JAIIB AFM MCQ 2026 — 100 Practice Questions with Answers & Explanations

Q1. Which accounting concept states that a business is separate from its owner?

• A) Going Concern
• B) Consistency
• C) Business Entity ✓
• D) Accrual

Answer: C. The Business Entity concept treats the business as distinct from its proprietor. Personal transactions of the owner are not recorded in business books.

Q2. The accounting equation is:

• A) Assets = Liabilities − Capital
• B) Capital = Assets + Liabilities
• C) Assets = Capital + Liabilities ✓
• D) Liabilities = Assets + Capital

Answer: C. The fundamental accounting equation: Assets = Capital + Liabilities. Every transaction keeps this equation balanced.

Q3. Under the accrual concept, revenue is recognised when:

• A) Cash is received
• B) It is earned, regardless of cash receipt ✓
• C) Invoice is raised only after payment
• D) The financial year ends

Answer: B. Accrual basis records revenue when earned and expense when incurred, irrespective of cash movement. Banks follow accrual accounting for interest income.

Q4. A firm purchased machinery for ₹5,00,000. Under Straight Line Method (SLM), if the useful life is 10 years and scrap value is ₹50,000, the annual depreciation is:

• A) ₹50,000
• B) ₹45,000 ✓
• C) ₹55,000
• D) ₹40,000

Answer: B. SLM depreciation = (Cost − Scrap) ÷ Life = (5,00,000 − 50,000) ÷ 10 = 4,50,000 ÷ 10 = ₹45,000 per year.

Q5. Under Written Down Value (WDV) method, a machine costs ₹1,00,000 and the depreciation rate is 20%. What is the book value at the end of Year 2?

• A) ₹60,000
• B) ₹64,000 ✓
• C) ₹80,000
• D) ₹70,000

Answer: B. Year 1: 1,00,000 × 20% = ₹20,000 depreciation → WDV = ₹80,000. Year 2: 80,000 × 20% = ₹16,000 → WDV = ₹64,000.

Q6. Which of the following is a Real Account?

• A) Capital Account
• B) Salary Account
• C) Machinery Account ✓
• D) Debtors Account

Answer: C. Real accounts relate to assets — tangible (machinery, cash, stock) and intangible (goodwill). Rule: Debit what comes in, credit what goes out.

Q7. A debit balance in a bank pass book means:

• A) The bank has excess funds
• B) The account holder has an overdraft ✓
• C) The account holder has a credit balance in his books
• D) The bank owes money to the customer

Answer: B. In the bank’s pass book, a debit balance indicates the customer has overdrawn (overdraft). From the customer’s perspective, this is a liability.

Q8. In Bank Reconciliation Statement (BRS), if a cheque deposited by the firm has not been credited by the bank, the adjustment is:

• A) Deduct from bank balance
• B) Add to bank balance ✓
• C) Deduct from cash book balance
• D) No adjustment needed

Answer: B. A cheque deposited but not yet cleared by the bank means the bank balance is understated. To reconcile, add it to the bank balance (or deduct from cash book balance).

Q9. The balance as per cash book is ₹15,000. A cheque of ₹3,000 issued by the firm has not been presented for payment. The balance as per pass book is:

• A) ₹12,000
• B) ₹18,000 ✓
• C) ₹15,000
• D) ₹13,000

Answer: B. Unpresented cheque means the bank has NOT yet debited the account. Pass book balance = Cash book balance + Unpresented cheques = 15,000 + 3,000 = ₹18,000.

Q10. Which principle requires that accounting methods once adopted should be followed consistently year to year?

• A) Prudence
• B) Materiality
• C) Consistency ✓
• D) Matching

Answer: C. The Consistency concept ensures comparability of financial statements across periods. A change in method (e.g., SLM to WDV) must be disclosed with reasons.

Q11. The trial balance checks:

• A) Accuracy of all ledger accounts
• B) Arithmetic accuracy of posting ✓
• C) Profit or loss of the firm
• D) Completeness of all transactions

Answer: B. A trial balance verifies that total debits equal total credits, confirming arithmetic accuracy. It does NOT detect errors of omission, commission, or principle.

Q12. Which of the following errors will NOT be detected by a trial balance?

• A) Wrong totalling of a ledger account
• B) Posting to wrong side of an account
• C) Complete omission of a transaction ✓
• D) Extracting wrong balance from ledger

Answer: C. If a transaction is completely omitted from both sides, debits and credits are equally affected — the trial balance still tallies. This is an error of omission.

Q13. Closing stock is valued at:

• A) Cost price only
• B) Market price only
• C) Cost or market price, whichever is lower ✓
• D) Cost plus profit margin

Answer: C. As per the Prudence (Conservatism) concept and AS 2, inventory is valued at cost or Net Realisable Value (NRV), whichever is lower.

