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Liquidity Ratios help in analysing the cash position of the firm
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Objective Questions and Answers of Financial Management

1.

State whether each of the following statements is True (T) or

False(F)

(i) Fina

ncial statements are an important source of info

rmatio

n to shareholders and stakeholders.

(ii) Both

the

BS and the I

S shows the financial position of fen at the end of the year.

(ii) BS of

a company must be prepared in the horizontal

format only.

(iv) Prepar

ation of Profit & Loss Appropriation A/c is a

require

ment under the Companies Act, 1956.

(v) Ratio

Analysis is the

only technique of analysis of

financi

al statements.

(vi) Met

hodical presentation of financial statements

helps

in Nation of various ratios.

(vii) In Common

Size Statements, each item is expressed as

a

percentage

of

some common

items

(total).

(viii) Trend

Percentage Analysis helps in Dynamic Analysis.

(ix) Liquidity Ratios help in analysing the cash position of the firm.

(x) In calculation of Acid Test Ratio, Inventory is included in current assets.

(xi) Working Capital Turnover Ratio may be classified as a

n Activity Ratio.

(xii) Debt

-

Equity Ratio is a measure of long

-

term solvency of a firm.

(xiii) GP Ratio and NP Ratio give the profitability of the firm from the point of view of the shareholders.

(xiv) Return on Equity and Earnings

per

Share are one and th

e same thing.

(xv) DU PONT Analysis looks into the elements of profits.

(

xvi) Ratio Analysis provides the solution to the financial problems.

Answers:

(i) T, (ii) F, (

ii

i) F, (iv) F, (v) F, (vi) T, (vii) T, (viii) T, (ix) F, (x) F, (xi) T, (xii) T, (xiii)

F, (xiv) F, (xv) T,

(xvi) F.]

2.

Multiple Choice Questions:

1. Accounting Ratios are important tools used by

(a) Mana

gers,

(b) Re

searchers,

(c)Investors, (d) All of the above

2. Net Profit Ratio S

ignifies:

(a) Ope

rational Profitability,

(b) Liquidity

Positi

on,

(c)

B

i

g

-

t

erm Solvency,

(d)Pro

fit

for Lenders.

3.

Working Capital Turnover measures the relationship of

Working Capital with:

(a)

Fixed Assets,

(b)

Sales,

(c)

Purchases,

(d)

Stock.

4.

In Ratio Analysis, the term Capital Employed refers

to:

(a)

Equity Share Capit

al,

(b)

Net worth,

(c)

Shareholders' Funds,

(d)

None of the above.

5.

Dividend Payout Ratio

is:

(a)

PAT

Capital

,

(b)

DPS

÷

EPS,

(c)

Pref. Dividend

÷

PAT,

(

d

) Pref. Dividend

÷

Equity Dividend.

6.

DU PONT Analysis deals with:

(a)

Analysis of Current Assets,

(b)

Analys

is of Profit,

(c)

Capital Budgeting,

(d)

Analysis of Fixed Assets.

7.

In Net Profit Ratio, the denominator

is:

(a)

Net Purchases,

(b)

Net Sales,

(c)

Credit Sales,

(d)

Cost of goods sold.

8.

Inventory Turnover measures the relationship of inven

tory with:

(a)

Av

erage Sales,

(b)

Cost of Goods Sold,

(c)

Total Purchases,

(d)

Total Assets.

9.

The term 'EVA' is used

for:

(a)

Extra Value Analysis,

(b)

Economic Value Added,

(c)

Expected Value Analysis,

(d)

Engineering Value Analysis.

10.

Return on Investment may be improved

by:

(a)

Increasing Turnover,

(b)

Reducing Expenses,

(c)

Increasing Capital Utilization,

(d)

All of the above.

11.

In Current Ratio, Current Assets are compared

with:

(a)

Current Profit,

(b)

Current Liabilities,

(c)

Fixed Assets,

(d)

Equity Share Capital.

12.

ABC Ltd. ha

s a Current Ratio of

1.5:

1 and Net Current

Assets of Rs. 5,00,000. What are the Current

Assets?

(a)

Rs. 5,00,000

, (b)

Rs. 10,00,000

, (c)

Rs. 15,00,000

, (d)

Rs. 25,00,000

13.

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.

14. Which of the following does not help to increase Curre

nt

Ratio?

