Economics Interview Questions and Answers!
Interview Question # Q.1. What do you mean by Capital Expenditure?
Ans. All expenditure which results in the acquisition of fixed assets and other development projects, the benefits of which are expected to be received beyond one year in the future is capital expenditure. Further, any expenditure incurred which tends to extend or improve existing fixed assets, so as to increase the profitability of a concern by increasing production or reducing cost of production beyond one year may rightly be called capital expenditure.
Thus, amounts of money spent in the acquisition, installation or development of fixed assets and in welfare and research and development projects fall under this category.
The specific objectives which necessitate capital expenditure in a concern are as follows:
1. Expanding business through increasing production by acquiring more fixed assets.
2. Improving quality of products with acquiring the up-to-date machinery.
3. Reducing cost of production by improving efficiency.
4. Diversification of products to survive through competitive conditions.
5. Giving more satisfaction to customers through after sales services
6. Welfare facilities to employees of the concern.
7. To comply with certain social objectives like acquisition of a pollution control devices, etc.
8. Reducing expenditure through research and development for reducing cost and making improvement in quality.
Charles T. Horngreen defines capital budgeting as “long-term planning for making and financing proposed capital outlays.”
According to Lynch, “Capital budgeting is planning development of available capital for the purpose of maximizing the long term profitability of the concern.”
Interview Question Q.2. What are the types of Capital Expenditure?
Ans. The following can be the various types of capital expenditure:
1. The replacement of fixed assets already in use.
2. The purchase of new fixed assets for expansion of the business.
3. Projects to comply with the statutory requirements such as making provision for accident prevention devices, providing creches and rest-room under the Factory Act, 1948.
4. Welfare projects to motivate the employees.
5. Research and development projects for reducing cost and improving quality of products and finding new uses of the product.
6. Educational and training projects to improve the efficiency of the employees.
7. Prestige-value projects to create a favorable effect in the minds of the public such as investment may be made on guest-houses, public relation department, hospitals, schools, colleges, etc.
Capital expenditure can also be classified in another way:
1. Profit earning projects – Expenditure is incurred on projects with a view to earning profits, e.g., an investment in machinery to increase production or reduce cost. They are of two types, viz., replacement projects and expansion projects.
(a) Replacement Projects – In these projects, the existing fixed assets are replaced by new fixed assets as existing assets are completely worn out or have become obsolete.
(b) Expansion Projects – In these projects, new fixed assets are acquired to augment existing facilities so as to increase the productive capacity.
2. Non-profit projects – In these projects, the aim is not to earn profit but the expenditure is incurred to meet the requirements of law of the land, contractual obligations of the Government orders or orders of local authorities, such as safety precautions for employees, provision of welfare measures, research and development projects, pollution control, etc.
3. Profitability of projects which cannot be measured – Some capital projects are taken with a view to increasing profits but the amount of the expected profits from such projects cannot be accurately ascertained. Projects meant for the welfare of the workers and sales promotion and research schemes come under this category.
Interview Question Q.3. Difference between Partnership and Co-Ownership?
Ans. If some property is owned jointly without any intention to carry on a business, it is called co-ownership. For example, if two persons purchase a car jointly without any idea of giving it for hire, it is a case of co-ownership. But, if the car is purchased with the intention of giving it for hire and then distributing the income among co-owners, it will be a case of partnership, because it becomes a business.
Therefore, the important distinction between co-ownership and partnership is that while there is ownership and no business in the case of the former, there is both joint ownership and business in the case of the latter.
Some other distinctions between the two are given below:
1. Co-ownership is not always based on agreement, it may arise by the operation of law or from status. A co-ownership is created if a man dies leaving his property to his sons, whereas a partnership must arise by an agreement, express or implied.
2. There is no implied agency between co-owners. A co-owner cannot bind the other co-owner by his acts in the administration of the joint property. But in the case of a partnership, a partner possesses the implied authority to act as an agent for other partners and can bind them for his acts in the ordinary course of the business.
3. A co-ownership does not necessarily involve community of profit or loss, but as partnership is entered into for business alone, it involves community of profit or loss.