Q14. A machine is purchased for ₹2,40,000 on 1 April 2023. SLM rate is 10%. Depreciation for the year ending 31 March 2024 is:

• A) ₹24,000 ✓
• B) ₹21,600
• C) ₹12,000
• D) ₹20,000

Answer: A. SLM depreciation = 2,40,000 × 10% = ₹24,000. Since it is purchased on 1 April (start of year), full year depreciation applies.

Q15. Which account has a normal credit balance?

• A) Purchases
• B) Machinery
• C) Creditors ✓
• D) Cash

Answer: C. Creditors (accounts payable) are liabilities — they carry a normal credit balance. Assets and expenses carry normal debit balances.

Q16. Goodwill is an example of:

• A) Tangible fixed asset
• B) Current asset
• C) Intangible fixed asset ✓
• D) Fictitious asset

Answer: C. Goodwill is an intangible fixed asset — it has no physical form but provides long-term economic benefit. It appears on the asset side of the balance sheet.

Q17. Prepaid expenses appear in the balance sheet as:

• A) Current liability
• B) Fixed asset
• C) Current asset ✓
• D) Non-current liability

Answer: C. Prepaid expenses represent amounts paid in advance — they are benefits not yet received and therefore appear as current assets.

Q18. Outstanding salary of ₹10,000 will be recorded as:

• A) Debit Salary, Credit Cash
• B) Debit Salary, Credit Outstanding Salary ✓
• C) Debit Cash, Credit Salary
• D) Debit Outstanding Salary, Credit Salary

Answer: B. Outstanding salary is an accrued expense. Debit Salary (expense increases) and Credit Outstanding Salary (liability created).

Q19. The format for a Banker’s Book of Accounts is governed by:

• A) Companies Act 2013
• B) Income Tax Act 1961
• C) Banking Regulation Act 1949 ✓
• D) RBI Act 1934

Answer: C. Section 29 of the Banking Regulation Act 1949 requires banks to prepare annual accounts in the prescribed formats (Form A — Balance Sheet; Form B — P&L Account).

Q20. NPA provisioning for doubtful assets (1–3 years) secured portion requires:

• A) 10%
• B) 20%
• C) 25% to 40% ✓
• D) 100%

Answer: C. RBI norms: Doubtful assets (D1, up to 1 year) — secured 25%; D2 (1–3 years) — secured 40%; D3 (more than 3 years) — secured 100%. Unsecured portion always 100%.

Q21. AS-9 deals with:

• A) Depreciation Accounting
• B) Valuation of Inventories
• C) Revenue Recognition ✓
• D) Cash Flow Statements

Answer: C. AS-9 covers Revenue Recognition. It states revenue should be recognised when the seller has transferred significant risks and rewards to the buyer.

Q22. Which of the following is NOT a capital expenditure?

• A) Purchase of plant
• B) Cost of installing new machinery
• C) Repair of existing machinery ✓
• D) Legal fees for acquiring land

Answer: C. Routine repair costs are revenue expenditure (they maintain but do not enhance the asset). Major overhauls that extend useful life are capitalised.

Q23. Provision for bad debts is created by debiting:

• A) Debtors account
• B) Profit & Loss account ✓
• C) Capital account
• D) Cash account

Answer: B. Provision for bad debts: Debit P&L Account (expense), Credit Provision for Bad Debts (contra asset reducing debtors).

Q24. The WDV of an asset after 3 years at 25% depreciation on original cost of ₹80,000 is:

• A) ₹30,000
• B) ₹33,750 ✓
• C) ₹20,000
• D) ₹40,000

Answer: B. Year 1: 80,000 × 75% = 60,000. Year 2: 60,000 × 75% = 45,000. Year 3: 45,000 × 75% = ₹33,750.

Q25. Bills Receivable is classified as a:

• A) Fixed asset
• B) Liability
• C) Current asset ✓
• D) Capital item

Answer: C. Bills Receivable represent amounts the firm expects to receive — they are current assets. Bills Payable (amounts owed) are current liabilities.

Q26. Under double-entry bookkeeping, every transaction affects at least:

• A) One account
• B) Three accounts
• C) Two accounts ✓
• D) Four accounts

Answer: C. The double-entry system requires every debit to have a corresponding credit — minimum two accounts are affected.

Q27. A firm’s cash book shows a balance of ₹20,000 (Dr). Bank charges of ₹500 debited by the bank are not recorded in the cash book. The correct cash book balance should be:

• A) ₹20,500
• B) ₹19,500 ✓
• C) ₹20,000
• D) ₹21,000

Answer: B. Bank charges reduce the balance. Adjusted cash book balance = 20,000 − 500 = ₹19,500.

Q28. The purpose of Suspense Account in BRS is:

• A) To record profits temporarily
• B) To record errors in the ledger
• C) To temporarily park entries whose correct account is unknown ✓
• D) To adjust depreciation

Answer: C. Suspense Account is a temporary account used when the correct account for an entry is not immediately known. It is cleared once the correct posting is identified.

