Financial Statements and Analysis Test

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Financial Statements and Analysis Test - 20

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Weekly Quiz Competition

Question 1
1 / -0

Capital Budgeting Decisions are __________.

A
Reversible

B
Irreversible

C
Unimportant

D
All of the above

Solution

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.
Question 2
1 / -0

Which of the following is not followed while taking Capital budgeting decisions?

A
Cash flows be calculated on 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

Solution

Capital budgeting is evaluating all the big expenses and cost that the business will incur on a project. They only take into consideration all the cash expenses and revenues and not accrued cost and revenues.
In capital budgeting cash is more important than profit. All benefits are measured on cash basis, tax is taken into consideration to understand the tax benefit.
Question 3
1 / -0

What factors increase the riskiness of a Capital budgeting Project?

A
Industry specific risk factors

B
Competition risk factors

C
Project specific risk factors

D
All of the above

Solution

The factors that increase riskiness of a capital budgeting project are industry specific risk, competition risk and project risk. Industry specific risk/market risk are the risks that might occur due to change in the industry, competition risks are the risk that can occur because of the competitors strategy and lastlyt project risk are the risk that are associated with the project as whether or not the project will be profitable or not.
Question 4
1 / -0

Two mutually exclusive projects with different economic lives can be compared on the basis of ______________.

A
Internal Rate of Return

B
Profitability Index

C
Net Present Value

D
Equivalent Annuity Value

Solution

The Equivalent Annual Cost (EAC) is the annual cost of owning, operating and maintaining an asset over its entire life. EAC is often used by firms for capital budgeting decision.The equivalent annual cost methodology allows a company to compare the cost effectiveness of various assets that have unequal lifespan.
Question 5
1 / -0

Evaluation of capital budgeting proposals is based on cash flows because_____________.

A
Cash rows are easy to calculate

B
Cash flows are suggested by SEBI

C
Cash is more important than profit

D
None of the above

Solution

Capital budgeting is based on cash flows because there is discounting and other factors used which can be done only on cash. Moreover, cash can be spent and not profit. Cash is more important than profit as the company has to focus on many costs. As in the long run the company will succeed if it focuses mote on cash flow statement.
Question 6
1 / -0

Risk in Capital budgeting implies _____________.

A
Uncertainty of Cash flows

B
Probability of Cash flows

C
Certainty of Cash flows

D
Variability of Cash flows

Solution

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.
Question 7
1 / -0

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

A
Internal Rate of Return

B
Profitability Index

C
Feasibility Set Approach

D
All of the above

Solution

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.
Question 8
1 / -0

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

A
Project cannot be taken in parts

B
NPV is linearly proportionate to part of the project taken up

C
NPV is additive in nature

D
Both B and C

Solution

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.
Question 9
1 / -0

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

Solution

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.
Question 10
1 / -0

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

A
Variability

B
Probability

C
Certainty

D
None of the Above

Solution

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.

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Re-Attempt Weekly Quiz Competition

Financial Statements and Analysis Test - 20

Result

Financial Statements and Analysis Test - 20

Score

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Rank

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SHARING IS CARING

Question 1

Reversible

Irreversible

Unimportant

All of the above

Solution

Question 2

Cash flows be calculated on incremental terms

All costs and benefits are measured on cash basis

All accrued costs and revenues be incorporated

All benefits are measured on after-tax basis

Solution

Question 3

Industry specific risk factors

Competition risk factors

Project specific risk factors

All of the above

Solution

Question 4

Internal Rate of Return

Profitability Index

Net Present Value

Equivalent Annuity Value

Solution

Question 5

Cash rows are easy to calculate

Cash flows are suggested by SEBI

Cash is more important than profit

None of the above

Solution

Question 6

Uncertainty of Cash flows

Probability of Cash flows

Certainty of Cash flows

Variability of Cash flows

Solution

Question 7

Internal Rate of Return

Profitability Index

Feasibility Set Approach

All of the above

Solution

Question 8

Project cannot be taken in parts

NPV is linearly proportionate to part of the project taken up

NPV is additive in nature

Both B and C

Solution

Question 9

Is related to fixed assets

Brings long-term benefits

Brings short-term benefits Only

Has very large investment

Solution

Question 10

Variability

Probability

Certainty

None of the Above

Solution

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