Tamilnadu State Board New Syllabus Samacheer Kalvi 11th Commerce Guide Pdf Chapter 19 Sources of Business Finance Text Book Back Questions and Answers, Notes.
Tamilnadu Samacheer Kalvi 11th Commerce Solutions Chapter 19 Sources of Business Finance
11th Commerce Guide Sources of Business Finance Text Book Back Questions and Answers
I. Choose the Correct Answer:
Question 1.
What is defined as the provision of money at the time when it is required?
a. Finance
b. Bank
c. Cash management
d. None of these
Answer:
a. Finance
Question 2.
Internal sources of capital are those that are ……………
a. Generated through outsiders such as suppliers
b. Generated through loans from commercial banks
c. Generated through the issue of shares
d. Generated within the business
Answer:
d. Generated within the business
Question 3.
Debenture holders are entitled to a fixed rate of …………..
a. Dividend
b. Profits
c. Interest
d. Ratios
Answer:
c. Interest
Question 4.
Public deposits are the deposits which are raised directly from …………………….
a. The public
b. The directors
c. The auditors
d. The owners
Answer:
a. The public
Question 5.
Equity shareholders are the ……………………… of a company
a. Creditors
b. Owners
c. Debtors
d. Employees
Answer:
c. Debtors
Question 6.
Funds required for purchasing current assets is an example for
a. Fixed Capital Requirement
b. Ploughing Back of Profits
c. Working Capital Requirement
d. Lease Financing
Answer:
c. Working Capital Requirement
Question 7.
Which of the following holder is given voting right?
a. Debentures
b. Preference Shares
c. Equity shares
d. Bonds
Answer:
c. Equity shares
Question 8.
It may be wise to finance fixed assets through ……………….
a. Creditors
b. Long term debts
c. Bank Overdraft
d. Bills Discounting.
Answer:
b. Long term debts
II. Very Short Answer Questions:
Question 1.
Write short notes on debentures:
Answer:
Debentures are an important instrument for raising long term debt capital. A company can raise funds through the issue of debentures which bear a fixed rate of interest.
Question 2.
What do you mean by public deposits?
Answer:
It is a method of inviting public deposits by giving advertisements in the media by the companies. It offers deposit schemes for a longer tenure. The interest rates offered by companies on public companies are higher than the bank.
Question 3.
Name any two sources of funds classified under borrowed funds.
Answer:
- Debentures
- Loan from banks
Question 4.
Name any two internal sources of business finance.
Answer:
Capital by the owners (start-up or additional capital); Debt Collection.
Question 5.
State any two factors that affect the choice of source of finance.
Answer:
- Cost
- Financial capacity to the firms
III. Short Answer Questions:
Question 1.
Define Business finance.
Answer:
In the words of R.C.Os born, “ The finance function is the process of acquiring and utilizing funds by a business”.
Question 2.
What is a pledge?
Answer:
A customer transfers the possession of an article with the creditor (banker) and receives loan. Till the repayment of loan, the article is under the custody of the borrower. If the debtor fails to refund the loan, creditor (banker) will auction the article pawned and adjust the outstanding loan from the sale proceeds.
Question 3.
List sources of raising long-term and short-term finance
Answer:
Sources of Short-term finance:
- Loans and Advances
- Bank Overdraft
- Discounting Bills of Exchange
- Trade credit
- Pledge
- Hypothecation
- Mortgage
- Loans Against the Securities
- Clear loan
- Commercial paper (CP)
- Hire purchase finance.
- Factoring
Sources of Long – Term Finance:
- Shares
- Debentures
- Retained earnings
- Public deposits
- Long term loan from commercial banks
- The loans from financial institutions
Question 4.
For which purpose fixed capital is needed in business?
Answer:
Business enterprises need finance for fixed and working capital requirements. Fixed capital requirements include the purchase of plant, machinery, furniture, fixtures, vehicles, and so on.
Question 5.
What do you mean by the working capital requirement of a business?
Answer:
Working capital is nothing but the amount which is needed for meeting the day to j day expenses of the business. The working capital requirements include the purchase of I raw materials, payment of salary and wages, incurring operating expenses like telephone bills, carriage inward and outward, electricity charges, premium, stationery, etc.
IV. Long Answer Questions
Question 1.
List out the various sources of financing.
Answer:
The various sources of business finance can be classified into three categories on the basis of the following:
Period basis: On the basis of the period, The different sources of finance can be further grouped into three categories on the basis of period
- Short term finance
- Medium-term finance
- Long term finance
Ownership basis: On the Basis of Ownership, Business finance can be divided into two categories based on ownership of funds.
