1. Which form of business organization is owned and managed by a single individual?
- A. Partnership
- B. Sole Proprietorship
- C. Private Limited Company
- D. Public Limited Company
A sole proprietorship is a business owned and managed by a single individual who bears all profits and risks.
2. Which of the following is a key advantage of a partnership over a sole proprietorship?
- A. Limited liability
- B. Separate legal entity
- C. Shared responsibility and capital contribution
- D. No legal formalities required
Partnership allows multiple owners to contribute capital, share responsibilities, and reduce the burden on a single proprietor.
3. In a public limited company, the liability of shareholders is:
- A. Unlimited
- B. Limited to total assets of the company
- C. Jointly with directors
- D. Limited to the amount unpaid on shares held
Shareholders in a public limited company are liable only for the unpaid portion of the shares they own, not personal assets.
4. Which financial decision involves determining the mix of debt and equity in a firm’s capital structure?
- A. Capital structure decision
- B. Investment decision
- C. Dividend decision
- D. Working capital decision
Capital structure decision focuses on choosing the right proportion of debt and equity to optimize the firm’s cost of capital.
5. Which of the following decisions deals with allocation of funds to long-term projects?
- A. Financing decision
- B. Dividend decision
- C. Investment decision
- D. Liquidity decision
Investment decision (or capital budgeting) involves selecting long-term projects where the firm should invest funds to maximize value.
6. The main objective of financial management is to:
- A. Maximize profits only
- B. Maximize shareholder wealth
- C. Minimize costs
- D. Ensure high sales volume
Financial management aims at maximizing the net present value and market value of the shareholders' wealth rather than only focusing on profits.
7. Which of the following is the primary objective of financial management?
- A. Minimize taxation
- B. Maximize sales revenue
- C. Maximize shareholder wealth
- D. Reduce operational costs
The main goal of financial management is to increase the market value of the shareholders’ investment, not just profits or sales.
8. According to the principle of risk-return tradeoff, higher returns are generally associated with:
- A. Higher risk
- B. Lower risk
- C. No risk
- D. Guaranteed returns
The risk-return tradeoff principle states that investors demand higher returns for taking on higher risk.
9. Which principle of finance emphasizes that money available today is worth more than the same amount in the future?
- A. Principle of diversification
- B. Time value of money principle
- C. Principle of leverage
- D. Principle of risk minimization
Time value of money recognizes that a rupee today can be invested to earn interest, making it more valuable than the same rupee in the future.
10. The principle of conservatism in finance suggests that:
- A. Assets should always be maximized
- B. Liabilities should be ignored
- C. Profits should be overstated
- D. Caution should be exercised in reporting revenues and expenses
Conservatism advises recognizing potential losses early and not overstating profits, ensuring prudence in financial decisions.
11. Which principle of finance recommends that funds should be raised at the lowest possible cost?
- A. Principle of cost minimization
- B. Principle of liquidity
- C. Principle of profitability
- D. Principle of stability
Financial management aims to raise funds at the lowest cost possible without increasing risk unnecessarily.
12. According to the principle of consistency, a firm should:
- A. Frequently change its financial policies
- B. Maintain stable financial policies over time
- C. Ignore past financial decisions
- D. Focus only on short-term profits
Consistency principle ensures reliability and comparability of financial policies and reports over time.
13. Which of the following is considered a key building block of modern finance?
- A. Inventory management
- B. Human resource planning
- C. Risk-return tradeoff
- D. Sales promotion
Modern finance is built on principles such as risk-return tradeoff, time value of money, diversification, and efficient capital allocation.
14. According to the risk-return tradeoff principle, an investor seeking higher returns must be willing to:
- A. Invest only in government securities
- B. Accept higher risk
- C. Avoid diversification
- D. Invest in low-risk fixed deposits only
Higher expected returns are generally associated with higher risk; investors must be willing to accept this risk to achieve greater gains.
15. Which of the following best illustrates the risk-return tradeoff in investment?
- A. Keeping all funds in a savings account
- B. Investing in gold only
- C. Avoiding stocks entirely
- D. Investing in equities for higher potential returns but accepting volatility
Equity investments offer higher potential returns but come with price volatility, demonstrating the risk-return tradeoff.