Q29. AS-6 (Depreciation Accounting) requires disclosure of:

• A) Gross profit on sale of assets
• B) Method of depreciation and rate used ✓
• C) Market value of all assets
• D) Replacement cost of fixed assets

Answer: B. AS-6 mandates disclosure of the depreciation method adopted and the depreciation rates applied for each class of asset.

Q30. Contingent liabilities are shown in the balance sheet:

• A) As a current liability
• B) As a long-term liability
• C) As a footnote / by way of a note ✓
• D) They are not shown at all

Answer: C. Contingent liabilities (e.g., pending lawsuits, guarantees) are not recognised as actual liabilities but disclosed as notes to accounts, as per the Prudence concept.

Q31. Gross Profit Ratio = Gross Profit ÷ Net Sales × 100. If gross profit is ₹1,50,000 and net sales are ₹5,00,000, the ratio is:

• A) 20%
• B) 25%
• C) 30% ✓
• D) 35%

Answer: C. GP Ratio = 1,50,000 ÷ 5,00,000 × 100 = 30%.

Q32. Current Ratio = Current Assets ÷ Current Liabilities. If CA = ₹3,00,000 and CL = ₹1,50,000, the Current Ratio is:

• A) 1:1
• B) 1.5:1
• C) 2:1 ✓
• D) 2.5:1

Answer: C. Current Ratio = 3,00,000 ÷ 1,50,000 = 2:1. Ideal ratio is 2:1; lower ratio indicates liquidity stress.

Q33. Quick Ratio excludes which of the following from current assets?

• A) Debtors
• B) Cash
• C) Inventory (Stock) ✓
• D) Bills Receivable

Answer: C. Quick (Liquid) Ratio = (Current Assets − Inventory − Prepaid Expenses) ÷ Current Liabilities. Stock is excluded as it is the least liquid current asset.

Q34. Debt-Equity Ratio measures:

• A) Profitability of the firm
• B) Long-term solvency and financial leverage ✓
• C) Liquidity of current assets
• D) Efficiency of asset use

Answer: B. Debt-Equity Ratio = Long-term Debt ÷ Shareholders’ Equity. It indicates the proportion of debt financing and the firm’s ability to meet long-term obligations.

Q35. If Total Assets = ₹10,00,000 and Total Liabilities = ₹6,00,000, Shareholders’ Equity is:

• A) ₹16,00,000
• B) ₹4,00,000 ✓
• C) ₹6,00,000
• D) ₹10,00,000

Answer: B. Shareholders’ Equity = Total Assets − Total Liabilities = 10,00,000 − 6,00,000 = ₹4,00,000.

Q36. Cash Flow from Operating Activities in a bank primarily includes:

• A) Dividend paid
• B) Proceeds from issue of shares
• C) Interest received and paid, loans advanced and repaid ✓
• D) Purchase of fixed assets

Answer: C. For banks, operating activities include cash receipts from interest on loans, fees, and cash payments for deposits and borrowings, since lending and deposit-taking are core operations.

Q37. Funds Flow Statement shows changes in:

• A) Cash and bank balances only
• B) Working capital between two periods ✓
• C) Fixed assets and long-term liabilities
• D) Profit and dividend

Answer: B. Funds Flow Statement (Statement of Changes in Working Capital) shows how working capital changed between two balance sheet dates due to long-term sources and uses of funds.

Q38. Inventory Turnover Ratio = Cost of Goods Sold ÷ Average Inventory. COGS = ₹6,00,000; Opening stock = ₹80,000; Closing stock = ₹1,20,000. The ratio is:

• A) 5 times
• B) 6 times ✓
• C) 7.5 times
• D) 8 times

Answer: B. Average Inventory = (80,000 + 1,20,000) ÷ 2 = 1,00,000. Inventory Turnover = 6,00,000 ÷ 1,00,000 = 6 times.

Q39. Net Profit Ratio = Net Profit After Tax ÷ Net Sales × 100. NPAT = ₹90,000; Net Sales = ₹6,00,000. The ratio is:

• A) 12%
• B) 15% ✓
• C) 18%
• D) 20%

Answer: B. NP Ratio = 90,000 ÷ 6,00,000 × 100 = 15%.

Q40. Return on Equity (ROE) = Net Profit ÷ Shareholders’ Equity × 100. Net Profit = ₹50,000; Equity = ₹2,50,000. ROE is:

• A) 15%
• B) 18%
• C) 20% ✓
• D) 25%

Answer: C. ROE = 50,000 ÷ 2,50,000 × 100 = 20%. ROE measures how efficiently equity capital is used to generate profit.

Q41. In a bank’s Balance Sheet (Form A under BR Act), deposits appear under:

• A) Assets
• B) Liabilities ✓
• C) Contingent liabilities
• D) Capital and reserves

Answer: B. Deposits are a bank’s primary liability — they represent money owed to depositors. They appear under Liabilities in Schedule 3 of a bank’s balance sheet.