- Owner’s Fund
- Borrowed Fund
Source of generation basis: On the Basis of Generation of Funds, The sources of funds can be grouped into two categories based on generation.
- Internal sources
- External sources
Question 2.
What are the different types of short term finances given by commercial banks?
Answer:
1. Loans and Advances:
Loan is a direct advance made in a lump sum which is credited to a separate loan account in the name of the borrower. The borrower can withdraw the entire amount in cash immediately.
2. Bank Overdraft:
Bank overdraft refers to an arrangement whereby the bank allows the customers to overdraw the required amount from its current deposit account within a specified limit.
3. Discounting Bills of Exchange:
When goods are sold on credit, the suppliers generally draw bills of exchange upon customers who are required to accept it.
4. Trade Credit:
Trade credit is the credit extended by one trader to another for the purpose of purchasing goods and sendees. Purchaser need not pay money immediately after the purchase.
5. Pledge:
A customer transfers the possession of an article with the creditor (banker) and receives loan. Till the repayment of loan, the article is under the custody of the borrower. If the debtor fails to refund the loan, the creditor (banker) will auction the article pawned and adjust the outstanding loan from the sale proceeds.
6. Hypothecation:
This is a loan taken by depositing a document of title to the property with the banker. Of course, the physical possession of asset property is with the borrower. If the borrower fails to repay the loan amount, the article hypothecated will be sold in auction by the banker concerned.
Question 3.
Write short notes on :
Answer:
Retained Earnings:
Retained earnings refer to the process of retaining a part of net profit year after year and reinvesting them in the business. It is also termed as ploughing back of profit. An individual would like to save a portion of his/ her income for meeting the contingencies and growth needs.
Similarly profit making company would retain a portion of the net profit in order to finance its growth and expansion in near future. It is described to be the most convenient and economical method of finance.
Lease financing:
Lease financing denotes procurement of assets through lease. Leasing here refers to the owning of an asset by any individual or a corporate body which will be given for use to another needy business enterprise on a rental basis. The firm which owns the asset is called ‘Lessor’ and the business enterprise which hires the asset is called ‘Lessee’. The contract is called ‘Lease’.
The terms and conditions like lease period, rent fixed, mode of payment and allocation of maintenance, are mentioned in the lease contract.
Question 4.
Write short notes on
- Owner’s funds
- Borrowed funds
Answer:
1. Owner’s Funds:
Owner’s funds mean funds which are provided by the owner of the enterprises who may be an individual or partners or shareholders of a company. The profits reinvested in the business (ploughing back of profit or retained earnings) come under the owner’s funds. These funds are not required to be refunded during the lifetime of a business enterprise. It provides the owner the right to control the management of the enterprise.
2. Borrowed Funds:
The term ‘borrowed funds’ denotes the funds raised through loans or borrowings. For example debentures, loans from banks and financial institutions, public deposits, trade credit, lease financing, commercial papers, factoring, etc., represent borrowed funds.
These borrowed sources of funds provide a specific period before which the fund is to be returned. The borrower is under legal obligation to pay interest at given rate at regular intervals to the lender. Generally borrowed funds are obtained on the security of certain assets like bonds, land, building, stock, vehicles, machinery, documents of title to the goods, and the like.
Question 5.
Explain any four personal investment avenues.
Answer:
1. Public Provident Fund (PPF): It is the safest long-term investment option for investors in India. It is totally tax-free. PPF account can be opened in a bank or post office. The money deposited cannot be withdrawn before 15 years and an investor can earn compound interest from this account. PPF investor can take a loan against PPF account when he/she experiences financial difficulties.
2. Mutual Funds: An individual investor who wants to invest in equities and bonds with a balance of risk and return generally can invest in mutual funds. Nowadays people invest in stock markets through a mutual fund. A systematic investment plan is one of the best investment options in India.
3. Unit Linked Insurance Plans (ULIP): ULIP is a life insurance-linked product, which provides risk cover for the policyholder along with investment options to invest in any number of qualified investments such as stocks, bonds, or mutual funds.
4. Post Office Saving Schemes: There are different types of postal small savings schemes namely Post Office Savings Account, Post Office Recurring Deposit Account (RD), Post Office Fixed Deposit Account (FD/TD), Post Office Monthly Income Account Scheme (MIS), Senior Citizens Saving Scheme (SCSS) Public Provident Fund Account (PPF), National Savings Certificates (NSC), Kisan Vikas Patra (KVP), SukanyaSamriddhi Account (SSA). Investors can choose the appropriate postal schemes as per their needs. Postal investment schemes are the safest investments.
11th Commerce Guide Sources of Business Finance Additional Important Questions and Answers
I. Choose the Correct Answer:
Question 1.