16. Diversification helps investors primarily by:
- A. Reducing unsystematic risk
- B. Eliminating all risks
- C. Guaranteeing higher returns
- D. Maximizing short-term profits
Diversification spreads investments across multiple assets to reduce unsystematic (company-specific) risk, though systematic risk remains.
17. Which financial concept links expected return to the level of risk undertaken by an investor?
- A. Time value of money
- B. Capital asset pricing model (CAPM)
- C. Conservatism principle
- D. Liquidity preference
CAPM establishes the relationship between expected return and risk, showing that higher beta (risk) requires higher expected return.
18. A risk-free investment typically offers:
- A. Very high return with no risk
- B. Variable return with moderate risk
- C. Low return with virtually no risk
- D. High return with high liquidity
Risk-free investments, like government treasury bills, offer low returns but virtually no default risk.
19. The agency problem in financial management arises primarily due to:
- A. Lack of capital
- B. Conflict of interest between managers and shareholders
- C. High taxation
- D. Poor marketing strategies
The agency problem occurs when managers (agents) prioritize personal goals over shareholders’ (principals) wealth maximization.
20. Which of the following is a common way to mitigate the agency problem?
- A. Reducing dividends
- B. Increasing short-term borrowing
- C. Performance-based incentives for managers
- D. Limiting shareholder meetings
Linking manager compensation to company performance aligns managers’ interests with shareholders’ wealth maximization.
21. Business ethics primarily refers to:
- A. Moral principles guiding business conduct
- B. Maximizing profits at any cost
- C. Avoiding taxation
- D. Following legal compliance only
Business ethics involves following moral principles and values, beyond just legal compliance, in all business decisions.
22. Corporate social responsibility (CSR) primarily focuses on:
- A. Maximizing shareholder returns only
- B. Reducing operational costs
- C. Increasing product prices
- D. Contributing to social and environmental welfare
CSR initiatives are actions taken by a company to contribute positively to society, environment, and the community.
23. Ethical business practices help in:
- A. Avoiding all government regulations
- B. Building trust with stakeholders and long-term sustainability
- C. Guaranteeing high profits in the short term
- D. Eliminating competition
Following ethical practices enhances reputation, strengthens relationships with stakeholders, and supports sustainable growth.
24. Which of the following is an example of social responsibility in banking?
- A. Offering maximum loans to high-income customers only
- B. Reducing interest rates arbitrarily
- C. Financing projects that benefit community development
- D. Avoiding compliance with RBI guidelines
Banks show social responsibility by funding projects that promote social welfare, such as rural development or sustainable initiatives.
25. The finance function in a company primarily deals with:
- A. Marketing and sales strategies
- B. Planning, raising, and managing funds
- C. Manufacturing and operations
- D. Human resource management
The finance function focuses on acquiring funds, allocating them efficiently, and managing financial resources for the firm's objectives.
26. Finance and economics are related because:
- A. Economics only deals with micro-level issues
- B. Finance ignores economic principles
- C. Financial decisions are influenced by economic conditions and policies
- D. Economics is concerned only with government budgeting
Economic principles like inflation, interest rates, and GDP growth directly influence financial planning, investment, and risk management.
27. Accounting supports the finance function by providing:
- A. Accurate financial data for decision-making
- B. Marketing insights
- C. Human resource allocation
- D. Customer feedback reports
Accounting records, financial statements, and reports provide the necessary data for planning, budgeting, and evaluating financial performance.
28. Which of the following is an emerging role of financial managers in India?
- A. Managing only cash and banking transactions
- B. Limiting finance to book-keeping and record-keeping
- C. Avoiding risk analysis
- D. Strategic planning, risk management, and value creation
Modern financial managers in India are taking a strategic role by focusing on risk assessment, capital allocation, and long-term value creation.
29. A well-organized finance function ensures:
- A. Random allocation of funds
- B. Efficient use of resources and optimal capital structure
- C. Minimal reporting to management
- D. Only short-term profit maximization
Organizing the finance function ensures funds are raised at minimum cost, allocated efficiently, and managed to achieve strategic objectives.
30. Which of the following best describes the relationship between finance and accounting?
- A. Finance provides data; accounting makes decisions
- B. Finance and accounting are unrelated
- C. Accounting provides financial information; finance uses it for planning and decision-making
- D. Accounting is a subset of marketing
Finance relies on accounting for accurate financial data, which is then analyzed to make investment, financing, and dividend decisions.