Q42. Which ratio is most useful in assessing a bank’s ability to meet short-term obligations?

• A) Debt-Equity Ratio
• B) Current Ratio / Cash Reserve Ratio ✓
• C) Return on Assets
• D) Price-Earnings Ratio

Answer: B. For banks, liquidity ratios (CRR, SLR) and the Current Ratio indicate the capacity to meet short-term obligations and regulatory liquidity requirements.

Q43. A Cash Flow Statement prepared under the indirect method starts with:

• A) Cash sales
• B) Net profit before tax ✓
• C) Opening cash balance
• D) Capital raised during the year

Answer: B. Under the indirect method, operating cash flow is derived by adjusting Net Profit Before Tax for non-cash items (depreciation, provisions) and changes in working capital.

Q44. Debenture interest paid is classified in Cash Flow Statement as:

• A) Operating activity
• B) Financing activity ✓
• C) Investing activity
• D) Not shown in Cash Flow Statement

Answer: B. AS-3 classifies interest paid on borrowings as a financing activity for non-financial entities. (For banks, it is operating activity.) For general JAIIB purposes, interest on debentures = financing.

Q45. Schedule 9 in a bank’s financial statement (as per BR Act) represents:

• A) Advances
• B) Investments
• C) Borrowings ✓
• D) Other liabilities

Answer: C. Standard schedules under BR Act Form A — Schedule 4: Borrowings; Schedule 9: Advances; Schedule 6: Investments. Memorise these schedule numbers for the exam.

Q46. The present value of ₹1,000 receivable after 2 years at a discount rate of 10% (compound) is: [Use (1.1)² = 1.21]

• A) ₹909
• B) ₹826 ✓
• C) ₹750
• D) ₹800

Answer: B. PV = FV ÷ (1 + r)ⁿ = 1,000 ÷ 1.21 = ₹826.45 ≈ ₹826.

Q47. The future value of ₹5,000 invested at 8% per annum compound interest for 3 years is: [(1.08)³ = 1.2597]

• A) ₹6,000
• B) ₹6,299 ✓
• C) ₹6,500
• D) ₹5,800

Answer: B. FV = PV × (1 + r)ⁿ = 5,000 × 1.2597 = ₹6,298.50 ≈ ₹6,299.

Q48. An ordinary annuity pays ₹10,000 per year for 3 years. Discount rate = 10%. PVIFA(10%, 3) = 2.487. The present value of the annuity is:

• A) ₹30,000
• B) ₹24,870 ✓
• C) ₹27,000
• D) ₹22,000

Answer: B. PV of annuity = PMT × PVIFA = 10,000 × 2.487 = ₹24,870.

Q49. An annuity due differs from an ordinary annuity in that payments occur:

• A) At the beginning of each period ✓
• B) At the end of each period
• C) Once a year regardless of timing
• D) Only on maturity

Answer: A. Ordinary annuity: payments at end of period (e.g., loan EMI). Annuity due: payments at beginning of period (e.g., lease rental paid in advance). Annuity due has higher PV.

Q50. A loan of ₹1,00,000 is to be repaid in 5 equal annual instalments at 12% p.a. PVIFA(12%, 5) = 3.605. The annual EMI is approximately:

• A) ₹25,000
• B) ₹26,000
• C) ₹27,740 ✓
• D) ₹30,000

Answer: C. EMI = Loan ÷ PVIFA = 1,00,000 ÷ 3.605 = ₹27,739 ≈ ₹27,740.

Q51. Net Present Value (NPV) of a project is positive when:

• A) Total cash inflows equal total outflows
• B) PV of cash inflows exceeds initial investment ✓
• C) The IRR equals the discount rate
• D) The payback period is less than project life

Answer: B. NPV = PV of all cash inflows − Initial Investment. Positive NPV means the project creates value and should be accepted.

Q52. A project requires an initial investment of ₹2,00,000. It generates ₹80,000 per year for 3 years. Discount rate = 10%. PVIFA(10%,3) = 2.487. NPV is:

• A) ₹40,000
• B) −₹240 (approximately zero — marginal loss) ✓
• C) ₹50,000
• D) ₹2,00,000

Answer: B. PV of inflows = 80,000 × 2.487 = ₹1,98,960. NPV = 1,98,960 − 2,00,000 = −₹1,040. The project marginally destroys value at 10% — reject.

Q53. Internal Rate of Return (IRR) is defined as the discount rate at which:

• A) NPV is maximised
• B) Payback period equals project life
• C) NPV = 0 ✓
• D) Cash inflows equal cash outflows in nominal terms

Answer: C. IRR is the rate that makes NPV = 0. If IRR > cost of capital (hurdle rate), the project is accepted. IRR is found by trial-and-error or interpolation.

