Please refer to Financial Management Class 12 Business Studies Important Questions with solutions provided below. These questions and answers have been provided for Class 12 Business Studies based on the latest syllabus and examination guidelines issued by CBSE, NCERT, and KVS. Students should learn these problem solutions as it will help them to gain more marks in examinations. We have provided Important Questions for Class 12 Business Studies for all chapters in your book. These Board exam questions have been designed by expert teachers of Standard 12.
Class 12 Business Studies Important Questions Financial Management
Question: What is meant by investment decision?
Answer: It 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.
Question: State the primary objective of financial management.
Answer: Wealth maximization is the primary objective of financial management which means maximizing the market value of investment in the shares of the company.
Question: What is meant by ‘Capital Structure”?
Answer: It refers to the proportion of long-term sources of funds.
Question: State the objective of Financial Management’.
Answer: The objective of financial management is maximizing shareholder’s wealth.
Question: What is meant by Gross Working Capital?
Answer: It refers to the aggregate of current assets.
Question: What is meant by Financial Planning?
Answer: It refers to the preparation of a financial blueprint of an organization’s future operations.
Question: What is meant by fixed capital?
Answer: It refers to that capital which is used for the purchase of fixed assets, such as land, building, machinery, furniture, etc.
Question: What is meant by Financial Management’?
Answer: It refers to that branch of management which is concerned with the effective acquisition and use of money.
Question: What is meant by ‘Financial Risk?
Answer: It refers to the risk of not able to cover fixed financial costs by a business.
Short/Long Answer Type Questions:
Question: Explain the importance of ‘Financial Planning’.
- Helps to Face the Eventualities: It tries to forecast various business situations. On this basis alternative financial plans are prepared. By doing so, it helps to face the eventual situation in a better way.
- Helps in Avoiding Business: Shocks and Surprises: Proper provision regarding shortage or surplus of funds is made by anticipating future receipts and payments. Hence, it helps in avoiding business shocks and surprises.
- Helps in Coordination: It helps in coordinating various business activities, such as, ale purchase, production, finance, etc.
Question: Explain any four factors which affect the ‘Dividend Decision’ of a company.
Answer: The chief factors affecting dividend decision are the following:
- Amount of Earning: The dividend paid out of the present and reserved profit. Therefore, greater amount of total profit will ensure greater dividend.
- Stability Earnings: company having stable earning is in a position to declare more dividends and vice-versa.
- Stability Dividend: Every company adopts policy maintaining dividend stability dividend per share. It is always good if the dividend remains stable or increase.
- Growth Opportunities: the company has more opportunities growth, it will require more finance. In such situation, major part the income should retained and a small part of should be paid as dividend.
Question: Give the meaning of ‘Investment’ and Financing decisions financial management.
Answer: Investment Decision: It refers deciding about how the funds invested assets that they are able earn the highest possible return are obtained for the investors.
Financing Decision: It refers the determination how the total funds required the business will be obtained from various long-term sources. Long-term financial sources chiefly include equity share capital, preference share capital, retained long-term loan, etc.
Question: Explain the objectives of financial planning.
Answer: Following are the objectives of financial planning.
- To Ensure Timely Availability of Finance: The first objective of financial planning is make finance available in time. Under it, the long-term and short-term financial needs are anticipated and then the sources of availability of finance are located.
- To Ensure Proper Balance of Finance: It is always ensured that the balance of cash should neither be in excess nor short. The balance of cash in both these situations is harmful.
Question: Explain the term Financial Planning.
Answer: To predetermine what is to be done in future is called planning. A financial manager has to formulate plans regarding future financial requirement, its procurement and utilization.
Financial planning, therefore refers to predetermining of financial activities so that the objectives of the organisation could be achieved. In short, it includes financial objectives, financial policies and financial procedures.
Question: What is meant by Financial Planning? State any two points of its importance.
Answer: Meaning: It refers to the preparation of a financial blueprint of an organization’s future operations.
