FINANCIAL MANAGEMENT -4

         FM – True/False

Assgn :1:

01) Retained earnings or ploughed back profits is one of the best source of raising long term funds for the company=> True **

02) When a company issues bonus shares, reserves of the company get reduced and share capital of the company increases=> True ****

03) Introduction of a heavy amount of debt capital in the capital structure will not only reduce the valuation of the firm but will also increase the cost of capital=> True **

04) Before the company can pay the dividend on Equity shares, it is bound to pay the dividend on Preference shares=> True

05) Internal rate of return indicates that the discounting rate at which net present value is zero=> True ****

06) Semi-variable cost is the cost which varies in direct proportion to the sales revenue=> False **

07) One of the most common methods to monitor the receivables on macro basis is to calculate age-wise analysis of receivables=> False

08) Solvency ratios consists of current ratio and Price earnings ratio=> False ****

09) Economic Order Quantity model is a very useful model of determining the order quantity=> True **

10) Inadequate provision for depreciation may be the cause of overcapitalization=> True *

Assgn :2:

11) Mortgage mode of security pertains to immovable properties like land and buildings=> True ***

12) Cash from operation is the main internal source of cash=> True **

13) Internal rate of return is difficult to use, calculate and understand=> True

14) Profitability Statement is a period statement=> True **

15) Public deposits are unsecured borrowings for the company=> True **

16) Income tax paid in the case of sole proprietor firms should be treated as a personal expense of the proprietor=> True *

17) Under pledge mode of security, possession of the goods is with the Bank and the goods pledged are in the custody of the Bank=> True

18) Overdraft is given by the bank for a very short period of time, at the end of which the company is supposed to repay the same=> True *

19) Wealth maximization goal is only an extension of Profit maximization goal of the organization=> True **

20) Introduction of a heavy amount of debt capital in the capital structure will not only reduce the valuation of the firm but will also increase the cost of capital=> True

Assgn :3:

21) Earnings per share is calculated as ( Profit after tax - Preference Dividend ) / Number of Equity shares=> True **

22) The mostly used methods of short term forecasting is the Receipt and Payment method=> True

23) The assumptions of capital structure theories is that Operating earnings are not expected to grow=> True **

24) In calculating funds from operations non-business expenses like dividends paid etc. as well as non cash expenses like depreciation etc. are added back in the net profits shown by the Profit & Loss Account=>True ********

25) Ratios can be expressed only in percentage=>False **

26) All Intangible assets are fictitious assets=> False *

27) Secured Premium notes did not carry any interest during the first three years=> True ******

28) Cash flow statement is important financial tool for the management=> True ***

29) In case of lease transactions, neither the assets side nor the liabilities side of the balance sheet of lessee gets affected=> True **

Assgn :4:

30) Internal rate of return presupposes that the cash inflows can be reinvested immediately to yield the return equivalent to the Internal rate of return=> True *

31) Ratio should be computed on the basis of inter-related figures which have a cause and effect relationship=> True **

32) Inventory is the intermediate stage between purchase of raw materials and consumption of raw materials=> True ****

33) The operating profit is computed as Sales Revenue Less Variable Operating Cost Less Fixed Operating cost=> True *****

34) The basic objective behind fixation of the levels is to avoid overstocking and understocking=> True *****

35) If the customer fails to pay the amount due from him the legal action should be initiated against the customer after the limitation period is over=> False **

36) Higher Earnings per share indicates higher amount of profits available to the investor=> True **

37) When the firm's actual bank balance is greater than the balance shown by the firm's books, the difference is called as 'payment float'=> True ***

Assgn :5:

38) Ordering cost of inventory includes cost incurred for insurance=> False **

39) Wages/salaries is considered under Operating cash inflow=> False

40) The assumptions of capital structure theoraies is that Corporate Income Tax does not exist=> True **

41) Reorder level is calculated as Maximum Lead Time * Minimum Usage=> False ****

42) Debt equity ratio is alternately called Leverage ratio=> True *****

43) Credit rating does not create any legal relationship between the rating agency and the investor=> True ****

44) Carrying cost of inventory includes cost incurred for preparation of purchase requisition=> False *

45) The basic limitation of the capital budgeting process lies in this fact that it involves various estimations=> True ****

Assgn :6:

46) Interest in provision for doubtful debts should be added back in order to find out cash from operations=> True ****

47) Funds flow statements and cash flow statement are one and the same=> False **

48) A good Budget manual promotes standardization and simplification of budgetary procedures=> True *****

49) Cross-sectional Analysis is the comparison of financial data of same time period of different organisations engaged in similar business=> True **

50) The Stock Dividends are more expensive to administer as compared to cash dividends=> True ****

Assgn :7:

51) The cost of the factor is slightly higher than the interest which the client would have paid had he borrowed the funds from the Bank=> True *

52) The term Current Assets and Liquid assets have synonymous meanings=> False

53) An ideal investor makes an comparison between the current market price and future Earning per share as the market value of shares depends upon the future Earnings per share=> True ****