Q54. A project costs ₹1,00,000 today and returns ₹60,500 at end of Year 1 and ₹60,500 at end of Year 2. At 10%: PV(Y1) = 60,500/1.1 = 55,000; PV(Y2) = 60,500/1.21 = 50,000. NPV at 10% is:

• A) ₹10,000
• B) ₹5,000 ✓
• C) ₹0
• D) −₹5,000

Answer: B. PV of inflows = 55,000 + 50,000 = 1,05,000. NPV = 1,05,000 − 1,00,000 = ₹5,000. Accept the project.

Q55. Payback Period method’s main limitation is that it:

• A) Is difficult to calculate
• B) Ignores cash inflows
• C) Ignores cash flows after the payback period and time value of money ✓
• D) Requires knowledge of cost of capital

Answer: C. Payback ignores what happens after the initial investment is recovered and does not discount future cash flows — projects with large terminal cash flows may be incorrectly rejected.

Q56. A bond has face value ₹1,000, coupon rate 10% p.a., and matures in 3 years. If the market discount rate is 12%, the bond trades at:

• A) Below par (discount) ✓
• B) At par
• C) Above par (premium)
• D) Cannot be determined

Answer: A. When market rate (12%) > coupon rate (10%), the bond offers less than market return — it trades at a discount (price < face value).

Q57. Weighted Average Cost of Capital (WACC) is used to:

• A) Calculate the payback period
• B) Discount cash flows in project evaluation as the hurdle rate ✓
• C) Determine dividend payout ratio
• D) Calculate current ratio

Answer: B. WACC represents the minimum return a company must earn on its assets to satisfy all capital providers. It serves as the discount/hurdle rate in NPV analysis.

Q58. A firm’s capital structure: Equity ₹6,00,000 (cost 15%), Debt ₹4,00,000 (cost 8% after tax). WACC is:

• A) 11.5%
• B) 12.2% ✓
• C) 13%
• D) 11%

Answer: B. WACC = (6/10 × 15%) + (4/10 × 8%) = 9% + 3.2% = 12.2%.

Q59. Operating Leverage (DOL) measures the sensitivity of:

• A) EPS to changes in EBIT
• B) Net profit to changes in sales
• C) EBIT to changes in sales/volume ✓
• D) Cash flow to changes in interest rates

Answer: C. DOL = % change in EBIT ÷ % change in Sales. Higher fixed costs → higher DOL → more sensitivity. DOL = Contribution ÷ EBIT.

Q60. Contribution = Sales − Variable Costs. A firm’s contribution = ₹3,00,000; Fixed Costs = ₹1,50,000. EBIT is:

• A) ₹3,00,000
• B) ₹1,50,000 ✓
• C) ₹4,50,000
• D) ₹75,000

Answer: B. EBIT = Contribution − Fixed Costs = 3,00,000 − 1,50,000 = ₹1,50,000.

Q61. Break-Even Point (units) = Fixed Costs ÷ Contribution per unit. Fixed costs = ₹2,00,000; Selling price = ₹50; Variable cost = ₹30. BEP in units is:

• A) 5,000 units
• B) 10,000 units ✓
• C) 8,000 units
• D) 12,000 units

Answer: B. Contribution per unit = 50 − 30 = ₹20. BEP = 2,00,000 ÷ 20 = 10,000 units.

Q62. Margin of Safety = Actual Sales − Break-Even Sales. Actual sales = ₹8,00,000; BEP sales = ₹5,00,000. Margin of Safety Ratio is:

• A) 25%
• B) 30%
• C) 37.5% ✓
• D) 40%

Answer: C. MOS = 8,00,000 − 5,00,000 = ₹3,00,000. MOS Ratio = 3,00,000 ÷ 8,00,000 × 100 = 37.5%.

Q63. Financial Leverage (DFL) = EBIT ÷ (EBIT − Interest). EBIT = ₹2,00,000; Interest = ₹50,000. DFL is:

• A) 1.2
• B) 1.33 ✓
• C) 1.5
• D) 2.0

Answer: B. DFL = 2,00,000 ÷ (2,00,000 − 50,000) = 2,00,000 ÷ 1,50,000 = 1.33.

Q64. Combined Leverage (DCL) = DOL × DFL. DOL = 2.5; DFL = 1.4. DCL is:

• A) 3.0
• B) 3.2
• C) 3.5 ✓
• D) 4.0

Answer: C. DCL = 2.5 × 1.4 = 3.5. DCL shows the overall sensitivity of EPS to a change in sales.

Q65. Which capital budgeting technique accounts for the time value of money AND generates a percentage return figure?

• A) Payback Period
• B) Accounting Rate of Return
• C) Internal Rate of Return (IRR) ✓
• D) Break-Even Analysis

Answer: C. IRR uses discounted cash flows (TVM) and expresses the result as a rate of return (%). This makes it easy to compare against the cost of capital.

