TN State Board 11th Commerce Important Questions Chapter 19 Sources of Business Finance
Write a short notes on debentures.
The term debenture refers to a document issued by a company acknowledging a debt due by it to its holders. It also provides for payment of interest at a fixed rate at stated intervals. It also contains an undertaking to repay the debt or at its option. It is usually under the common seal of the company.
What do you mean by public deposits?
Under this method, companies invite public deposits by giving advertisement in the media. It offers deposit schemes for a longer tenure. Person interested in making public deposit has to undergo a simple formality. The interest rates offered by companies on public deposits .are relatively higher than the bank.
Name any two sources of funds classified under borrowed funds.
The term ‘borrowed funds ’ denotes the funds raised through loans or borrowings. For example debentures, loans from banks.
eg: debentures, loans from banks and financial institutions.
Name any two internal sources of business finance.
This includes all those sources generated from within the business enterprises. For instance retained earnings, collection from receivables (trade debtors and bills receivable). Surplus from sale of old fixed assets etc.
State any two factors that affect the choice of source of finance.
- Financial Capacity of the Firm.
- Forms of Organisation.
- Time period.
Define Business finance.
“Finance is that business activity which is concerned with the acquisition and conservation of capital fund in meeting the financial needs and overall objectives of business enterprises.” – B.O.Wheeler
What is 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, creditor (banker) Will auction the article pawned and adjust the outstanding loan from the sale proceeds.
List sources of raising long-term and short-term finance.
- Business finance is classified into three types with reference to time period i.e. Long term finance (more than 5 years), Medium term finance (above 1 year but below 5 years) and Short term finance (within one year) for carrying on business operations.
- Long term finance can be mobilized by issue of shares and debentures, term loans from commercial banks and financial institutions, and retained earnings. Short term fiance can be raised through public deposits, trade credit, customer advance, hypothecation, cash credit, bank overdraft, pledge, mortgage etc.
For which purpose fixed capital is needed in business?
“Finance is the lifeblood of any business.” No business enterprise can function without finance. Business enterprises need finance for fixed and working capital requirement. Fixed capital requirements include purchase of plant, machinery, furniture, fixtures, vehicles etc.
What do you mean by working capital requirement of business?
Working capital requirements include purchase of raw materials, payment of salary and wages, incurring operating expenses like telephone bills, carriage inward and outward, electricity charges, premium, stationery, etc.
List out the various sources of financing.
I. On the basis of period:
The different sources of finance can be further grouped into three categories on the basis of period.
(i) Short term finance.
(ii) Medium term finance.
(iii) Long term finance.
(i) Sources of Short term Finance:
Loans and Advances, Bank Overdraft, Discounting Bills of Exchange, Trade Credit, Pledge, Hypothecation, Mortgage, Loans Against the Securities, Clean Loan, Commercial Paper (CP), Hire Purchase Finance, Factoring.
(ii) Sources of Medium Term Finance: Loans from Banks, Loan from Financial Institutions and Lease Financing.
(iii) Sources of Long Term Finance: Shares, Equity Shares, Preference Shares, Debentures, Retained Earnings, Public Deposits, Long Term Loan from Commercial Banks, The Loans from Financial Institutions.
II. On the Basis of Ownership:
(i) Owner’s Funds
(ii) Borrowed Funds
III. On the Basis of Generation of Funds :
(i) Internal Sources
(ii) External Sources.
What are the different types.of short term finances given by commercial banks?
(i) Loans and advances:
Loan is a direct advance made in lump sum which is credited to a separate loan account in the name of borrower. The borrower can withdraw the entire amount in cash immediately.
(ii) 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.
(iii) 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.
(iv) Trade credit:
Trade credit is the credit extended by one trader to another for the purpose of purchasing goods and services. Purchaser need not pay money immediately after the purchase.
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.
Write short notes on (i) Retained Earnings (ii) Lease financing.
(i) Retained earnings:
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.
(ii) Lease financing:
Lease financing denotes procurement of assets through lease. For many small and medium enterprises, acquisition of plant and equipment and other permanent assets will be difficult in the initial stages. In such a situation Leasing is helping them to a greater extent. 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.
Write short notes on
(i) owner’s funds
(ii) borrowed funds.
(i) 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 owner’s funds. These funds are not required to be refunded during the life time of business enterprise. It provides the owner the right to control the management of the enterprise.
(ii) 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.
(a) These borrowed sources of funds provide specific period before which the fund is to be returned.
(b) Borrower is under legal obligation to pay interest at given rate at regular intervals to the lender.
(c) 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.
Explain any four personal investment avenues.
(i) Public Provident Fund (PPF):
It is the safest long-term investment option for the investors in India. It is totally tax-free. PPF account can be opened in bank or post office. The money deposited cannot be withdrawn before 15 years and an investor can earn compound interest from this account.
