Commerce and B Com Interview Questions and Answers

Does dividend reduce profits?

No, only the operating and adminstartive expenses reduces the profit margin so as the bottom line(profit). Paying Dividend decision is taken(at the time of appropriation of funds) after knowing what the profit is and based on which either part/whole profit can be declared as divideds to its shareholders or it can be retain same partially/whole in the company and reinvested in the company itself. Paying dividends only reduces the amount carried forwarded to reserves and surplus.

What is the highest rate of Depreciation under Income Tax and for what items?
Few of them are, 100% depreciation is allowed for machinery acquired for water supply project or water treatment system and used for infrastructure facilities. Air, water pollution control equipments, Books.

Does depreciation reduce profit?
Yes, the Net profit gets reduced since the law allows the depreciation amount can be considered as an expenses and charged in expenses column of income statement, because of which the profit reduces though there is no cash outflow from the company.

What is Current Ratio?
What is the ideal Current Ratio? Why?
In simple, its the assets available with the company to meets its future short term obligations(liabilities)
It is calculated by CURRENT ASSETS/CURRENT LIABILITIES, Ideally it should be 2:1 ratio. It means the company has assets twice its liabilities, it should be twice because the assets cannot be turned into liquid cash immediately, so if the assets are twice the chances of converting few assets are higher than another.

What is Capital and Revenue Expenditure?
Any expenses which are incurred for short term gain is Revenue expenditure(example., stationery, or any item which the gain can be obtained for less than an year) and expenditure which sustains for longer period of time let say more than 2-3 is capital expenditure(example., Machinery, Building)

What would happen if a company pays a lower dividend?
Company perspective: It can retain the profits and reinvest and increase the shareholder value(market price) .Investors Perspective: It discourages the new investors to invest in that particular stock/company. Both are applicable in different scenario.

Where does Goodwill appear in a Balance Sheet? Why?
Goodwill is an Intabgible asset gained by the company throught its operation over an period of time. In other words its the monetary figure what the company has earned as Brand Value/Equity from its customers. It is shown in the Asset side of the Balancesheet. 

Can the captain of the vessel dump the goods in the middle of the sea?
Yes, the captain can dump it when he feels than the ship is overweighed and its can be sunked. The sales of goods act and Indian contact act permits it. 

Can depreciation be on fixed assets only?
Yes.

As depreciation is to fixed assets, what is the same analogous to debtors?

Provision for Bad Debts.

Why the Net cash and Net Income amount figure Differs?

The Main reason for the difference in the amount is because of the accounting concept the 

company uses. When the company uses the "Accrual accounting concept", it take both 

the Cash and Credit sales in account, irrespective of cash received on credit sales or not. 


Which means, the company will take its credit sales as actually Sales, even it dint 

received the cash from the customers. When such event occurs, for example, 

the INCOME STATEMENT Shows in this way.


Net Sales(Includes Credit Sales of Rs 5000)   -   10,000

Less: COGS and Operation Expenses            -      2,000

-----------------------------------------------------------------------

NET INCOME                                                 -    Rs 8,000    
-----------------------------------------------------------------------       

Well in the CASH FLOW STATEMENT, only those transaction are taken where actual 

cash Inflow or outflow occurs, not all transactions. The Cash Flow shows in this way.


Net Cash Sales                                                       -   Rs 5,000

Less: COGS and Operation Expenses                -   Rs 2,000
----------------------------------------------------------------------

NET CASH                                                         -  Rs 3,000   

Differentiate between commerce, trade and business

Trade

Trade refers to buying and selling of goods and services for money or money's worth. 

Commerce

Exchange of goods or services for money or in kind, usually on a scale large enough to require transportation from place to place or across city, state, or national boundaries. Commerce is Trade and Trade related activities vis-a-vis  Insurance, Transportation, Communication, Warehousing, and other auxiliaries to trade. commerce is an ocean ,trade like a river which will merge into the sea.. 

trade is the part of commerce .trade refers to the buying & selling .where as commerce refers the whole system of business ,accounting .

Business

Business is nothing but any activity that is carried out on a constant basis with the motive of making profits. 

Trade- buying n selling of goods is called trade

Commerce-the next activities to the trade is commerece

 Business- the next step of trade and commerce for profit motive is known as business

What is break – even analysis?

Financial analysis that identifies the point at which expenses equal 

gross revenue for a zero net difference. 

For example, if a mailing costs $100 and each item generates $5 in 

revenue, the break-even point is at 20  items sold. A profit will be 

made on items sold in excess of 20. A loss will result on sales under 

20. The  break-even point may be analyzed in terms of units, as 

above, or dollars.

A break-even chart is one in which sales revenue, variable costs, 

and fixed costs are plotted on the vertical axis while volume is 

plotted on the horizontal axis. The break - even point is the point at 

which the total sales revenue line intersects the total cost line. 

The basic formula for break-even analysis is as follows:

BEQ FC /(P-VC)

Where BEQ Break-even quantity

FC Total fixed costs

P Average price per unit, and

VC Variable costs per unit.

