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Questions Related to accountancy

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

Which of the following is not true with reference to capital budgeting?

  1. Capital budgeting is related to asset replacement decisions

  2. Cost of capital is equal to minimum required return

  3. Existing investment in a project is not treated as sunk cost

  4. Timing of cash flows is relevant
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Sunk cost is a cost that cannot be recovered and has been incurred already. Existing investment in a project is treated as a sunk cost as it is incurred in the past and cannot be recovered. 

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

Which of the following is not true for capital budgeting?

  1. Sunk costs are ignored

  2. Opportunity costs are excluded

  3. Incremental cash flows are considered

  4. Relevant cash flows are considered
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Capital budgeting decisions involve huge funds and are long term decisions. As they involve huge costs one wrong decision would have a big effect on the business. They include all the potential expenses/costs. It includes opportunity cost, actual cost, incremental and relevant cash flows. It does not include sunk costs.

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

Capital Budgeting Decisions are __________.

  1. Reversible

  2. Irreversible

  3. Unimportant

  4. All of the above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Capital budgeting decisions involve huge funds and are long term decisions. As they involve huge costs one wrong decision would have a big effect on the business. Hence, capital budgeting decisions are irreversible as its difficult to take back the decision. 

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

Risk in Capital budgeting implies  _____________.

  1. Uncertainty of Cash flows

  2. Probability of Cash flows

  3. Certainty of Cash flows

  4. Variability of Cash flows
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Risk is the probability of damage, loss or threat. Risk in capital budgeting implies that the decision maker knows the probability of cash flows. Therefore, risk in capital budgeting means uncertainty of cash flows. 

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

Feasibility Set Approach to Capital Rationing can be applied in ____________.

  1. Accept-Reject situations

  2. Divisible projects

  3. Mutually Exclusive Projects

  4. None of the Above
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Feasibility Set Approach to capital Rationing can be applied in Accept-reject situations.  Accept-Reject situations are the situations which the company is not sure about, so conducting a feasibility test would ensure if the project is suitable or not for the company. 

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

In case of the indivisible projects, which of the following may not give the optimum result?

  1. Internal Rate of Return

  2. Profitability Index

  3. Feasibility Set Approach

  4. All of the above
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Feasibility Set Approach to capital Rationing can be applied in divisible projects. Indivisible projects are the one which can be accepted or rejected wholly. So conducting a feasibility test would ensure if the project is suitable or not for the company. 

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

Real rate of return is equal to__________.

  1. Nominal Rate x Inflation Rate

  2. Nominal Rate $\div$ Inflation Rate

  3. Nominal Rate - Inflation Rate

  4. Nominal Rate + Inflation Rate
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The real rate of return formula is the sum of one plus the nominal rate divided by the sum of one plus the inflation rate which then is subtracted by one. The formula for the real rate of return can be used to determine the effective return on an investment after adjusting for inflation.

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

Risk in capital budgeting implies that the decision-maker knows _______ of the cash flows.

  1. Variability

  2. Probability

  3. Certainty

  4. None of the Above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Risk is the probability of damage, loss or threat. Risk in capital budgeting implies that the decision maker knows the probability of cash flows. The decision maker after analysing the risk will have of fair idea of the cash flows that might arise from the decision that is made. 

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

A proposal is not a capital budgeting proposal if it____________.

  1. Is related to fixed assets

  2. Brings long-term benefits

  3. Brings short-term benefits Only

  4. Has very large investment
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

A proposal is not a capital budgeting proposal if it brings short-term benefits only. Capital budgeting decisions involve huge funds and are long term decisions, it benefits the firm in long term. As they involve huge costs one wrong decision would have a big effect on the business.

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

Profitability Index, when applied to Divisible Projects, impliedly assumes that_____________.

  1. Project cannot be taken in parts

  2. NPV is linearly proportionate to part of the project taken up

  3. NPV is additive in nature

  4. Both B and C
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Profitability index is an index that identifies the relationship between cost and profitability of a project. Profitability Index. when applied to divisible projects impliedly assumes that project cannot be taken in parts has to be accepted fully, NPV is linearly proportionate to part of the project taken up and NPV is additive in nature.