Fundamentals of Financial Management mcq practice set 1

Q1. Which of the following is NOT a key activity of a finance manager?
a. Financial planning
b. Financial reporting
c. Financial decision making
d. Human resource management

Answer

Answer: d. Human resource management

Q2. The evolution of financial management refers to:
a. The historical development of financial theories
b. The changing role of finance managers over time
c. The emergence of financial institutions
d. The transition from manual to computerized financial systems

Answer

Answer: a. The historical development of financial theories

Q3. The key decision areas in financial management include:
a. Marketing decisions
b. Production decisions
c. Investment decisions
d. All of the above

Answer

Answer: c. Investment decisions

Q4. Which of the following is NOT an objective of the firm?
a. Profit maximization
b. Wealth maximization
c. Market share maximization
d. Value creation for shareholders

Answer

Answer: c. Market share maximization

Q5. The Indian Financial System refers to:
a. The banking system in India
b. The stock market in India
c. All financial institutions and markets in India
d. The regulatory bodies governing the financial sector in India

Answer

Answer: c. All financial institutions and markets in India

Q6. Financial statement analysis involves the interpretation and analysis of:
a. Income statement
b. Balance sheet
c. Cash flow statement
d. All of the above

Answer

Answer: d. All of the above

Q7. Which financial statement shows the inflow and outflow of cash over a specific period?
a. Income statement
b. Balance sheet
c. Cash flow statement
d. Statement of retained earnings

Answer

Answer: c. Cash flow statement

Q8. Financial ratios are used to:
a. Measure a company’s profitability
b. Assess a company’s liquidity
c. Evaluate a company’s solvency
d. All of the above

Answer

Answer: d. All of the above

Q9. Which financial statement provides a year-to-year comparison of financial data?
a. Fund flow statement
b. Cash flow statement
c. Comparative statement
d. Trend analysis

Answer

Answer: c. Comparative statement

Q10. Time series analysis involves:
a. Analyzing financial data over a specific period
b. Comparing financial data of different companies
c. Estimating future financial performance
d. Assessing a company’s competitive position

Answer

Answer: a. Analyzing financial data over a specific period

Q11. The concept of time value of money recognizes that:
a. Money has a fixed value over time
b. Money loses value over time due to inflation
c. Money has different values at different points in time
d. Money should always be saved for the future

Answer

Answer: c. Money has different values at different points in time

Q12. The process of compounding involves:
a. Calculating the present value of a future amount
b. Calculating the future value of a present amount
c. Adjusting for the effects of inflation
d. Assessing the risk associated with an investment

Answer

Answer: b. Calculating the future value of a present amount

Q13. Future value of a single amount refers to:
a. The value of an investment at a future date
b. The value of a lump sum invested today
c. The value of an annuity received in the future
d. The value of a fixed deposit account

Answer

Answer: b. The value of a lump sum invested today

Q14. Future value of an annuity represents:
a. The total amount of money received in the future
b. The total amount of money invested in the future
c. The value of a series of equal payments received in the future
d. The value of an interest-bearing account

Answer

Answer: c. The value of a series of equal payments received in the future

Q15. Present value of a single amount refers to:
a. The value of an investment today
b. The value of a lump sum to be received in the future
c. The value of an annuity received today
d. The value of a loan to be repaid in the future

Answer

Answer: a. The value of an investment today

Q16. Present value of an annuity represents:
a. The total amount of money received today
b. The total amount of money invested today
c. The value of a series of equal payments received today
d. The value of a loan to be repaid today

Answer

Answer: c. The value of a series of equal payments received today

Q17. Which financial tool is used to analyze the cash flow patterns of a business?
a. Fund flow statement
b. Income statement
c. Balance sheet
d. Comparative statement

Answer

Answer: a. Fund flow statement

Q18. Which financial tool is used to evaluate the ability of a company to meet its short-term obligations?
a. Profit and loss statement
b. Balance sheet
c. Cash flow statement
d. Ratio analysis

Answer

Answer: b. Balance sheet

Q19. The common size statement expresses each item as a percentage of:
a. Total assets
b. Total liabilities
c. Net income
d. Sales revenue

Answer

Answer: d. Sales revenue

Q20. Which financial tool is used to analyze the financial performance of a company over multiple periods?
a. Comparative statement
b. Trend analysis
c. Cash flow statement
d. Ratio analysis

Answer

Answer: b. Trend analysis

Q21. Which of the following is NOT a component of time value of money?
a. Interest rate
b. Present value
c. Future value
d. Inflation rate

Answer

Answer: d. Inflation rate

Q22. The process of discounting involves:
a. Adjusting the future value of an amount to its present value
b. Adjusting the present value of an amount to its future value
c. Estimating the future value of an investment
d. Assessing the credit risk associated with a loan