54) According to Net Income Approach, the valuation of the firm and its cost of capital is independent of its capital structure=> False **

55) Internal rate of return considers time value of money=> True **

56) Ratios can be expressed only in percentage=> False

57) Financial statements do not provide information about sources of raising funds as well as the applications of these funds=> True ****

58) A high degree of operating leverage means that the component of fixed cost is too high in the overall cost structure=> True ***

59) The capital expenditure has to be planned properly taking into consideration the present and future needs of the business=> True

Assgn :8:

60) The excessive issue of equity shares may result in over-capitalisation to be realized in future=> True *

61) Debtors turnover ratio is normally supported by the calculations of average collection period=> True ***

62) The mostly used methods of short term forcasting is the Receipt and Payment method=> True

63) Following lenient dividend policy without bothering much about building up the reserves may be the cause for Undercapitalisation=> False **

64) A partnership is an incorporated association of individuals.=> False ***

65) Wealth maximization goal is only an extension of Profit maximization goal of the organization=> True *

66) With limited funds, the company must obtain the optimum combination of acceptable investment proposals=> True ***

67) Financial lease is also referred to as Capital lease=> True ***

68) If the cash is held to take advantage of profit making opportunities arising out of changes in the value of securities, the cash holding is called Precautionary motive=> False *******

Assgn :9:

69) Proprietary ratios is the relationship between owners funds and total assets=> True **

70) Return on Assets is a ratio of relationship between Assets and Sales=> False ****

71) In Regular Stock Dividend policy, the company may pay dividend in the form of bonus shares instead of cash=> True **

72) Wages/salaries is considered under Operating cashinflow=> False **

73) The requirement of Fixed Working Capital is unaffected due to the changes in the level of activity=> True ***

74) Internal rate of return can be computed even in the absence of the knowledge about the firm's cost of capital=> True **

75) The lessor is the nominal owner of the asset as the possession and economic use of the asset rests with the lessee=> True ****

76) Economic order quantity is based on the assumption that the demand for the material concerned is uniform throughout a year=> True *

Assgn :10:

77) One of the basic objectives of cash management is to maintain the optimum cash balance=> True *******

78) Private limited company can commence business immediately on incorporation=> True **

79) Loans from financial corporations etc. are sources of cash=> True ****

80) The redemption of preference shares if they carry too high rate of dividend is the remedy to overcome the situation of overcapitalization=> True *

81) Debt Service Coverage Ratio is one of the most important ratios calculated by the bankers of financial institutions giving long term finance to the organization=> True ***

82) According to Net Operating Income Approach there exists a direct relationship between the capital structure and valuation of the firm and the cost of capital=> False ****

83) A systematic maintenance of perpetual inventory system enables to locate slow and non-moving items and to take remedial action for the same=> True ***

84) Turnover ratios indicate the efficiency of the organisation to use the various kinds of assets by converting them in the form of Sales=> True *****

Assgn :11:

85) Issue of Bonus shares is the remedy used in the situation of overcapitalization=> False **

86) In narrow sense funds means only cash resources of the business=> True **

87) Liquid liabilities includes all current liabilities except bills payable=> False

Assgn :12:

88) Traditional approach believes the existence of Optimal Capital structure=> True **

89) Capital budgeting process involves the estimation of various future aspects regarding future cash inflows, life of the project etc.=> True ***

90) If the process of capital rationing is strictly followed it may result into the exclusion of various smaller projects by larger projects=> True *

91) Financial leverage is calculated as ( Sales - Variable cost ) / ( Earnings before Interest and tax - Interest )=> False *

Assgn :13:

92) Fixed Assets turnover ratio is the relationship between fixed assets and owner's funds=> False **

93) A high debt equity ratio may indicate that the financial stake of the creditors is more than that of the owners=> True **

94) The combination of irrevocable and confirmed letter of credit can be considered to be a guaranteed payment on the part of the exporter=> True ****

95) In case of cash credit, the company need not have a formal current account=> True **

96) Turnover ratios measure efficiency of a business in using its resources=> True ******

97) Under hypothecation mode of security neither the property not the possession of the goods hypothecated is transferred to the Bank=> True ***

Assgn :14:

98) Internal rate of return is difficult to use , calculate and understand=> True **

99) Internal rate of return does not considers cash inflows from the project throughout its life=> False *

100) If the company buys back its own shares, it shall not make further issue of Bonus shares within a period of 24 months=> False ***

101) Informal method of capital budgeting does not follow any mathematical or statistical model to consider the risk factor=> True ***

102) The objective of funds flow statement may be to find out uses of loans raised by the business=> True **

103) Semi-variable cost is the cost which varies in direct proportion to the sales revenue=> False *

Assgn :15:

104) Banks or financial institutions granting the term loans are the creditors of the company=> True **

105) The analysis of different sources and application of cash enables the management to make reliable cash flow projections for the immediate future=> True **

106) By issuing the debentures, the controlling position of the existing equity shareholders does not get affected as the debentures do not carry any voting rights=> True

107) A revenue budget has time horizon of just a year and so many things can be reasonably forecast and estimated=> True **