Fixed costs include rent, equipment leases, insurance, interest on 

borrowed funds, and administrative salaries—costs that do not tend 

to vary based on sales volume. Variable costs, on the other hand, 

include direct labor, raw materials, sales commissions, and delivery 

expenses—costs that tend to fluctuate with the level of sales. A 

key component of break-even analysis is the contribution margin, 

which can be defined as a product or service's price (P) minus 

variable costs (VC) per unit sold.

Break-even analysis has numerous potential applications for small businesses. For example, it can help managers assess the effect of changing prices, sales volume, and costs on profits. It can also help small business owners make decisions regarding whether to expand their operations or hire new employees. Break-even analysis would also be useful in the following situation: a small business owner is skeptical of her marketing manager's projection for sales of 15,000 units of a new product, and wants to know what minimum quantity of units must be sold to avoid losing money, assuming a selling price of $25, fixed costs of $100,000, and variable costs of $15. The equation tells her that these parameters will require a break-even volume of 10,000 units; fewer than that level yields losses, more than that level yields profits.

What is sunk cost?

A sunk cost is a retrospective (past) cost that has already been incurred and cannot be recovered. For example, if a firm sinks $1 million on an enterprise software installation, that cost is "sunk" because it was a one-time expense and cannot be recovered once spent.

What is Acid Test Ratio ?

The acid-test ratio is a measure of how well a company can meet its short-term 

financial liabilities. 

Also known as the quick ratio, the acid-test ratio can be calculated as follows:

Acid-Test Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current 

Liabilities

A common alternative formula is:

Acid-Test Ratio = (Current assets – Inventory) / Current Liabilities The acid-test 

ratio is a more conservative version of another well-known liquidity metric  -- 

the current ratio. 

Although the two are similar, the Acid-Test ratio provides a more  rigorous assessment 

of a company's ability to pay its current liabilities. It does this by 

eliminating all but the most liquid of currentassets from consideration. Inventory is the 

most notable exclusion, because it is not as rapidly convertible to cash and is often 

sold 

on credit. Some analysts include inventory in the ratio, though, if it is more liquid than 

certain receivables.

To demonstrate, let's assume this information was pulled from the balance sheet of our 

theoretical firm -- Company XYZ:
 

Cash	$60,000	Accounts Payable	$30,000
Marketable Securities	$10,000	Accrued Expenses	$20,000
Accounts Receivable	$40,000	Notes Payable	$5,000
Inventory	$50,000	Current Portion of Long-Term Debt	$10,000
Total Current Assets	$160,000	Total Current Liabilities	$65,000

Using the primary quick ratio formula and the information above, we can calculate 

Company XYZ's Acid-Test ratio as follows:

($60,000 + $10,000 + $40,000) / $65,000 = 1.7

This means that for every dollar of Company XYZ's current liabilities, the firm has 

$1.70 of very liquid assets to cover those immediate obligations.

Obviously, it is vital that a company have enough cash on hand to meet accounts payable, interest expenses, and other bills when they become due. The higher the ratio, the more financially secure a company is in the short term. A common rule of thumb is that companies with a Acid-Test or 
quick ratio of greater than 1.0 are sufficiently able to meet their short-term liabilities.

What is Liquidity Ratio ?

Liquidity Ratios: To meet its commitments, business needs liquid funds. The ability of the business to pay the amount due to stakeholders as and when it is due is known as liquidity, and the ratios calculated to measure it are known as ‘Liquidity Ratios’. These are essentially short-term in nature.

What is Solvency Ratio ?

Solvency Ratios: Solvency of business is determined by its ability to meet its contractual obligations towards stakeholders, particularly towards external stakeholders, and the ratios calculated to measure solvency position are known as ‘Solvency Ratios’. These are essentially long-term in nature.

What is Activity Ratio ?

Activity (or Turnover) Ratios: This refers to the ratios that are calculated for measuring the efficiency of operations of business based on effective utilisation of resources. Hence, these are also known as ‘Efficiency Ratios’.

What is Profitability Ratio?

Profitability Ratios: It refers to the analysis of profits in relation to revenue from operations or funds (or assets) employed in the business and the ratios calculated to meet this objective are known as ‘Profitability Ratios’

What is Quick Ratio ?

Quick ratio = Quick Assets : Current Liabilities  or = Quick Assets / Current Liabilities

Quick Assets = Current assets -(Inventories + Advance tax)

The quick assets are defined as those assets which are quickly convertible into cash. While calculating quick assets we exclude the inventories at the end and other current assets such as prepaid expenses, advance tax, charges and expenses, etc. from the current assets. Because of exclusion of non-liquid current assets it is considered better than current ratio as a measure of liquidity position of the business. It is calculated to serve as a supplementary check on liquidity position of the business and is therefore, also known as ‘Acid-Test Ratio’.

Significance: The ratio provides a measure of the capacity of the business to meet its short-term obligations without any flaw. Normally, it is advocated to be safe to have a ratio of 1:1 as unnecessarily low ratio will be very risky and a high ratio suggests unnecessarily deployment of resources in otherwise less profitable short-term investments.

What is Liquidity Ratio ?

Liquidity Ratio = Liquidity Assets/ Current Liabilities

Liquidity Assets = Current assets –(Inventories + Prepaid expenses +