Q66. Working Capital = Current Assets − Current Liabilities. CA = ₹5,00,000; CL = ₹2,00,000. Working Capital is:

• A) ₹2,00,000
• B) ₹4,00,000
• C) ₹3,00,000 ✓
• D) ₹7,00,000

Answer: C. Working Capital = 5,00,000 − 2,00,000 = ₹3,00,000. Positive working capital indicates the firm can meet its short-term obligations.

Q67. Gross Working Capital refers to:

• A) Total current assets ✓
• B) Current assets minus current liabilities
• C) Fixed assets minus long-term liabilities
• D) Total assets of the firm

Answer: A. Gross Working Capital = Total Current Assets. Net Working Capital = Current Assets − Current Liabilities. Both concepts are tested in JAIIB AFM.

Q68. The Operating Cycle (Cash Conversion Cycle) does NOT include:

• A) Raw material holding period
• B) Debtors collection period
• C) Fixed asset depreciation period ✓
• D) Creditors payment period

Answer: C. Operating Cycle = Raw Material period + WIP period + Finished Goods period + Debtors period − Creditors period. Fixed asset depreciation is not part of working capital cycle.

Q69. The Profitability Index (PI) = PV of Cash Inflows ÷ Initial Investment. A project with PI > 1 means:

• A) NPV is negative
• B) NPV is positive — accept the project ✓
• C) IRR equals cost of capital
• D) Payback period exceeds project life

Answer: B. PI > 1 ↔ NPV > 0 → accept. PI < 1 ↔ NPV < 0 → reject. PI = 1 ↔ NPV = 0 → indifferent. PI is used when capital is rationed across projects.

Q70. Dividend Discount Model (Gordon’s Model) values a stock as: P = D₁ ÷ (Ke − g). D₁ = ₹5; Ke = 15%; g = 10%. Stock price is:

• A) ₹33.33
• B) ₹75
• C) ₹100 ✓
• D) ₹50

Answer: C. P = 5 ÷ (0.15 − 0.10) = 5 ÷ 0.05 = ₹100. This model assumes dividends grow at a constant rate g forever.

Q71. A 5-year bond with face value ₹1,000 and 9% annual coupon. If market yield = 9%, the bond price is:

• A) ₹1,000 (at par) ✓
• B) ₹950
• C) ₹1,050
• D) ₹900

Answer: A. When coupon rate = market yield, the bond always trades at par (face value). This is the fundamental bond pricing rule.

Q72. The term “Duration” of a bond measures:

• A) The maturity of the bond in years
• B) The weighted average time to receive all cash flows, reflecting interest rate sensitivity ✓
• C) The coupon payment frequency
• D) The credit risk of the bond

Answer: B. Macaulay Duration is the weighted average time to receive a bond’s cash flows. Modified Duration measures price sensitivity to interest rate changes — key concept in bond portfolio management.

Q73. Simple interest on ₹10,000 at 12% p.a. for 3 years is:

• A) ₹3,000
• B) ₹3,200
• C) ₹3,600 ✓
• D) ₹4,000

Answer: C. SI = P × R × T = 10,000 × 12% × 3 = ₹3,600. Amount = ₹13,600.

Q74. Compound interest on ₹10,000 at 10% p.a. for 2 years (compounded annually) is:

• A) ₹2,000
• B) ₹2,100 ✓
• C) ₹2,200
• D) ₹1,900

Answer: B. Year 1 interest: 10,000 × 10% = ₹1,000 → balance ₹11,000. Year 2 interest: 11,000 × 10% = ₹1,100. Total CI = 1,000 + 1,100 = ₹2,100.

Q75. The effective annual rate (EAR) when the nominal rate is 12% compounded monthly is: [(1 + 0.01)¹² − 1 = 0.1268]

• A) 12.00%
• B) 12.68% ✓
• C) 12.36%
• D) 13.00%

Answer: B. EAR = (1 + 0.12/12)¹² − 1 = (1.01)¹² − 1 = 1.1268 − 1 = 12.68%. Higher compounding frequency → higher EAR.

Q76. MM (Modigliani-Miller) theorem in a world without taxes states that firm value is:

• A) Independent of capital structure ✓
• B) Maximised with 100% debt
• C) Maximised with 100% equity
• D) Dependent on dividend policy

Answer: A. MM Proposition I (no tax): The value of a firm is independent of its financing mix. In the real world (with taxes), debt has a tax shield advantage, making some debt optimal.

Q77. The cost of equity using CAPM = Rf + β(Rm − Rf). Rf = 6%; β = 1.2; Rm = 14%. Cost of equity is:

• A) 14.6%
• B) 15.6% ✓
• C) 16.8%
• D) 13.6%

Answer: B. Ke = 6% + 1.2 × (14% − 6%) = 6% + 1.2 × 8% = 6% + 9.6% = 15.6%.