108) The approved credit rating agencies prevailing in the country are promoted by the government controlled organizations=> True

109) While calculating funds from operations, non-cash as well as non-business income is deducted from net profits=> True *

110) Accounts Receivable is an example of current assets=> True ***

Assgn :17:

111) As per the SEBI guidelines revaluation reserve can be used for issue of bonus share=> False ***

112) The funds flow statements can be prepared on monthly basis, six monthly basis or annual basis=> True ***

113) A high inventory turnover ratio indicates a high holding period of the inventory=> False *

Assgn :18:

114) The Stock Dividends are more expensive to administer as compared to cash dividends=> True

115) In an organisation, Dividend distribution is the function of a Finance Controller=> False ***

116) Under hypothecation mode of security neither the property not the possession of the goods hypothecated is transferred to the Bank=> True

117) Introduction of a heavy amount of debt capital in the capital structure will not only reduce the valuation of the firm but will also increase the cost of capital=> True

118) Retained earnings or ploughed back profits is one of the best source of raising long term funds for the company=> True **

119) Internal rate of return considers time value of money=>True *

120) Proprietary ratios is the relationship between owners funds and total assets=> True *

121) Overdraft is given by the bank for a very short period of time, at the end of which the company is supposed to repay the same=> True ***

122) The approved credit rating agencies prevailing in the country are promoted by the government controlled organizations=> True *

123) Liquid assets includes all current assets except Inventories and Prepaid expenses=> True

Assgn :19:

124) The knowledge of Working capital is necessary while studying the concept of Cash flow statement=> True *

125) Budgeting is the main function of a Treasurer=> False *

126) Current ratio and Acid test ratio are categorised under liquidity group=> True **

Assgn :20:

127) The term Accrued Income and Outstanding Income have synonymous meaning=> False *

128) Quick Assets are the most liquid of current assets=> True *

129) Under Hire Purchase agreement, depreciation is considered by the hirer as an expenditure, debited the same to Profit and Loss account and hence becomes the tax deductible expenditure=> True **

130) Credit rating is not a recommendation for buying, selling or holding a security=> True *

131) Reserve Bank of India appointed the Marathe Committee with the intention to recognize the contribution made by the SSI Sector to the economy=> False *

Assgn :23:

132) The evaluation of various proposals of capital expenditure should be done as rationally as possible=> True ***

Assgn :24:

133) Retained earnings involves cost in terms of dividend foregone by or withheld from the equity shareholders=> True *

134) Re-order level is the highest level of inventory to be maintained above which the inventory should not rise=> False *

135) For the computation of Gross Profit ratio, manufacturing cost is to be considered in case of manufacturing companies=> True ***

Assgn :25:

136) There are essentially two parties in case of a letter of credit=>False

137) It is only after crossing the break even point that the profit generating capacity of the company starts=> True ******

138) If Average credit period works out to be more than the Normal credit period, it indicates efficiency on the part of collection department of the company in collecting the dues from the customers=>False

Assgn :26:

139) In case of Without Recourses factoring, the risk on account of non-payment by the customer is assumed by the selling company=> False ***

140) Projects for venture capital financing are more risky in nature and involve larger gestation period=> True

141) Earnings per share does not indicate the amount of profits distributed among the owners by way of dividend and also the amount of profits retained in the business=> True ***

142) Usually, the implementation of capital expenditure proposals are spread over more than one year=> True *

Assgn :27:

143) Provision for doubtful debts is created on debtors who are definitely bad=> False *

Assgn :28:

144) Debt Service means payment of instalments and interest against an amount borrowed as per terms of loan=> True *

Assgn :31:

145) Introduction of debt capital increases the risk of insolvency due to non-availability of cash and variability of earnings available to equity shareholders=> True

146) In funds flow statement, net decrease in working capital is shown on sources side=> True

147) Undercapitalisation indicates sound financial position and efficient management of the company=> True **

Assgn :33:

148) Debt equity ratio indicates the stake of share holders and creditors in the organization=> True *

Assgn :34:

149) Premium paid on the life policy of the proprietor is debited to the Profit and Loss Account=> False

150) The shares of the company can be bought back by purchasing the shares issued to the employees under the employees stock option scheme=> True

Assgn :35:

151) During the phase of boom and prosperity the company will like to retain more profits which can be used during the depression which is likely to follow=> True

Assgn :37:

152) In any organisation, low creditors turnover ratio is considered to be favourable=> True *

Assgn :41:

153) Operating leverage is calculated as Earnings Before Interest and Tax / ( Earnings before Interest and Tax - Interest )=> False *

154) The factor need not factor all the debts of the client=> True

155) Credit rating is obligatory only in case of the debt instruments=> True

156) The ratios of one organisation compared with the ratios of the same organisation is termed as inter-firm comparison=> False

157) In certain cases, the capital expenditure may not involve any specific inflow of funds, but only outflow of funds=> True

158) Risk adjusted discounting rate method of capital budgeting decision is advantageous in the sense that it is simple to understand and incorporates the risk attached with the future returns in case of capital expenditure proposals=> True