Long term finance ………………
(a) more than 5 years
(b) above I year but below 5 years
(c) more than one year but below 3 years
(d) within one year
Answer:
(a) more than 5 years
Question 2.
Funds required for purchasing current assets is an example of ………………
a. Fixed Capital requirement
b. Ploughing back of profit
c. Working capital requirement
d. Lease financing
Answer:
c. Working capital requirement
Question 3.
Business people hypothecate goods or equipment to get ……………… type of loan. It is a loan taken on the security of movable assets.
(a) Hypothecation
(b) Pledge
(c) Trade credit
(d) Bank overdraft
Answer:
(a) Hypothecation
Question 4.
Debentures are treated as ………………………….
a. Fixed Capital
b. Permanent Capital
c. Fluctuating Capital
d. Loan Capital
Answer:
d. Loan Capital
Question 5.
Source of Medium Term Finance is ………………
(a) share
(b) debentures
(c) Bank overdraft
(d) lease finance
Answer:
(d) lease finance
Question 6.
…………………………. is an unsecured money market instrument in the form of the promissory note.
a. Pledge
b. Trade Credit
c. Commercial paper
d. Mortgage
Answer:
c. Commercial paper
Question 7.
Which one are the owner’s funds?
(a) Debentures
(b) Loan from banks
(c) Equity shares
(d) Commercial papers
Answer:
(c) Equity shares
Question 8.
Which of the following holder are not having voting rights?
a. Debentures
b. Equity Shares
c. Preference Shares
d. Bonds
Answer:
c. Preference Shares
Question 9.
Which one of the following is the tax-free investment option?
a. Equity Share Purchase
b. Real Estate.
c. Investments in Gold
d. Public Provident Fund
Answer:
d. Public Provident Fund
Question 10.
The period for opening a Recurring Deposit is …………………
a. 1-10 years
b. 1 year only
c. 5-10 years
d. 10 years only
Answer:
a. 1-10 years
II. Very short Answer Questions
Question 1.
What do you mean by Bonds?
Answer:
Bonds are one of the ideal investment options for those investors who would like to invest their hard-earned money safely. Bonds are issued both by government and public and private sector companies and financial institutions.
Question 2.
What is Trade Credit?
Answer:
Trade credit is the credit extended by one trader to another for the purpose of purchasing goods and services. It is a very simple and convenient method of raising short-term finance.
Question 3.
What is Commercial Paper (CP)?
Answer:
Commercial paper (CP) is an unsecured money market instrument in the form of a promissory note. It was introduced in India in 1990 under Section 45 W of the Reserve Bank of India Act.
Question 4.
What are the three important terms used in the process of Lease Financing?
Answer:
The firm which owns the asset is called ‘Lessor’ and the business enterprise which hires the asset is called ‘Lessee’. The contract is called ‘Lease’. These are the three important terms used in the process of Lease Financing.
Question 5.
Define Share:
Answer:
The Indian Companies Act 2013 defines a share as “To be a share in the share capital of a company”.
Question 6.
Who is called a shareholder?
Answer:
The person holding a share is called a shareholder who has an interest in the assets and profits of the company.
Question 7.
Define Savings:
Answer:
Saving is defined as the difference between income and consumption.
III. Short Answer Questions
Question 1.
Mention any three significance of business finance.
Answer:
- A firm with adequate business finance can easily start any business venture.
- Business finance helps the business organization to purchase raw materials from the supplier easily to produce goods.
- The business firm can meet financial liabilities like prompt payment of salary and wages, expenses, etc., in time with the help of sound financial support.
Question 2.
Write a short note on Commercial paper (CP).
Answer:
Commercial paper (CP) is an unsecured money market instrument in the form of a promissory note. Corporates, Primary Dealers (PD), and All India Financial Institutions are eligible to issue Commercial Paper. It was introduced in India in 1990 under Section 45 W of the Reserve Bank of India Act. It is issued by a firm to raise funds for a short period. It can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue.
Question 3.
Explain the types of shares:
Answer:
There are two types of shares namely Equity Shares and Preference Shares.
1. Equity Shares: Equity share is the most important source of raising long-term capital by a company. These shares do not carry any special or preferential rights in the matter of payment of annual dividend and repayment of capital at the time of winding up. Equity shareholder enjoys more voting rights in proportion to a number of shares held by them. They took part in the management of the company.
2. Preference Shares: Preference shares are those shares which enjoy priority regarding payment of dividend at a fixed rate out of the net profits of the company. They will get their dividend every year before any dividend is paid to equity shareholders. They will have a right to get their settlement before the claims of equity shareholders are settled at the time of liquidation of the company. They do not have voting rights.
Question 4.
What is meant by preference shares?