Q78. After-tax cost of debt = Kd × (1 − Tax Rate). Pre-tax cost = 10%; Tax rate = 30%. After-tax cost of debt is:

• A) 10%
• B) 8%
• C) 7% ✓
• D) 6%

Answer: C. After-tax Kd = 10% × (1 − 0.30) = 10% × 0.70 = 7%. Interest is tax-deductible, so the effective cost of debt is reduced by the tax shield.

Q79. A perpetuity pays ₹6,000 per year forever. Discount rate = 12%. Present value of perpetuity is:

• A) ₹60,000
• B) ₹50,000 ✓
• C) ₹72,000
• D) ₹40,000

Answer: B. PV of perpetuity = C ÷ r = 6,000 ÷ 0.12 = ₹50,000. Government bonds, preference shares with no maturity date, and CRR are sometimes modelled as perpetuities.

Q80. A project’s payback period: Investment = ₹1,20,000; Cash inflows ₹40,000 per year. Payback Period is:

• A) 2 years
• B) 2.5 years
• C) 3 years ✓
• D) 4 years

Answer: C. Payback = 1,20,000 ÷ 40,000 = 3 years. The project recovers its investment in 3 years.

Q81. Debtors Turnover Ratio = Net Credit Sales ÷ Average Debtors. Sales = ₹12,00,000; Average Debtors = ₹2,00,000. The Average Collection Period (in days) is:

• A) 30 days
• B) 45 days
• C) 61 days ✓
• D) 90 days

Answer: C. Debtors Turnover = 12,00,000 ÷ 2,00,000 = 6 times. Collection Period = 365 ÷ 6 = 60.8 ≈ 61 days.

Q82. Which method of inventory valuation results in lower profit during periods of rising prices?

• A) FIFO
• B) LIFO ✓
• C) Weighted Average
• D) Specific Identification

Answer: B. During rising prices, LIFO (Last In First Out) charges the most expensive (recent) inventory to COGS, reducing profit. FIFO shows higher profit as older lower-cost inventory is expensed first. (Note: LIFO is not permitted under IndAS/IFRS.)

Q83. Economic Order Quantity (EOQ) minimises the total of:

• A) Purchase cost and selling cost
• B) Ordering cost and carrying (holding) cost ✓
• C) Labour cost and material cost
• D) Fixed cost and variable cost

Answer: B. EOQ = √(2 × Annual Demand × Ordering Cost ÷ Carrying Cost per unit). It is the inventory quantity that minimises the sum of ordering and holding costs.

Q84. Capital Rationing refers to a situation where:

• A) There is unlimited capital for all positive NPV projects
• B) A firm has limited capital and must choose among profitable projects ✓
• C) Government restricts company borrowing
• D) All projects have negative NPV

Answer: B. Under capital rationing, a firm ranks projects by Profitability Index (PI) and selects the combination that maximises total NPV within the budget constraint.

Q85. Cash Budget is a tool for managing:

• A) Long-term capital expenditure
• B) Short-term liquidity and cash flow planning ✓
• C) Dividend distribution
• D) Depreciation scheduling

Answer: B. A Cash Budget projects expected cash inflows and outflows over a short period (weekly/monthly), helping the firm identify and plan for cash surpluses or shortfalls.

Q86. Marginal Cost = Variable Cost. Under Marginal Costing, which cost is NOT included in product cost?

• A) Direct material
• B) Direct labour
• C) Fixed manufacturing overhead ✓
• D) Variable overhead

Answer: C. Marginal Costing includes only variable costs in product cost — direct material, direct labour, variable overhead. Fixed overheads are treated as period costs and charged to P&L in full.

Q87. P/V Ratio (Profit-Volume Ratio) = Contribution ÷ Sales × 100. Sales = ₹5,00,000; Variable costs = ₹3,00,000. P/V Ratio is:

• A) 30%
• B) 35%
• C) 40% ✓
• D) 60%

Answer: C. Contribution = 5,00,000 − 3,00,000 = ₹2,00,000. P/V Ratio = 2,00,000 ÷ 5,00,000 × 100 = 40%.

Q88. BEP Sales (₹) = Fixed Costs ÷ P/V Ratio. Fixed Costs = ₹1,20,000; P/V Ratio = 40%. BEP in sales value is:

• A) ₹2,00,000
• B) ₹2,50,000
• C) ₹3,00,000 ✓
• D) ₹3,50,000

Answer: C. BEP = 1,20,000 ÷ 0.40 = ₹3,00,000.

Q89. Standard Costing establishes:

• A) Actual cost of production
• B) Pre-determined cost benchmarks for comparison and variance analysis ✓
• C) Selling price of products
• D) Tax liability of the firm

Answer: B. Standard Costing sets target (standard) costs for materials, labour, and overheads. Actual costs are compared to standards; the differences are called variances — used for cost control.