4. A co-owner, without the consent of the other co-owners, can transfer his interest to a stranger but a partner is not permitted to transfer his share without the consent of all the partners.
5. A co-owner has no lien on the joint property; whereas a partner being an agent of other partners has a lien on the partnership property.
6. A co-owner can demand division of the property in specie but in the case of partnership, such demand is not allowed. Suppose a house is owned by two persons, in the case of co-ownership, a co-owner can demand dividing the house into two portions, but in the case of a partnership, a partner can have only cash in repayment of his share of capital.
Interview Question Q.4. How Classes of Companies are Classified?
Ans. Companies may be classified from three different angled, namely:
1. From the Point of View of Incorporation:
Companies can be incorporated in three ways, viz., by Charter, by Statute, or by Registration.
i. Chartered company – If a company is incorporated under a special charter granted by the monarch, it is called a chartered company and is regulated by that charter. For example, the East India Company, the Chartered Bank of Australia, India, and China were incorporated by the grant of a special Royal Charter. This form of organization does not exist in India, as there is no monarchy.
ii. Statutory company – A company which is created by a special Act of the Legislature is called a statutory company, and it is governed by the provisions of such an Act. This is done only in special cases where it is necessary to regulate the working of the company for some specific purposes. The State Bank of India, Industrial Finance Corporation, the Reserve Bank of India, Life Insurance Corporation of India, etc., are examples of this kind.
iii. Registered company – A company brought into existence by registration with the Registrar of Joint Stock Companies under the Companies Act of 1956 is called a registered company.
2. From the Point of View of Liability:
Companies which may be registered under the Companies Act are as follows:
i. Companies with unlimited liability – In an unlimited company, the liability of members is unlimited as in the case of individual proprietorship and members can be called upon to pay unlimited amount to discharge in full the debts and liabilities of the company when it is wound up. Such companies are rare.
ii. Companies with liability limited by guarantee – In the case of companies limited by guarantee, each member gives guarantee for the debts of the company up to a certain extent. This type of company is formed mostly when the business is of non-profit making and has the object of promoting social and cultural activities. Trade associations, clubs, and societies can be registered in this type.
iii. Companies with liability limited by shares – In the case of these companies, liability being limited by share the members are called upon to pay only the unpaid amount on shares held by them. For example, a shareholder who has paid Rs.50/- on nothing more. Most of the companies formed these days are of this type.
3. From the Point of View of Public Interest:
From this point of view, the companies may be:
i. Private Company,
ii. Public Company, and
iii. Government Company.
i. Private Company:
A private company has been defined as a company which requires a minimum number of two persons for registration and, by its articles.
(a) Limits the number of its members to 50, excluding its employees or past employees who were members;
(b) Restricts the transfer of its shares from one shareholder to another; and
(c) Prohibits an invitation to the public to subscribe to its shares and debentures.
The private company suits the need of those who wish to have both the advantages of limited liability and also keeping the business as private as possible. There are some similarities between private company and partnership. In both of these forms of organization, shares are not freely transferable and membership in both is confined to friends and relatives. But the advantage of limited liability in the case of a private company induces many businessmen to resort to this form of organization rather than partnership.
ii. Public Company:
In the case of public company the minimum number required to start is seven and there is no maximum limit. It can invite the public to subscribe for its shares and does not impose any of the conditions necessary in the case of a private company and any person competent to contract can become a member. To commence its business, it must have at least three directors and also it should obtain a certificate to commence business, from the Registrar of joint stock companies.
iii. Government Company:
A government company is a company in which not less than 51 per cent of share capital is held by the central government or by any state government(s) and up to 49 per cent of the paid up share capital may, therefore, be held by private parties or financial institutions.
Interview Question Q.5. What are the Privileges of a Private Company?
Ans. Because of advantages of limited liability, privacy in business and simplicity in formation many people prefer to start private companies rather than public companies. Moreover, private companies enjoy certain privileges which are not allowed to a public company and this is also one of the reasons for its popularity.
The privileges are as follows:
(i) Only two members are sufficient to form a private company.
