Chapter -9: Financial Management

ASSERTION AND REASONING QUESTIONS (ARQ)

1 Assertion: The capital structure of a company is the ratio between the equity capital and debt
capital, which use to maximize the shareholders wealth.

Reason: maximum use of debt fund will maximize the equity shareholder return when the cost of
debt is lower than internal rate of return.

A)Both assertion and reason are true and reason is correct explanation of assertion
B) Both assertion and reason are true but reason is not the correct explanation of assertion
C) Assertion is true, reason is false
D)Assertions is false ,reason is true
2 Assertion: working capital is that fund which is required for financing the day to day
Business activities.
Reason: capital budgeting required for investment made into fixed assets.

A)Both assertion and reason are true and reason is correct explanation of assertion
B) Both assertion and reason are true but reason is not the correct explanation of assertion
C) Assertion is true, reason is false
D)Assertions is false ,reason is true
3 Assertion: Return on investment is another crucial factor which helps in deciding the capital
structure.
Reason: if the return on investment is more than the rate of investment is less than rate of interest to
be paid on the debt.

A)Both assertion and reason are true and reason is correct explanation of assertion
B) Both assertion and reason are true but reason is not the correct explanation of assertion
C) Assertion is true, reason is false
D)Assertions is false ,reason is true
4 Assertion: The net working capital refers to the excess of current assets over current liabilities.

Reason: The net working capital can be negative also, when current liabilities exceed current assets

A)Both assertion and reason are true and reason is correct explanation of assertion
B) Both assertion and reason are true but reason is not the correct explanation of assertion
C) Assertion is true, reason is false
D)Assertions is false ,reason is true
5 Assertion: ROI=EBTI/Total investment

Reason: The objective of financial management is to maximize the profit.

A)Both assertion and reason are true and reason is correct explanation of assertion
B) Both assertion and reason are true but reason is not the correct explanation of assertion
C) Assertion is true, reason is false
D)Assertions is false ,reason is true
6 Assertion(a): business finance refers to money required in business
Reason(b): money required in business for expansion, diversification
a. b is not right reason
b. a is incorrect but b is right reason
c. Both a and b not correct
d. b is the right reason of a
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7 Assertion(a): Wealth maximisation is achieved
Reason(b): judicious of funds
a. b is not right reason
b. a is incorrect but b is right reason
c. Both a and b not correct
d. b is the right reason of a
8 Assertion(a): company pays low dividend
Reason(b) : future expansion of business by reinvesting profit
a. b is not right reason
b. a is incorrect but b is right reason
c. Both a and b not correct
d. b is the right reason of a

9 Assertion(a): Capital budgeting decision is under investment decision

Reason(b): not affected by future cash flows
a. b is not right reason
b. a is incorrect but b is right reason
c. Both a and b not correct
d. b is the right reason of a

10 Assertion(a): financial leverage is possible in deciding capital structure

Reason(b): when cost of debt is more than return on investment
a. b is not right reason
b. a is incorrect but b is right reason
c. Both a and b not correct
d. b is the right reason of a

11 Assertion (A): Financial Management refers to branch of Management which is concerned with the
effective acquisition and use of money

Reason (R): Financial Management refers to determination of proportion of Long-term and short-
term Finance.

a. Assertion (A) and Reason(R) are correct but the Reason (R) is not correct explanation of
Assertion(A).

b. Both Assertion(A) and Reason (R) are correct and Reason(R) is the correct explanation
of Assertion(A).

c. Only Assertion (A) is correct.

d. Both assertion(A) And Reason (R) are not correct.

12
Assertion (A): Financial Planning refers to the preparation of financial blueprint of an organisation’s
future operations.

Reason (R) – Financial planning helps in Creating link between Investment and Financing decision.

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 a. Assertion (A) and Reason(R) are correct but the Reason (R) is not correct explanation
of Assertion(A).

b. Both Assertion(A) and Reason (R) are correct and Reason(R) is the correct
explanation of Assertion(A).

c. Only Assertion (A) is correct.

d. Both assertion(A) And Reason (R) are not correct.