Q90. Material Price Variance = (Standard Price − Actual Price) × Actual Quantity. SP = ₹10; AP = ₹11; AQ = 5,000 kg. Variance is:

• A) ₹5,000 Favourable
• B) ₹5,000 Adverse ✓
• C) ₹10,000 Adverse
• D) ₹10,000 Favourable

Answer: B. MPV = (10 − 11) × 5,000 = −₹5,000 = ₹5,000 Adverse (actual price exceeded standard, so cost was higher than planned).

Q91. Labour Efficiency Variance = (Standard Hours − Actual Hours) × Standard Rate. SH = 1,000 hrs; AH = 1,100 hrs; SR = ₹20. LEV is:

• A) ₹2,000 Favourable
• B) ₹2,000 Adverse ✓
• C) ₹1,000 Adverse
• D) ₹2,200 Adverse

Answer: B. LEV = (1,000 − 1,100) × 20 = −100 × 20 = ₹2,000 Adverse (workers took more hours than standard).

Q92. Zero-Based Budgeting (ZBB) requires managers to:

• A) Use last year’s budget as the baseline
• B) Justify every expenditure from scratch each budget period ✓
• C) Focus only on capital expenditure
• D) Eliminate all fixed costs

Answer: B. ZBB does not carry forward prior budgets — every department justifies all activities anew. It eliminates entrenched wasteful spending but is time-intensive.

Q93. A firm produced and sold 10,000 units. SP = ₹100; Variable cost = ₹60; Fixed cost = ₹2,00,000. Profit under Marginal Costing is:

• A) ₹1,50,000
• B) ₹2,50,000
• C) ₹2,00,000 ✓
• D) ₹1,00,000

Answer: C. Contribution = (100 − 60) × 10,000 = ₹4,00,000. Profit = Contribution − Fixed Costs = 4,00,000 − 2,00,000 = ₹2,00,000.

Q94. Under the Income Tax Act 1961, a bank’s interest income from loans is taxable under the head:

• A) Salary
• B) Capital Gains
• C) Profits and Gains from Business or Profession ✓
• D) Income from Other Sources

Answer: C. Banks are assessed as businesses. Their entire income (interest on loans, fee income, trading profits) is taxed under PGBP (Profits and Gains from Business or Profession).

Q95. Deferred Tax Liability (DTL) arises when:

• A) Accounting profit exceeds taxable profit
• B) Taxable income is lower than accounting profit due to timing differences ✓
• C) The company makes a loss
• D) Advance tax is paid

Answer: B. DTL arises when tax is currently lower (e.g., WDV depreciation vs SLM) but will be higher in future years. Future tax obligation = DTL, per AS-22.

Q96. Cash profit = Net Profit + Depreciation. Net profit = ₹5,00,000; Depreciation = ₹80,000. Cash profit is:

• A) ₹4,20,000
• B) ₹5,80,000 ✓
• C) ₹5,00,000
• D) ₹6,00,000

Answer: B. Cash Profit = 5,00,000 + 80,000 = ₹5,80,000. Depreciation is added back because it is a non-cash expense that reduced profit without consuming cash.

Q97. Transfer Pricing in banking refers to:

• A) Price charged to retail customers
• B) Internal rate at which one department lends funds to another ✓
• C) RBI-mandated lending rate
• D) Price of government securities

Answer: B. Funds Transfer Pricing (FTP) is an internal accounting mechanism in banks to measure each business unit’s contribution to overall profitability by assigning a cost to internal fund usage.

Q98. Under marginal costing, the difference in profit between two periods is explained entirely by:

• A) Change in fixed costs
• B) Change in sales volume (contribution) ✓
• C) Change in closing stock valuation
• D) Change in depreciation method

Answer: B. Under marginal costing, fixed costs are constant period charges. Profit changes only because of changes in contribution (i.e., sales volume or selling price or variable cost).

Q99. A company desires a profit of ₹80,000 after tax at 20%. P/V Ratio = 40%; Fixed Costs = ₹60,000. Required sales value is:

• A) ₹3,00,000
• B) ₹4,00,000 ✓
• C) ₹3,50,000
• D) ₹5,00,000

Answer: B. Desired profit before tax = 80,000 ÷ (1 − 0.20) = ₹1,00,000. Required contribution = Fixed Costs + Desired Profit (BT) = 60,000 + 1,00,000 = 1,60,000. Sales = 1,60,000 ÷ 0.40 = ₹4,00,000.

Q100. Which of the following is NOT a feature of a good budgetary control system?

• A) Clear objectives and responsibility centres
• B) Regular comparison of actual vs budgeted performance
• C) Flexible budgets to accommodate volume changes
• D) Budgets set by top management without input from departments ✓

Answer: D. A good budgetary control system requires participative budgeting — departmental managers should be involved in setting budgets. Top-down imposed budgets reduce motivation and accuracy.