(ii) There is no need to file the Registrar either prospectus or statement in lieu of prospectus.
(iii) Business can be commenced immediately after registration and there is no need for the certificate to commence business.
(iv) It is not required to hold the statutory meeting or to file the statutory report.
(v) Two directors are sufficient though more can be appointed if company desires.
(vi) Directors can receive loans without the approval of the government.
(vii) Many restrictions regarding the allotment of shares of public companies are not applicable to the shares of private company.
(viii) Persons can be appointed to the office of profit without any restriction and also there is no restriction regarding the term of appointment.
(ix) For its meetings only two members can make a quorum, but this is subject to provisions in Articles.
(x) Restrictions as to the classes of shares issued by the companies and the issue of shares with disproportionate right are not applicable to private companies.
(xi) There are no restrictions regarding remuneration payable to directors and managerial personnel.
(xii) Provision regarding the issue of further shares first to the existing holders of equity shares does not apply to private companies.
(xiii) Investments in the same group of companies can be done without any restrictions.
(xiv) The public cannot have access to its balance sheet and profit and loss accounts although it is required to file three copies of each with the Registrar of joint stock companies.
Interview Question Q.6. What are the types of Partnership Organization?
Ans. All partnerships can be of the following two types:
1. General Partnership:
In this type of partnership the liability of the members is unlimited and this type of partnership is found in India. A general partnership may further be sub-divided into two main classes – partnership at will and particular partnership. If no provision is made in the agreement regarding the duration of the business, it is called partnership at will. When a contact is entered into to do only a particular business, it is called particular partnership.
2. Limited Partnership:
In this type of partnership, the liability of certain partners of a firm is limited to the amount of capital, which they have agreed to contribute to the business. In a limited partnership, there will be at least one general partner whose liability is unlimited and one is a special partner whose liability is limited.
Since the liability of special partners is limited, their rights also are restricted and they cannot take part in the management of the business. Again, retirement, death, or bankruptcy of a special partner does not dissolve the partnership. A limited partner may transfer his share of capital to others only with the consent of the general partner. All limited partnership must be registered with the government.
This type of partnership is not found in India and it is mainly prevalent in European countries and the USA. This form of organization suits the investors who want to be very cautious and want to invest only capital without having unlimited liability. But as mentioned above, there must be at least one partner having unlimited liability in “Limited Partnership.”
Interview Question Q.7. How public undertaking has progressed in India?
Ans. With the introduction of Five Year Plans in India, the public sector has been given much important role in the economic development of our nation. By passing the Industrial Policy Resolutions of 1948 and 1956 and Industries (Development and Regulation) Act of 1951, the State’s sphere in the industrial field increased significantly. The State’s investment in public undertakings, which was very negligible in 1951, has increased to about Rs.2, 287 crores in 1962-63 and to Rs.5, 137 crores in 1969-70.
While discussing the role of public sector in the Fourth Five Year Plan, the Planning Commission has stated that “during the Fourth Five Year Plan a matter of crucial significance will be the emergence of the public sector as a whole as the dominant more and more of the commanding heights in the production and distribution of basic and consumer goods.”
Though much progress has been in the investment in public undertakings, there has been a general criticism that the return on investment earned by the public enterprises is low when compared to the return on the investment in private sector units. This criticism is not unfounded, because according to the study conducted by the Commerce Research Bureau for the years 1962-63 to 1969-70, in no year the rate of return on investment in Central Government undertakings is more than 3 per cent.
As against this, it may be noted that according to the Reserve Bank of India survey of selected companies in private sector, the gross profits as a percentage of the total capital employed vary on an average from little over 10.5 per cent.
From the above figures, however, one cannot come to the conclusion that all the undertakings in the public sector are not run efficiently. Some undertakings like Hindustan Machine Tools, Hindustan Antibiotics, Indian Telephone Industries, Bharat Electronics, etc., have been functioning efficiently and have yielded a gross profit of over 10.5 per cent on the capital employed.
In considering the return on investment on public undertakings, we have to give allowance for huge investment involved for providing welfare amenities to the workers and for developing townships. Hence, criticism against the public undertakings may not be completely justified. However, this is not to suggest that the public undertakings are from problems and do not need any improvement.
