Financial Management MCQs: Practice with Answers & Explanations

Financial management refers to the strategic planning, organizing, directing, and controlling of financial resources for optimal business outcomes. This topic is crucial for students preparing for Class 12, UGC NET, MBA entrance, and other competitive exams, as well as for understanding real-world business decisions.

What is Financial Management?

Financial management involves planning and managing a business's funds to achieve its objectives efficiently. It includes processes to obtain, allocate, and control financial resources, helping businesses maximize profitability and ensure smooth daily operations.

Functions of Financial Management

The primary functions of financial management are investment, financing, dividend, and working capital decisions. Each function supports business growth and stability by utilising resources efficiently and minimizing risk. Students can learn these aspects in-depth with relevant examples.

Objectives of Financial Management

The main objectives are profit maximization and wealth maximization. While profit maximization focuses on short-term earnings, wealth maximization aims at increasing the long-term value for shareholders, aligning with sustainable business goals.

Financial Management MCQs with Answers

Multiple choice questions (MCQs) help students test their understanding of financial management concepts for exams. Below are ten practice questions with answers and explanations to support your preparation.

• 1. Investment can be defined as:
  A) Person’s dedication to purchasing a house or flat
  B) Use of capital on assets to receive returns
  C) Usage of money on a production process of products and services
  D) Net additions made to the nation’s capital stocks
  Answer: B
  Explanation: Investment means using funds to purchase assets for returns or profits, central to capital budgeting decisions.


• 2. The concept of financial management is:
  A) Profit maximization
  B) All features of obtaining and using financial resources for company operations
  C) Organization of funds
  D) Effective management of every company
  Answer: B
  Explanation: Financial management deals with all aspects of procuring and utilizing finances for business operations.


• 3. What is the primary goal of financial management?
  A) To minimise the risk
  B) To maximise the owner’s wealth
  C) To maximise the return
  D) To raise profit
  Answer: B
  Explanation: Wealth maximization ensures long-term value for shareholders, a key objective of financial managers.


• 4. GST is a consumption of goods and service tax based on:
  A) Development
  B) Dividend
  C) Duration
  D) Destination
  Answer: D
  Explanation: GST is applied on goods and services based on the destination of consumption rather than origin.


• 5. The finance manager is accountable for:
  A) Earning capital assets of the company
  B) Effective management of a fund
  C) Arrangement of financial resources
  D) Proper utilisation of funds
  Answer: C
  Explanation: Finance managers are responsible for arranging and coordinating the necessary financial resources for the company.


• 6. The market value of the shares is decided by:
  A) The investment market
  B) The government
  C) Shareholders
  D) The respective companies
  Answer: A
  Explanation: The investment market (stock market) determines the share prices based on demand and supply.


• 7. The capital budget is associated with:
  A) Long term and short term assets
  B) Fixed assets
  C) Long term assets
  D) Short term assets
  Answer: C
  Explanation: Capital budgeting focuses on long-term investments like machinery or new projects.


• 8. CAPM stands for:
  A) Capital asset pricing model
  B) Capital amount printing model
  C) Capital amount pricing model
  D) Capital asset printing model
  Answer: A
  Explanation: CAPM is a model that determines the required return on equity based on risk and expected market return.


• 9. What does financial leverage measure?
  A) No change with EBIT and EPS
  B) The sensibility of EBIT with % change with respect to output
  C) The sensibility of EPS w.r.t % change in EBIT
  D) % variation in the level of production
  Answer: C
  Explanation: Financial leverage indicates how a change in operating profit (EBIT) impacts earnings per share (EPS).


• 10. From the below-mentioned items, which are financial assets?
  A) Machines
  B) Bonds
  C) Stocks
  D) B and C
  Answer: D
  Explanation: Bonds and stocks are financial assets, while machines are tangible assets.

Application of Financial Management in Real Life

You use financial management in business expansions, selecting the right funding sources, deciding dividend payouts, and handling cash flows. For example, when a company considers buying new machinery, it must analyze the investment's costs and expected returns—a process called capital budgeting.

How Financial Management Helps in Exams

Understanding financial management enables students to score better in board and competitive exams. Regular practice of MCQs builds conceptual clarity and boosts confidence for questions covering investment, capital structure, leverage, and financial planning.

Key Internal Vedantu Links for Deep Learning

• Functions of Financial Management: Study each function in detail for stronger MCQ answers.
• Ratio Analysis: Learn about operating, profitability, and liquidity ratios.
• Cost of Capital: Essential for valuation and investment decision questions.
• Scope of Financial Management: Discover the broad application areas of the discipline.
• Objectives of Financial Management: Deep dive into profit versus wealth maximization.
• Working Capital: Key topic for liquidity and cash management questions.
• Capital Structure: Understand funding options and their impact on organizations.
• Budgeting: Important for MCQs on financial planning and control.
• Financing Decisions: Supports decision-making in sourcing and allocating capital.

Vedantu’s Approach to Financial Management Learning

At Vedantu, we offer clear explanations for every financial management concept. Our resources combine structured notes, MCQ practice, and detailed solutions, ensuring you excel in exams and practical scenarios alike.

In summary, financial management is the backbone of business success, covering investments, funding, dividends, and daily operations. Mastering its concepts prepares students for exams and real-world decision-making. Practice regularly with MCQs and explore linked Vedantu topics for deep expertise.