However the investor can extend the time frame for the next five years if the investor does not opt to withdraw the amount matured for payment at maturity date. PPF investor can take loan against PPF account when he/she experiences financial difficulties.
(ii) Mutual Funds:
An individual investor who wants to invest in equities and bond with a balance of risk and return generally can invest in mutual funds. Nowadays people invest in stock markets through a mutual fund. Systematic.investment plan is one of the best investment options in India.
(iii) Direct Equity or Share Purchase:
An individual can opt for investment in shares. But he has to analyse the market price of various shares traded in stock exchange, reputation of the company, consistency in the payment of dividend, the nature of the project undertaken by the company, growth prospects of industry in which a company is operating, before investing in shares.
If the investment is made for a long time, it may yield good return. However there is equally risky to invest in shares as there is no guaranteed return therein.
(iv) Real Estate Investment:
Real estate is one of the fastest growing sectors in India. Buying a flat or plot is supposed to be the best decision amongst the investment options. The value of the real asset may increase substantially depending upon the area of location and other support facilities available therein.
However an investor in real estate has to be cautious and circumspect in verifying the genuineness of the title deeds before investing in real estate assets and also the reputation of seller of real assets.
Gokul Steel Ltd is a large and credit worthy company that manufactures steel for the Indian market. It now wants to cater the Asian market and decides to invest in new hi-tech machines. Since the investment is large, it requires long term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost, the company decides to tap money market.
(a) Name and explain the money-market instrument the company can use for the above purpose.
The help the central bank in regulating liquidity in the economy. Money market help short-term fund user to fulfill their needs reasonable costs.
(b) What is the duration for which the com party can get funds through the instrument?
These instruments are shoft-term notes issued by state and municipal governments although they carry some what more risk than T-bills and tend to be less negotiable. They feature the added benefit that the interest is not subject to federal income tax. For this reason corporation find that the lower yield is worth while on this type of short-term investment.
(c) State any other purpose for which this instrument can be used.
Financial instruments are assets that can be traded. They can also be seen as packages of capital that may be traded. Most type of financial instruments provide an efficient flow and transfer of capital all throughout the world investors. These assets can be cash a contractual right to deliver or receive cash or another type of financial instrument or evidence of one’s ownership of an entity.
Working of chit funds.
Equity mutual funds are managed by professional and certified funds managers who have expertise and experience in financial markets. As mutual funds collect money from many investors the cost of asset management is divided between a larger number of people. Thus reducing the assets management fee per person.
Finance for bonded labour.
“Debt bondage” also known as debt slavery or bonded labour is a person’s pledge of labour or service as security for the repayment for a debt or other obligation where there is no hope of actually repaying the debt.
Export finance for small entrepreneurs.
Exporting goods and services can bring significant opportunities for companies of all sizes. By tapping into new markets and new revenue streams. Companies can access a larger customer base and grow their business. Importantly these opportunities are not limited to large corporations.
Financing software companies run by young graduates.
Even employees already working in the financial sector eyeing opportunities in tech; In a new study of over 800 financial services employees in partnership with kronos. We found that one-fourth are more interested in working in the tech industry than finance. Finance as a career choice is down 22% from 2008 and graduates from the top 10 MBA schools are now 40% less likely to work’ in investment banking.
Choose the Correct Answer:
What is defined as the pro vision of money at the time when it is required?
(c) cash management
(d) none of these
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 issue of shares
(d) generated within the business
(d) generated within the business
Debenture holders are entitled to a fixed rate of:
Public deposits are the deposits which are raised directly from:
(a) the public
(b) the directors
(c) the auditors
(d) the owners
(a) the public
Equity shareholders are the _________ of a company.
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
(c) working capital requirement
Which of the following holder is given voting right?
(b) Preference Shares
(c) Equity shares
(c) Equity shares
It may be wise to finance fixed assets through:
(b) long term debts
(c) bank overdraft
(d) bills discounting
(b) long term debts
Samacheer Kalvi 11th Commerce Notes Chapter 19 Sources of Business Finance
→ First study the concept of business. Need for the business finance, sources of funds and the importance of savings and personal investment avenues.
→ Finance is the lifeblood of any business no business can run without finance. Business enterprises need finance for fixed and working capital requirement. Fixed capital requirement include purchase of plant, machinery, furniture, fixtures, vehicles and so on.
→ While working capital requirement, includes purchase of raw materials, payment of salary and wages, incurring operating expenses like telephone bills carriage inward and outward, electricity charges, premium stationary etc. owner or promoter has to estimate the business finance and accordingly look for various sources of financing the operations of the enterprises.
→ Sources of finance loans from banks, trade credit pledge the article land and building mortgage loan, loans against securities. Commercial paper getting loan in the form of promissory note, loans from financial institutions (medium term finance). Long term sources issue of shares debentures.