(a)

Issue of Debenture

s to buy Stock

, (b)

Issue of Debentures to pay Creditors,

(c)

Sale of Investment to pay

Creditors,

(d)

Avail Bank Overdraft to buy Machine.

75. Debt to Total Assets Ratio can be improved by:

(a)

Borrowing More,

(b)

Issue of Debentures,

(c)

Issue of Equity Shares,

(d

)

Redemption of Debt.

16.

Ratio of Net Income to Number of Equity Shares

known as

:

(a)

Price Earnings Ratio,

(b)

Net Profit Ratio,

(c)

Earnings per Share,

(d)

Dividend per Share.

17.

Trend Analysis helps

comparing performance of a firm

(a)

With other firms,

(b)

O

ver a period of firm,

(c)

With other industries,

(d)

None of the above.

18.

A Current Ratio of Less than One means:

(a)

Current Liabilities < Current Assets,

(b)

Fixed Assets > Current Assets,

(c)

Current Assets < Current Liabilities,

(d)

Share Capital > Current A

ssets.

19.

A firm has Capital of Rs. 10,00,000; Sales of Rs. 5,00

,000;

Gross Profit of Rs. 2,00,000 and Expenses of Rs.

1,

00,000.

What is the Net Profit Ratio?

(a)

20%,

(b)

50%,

(c)

10%,

(d)

40%.

20.

XYZ Ltd. has earned 8% Return on Total Asses

ts of

Rs. 50,00

,000 and has a Net Profit Ratio of 5%. Find out

the

Sales of the firm

. (a)

Rs. 4,00,000,

(b)

Rs. 2,

50,000,(c)Rs. 80,00,000,(d)Rs. 83,33,333.

21.

Suppliers and Creditors of a firm are interested in

(a)Profitability Position,(b)Liquidity Position,(c)

Market

Sha

re Position,

(d

) Debt Position.

22. W

hich of the following is a measure of Debt Service

c

apacity of a

firm?

 

 

 

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(a)

Current Ratio,

(b)

Acid Test Ratio,

(c)

Interest Coverage Ratio,

(d)

Debtors Turnover.

23. G

ross Profit Ratio for a firm remains same but the Net

Pr

o

fit

Ratio is decreasing. The reason for such

behavior

could

be:

(a)

Increase in Costs of Goods Sold,

(b)

If Increase in Expense,

(c)

Increase in Dividend,

(d)

Decrease in Sales.

24. Wh

ich of the following statements is correct?

(a)

A Higher Receivable Turnove

r is not desirable,

(b)

Interest Coverage Ratio depends upon Tax Rate,

(c)

Increase in Net Profit Ratio means increase in Sales,

(d)

Lower Debt

-

Equity Ratio means lower Financial Risk.

25. De

bt to Total Assets of a firm is .2. The Debt to Equity boo would

b

e:

(a)

0.80,

(b)

0

.

25,

(c)

1.00,

(d)0.75

26. Whi

ch of the following helps analysing return to equity

Sha

reholders?

(a)

Return on Assets,

(b)

Earnings Per Share,

(c)

Net Profit Ratio,

(d)

Return on Investment.

27.

Return on Assets and Return on Investment Rat

ios be

long to:

(a)

Liquidity Ratios,

(b)

Profitability Ratios,

(c)

Solvency Ratios,

(d)

Turnover.

28.

XYZ Ltd. has a Debt Equity Ratio of 1.5 as compared to

1.3 Industry average. It means that the firm

has:

(

a)

Higher Liquidity,

(b)

Higher Financial Risk,

(c)

High

er Profitability,

(d)

Higher Capital Employed.

29.

Ratio Analysis can be used to study liquidity, turnover,

profitability, etc. of a firm. What does Debt

-

Equity

Ratio

help to study?

(a)

Solvency,

(b)

Liquidity,

(c)

Profitability,

(d)

Turnover,

30.

In Inventory Tur

nover calculation, what is taken in the

numerator?

(a)

Sales,

(b)

Cost of Goods Sold,

(c)

Opening Stock,

(d)

Closing Stock.

[Answers : 1. (d); 2. (a) 3. (a); 4. (d); 5. (b); 6. (b); 7. (b); 8. (b); 9. (b); 10. (d); 11. (b); 12. (c); 13. (c); 14. (d)

; 15. (d);

1

6. (c); 17. (b); 18. (c);19. (a); 20. (c);21. (b);22. (c);23. (b);24. (d);25. (b);26. (b); 27. (b); 28. (b); 29. (a); 30. (b)

].

