Consider the following statements about how financial management decisions affect the financial statements of a business:
(A) A capital budgeting decision to invest in fixed assets raises the size of the fixed assets block by that amount.
(B) With an increase in the investment in fixed assets, there is a commensurate decrease in the working capital requirement.
(C) A higher amount of debt means a higher interest expense in future.
(D) Use of higher equity may entail a lower payment of dividends.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A) and (C) only
(A) A capital budgeting decision to invest in fixed assets raises the size of the fixed assets block by that amount. — Correct. A capital budgeting decision commits funds to fixed assets for the long term. If a firm invests Rs. 100 crore in fixed assets, its fixed assets block grows by that amount.
(B) With an increase in the investment in fixed assets, there is a commensurate decrease in the working capital requirement. — Incorrect. New fixed assets need more raw material, stock and cash to run them. So the working capital requirement rises in proportion (a commensurate increase); it does not fall.
(C) A higher amount of debt means a higher interest expense in future. — Correct. Interest must be paid on every rupee borrowed. So more debt means more interest in the profit and loss account of later years.
(D) Use of higher equity may entail a lower payment of dividends. — Incorrect. More equity means more shareholders to reward. So higher equity may lead to higher dividend payments.
NCERT (2026-27 Edition): “Financial Management … Importance: … (i) The size and the composition of fixed assets of the business: For example, a capital budgeting decision to invest a sum of Rs. 100 crores in fixed assets would raise the size of fixed assets block by this amount. “Financial Management … Importance: … (v) All items in the Profit and Loss Account, e.g., Interest, Expense, Depreciation, etc. : Higher amount of debt means higher interest expense in future. Similarly, use of higher equity may entail higher payment of dividends. Similarly, an expansion of business which is a result of capital budgeting decision is likely to affect virtually all items in the profit and loss account of the business. …” |