Test: Financial Management- Assertion & Reason Type Questions- 2 - Commerce MCQ

The finance manager begins by reviewing corporate objectives to determine the funds the company needs. The finance manager plans a strategy based on whether the ending cash is positive or negative. If cash inflows exceed cash outflows the company will have cash to invest.

Answer: b
Solution: Working capital management involves managing short-term assets (e.g., inventory, receivables) and liabilities to ensure liquidity and operational efficiency. Assertion (A) is true because effective working capital management ensures a firm can pay its short-term obligations. Reason (R) is true and explains A, as minimizing excess inventory and receivables reduces holding costs, thereby enhancing liquidity and supporting the ability to meet obligations.t popular metric of measuring the success of a business venture but it is by no means the only (or the best) method for measuring success. Most start-ups are not profitable at the beginning of operation and many are not profitable for years.

Financial management is at the heart of running a successful business. It affects every aspect, from managing cash flow and tracking business performance to developing plans that ensure that business owners can make the most of opportunities.

 While financial planning is crucial because it provides necessary foresight for financial stability, it is not typically over-emphasized. This makes Assertion (A) false. Reason (R) is true as it correctly states that financial planning helps to anticipate future fund requirements. Therefore, the correct answer is that Assertion (A) is false, but Reason (R) is true.

Excess funding is almost as bad as inadequate funding. Even if there is some surplus money, good financial planning would put it to the best possible use so that the financial resources are not left idle and don’t unnecessarily add to the cost.

Profit is the positive financial gain your business makes after you've subtracted all your expenses. It is about more than just making money, it's also about the ability to use surplus funds to invest in and grow your business in the future.

The correct answer is: c) Both A and R are true and R is the correct explanation of A

Explanation:

• Assertion (A): Effective and efficient management of finance enables the firm to prosper and grow.
  This is true because managing finance effectively helps in allocating resources properly, ensuring sustainability, and promoting growth.

• Reason (R): Without adequate finance, business can survive only for a short time.
  This is also true because without sufficient financial resources, a business may struggle to meet its operational needs and face difficulties in long-term survival.

Assertion (A): Higher the flotation cost, less attractive the source.

Reason (R): The choice between the payment of dividend and retaining the earnings is, to some extent, affected by the difference in the tax treatment of dividends and capital gains.

If the flotation cost is high, it becomes more expensive for the company to raise funds. This is because the company incurs significantly higher expenses compared to when flotation costs are lower.

• Flotation costs refer to the expenses associated with issuing new securities.
• High flotation costs can make financing through equity less appealing.
• The decision to pay dividends or retain earnings is influenced by tax treatments.
• Dividends may be taxed differently than capital gains, affecting shareholder preferences.

Assertion (A): Financial management is an imaginative function.

Reason (R): Financial management is one of the functional areas of management.

The correct evaluation of the statements is:

• A is false because financial management involves structured decision-making rather than just imagination.
• R is true as financial management is indeed a key functional area.

Thus, the answer is:

• D: A is false, but R is true.

Answer: b
Solution: The cost of capital represents the minimum return a firm must earn on its investments to satisfy investors. Assertion (A) is true, as the cost of capital guides investment decisions by determining project viability. Reason (R) is true and explains A, as a higher cost of capital increases the discount rate used in NPV calculations, reducing the NPV and making projects less attractive.

Money is required to ensure the conduct of the daily business activities. Even individuals spend money daily so that their activities are not hampered. Thus Finance is regarded as the life blood of a business enterprise, the success of an organization largely depends on efficient management of its finances.