Fresh Corporate Finance Interview Questions & Answers:

1. List the advantages of proprietary firms?

Advantages of proprietary firms:
★ Easy Formation
★ Better Control
★ Quick Decision Making
★ Flexibility in Operations
★ Personal attention to customer needs
★ Creation of Employment
★ Equal Distribution of Wealth
★ No Legal Formalities required

2. Can you please explain the difference between share capital & reserves and surpluses?

Share Capital is that portion of a company's equity that has been obtained by issuing share to a shareholder. The amount of share capital increases as new shares are sold to public in exchange for cash.
Reserves and Surpluses indicate that portion of the earnings, receipt or other surplus of the company appropriated by the management for a general or specific purpose other than provisions for depreciation or for a known liability. Reserves are classified as: Capital Reserve and Capital Redemption Reserve.

3. Define mercantile or accrual system of Accounting?

In this system, expenses and incomes are considered during that period to which they pertain. This system of accounting is considered to be ideal but it may result into unrealized profits which might reflect in the books of the accounts on which the organization have to pay taxes too. All the company forms of organization are legally required to follow Mercantile or Accrual System of Accounting.

4. Described Revenue Expenditure?

Revenue Expenditure is the expenditure incurred in one accounting year and the benefits from which is also enjoyed in the same period only. This expenditure does not increase the earning capacity of the business but maintains the existing earning capacity of the business. It included all the expenses which are incurred during day to day running of business. The benefits of this expenditure are for short period and are not forwarded to the next year. This expenditure is on recurring nature.

5. Described Capital Expenditure?

Capital Expenditure is an amount incurred for acquiring the long term assets such as land, building, equipments which are continually used for the purpose of earning revenue. These are not meant for sale. These costs are recorded in accounts namely Plant, Property, Equipment. Benefits from such expenditure are spread over several accounting years.

6. Define cash system of Accounting?

This system records only cash receipts and payments. This system assumes that there are no credit transactions. In this system of accounting, expenses are considered only when they are paid and incomes are considered when they are actually received. This system is used by the organizations which are established for non profit purpose. But this system is considered to be defective in nature as it does not show the actual profits earned and the current state of affairs of the organization.

7. What are the two most basics financial statements prepared by the companies?

Financial statements are prepared in two forms:
★ Balance Sheet is a position statement as it refers to a particular date. It is also referred to as Statement of Sources and Application of Funds. It informs about the various sources used by the organization which are technically known as liabilities to raise the funds which are referred as assets.
★ Profitability Statement also known as Profit and Loss Account. It is a period statement as it refers to a particular period.

8. Define the disadvantages of Limited Capacity of Individual in proprietary firms?

An individual has limited knowledge, set of skills due to which his capacity to undertake responsibilities, his capacity to take quick decisions and bear risks are also limited.

9. Define the disadvantages of Higher Taxes in proprietary firms?

As the sole proprietor is the direct person enjoying the profits thus he needs to pay higher taxes.

10. Define the disadvantages of No Legal Status in proprietary firms?

The existence of business is due to the existence of sole proprietor. Death or insolvency of the sole proprietor brings an end to the business.