3. State

whether each of the following statements is True (T) or F

alse(F)

(i)

Financial Planning deals with the preparation of f

inan

cial statements.

(ii)

Cash planning is a part of long

-

term financial planning.

(iii)

Financial

forecasting

is followed by financial planning.

(iv)

Budgeting helps in establishing the responsibilities at different levels.

(v)

A budget is a collation of

forecasts and plans expressed

in

financial

terms.

(vi)

Cash budget is also known as Master Budget.

(vii)

Sales and Production Budgets are Capital Budgets.

(viii)

Rolling Budget System, budget for every

month

is prepared.

(ix)

Cash budget is an important el

ement of profit planning.

(x) Financial planning is incomplete without cash budget.

(xi)

Projected Financial Statements are prepared on the basis of opening financial statements.

(xii)

Projected Financial Statements can be prepared only if several other b

udgets are available.

(xiii) There is no assumption required for the preparation of projected financial statements.

(xiv) Percentage of Sales method can be used to prepare both the PIS and PBS.

[

Answers:

(i) F, (ii) F, (

ii

i) T, (iv) T, (v) T, (vi) F, (vii)

F, (viii) F, (ix) F, (x) T, (xi) F, (xii) T, (xiii) F, (xiv)

T

]

4.

Multiple choice questions

1. Fina

ncial Planning deals with:

(a)

Preparation of Financial Statements,

(b)

Planning for a Capital Issue,

(c)

Preparing Budgets,

(d)

All of the above.

2. Financi

al

planning starts with the preparation of:

(a)

Master Budget,

(b)

Cash Budget,

(c)

Balance Sheet,

(d)

None of the above.

3. Which

of the following is not a part of Master Budget?

(a)

Projected Balance Sheet,

(b)

Capital Expenditure Budget,

(c)

Operating Budgets,

(

d

)

Budget Manual.

4.

Which of the following is not shown in Cash Budget?

(a)

Proposed Issue of Capital,

(b)

Loan Repayment,(c)

Interest on loan,(d)

Depreciation.

5.

During year 1, the sales and Cost of goods sold were Rs. 6,00,000 and Rs. 4,30,000 respecti

vely. Next year, the

sales are expected to increase by 10%. The Cost of goods sold for next year would

be:

(a)

Rs. 4,30,000,(b)

Rs. 4,90,000,(c)

Rs. 4,73,000,(d)

Rs. 4,40,000.

6.

In 'Percentage of Sales' method of preparation of Pro

jected Financial Statem

ents, the Operating Expenses

should be projected on the basis

of:

(a)

% of Profit before tax,

(b)

% of Cost of goods Sold,

(c)

% of Gross Profit,

(d)

% of Sales.

7.

In'% of Sales' method, various items of balance sheet are estimated on the basis of.

(a) %

of Share Capital,

(b)

% of Sales in current year,

(c)

% of Fixed Assets,(d)

% of Sales in preceding year.

8.

In Projected Balance Sheet, a balancing

figure:

(a)

May appear on Assets Side,(b)

May appear on Liabilities Side,(c)

Would never appear,(d)

Any of

(a) or (&).

9.

Procedure for preparation of 'Projected Financial State

ments' should start from:

(a)

Projection of Fixed Assets,(b)

Projection of Capital,(c)

Projection of Sales,(d)

Projection of Profit.

10.

Which of the following is not considered which p

reparing cash

budget?

(a)

Accrual Principle,(b)

Difference in Capital, and Revenue items, (c)

Conservation Principle, (

d

)

All of the

above.

11.

Which of the following may not be apart of proje

cted

Financial

Statements?

(a)

Projected Income Statement,(b)

Pr

ojected Trial Balance,(c)

Projected Cash Flow Statement,(d)

Projected

Balance Sheet.

12.

Process of Financial Planning ends

with:

 

 

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Liquidity Ratios help in analysing the cash position of the firm
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1. State whether each of the following statements is True (T) or False(F) (i) Financial statements are an important source of information to shareholders and stakeholders. (ii) Both the BS and the IS shows the financial position of fen at the end of the year. (ii) BS of a company must be prepared in the horizontal format only. (iv) Preparation of Profit & Loss Appropriation ...
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