13
Assertion (A)- Wealth maximisation means to increase the capital invested in the business by
shareholders.

Reason(R)- The only objective of financial management is “WEALTH MAXIMISATION”.

a. Assertion (A) and Reason(R) are correct but the Reason (R) is not correct explanation
of Assertion(A).

b. Both Assertion(A) and Reason (R) are correct and Reason(R) is the correct
explanation of Assertion(A).

c. Only Assertion (A) is correct.

d. Both assertion(A) And Reason (R) are not correct.

14 Assertion (A)- Financial Planning helps in avoiding business shocks and surprises.

Reason(R)- proper provision regarding shortage or surplus of funds is made by anticipating future
receipts and payments.

a. Assertion (A) and Reason(R) are correct but the Reason (R) is not correct explanation
of Assertion(A).

b. Both Assertion(A) and Reason (R) are correct and Reason(R) is the correct
explanation of Assertion(A).

c. Only Assertion (A) is correct.

d. Both assertion(A) And Reason (R) are not correct.

15 Assertion (A)- investment decision refers to deciding about how the funds are invested in different
assets so that they are able to earn the highest possible return for the investors.

Reason(R)- Assets which are obtained by the business are of two types, i.e., long-term assets and
short-term assets.

a. Assertion (A) and Reason(R) are correct but the Reason (R) is not correct explanation
of Assertion(A).

b. Both Assertion(A) and Reason (R) are correct and Reason(R) is the correct
explanation of Assertion(A).

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 c. Only Assertion (A) is correct.

d. Both assertion(A) And Reason (R) are not correct.

16 Assertion: The cheapest source of finance is retained earnings.

Reason: There is no fixed commitment of repayment and no risk involved.
(A) Both Assertion and Reason are true and reason is correct explanation of assertion.
(B) Assertion and Reason both are true but Reason is not the correct explanation of Assertion.
(C) Assertion is true, Reason is false.
(D) Assertion is false, Reason is true.

17 Assertion: The main objective of financial management is to maximise the wealth of equity
shareholder.
Reason: The fulfilment of this objective means other claimants are also gaining
(A) Both Assertion and Reason are true and reason is correct explanation of assertion.
(B) Assertion and Reason both are true but Reason is not the correct explanation of Assertion.
(C) Assertion is true, Reason is false.
(D) Assertion is false, Reason is true.

18 Assertion: Financing decisions are also known as capital budgeting decisions.

Reason: Deciding how much to raise from which source is the concern of financing decision.
(A) Both Assertion and Reason are true and reason is correct explanation of assertion.
(B) Assertion and Reason both are true but Reason is not the correct explanation of Assertion.
(C) Assertion is true, Reason is false.
(D) Assertion is false, Reason is true.

19 Assertion: Cost involved in issue of securities is known as floatation cost.

Reason: There are two sources of finance viz. owner’s fund and borrowed fund.
(A) Both Assertion and Reason are true and reason is correct explanation of assertion.
(B) Assertion and Reason both are true but Reason is not the correct explanation of Assertion.
(C) Assertion is true, Reason is false.
(D) Assertion is false, Reason is true.

20 Assertion: Financial planning ensures availability of funds whenever required.

Reason: Having more fund than that required is good for an organisation.
(A) Both Assertion and Reason are true and reason is correct explanation of assertion.

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 (B) Assertion and Reason both are true but Reason is not the correct explanation of Assertion.
(C) Assertion is true, Reason is false.
(D) Assertion is false, Reason is true.

21 Assertion: The main objective of financial management is to maximize shareholders wealth

Reason : That is maximization of the market value of shares
(A) Both (A) and (R) are true and (R) is the correct explanation of (A)
(B) Both (A) and (R) are true and (R) is not the correct explanation of (A)
(C)(A) is true, but (R) is false
(D) is false, but (R) is true.
22 Assertion: Investment decision deals with quantum of finance to be raised from long term sources
Reason: Investment decision may be long term or short term
(A) Both (A) and (R) are true and (R) is the correct explanation of (A)
( B) Both (A) and (R) are true and (R) is not the correct explanation of (A)
(C ) (A) is true, but (R) is false
(C) (A) is false, but (R) is true.

