Sources of Finance Quiz: Chapter 8 Business Finance

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Questions and Answers

What is the term used to describe the funds needed to purchase fixed assets like land and building, plant and machinery?

Technology upgradation

Diversification requirement

Working capital requirement

Fixed capital requirement (correct)

Which of the following is NOT classified as a long-term source of funds for a business?

Retained earnings

Debentures

Bank overdraft (correct)

Equity shares

What is the main purpose of working capital in a business?

Purchasing fixed assets

Diversification of operations

Adopting modern technology

Day to day operations (correct)

What does the term 'finance' mean in the context of business?

Money or fund Signup and view all the answers

Which activity requires higher investment in fixed assets, leading to the need for finance?

Growth and expansion Signup and view all the answers

Which of the following is NOT an example of medium-term sources of funds?

Trade credit Signup and view all the answers

What does 'Owner’s funds' include?

Profits reinvested in the business and funds procured by the owners Signup and view all the answers

What are internal sources of funds?

Funds generated inside the business through activities like speeding collection of receivables and increasing profit Signup and view all the answers

Which type of funds remains invested in the business for a longer duration and is not required to be refunded during the life period of the business?

Owner’s funds Signup and view all the answers

What does 'Retained Earnings' refer to?

Profit retained within the business for future use Signup and view all the answers

What are the different types of capital requirements for a business?

Fixed capital requirement and working capital requirement Signup and view all the answers

What are the financial needs for diversifying a business operation?

More funds Signup and view all the answers

What is the purpose of finance in technology upgradation for a business?

To adopt modern technology Signup and view all the answers

How does higher growth of a business enterprise affect its financial requirement?

Higher investment in fixed assets Signup and view all the answers

What are the three classifications of sources of funds based on the period?

Long-term sources, medium-term sources, and short-term sources Signup and view all the answers

What are the different sources of medium-term funds?

Borrowings from commercial banks, public deposits, lease financing, and loans from financial institutions Signup and view all the answers

Explain the difference between internal and external sources of funds.

Internal sources are generated inside the business, while external sources lie outside the organization, such as suppliers, lenders, and investors. Signup and view all the answers

What are the examples of short-term sources of funds mentioned in the text?

Trade credit, loans from commercial banks, and commercial papers Signup and view all the answers

What does 'Owner’s funds' include?

Funds procured by the owners of a business, which may be a sole entrepreneur or partners or shareholders, and reinvested profits Signup and view all the answers

What is the main purpose of retained earnings in a business?

To retain a certain amount or percentage of profits for future use Signup and view all the answers

Study Notes

Business Financing Concepts

Term for Funds for Fixed Assets: Capital expenditure refers to the funds required for purchasing fixed assets such as land, buildings, and machinery.
Non-Long-Term Fund Classification: Short-term loans and credit lines are NOT classified as long-term sources of funds.
Purpose of Working Capital: Working capital is essential for maintaining daily operations and meeting short-term financial obligations.
Definition of Finance in Business: Finance in a business context involves the management of money and investments for operational and strategic purposes.

Investment and Capital

Higher Investment Activities: Manufacturing activities typically require higher investment in fixed assets, necessitating substantial financing.
Medium-Term Fund Classifications: Sources like short-term loans are NOT considered medium-term sources of funds.
Owner’s Funds Components: Owner’s funds generally include equity capital, retained earnings, and profits reinvested into the business.
Internal Sources of Funds: Internal sources consist of retained earnings, depreciation reserves, and other profits generated within the organization.

Fund Duration and Types

Long-Term Funds: Long-term sources of funds are invested in the business for extended durations and are not required to be repaid during the business's lifetime.
Definition of Retained Earnings: Retained earnings refer to the portion of net income kept within the company instead of being distributed to shareholders.
Types of Business Capital Requirements: Different capital requirements for a business include working capital, fixed capital, and contingency capital.

Financial Needs and Growth

Financial Needs for Diversification: To diversify business operations, funds are necessary for research, development, marketing, and new product lines.
Finance for Technology Upgradation: Finance is crucial for technology upgrades to improve efficiency, enhance productivity, and maintain competitive advantage.
Impact of Business Growth on Financial Needs: Higher growth leads to increased financial requirements for scaling operations, hiring, and expanding infrastructure.

Classifications and Sources of Funds

Sources of Funds Classifications: Funds can be classified based on the duration into short-term, medium-term, and long-term sources.
Medium-Term Funds Sources: Examples include term loans, leasing agreements, and debentures used for capital purchases.
Internal vs. External Sources of Funds: Internal sources are generated within the business, while external sources are obtained from outside entities such as banks, investors, or financial markets.
Short-Term Sources of Funds: Examples include bank overdrafts, trade credit, and short-term loans.
Main Purpose of Retained Earnings: Retained earnings are primarily used for reinvestment in business operations, supporting growth, and funding capital expenditures.

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Test your knowledge of the sources and nature of business finance, including fixed capital requirements, working capital requirements, and long-term and short-term finance options.