In fact, some of the important problems that are faced by the public undertakings are as follows – faulty production planning, heavy overheads, frequent transfer of managerial personnel, too much interference in the administration by the government, poor project planning, over-capitalization, poor manpower planning, personnel management, etc.
Interview Question Q.8. What are the advantages and disadvantages of Net Present Value Method (NPV)?
Ans. Some of the advantages and disadvantages of net present value method
i. It recognizes time value of money and considers cash flows over a period of several years.
ii. It is based on cash inflows rather than accounting profit; it helps in better analyses of wealth of the shareholders.
iii. An appropriate discount rate ensures shareholders’ expectation is adequately met.
iv. It correctly allows both recovery of initial investment and earning at a predetermined rate.
i. Lengthy and difficult calculations are involved.
ii. Determination of the required rate of return is difficult.
iii. May not give correct result while comparing projects with unequal investment of funds.
iv. Use of this method comparing projects with unequal life periods.
Interview Question Q.9. How is Journal Classified?
Ans. A journal is classified into two categories based on the purpose for which it is used:
General journal is the simplest type of journal book useful for small business enterprises. It is used to record any kind of transactions without classifying them into special types. Special journal is used by the enterprises having innumerable transactions. To facilitate easy identification, the transactions are classified into eight categories and recorded in the special category of journal books.
Special journals are further classified as follows:
1. Purchases book (journal) facilitates recording of all credit purchases of merchandise (goods).
2. Sales book (journal) facilitates recording of all credit sales of merchandise (goods).
3. Purchases returns book or returns outwards book (journal) facilitates recording of’ purchased merchandise returned’ to suppliers (may be because of damage or not in accordance with specification/quality, etc.).
4. Sales returns book or returns inwards book (journal) facilitates recording of ‘sold merchandise returned’ by the customers (may be because of damages or not in accordance with specification/quality, etc.).
5. Bills receivable book (journal) facilitates recording of bills drawn on the customers for the amount ‘due by them’. When the customers accept these bills and return them, they become ‘Bills Receivable’ to be recorded as asset. (Debtors acknowledge their dues by creating the document by accepting the bills drawn.)
6. Bills payable book (journal) facilitates recording of bills accepted by the entrepreneur for the amount ‘due to suppliers’. The suppliers draw bills and send for entrepreneur’s acceptance. When the acceptance is given (the entrepreneur acknowledges the dues by accepting the bill), they become ‘bills payable’ (to be recorded as liability).
7. Cash book (journal) facilitates recording of transactions relating to ‘cash received and cash paid’. All cash received are debited and all cash paid are credited into this book. This journal acts as a ledger also because it contains the entries of both debit and credit along with opening balance of cash. When this book is closed at the end of the given period, it results in closing balance of cash to be recorded as an asset.
8. Journal proper (special journal) facilitates recording of rectifying entries and adjusting entries besides opening entries and closing entries. In this book all other transactions, other than the ones already recorded in the above-mentioned seven books are recorded. As a special journal, journal proper has a limited role to play compared to general journal.
Interview Question Q.10. What are the benefits and limitations of Internal Rate of Return (IRR) Method?
Ans. i. It takes into account time value of money and is based on cash flows and not accounting profits.
ii. It aims at maximizing profits, hence helps in selecting that proposal which is expected to earn more than the minimum rate of return.
iii. Determination of cost of capital is not a prerequisite hence better than net present value method.
iv. It provides for uniform ranking of various proposals due to the percentage rate of return.
v. It is a more reliable technique of capital budgeting.
i. It is very complicated and tedious.
ii. It is based on the assumption that the future cash inflows of a proposal are reinvested at a rate equal to IRR.
iii. IRR tends to be biased toward smaller projects.
iv. The results of NPV and IRR methods may differ when the projects under evaluation differ in their size, life, and timings of cash flows.
Interview Question Q.11. What are the types of Financial Analysis?