Answer:
The fund raised by the issue of preference shares is called preference share capital. Preference shares are those shares which enjoy priority regarding payment of dividend at a fixed rate out of the net profits of the company. They will get their dividend every year before any dividend is paid to equity shareholders.
They will have a right to get their settlement before the claims of equity shareholders are settled at the time of liquidation of the company. However, they do not have voting rights.
IV. Long Answer Questions:
Question 1.
Briefly explain the features of Business finance.
Answer:
The following are the main features of Business Finance:
- Business finance comprises of all types of funds namely short, medium and long term used in business.
- The volume of business finance required varies from one business enterprise to another depending upon its nature and size. In other words, small and medium enterprises require a relatively lower level of business finance than large scale enterprises.
- The amount of business finance required differs from one period to another. In other words, the requirement of business finance is heavy during the peak season while it is at a low level during the dull season.
- The amount of business finance determines the scale of operations of business enterprises.
Question 2.
What are the differences between the internal and external sources of raising funds?
Answer:
|
Nature of differences |
Internal sources |
External sources |
| 1. Meaning | The sources of funds which are generated inside the business | Sources of funds which are generated from outsiders |
| 2. Example | Retained earnings, collection from the receivable(trade debtors and bills receivables), surplus from the disposal of old assets | Issue of shares and debentures, borrowings from banks and financial institutions, public deposits, factoring, leasing, hire purchase, etc. |
| 3. Fulfilment of need | These sources can fulfill only the limited need of the concern since the amount will be limited. | These sources can fulfill the external needs also since a large amount of money can be raised from external sources |
Question 3.
What is the significance of Business Finance?
Answer:
The following are the importance/significance of Business Finance:
- A firm with adequate business finance can easily start any business venture.
- Business finance helps the business organization to purchase raw materials from the supplier easily to produce goods.
- The business firm can meet financial liabilities like prompt payment of salary and wages, expenses, etc., in time with the help of sound financial support.
- The sound financial support enables the enterprises to meet any unexpected or uncertain risks arising from the business environment efficiently. For example economic slowdown, trade cycles, severe competition, a shift in consumer preference, etc.
- Sound financial position empowers the enterprise to attract talented manpower and introduce the latest technology.
Question 4.
“Saving leads to the economic development of a country” Justify the statement.
Answer:
Yes. The money invested in various attributes helps in the economic development of a country.
The following are the reasons:
- Money invested in bank deposits facilitates employment generation in various sectors of the economy and poverty alleviation.
- The savings invested in bank deposits lead to credit creation in the country which in turn promotes industrial and agricultural development in a country.
- Savings invested in government bonds and various institutions help in great measure in building in strengthening the infrastructure facilities in a country.
- The country with higher savings can easily face the consequences of economic recession.
- The bad consequences of inflation can be met easily with strong savings. As a result, the evil effect of soaring prices can be controlled.
Question 5.
Explain any five factors influencing the choice of Business Finance:
Answer:
The factors influencing the choice of business finance are as follows:
1. Cost: Business enterprises have to analyze the cost of mobilizing and utilizing the funds. For instance, where the interest rate is relatively lower, public deposits, debentures, term loan,s etc. may be desirable options.
2. Financial Capacity of the Firm: Financially sound enterprises have the capacity to pay interest promptly and return the capital at the stipulated time. Such enterprises can go for borrowed sources. On the other hand, if the firm is not financially stable, it has to depend on owned sources of funds.
3. Time Period: The period for which business finance is required determines the suitable source. For instance, where funds are required for a shorter period, bank finance like an overdraft, cash credit, bill discounting, mortgage, pledge, leasing, hire purchase, factoring, and so on, are suitable sources. Funds required for a longer period can be tapped from the issue of shares, debentures, bonds, term loans and the like.
4. Control: Equity shareholders are real owners of corporate enterprises. They exercise complete control over the management of the company. If the existing shareholders do not like to lose their control, they must not issue more equity shares to supplement the financial resources. Contrarily borrowed sources of funds will not disturb the control exercised by the company management. Hence borrowed source is suitable for maintaining the administrative control of the company.
5. Stage of Development: A new business enterprise finds it hard to mobilize business finance than an established firm. Therefore it may have to rely on owned sources in the initial stage. Once the business enterprise has established itself in the business world, it can tap borrowed sources of funds and offer its assets as security therefor.
6. Credit Worthiness of Firms: Some sources of funds like debentures and creditors require the business firms to mortgage the assets. This hurts the creditworthiness of the business concern in the financial market, Contrarily business concerns do not have to mortgage their assets when they mobilize funds through sources like share capital, retained; earnings, unsecured loans, etc., and thereby maintaining a good image in the financial market.