23 Assertion: Financial planning will forsees entire fund requirement in respect to quantum as well as
timing
Reason: Financial planning cant ensure availability of funds whenever required.
(A) Both (A) and (R) are true and (R) is the correct explanation of (A)
(B) Both (A) and (R) are true and (R) is not the correct explanation of (A)
(C ) (A) is true, but (R) is false
(D) is false, but (R) is true.
24 Assertion: The amount of capital investment in fixed assets is called fixed capital
Reason: Net working capital= current asset-current liability
(A) Both (A) and (R) are true and (R) is the correct explanation of (A)
(B) Both (A) and (R) are true and (R) is not the correct explanation of (A)
(C )(A) is true, but (R) is false
(D) is false, but (R) is true.
25 For the following two statement of Assertion (A) and Reasoning (R) indicate the correct code :
Assertion (A) Financial management process begins with the financial planning and decisions
Reasoning (R) Financial management process does not need feedback system.
a) Both A and R are true and R is the correct explanation of A.
b) Both A and R are true , but R is not the correct explanation of A.
c) A is true ,but R is false.
d) A is false ,but R is true .

26 For the following two statement of Assertion (A) and Reasoning (R) indicate the correct code :
Assertion (A) Financial management provide the base for success of promotion.
Reasoning (R) Sound financial plan is very necessary for the success of business enterprise.
a) Both A and R are true and R is the correct explanation of A.
b) Both A and R are true , but R is not the correct explanation of A.
c) A is true ,but R is false.
d) A is false ,but R is true .

27 For the following two statement of Assertion (A) and Reasoning (R) indicate the correct code :
Assertion (A) The need for financial planning in a concern can be over -emphasised.
Reasoning (R) Financial planning helps to provide ahead for any more funds ,if required.
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 a) Both A and R are true and R is the correct explanation of A.
b) Both A and R are true , but R is not the correct explanation of A.
c) A is true ,but R is false.
d) A is false ,but R is true .
28 For the following two statement of Assertion (A) and Reasoning (R) indicate the correct code :
Assertion (A) A business firm is usually a profit earning concern.
Reasoning (R) Its earnings depend upon the efficient utilisation of funds .
a) Both A and R are true and R is the correct explanation of A.
b) Both A and R are true , but R is not the correct explanation of A.
c) A is true ,but R is false.
d) A is false ,but R is true .

29 Assertion – The fixed capital decisions involve huge funds and also big risk.
Reason: - The return from fixed capital comes in long run and company has to bear the risk for a
long period of time till the returns start coming.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true.
30 Assertion – The most important criteria to decide the investment proposal is reate of return.
Reason: - The capital budgeting decisions affect the long term growth of the company.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true.
31 Assertion – A companies have investment or growth plans then it would be better to distribute more
in the form of dividend.
Reason: - Companies declare high high rate of dividend only when they have surplus cash.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true.
32 Assertion – A company, Max Ltd., declared higher dividend this year.
Reason: - If tax rate is higher, then company prefers to pay less in the form of dividend whereas if
tax rate is low then company may declare higher dividend.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true.

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33 Assertion – Investment decisions must be taken after careful planning and evaluation of all effects
of that decision.
Reason: - Investment decisions can easily be reversed or changed overnight.

(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true.

ANSWER KEY

ARQ 1-A 2-B 3-A 4-B 5-C 6-d 7-d 8-d 9-d 10-d
11-a 12-a 13-c 14-b 15-b 16-A 17-A 18-D 19-B 20-C
21-A 22-D 23-C 24-B 25 c 26 a 27 d 28 a 29 A 30 B
31 D 32 A 33 C
PREPARED BY THE PGTs ( COMMERCE ) OF BHUBANESWAR, GUWAHATI, KOLKATA, RANCHI,
SILCHAR AND TINSUKIA REGIONS.

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