Podcast
Questions and Answers
Which of the following is NOT a source of borrowed funds?
Which of the following is NOT a source of borrowed funds?
Internal sources of funds are generated from outside the organization.
Internal sources of funds are generated from outside the organization.
False
What is a primary disadvantage of using borrowed funds?
What is a primary disadvantage of using borrowed funds?
Payment of interest must be made regardless of earnings.
Business can generate funds internally by accelerating collection of receivables and by _____ its profits.
Business can generate funds internally by accelerating collection of receivables and by _____ its profits.
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Match the following sources of funds with their categories:
Match the following sources of funds with their categories:
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Which of these is classified as a long-term source of funds?
Which of these is classified as a long-term source of funds?
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Medium-term sources of finance are needed for a period less than one year.
Medium-term sources of finance are needed for a period less than one year.
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What are owner's funds?
What are owner's funds?
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The period basis of categorizing sources of funds includes long-term, medium-term, and __________ sources.
The period basis of categorizing sources of funds includes long-term, medium-term, and __________ sources.
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Match the following sources of funds with their duration:
Match the following sources of funds with their duration:
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Which type of financing is most common for current assets?
Which type of financing is most common for current assets?
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Owner's capital is usually required to be refunded during the life of the business.
Owner's capital is usually required to be refunded during the life of the business.
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What form of financing is typically used for the acquisition of fixed assets?
What form of financing is typically used for the acquisition of fixed assets?
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Study Notes
Classification of Sources of Funds
- Funds for proprietary/partnership businesses can come from personal sources or loans (banks, friends). Company funding sources are categorized differently.
Classification by Period
- Long-term sources: Funds needed for over 5 years. Examples include shares, debentures, long-term loans, and financial institution loans. Primarily used for fixed assets (equipment, plants).
- Medium-term sources: Funds needed for more than 1 year but less than 5 years. Examples include commercial bank loans, public deposits, lease financing, and financial institution loans.
- Short-term sources: Funds needed for up to 1 year. Examples include trade credit, commercial bank loans, and commercial papers. Commonly used for financing current assets like accounts receivable and inventory. Seasonal businesses and those with significant inventory often rely heavily on short-term financing.
Classification by Ownership
- Owner's funds: Provided by business owners (sole traders, partners, shareholders). Includes initial capital and reinvested profits. Important sources are equity share issuance and retained earnings. Owner's funds are not repaid and provide the basis for owner control.
- Borrowed funds: Funds raised through loans or borrowings. Sources include commercial bank loans, financial institution loans, debentures, and public deposits. These funds have repayment schedules and interest payments, which can potentially affect the business, especially during low earnings periods. Often secured by fixed assets.
Classification by Source of Generation
- Internal sources: Funds generated within the business. Examples include faster collection of receivables, selling off excess inventory, and reinvesting profits/retained earnings. Internal sources have limitations.
- External sources: Funds from outside the business. Examples include suppliers, lenders, and investors. Used when large amounts are needed. External funding can be more costly and may require asset security/mortgages. Examples include debentures, bank loans, and public deposits.
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Description
This quiz explores the various sources of funds used in proprietary and partnership businesses. It covers classifications by period, including long-term, medium-term, and short-term sources, as well as ownership types. Test your knowledge on how these funding methods apply to different financial needs.