(i) Helps to Face the Eventualities: it tries to forecast various business situations. On this basis alternative financial plans are prepared. By doing so, it helps to face the eventual situations in a better way.
(ii) Helps in Avoiding Business Shocks and Surprises: Proper provision regarding shortage or surplus of funds is made by anticipating future receipts and payments. Hence. It helps in avoiding business shocks and surprises.
Question: What is meant by financial management State any two financial decisions taken by a financial manager?
Answer: Financial management: Itrefers to that part of management which concerned with the efficient planning and controlling of financial affairs of an enterprise.
Following are the main decisions which are involved in financial management Investment Decision:
(i) Investing Decision: It 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.
(ii) Financing Decision: It refers to the determination as to how the total funds required by the lines will be obtained from various long-term sources.
Question: Give the meaning of Financial Management. State its main Objective.
Answer: Meaning of Financial Management: refers that branch management activity which concerned with the efficient acquisition and use of money.
Objective of Financial Management: The objective financial management maximize wealth the owners of the business the maximum extent.
Question: What is meant by Investment decision? State any three factors which affect the ‘Investment Decision’.
Answer: Meaning of Investment Decision: refers deciding about how the funds are invested in different assets so that they are able earn the highest possible return the investors.
Factors affecting the investment decisions:
- Cash Flows of the Project: As we know investment decision (capital budgeting decision) is related with investment in long-term. These assets involve both cash outflows and cash inflows over a series of years. Both of these need to be analyzed carefully before finalizing the investment.
- The Rate of Return: A project may not be profitable compared to other. The criteria to decide the profitability of various projects is their respective rate of returns. The rate of return is calculated on the basis of expected return the project and risk attached with it.
- Investment Criteria Involved: There may be many criteria of the investor while investing the long-term assets. These are funds involve, rate of interest, rate return, cash flow, etc. All these factors influence the decision go for particular investment not. For same purpose, capital techniques are applied and accordingly decisions are taken.
Question: Explain briefly the Investment Decisions.
Answer: Investment Decision: It refers to the selection of assets in which funds will be invested by the business. Assets which are obtained by the business are of two types, i.e., long-term assets and Short-term assets. On this basis, investment decision is also divided into two parts:
(i) Long-term Investment Decision: This is referred to as the Capital Budgeting Decision. It relates to the investment in long-term assets. For example, buying a new machine.
(iil) Short-term Investment Decision: This is referred to as the Working Capital Management It relates to the investment in short-term assets, such as, cash, stock, debtors, etc
Question: What is meant by “Capital Structure’? Explain any two factors that affect the capital structure of a company.
Answer: Meaning: Capital structure refers to relative proportion of different sources of long-term finance.
Determining Factors: Some of the chief factors affecting the choice of the capital structure t the following
(i) Cash Flow Position: While making a choice of the capital structure, the future cash flow position should be kept in mind. Debt capital should be used only if the cash flow position is really good because a lot of cash is needed in order to make payment of interest and refund of capital.
(ii) Cost of Debt: The capacity of a company to take debt depends on the cost of debt. In case rate of interest on the debt capital is less, more debt capital can be utilized and vice versa.
Question: Explain any three factors that affect the working capital requirements of a company.
Answer: Factors affecting the Requirements of Working Capital:
- Scale of Operations: There is a direct link between the working capital and the sale d operations. In other words, more working capital is required in case of big organisation while less working capital is needed in case of small organisations.
- Business Cycle: The need for the working capital is affected by various stages of the business cycle. During the boom period, the demand increases and sales also increase. Therefore, more working capital needed. On the contrary during period depression, the demand declines and affects both the production and sales of goods. Therefore in such a situation less working capital is required.
- Production Cycle: Production cycle means time the involved converting material finished product. The longer this period, more will time which capital remain blocked in raw material and semi-manufactured products. Thus, more working will be needed. On the contrary, where period cycle is little, less working capital will be needed.