Answer

Answer: a. Adjusting the future value of an amount to its present value

Q23. The future value of a single amount can be calculated using the formula:
a. FV = PV / (1 + r)t
b. FV = PV × (1 + r)t
c. FV = PV × (1 – r)t
d. FV = PV / (1 – r)t

Answer

Answer: b. FV = PV × (1 + r)t

Q24. The future value of an annuity can be calculated using the formula:
a. FV = PMT / (1 + r)t
b. FV = PMT × (1 + r)t
c. FV = PMT × (1 – r)t
d
. FV = PMT / (1 – r)t

Answer

Answer: b. FV = PMT × (1 + r)t

Q25. The present value of a single amount can be calculated using the formula:
a. PV = FV / (1 + r)t
b. PV = FV × (1 + r)t
c. PV = FV × (1 – r)t
d. PV = FV / (1 – r)t

Answer

Answer: a. PV = FV / (1 + r)t

Q26. The present value of an annuity can be calculated using the formula:
a. PV = PMT / (1 + r)t
b. PV = PMT × (1 + r)t
c. PV = PMT × (1 – r)t
d. PV = PMT / (1 – r)t

Answer

Answer: a. PV = PMT / (1 + r)t

Q27. Which financial tool is used to assess a company’s liquidity and short-term solvency?
a. Fund flow statement
b. Cash flow statement
c. Balance sheet
d. Income statement

Answer

Answer: c. Balance sheet

Q28. Comparative statement is also known as:
a. Common size statement
b. Trend analysis
c. Horizontal analysis
d. Vertical analysis

Answer

Answer: c. Horizontal analysis

Q29. Which financial tool is used to evaluate the profitability of a company?
a. Cash flow statement
b. Income statement
c. Comparative statement
d. Balance sheet

Answer

Answer: b. Income statement

Q30. Which financial tool is used to measure a company’s ability to generate profit from its assets?
a. Financial ratios
b. Comparative statement
c. Cash flow statement
d. Fund flow statement

Answer

Answer: a. Financial ratios

Q31. What is the primary focus of capital budgeting?
a. Estimating cash flows
b. Evaluating project profitability
c. Managing project risks
d. Determining project timelines

Answer

Answer: b. Evaluating project profitability

Q32. Which of the following is NOT a type of capital budgeting decision?
a. Replacement decision
b. Expansion decision
c. Financing decision
d. New project decision

Answer

Answer: c. Financing decision

Q33. Which of the following techniques does NOT consider the time value of money?
a. Payback Period
b. ARR (Accounting Rate of Return)
c. NPV (Net Present Value)
d. IRR (Internal Rate of Return)

Answer

Answer: b. ARR (Accounting Rate of Return)

Q34. The payback period is defined as the:
a. Time taken to recoup the initial investment
b. Discount rate at which NPV becomes zero
c. Ratio of net present value to initial investment
d. Difference between cash inflows and outflows

Answer

Answer: a. Time taken to recoup the initial investment

Q35. Which capital budgeting technique uses a profitability index to evaluate projects?
a. Payback Period
b. ARR (Accounting Rate of Return)
c. IRR (Internal Rate of Return)
d. PI (Profitability Index)

Answer

Answer: d. PI (Profitability Index)

Q36. What is the discount rate used in the NPV (Net Present Value) method?
a. Internal Rate of Return (IRR)
b. Weighted Average Cost of Capital (WACC)
c. Accounting Rate of Return (ARR)
d. Payback Period

Answer

Answer: b. Weighted Average Cost of Capital (WACC)

Q37. Which capital budgeting technique assumes that cash flows are reinvested at the project’s cost of capital?
a. NPV (Net Present Value)
b. IRR (Internal Rate of Return)
c. Payback Period
d. ARR (Accounting Rate of Return)

Answer

Answer: b. IRR (Internal Rate of Return)

Q38. Modified IRR (Internal Rate of Return) is used when:
a. Cash flows are uneven over the project’s life
b. Discount rate changes over time
c. Inflation is expected to be high
d. There are multiple mutually exclusive projects

Answer

Answer: a. Cash flows are uneven over the project’s life

Q39. Which capital budgeting technique is most closely related to the concept of “time value of money”?
a. Payback Period
b. ARR (Accounting Rate of Return)
c. NPV (Net Present Value)
d. IRR (Internal Rate of Return)

Answer

Answer: c. NPV (Net Present Value)

Q40. What does “IRR” stand for in the context of capital budgeting?
a. Internal Revenue Ratio
b. Interest Rate Return
c. Internal Rate of Return
d. Investment Risk Ratio

Answer

Answer: c. Internal Rate of Return

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