Introduction to Finance: Meaning, Scope, Objectives and Key Concepts (Time Value of Money Basics) Questions

Question 1

Define finance.

Accepted Answer

Finance is the art and science of **managing money**—raising funds, using them effectively, and controlling returns/cash flows (concept).

Question 2

What is time value of money (TVM)?

Accepted Answer

TVM means ₹1 today is worth more than ₹1 in the future because money can earn **returns** over time (concept).

Question 3

Define present value (PV).

Accepted Answer

Present value is today’s value of a future amount after **discounting** at a given rate.

Question 4

State one objective of financial management.

Accepted Answer

To maximise owners’ **wealth/value** (concept) while maintaining liquidity and controlling risk.

Question 5

Name any one key finance decision.

Accepted Answer

**Investment decision** (or financing/dividend decision).

Question 6

Liquidity means ability to meet short-term obligations. (True/False)

Accepted Answer

True. **Liquidity** is the ability to pay short-term obligations on time.

Question 7

Explain the scope of finance (any three areas).

Accepted Answer

Scope of finance (any three):

- **investment decisions** (projects/assets to invest in)
- **financing decisions** (equity, debt, retained earnings)
- **dividend decisions** (payout vs retention)
- working capital management (cash, inventory, receivables)

Any three areas with brief meaning are enough.

Question 8

List the three key finance decisions using a table and give one example each.

Accepted Answer

Three finance decisions:

| Decision | Meaning | Example |
|---|---|---|
| **Investment** | where to invest funds | buy machinery / project |
| **Financing** | how to raise funds | loan / equity issue |
| **Dividend** | distribute vs retain | dividend payout ratio |

These decisions are interconnected in practice.

Question 9

Explain why TVM exists (any three reasons) using points.

Accepted Answer

Reasons for **time value of money** (any three):

- money can earn **interest/returns** if invested
- inflation reduces purchasing power over time (concept)
- uncertainty/risk increases with time (concept)

Hence, money today is more valuable than the same amount later.

Question 10

Differentiate PV and FV using a table (any three points).

Accepted Answer

PV vs FV:

| Basis | **PV (Present Value)** | **FV (Future Value)** |
|---|---|---|
| Time | value today | value at a future date |
| Method | **discounting** | compounding |
| Use | compare future cash to today | find growth of money over time |

Thus, PV brings money back to today; FV takes money forward to future.

Question 11

Differentiate liquidity and solvency (any three points) using a table.

Accepted Answer

Liquidity vs solvency:

| Basis | **Liquidity** | **Solvency** |
|---|---|---|
| Meaning | ability to meet short-term dues | ability to meet long-term obligations |
| Focus | current assets vs current liabilities | overall financial strength (concept) |
| Risk | cash shortage | long-term default/bankruptcy risk (concept) |

Thus, liquidity is short-term payment ability, while solvency is long-term financial capacity.

Question 12

Explain risk–return trade-off with a small table and conclusion (exam-style).

Accepted Answer

Risk–return trade-off: higher expected returns generally require accepting higher **risk/uncertainty**.

| Investment (concept) | Risk | Expected return |
|---|---|---|
| Fixed deposit | low | low–moderate |
| Shares | high | higher (uncertain) |

Conclusion: investors demand extra return (risk premium) for taking higher risk.

Question 13

Compute FV of ₹1,000 at 10% for 2 years and interpret (exam-style) (show working).

Accepted Answer

### Working
Given: PV = ₹1,000, r = 10% (= 0.10), n = 2

Formula: FV = PV × (1 + r)^n

FV = 1000 × (1.10)^2 = 1000 × 1.21 = ₹1,210

### Interpretation
₹1,000 today becomes **₹1,210** after 2 years at 10% compound rate.

| Item | Value |
|---|---|
| PV | ₹1,000 |
| Rate | 10% |
| Years | 2 |
| **FV** | **₹1,210** |

### Conclusion
Compounding shows growth of money over time; the interest earned over 2 years is ₹210.

Question 14

Compute PV of ₹1,210 receivable after 2 years at 10% and interpret (exam-style) (show working).

Accepted Answer

### Working
Given: FV = ₹1,210, r = 10% (= 0.10), n = 2

Formula: PV = FV ÷ (1 + r)^n

PV = 1210 ÷ (1.10)^2 = 1210 ÷ 1.21 = ₹1,000

### Interpretation
Receiving ₹1,210 after 2 years is equivalent to **₹1,000 today** at a 10% discount rate.

| Item | Value |
|---|---|
| FV | ₹1,210 |
| Rate | 10% |
| Years | 2 |
| **PV** | **₹1,000** |

### Conclusion
Discounting helps compare future cash receipts in today’s terms for decision-making.

Question 15

Write an exam-style note on objectives of financial management (any five points) with a table and conclusion.

Accepted Answer

### Objectives of financial management

| Objective | Explanation |
|---|---|
| **Value/wealth maximisation** | maximise long-term owner value (concept) |
| Liquidity | meet short-term obligations |
| Profitability | efficient use of funds to earn returns |
| Cost control | minimise cost of funds (concept) |
| Risk management | balance risk and return |

### Conclusion
A good finance function balances **profitability**, **liquidity**, and **risk** to maximise long-term value.

Introduction to Finance: Meaning, Scope, Objectives and Key Concepts (Time Value of Money Basics)

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