Finance multiple choice

Questions and Answers

What is a primary disadvantage of using retained earnings for financing?

Increases the company’s debt ratio

Requires immediate repayment

Creates tax liabilities for the business

May lead to shareholder dissatisfaction (correct)

Which of the following is NOT true about long-term loans?

Interest payments are tax-deductible

Interest rates may increase, affecting repayments

They are solely available to businesses (correct)

They can be secured against an asset

What benefit do debenture loans provide to a business?

They allow access to decreasing interest rates

They enable fixed interest rates to protect against rising costs (correct)

They require no interest payments

They do not require repayment

Why might a business prefer to use government finance over loans?

Government grants are often non-repayable Signup and view all the answers

What is one of the main risks associated with long-term loans?

There is a potential for asset loss in case of default Signup and view all the answers

What is a common advantage of using retained earnings for business investments?

No interest needs to be paid Signup and view all the answers

Which type of financing is primarily available to businesses rather than sole traders?

Retained earnings Signup and view all the answers

What is a downside of fixed interest rates on debenture loans?

They can lead to higher long-term repayments if interest rates fall Signup and view all the answers

Under what condition might a government grant become repayable?

If the business does not meet job creation targets Signup and view all the answers

What is a disadvantage of using retained earnings compared to debt financing?

Retained earnings may lead to slower growth for new businesses Signup and view all the answers

Study Notes

Business and Household Income

Business income sources: cash sales, credit sales, investment income, government grants, sale of fixed assets.
Household income sources: wages, child benefits, social welfare, interest on savings.

Sources of Finance

Vary based on purpose and timeline according to the matching principle.
Types: short-term, medium-term, and long-term finance.

Short Term Finance

Duration of up to one year; must be repaid within twelve months.
Used for daily operational expenses like electricity, wages, and stock.
Common sources: bank overdrafts, trade creditors, accrued expenses, factoring, and credit cards.

Bank Overdraft

Allows account holders to withdraw more than the balance, up to an agreed limit.
Advantages: only pay interest on used amounts, interest is tax-deductible, no security needed.
Disadvantages: interest charges apply, limitations on withdrawal, must have a credit balance for 30 days before approval.
Uses: purchasing stock, paying creditors, covering overheads.

Trade Creditors

Enables businesses to receive goods now and pay later, freeing immediate cash flow.
Also known as "leaning on the trade."
Advantages: free finance source, no interest.
Disadvantages: potential interest on late payments, loss of payment discounts, impact on credit rating.
Exclusively available to businesses.

Accrued Expenses

Involves delaying bill payments, allowing cash flow for other purposes.
Example: VAT collected and paid later.
Advantages: free finance source, no interest.
Disadvantages: risk of service cutoff for late payments, possible interest on unpaid bills.
Available to both households and businesses.

Factoring

Selling debtors to a bank for immediate cash.
Two types: with recourse (business liable for unpaid debts) and without recourse.
Advantages: immediate cash injection, no security required.
Disadvantages: expensive, suited for established businesses only.

Credit Card

Used for purchases with payment due at the end of the month.
Each card has a spending limit set by the bank.
Advantages: no interest if paid on time, safer than cash.
Disadvantages: high interest on unpaid bills, additional government taxes for cardholders.
Available to both households and businesses.

Medium Term Finance

Duration of 1 to 5 years; repayments within this timespan.
Funds mid-range purchases like computers and equipment.
Common sources: medium-term loans, hire purchase, leasing.

Medium Term Loan

Borrowing from financial institutions with fixed repayment terms.
Security may be required (e.g., property deeds).
Advantages: immediate ownership, adaptable repayment terms.
Disadvantages: interest charges, potential loss of security.

Hire Purchase

Acquiring assets through initial payment followed by installments.
Legal ownership transferred after the final payment.
Advantages: immediate use of assets, spread payments over time.
Disadvantages: interest on the total, repossession risk if payments are missed.

Leasing

Renting assets with monthly lease payments.
Business retains use without ownership unless arranged post-lease.
Advantages: access to up-to-date equipment, tax-deductible lease costs.
Disadvantages: no ownership (unless arranged), repossession risk.

Long Term Finance

Duration exceeding 5 years; typically repaid after this period.
Used for significant investments like property and business expansions.
Common sources: owner's capital, share capital, retained earnings, venture capital, long-term loans, debentures, and government finance.

Owner’s Capital

Personal savings invested into the business by the sole trader.
Advantages: low-cost finance, no interest.
Disadvantages: personal financial risk if the business fails.

Equity sourced from shareholders purchasing shares, aiming for dividends.
Advantages: no interest, permanent capital.
Disadvantages: risk of diluted company control, no guaranteed dividends.

Retained Earnings

Profits reinvested in the business instead of distributed as dividends.
Advantages: no interest, control retention.
Disadvantages: takes time to accumulate, potential shareholder discontent.

Long Term Loan

Mortgages for substantial purchases, secured against the asset.
Advantages: maintains company control, interest is tax-deductible.
Disadvantages: obligatory interest payments, potential loss of security.

Debenture Loan

Long-term loans available to companies with fixed interest rates.
Advantages: company control retained, protects against rising rates.
Disadvantages: interest payments required, fixed rates prevent accessing lower repayments.

Government Finance

Grants that do not require repayment, often contingent on conditions like job creation.
Offered by the Irish government and the EU for various business needs.

Description

Test your knowledge on various sources of business and household income, as well as the types and durations of finance. From cash sales to child benefits, and short-term to long-term finance options, this quiz covers essential concepts in finance. See how well you understand the different components that contribute to financial stability.