Ans. The classification is presented here:
Financial analysis can be of the following two types:
i. External Analysis:
This type of analysis is generally done by the outsiders of the business, as they do not have access to the detailed internal accounting records of the business firm. These outsiders include investors, creditors, government agencies, potential investors/creditors, and the general public. The external parties mainly depend on the published financial statements.
External analysis, thus, serves only a limited purpose. However, the recent changes in the government regulations requiring business firms to make available more detailed information to the public, though, audited published accounts have considerably improved the position of external analysis.
ii. Internal Analysis:
This type of analysis is done by persons who have access to the books of accounts and other information related to the business. Most often the analysis is done by executives and employees of the organization as well as government agencies, which have statutory powers vested in them. The analysis is done depending upon the objective to be achieved through this analysis.
2. On the Basis of Modus Operandi:
According to this, financial analysis can also be of two types:
i. Horizontal Analysis:
In this type of analysis, financial statements for a number of years are reviewed and analyzed. The current year’s figures are compared with the figures of standard or base year. The analysis statement usually contains the figures of two or more years and the changes are shown regarding each item from the base years, usually in the form of percentage. This method gives the management considerable insight into the levels and areas of strengths and weaknesses.
Since this type of analysis is based on the data from year to year rather than on one data, it is also termed as “dynamic analysis.” The horizontal analysis makes it possible to focus attention on items that have changed significantly during the period under review. Comparison of an item over several periods with a base year shows a trend developing. Comparative statements and trend percentages are two tools employed in horizontal analysis.
ii. Vertical Analysis:
This type of analysis is a study made on the quantitative relationship of the various items in the financial statements on a particular date, for example, the ratios of different items of costs for a particular period may be calculated with the sales for that period. This type of analysis is useful in comparing the performance of several companies in the same group, or divisions/departments in the same company.
Vertical analysis is also called as “static analysis” as it is frequently used for referring to ratios developed on one date or for one accounting period. Common-size financial statements and financial ratios are the two tools employed in vertical analysis.
Since this type of analysis depends on the data for one period, it is not very conducive to a proper analysis of the company’s financial position. However, it may be used along with horizontal analysis to make it more effective and meaningful.
iii. Ratio Analysis:
An analysis of financial statements with the help of ratio may be termed as “ratio analyses.” It implies the process of computing, determining, and presenting the relationship of items and group of items of financial statements. It also involves the comparison and interpretation of these ratios and the use of them for future projections.
Alexander Wall is considered to be a pioneer of ratio analysis. He presented, after a serious thinking, a detailed system of ratio analysis in 1909. He is of the opinion that the work of interpretation can be made easier by establishing quantitative relationships between the facts given in the financial statements.
Ratio analysis is one of the techniques of financial analysis where ratios are used as a yardstick for evaluating the financial condition and performance of a firm. Analysis and interpretation of various accounting ratios gives a skilled and experienced analyst a better understanding of the financial condition and performance of the firm than what he could have obtained only through a perusal of financial statements.
Interview Question Q.12. What are the merits and demerits of Payback Period?
Ans. i. It is simple to understand and easy to compute.
ii. It is cost effective as compared to other methods.
iii. It recommends that project where the PBP is shorter, the loss is reduced due to obsolescence.
i. It ignores cash inflows after the payback period, which may result in incorrect selection of project and does not consider the life time of the asset.
ii. It ignores time value of money and does not consider the magnitude and timings of cash inflows.
iii. It does not consider cost of capital for taking investment decisions.
iv. Decision taken on the basis of payback period may become subjective.
Interview Question Q.13. What are the merits and demerits of Rate of Return Method (ARR) Method?
Ans. i. It is very simple and easy to operate.
ii. It takes the entire earnings of the project in calculating rate of return, hence gives better view of profitability unlike PBP.
iii. It is based on the accounting concept of profits, which is readily available hence easy to compute.
i. It ignores time value of money; it ignores the fact that a rupee earned today is of more value than a rupee earned a year after, or so.
ii. It ignores cash inflows which are important as it considers accounting profits.
iii. It ignores the period in which the profits are earned.
iv. It cannot be applied in projects where investments are made in parts or at different time periods.