ltd. has forecast its sales for the next three months as follows:
May : 12,000 units
June : 20,000 units
July : 25,000 units
As per the company policy, closing stock should be equal to 20% of the coming month’s sales forecast. How many units should be produced in June?
(A) 20,000 Units
(B) 11,000 Units
(C) 21,000 Units
(D) 25,000 Units
Answer:
(C) 21,000 Units

Question 173.
Dec. 2018: is a budget which, by recognizing different cost behaviour patterns, is designed to change in relation to the volume of output.
(A) Production Budget
(B) Performance Budget
(C) Zero Base Budget
(D) Flexible Budget
Answer:
(D) Flexible Budget

Question 174.
Dec. 2018: is an operating and financial plan of a business enterprise.
(A) Forecast
(B) Budget
(C) Estimate
(D) Standard
Answer:
(B) Budget

Question 175.
Dec. 2018: is based on the premise that every rupee of expenditure requires justification.
(A) Zero Base Budgeting
(B) Programme Budgeting
(C) Performance Budgeting
(D) Appraisal Budgeting
Answer:
(A) Zero Base Budgeting

Question 176.
Dec. 2018: Under Balance Sheet Method of preparing cash budget, budget is prepared on the basis of:…………
(A) Current year balance sheet
(B) Previous year balance sheet
(C) Forecasted balance sheet
(D) Consolidated balance sheet
Answer:
(C) Forecasted balance sheet

Question 177.
June 2019: The following information extracted from the records of P Ltd. Sales for October, November and December, 2018 are ₹ 90,000, ₹ 1,10,000 and ₹ 80,000 respectively. 40% of its sales are expected to be for cash. Of its credit sales 70% are expected to pay in the month after sales and take 2% discount on it. Balance is expected to pay in second month after sales and 3% of it is expected to bad debts.
What are the sales receipts to be shown in cash budget for the month of December?
(A) ₹ 92,990
(B) ₹ 1,23,174
(C) ₹ 95,609
(D) ₹ 1,25,793
Note: MCQ is wrongly drafted; for further clarification please see the hints.

Question 178.
June 2019: Which of the following is not a step for successful implementation of the budgetary control system?
(A) Budget manual
(B) Budget controller
(C) Budget period
(D) Budget standard
Answer:
(D) Budget standard

Question 179.
June 2019:
Assertion (A):
The purpose of performance budgeting is to focus on work to be done and services to be rendered.
Reason (R):
The main purpose of performance budgeting is not to interrelate physical and financial aspect of every programme, project or activity.
Select the 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 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:
(C) A is true but R is false