Chapter sources-of-business-finance: Sources of Business Finance Short Questions | business studies Class 11 CBSE

Chapter sources-of-business-finance: Sources of Business Finance Short Questions | business studies Class 11 CBSE | ByteNotes.in

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Question 1

Quick Recall

What is meant by business finance?

Business finance refers to the funds required by a business to carry out its various activities from establishment to day-to-day operations and expansion.
It is often called the 'life blood' of business as no enterprise can function without adequate funds.
The need for finance arises right from the decision to start a business and continues throughout its life for fixed capital and working capital requirements.

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Medium

Question 2

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Distinguish between fixed capital requirements and working capital requirements of a business.

Fixed capital refers to funds needed for purchasing long-term assets like land, plant, and machinery, while working capital refers to funds required for day-to-day operations such as buying raw materials and paying wages.
Fixed capital remains invested in the business for a long period, whereas working capital is used and recovered in a short cycle.
A trading concern may need less fixed capital compared to a manufacturing concern, while businesses selling on credit require more working capital than those selling on cash basis.

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Question 3

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What are the three bases on which sources of business finance can be classified?

Sources of funds can be classified on the basis of the time period into long-term (exceeding 5 years), medium-term (1–5 years), and short-term (up to 1 year) sources.
On the basis of ownership, sources are classified into owner's funds (equity shares, retained earnings) and borrowed funds (loans, debentures, trade credit).
On the basis of source of generation, funds may be classified as internal sources (generated within the business) and external sources (obtained from outside parties like banks and investors).

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Question 4

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What is meant by retained earnings and why is it called 'ploughing back of profits'?

Retained earnings refer to the portion of net profits of a company that is not distributed as dividends but is kept back for use in the future.
It is called 'ploughing back of profits' because the profits are reinvested or ploughed back into the business to support growth and expansion.
The amount available for ploughing back depends on factors like net profits, dividend policy, and the age of the organisation.

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Question 5

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State any three merits of retained earnings as a source of business finance.

Retained earnings are a permanent source of funds with no explicit cost in the form of interest, dividend, or floatation charges.
Since funds are generated internally, the business enjoys greater operational freedom and flexibility without external interference.
Retained earnings enhance the capacity of the business to absorb unexpected losses and may lead to an increase in the market price of equity shares.

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Question 6

Quick Recall

What is trade credit? In whose records does it appear, and how?

Trade credit is the credit extended by one trader to another for the purchase of goods and services without requiring immediate payment.
In the records of the buyer of goods, trade credit appears as 'sundry creditors' or 'accounts payable'.
The volume and period of trade credit extended depend on factors like the buyer's reputation, financial position of the seller, volume of purchases, and degree of competition in the market.

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Question 7

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Explain any three limitations of trade credit as a source of finance.

Easy availability of trade credit may induce a firm to engage in overtrading, which increases the financial risk of the firm.
Only a limited amount of funds can be generated through trade credit, making it insufficient for meeting large financial requirements.
Trade credit is generally a costly source compared to most other sources of raising money due to the implicit cost embedded in the price of goods.

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Question 8

Quick Recall

What is factoring? Briefly explain recourse and non-recourse factoring.

Factoring is a financial service under which a firm's receivables are sold to a 'factor' at a discount; the factor is responsible for credit control and debt collection.
Under recourse factoring, the client (seller of receivables) is not protected against bad debts; if the buyer defaults, the loss falls on the client.
Under non-recourse factoring, the factor assumes the entire credit risk; the full invoice amount is paid to the client even if the debt becomes bad.

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Question 9

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What is lease financing? Explain the roles of lessor and lessee.

Lease financing is a contractual arrangement where the owner of an asset (lessor) grants another party (lessee) the right to use the asset for a specified period in exchange for periodic lease rentals.
The lessor retains ownership of the asset and receives lease rent; at the end of the lease period, the asset returns to the lessor.
The lessee uses the asset without purchasing it, paying fixed lease rentals which are tax-deductible, thereby conserving capital for other uses.

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Question 10

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Mention any three limitations of lease financing.

The lease agreement may impose restrictions on modifying or altering the leased asset, limiting the lessee's operational flexibility.
If the lease is not renewed, normal business operations may be adversely affected as the lessee loses access to the asset.
The lessee never becomes the owner of the asset and therefore does not benefit from its residual value at the end of the lease term.

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Question 11

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What are public deposits? How are they regulated?

Public deposits are funds raised directly from the public by companies who offer a higher rate of interest than that offered by banks.
Any person interested in depositing money fills a prescribed form and receives a deposit receipt from the company as acknowledgment of the debt.
The acceptance of public deposits is regulated by the Reserve Bank of India; companies generally invite public deposits for a period up to three years.

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Question 12

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State any three merits of public deposits as a source of finance.

The procedure for obtaining public deposits is simple and does not contain the restrictive conditions generally associated with bank loan agreements.
The cost of public deposits is generally lower than the cost of borrowings from banks and financial institutions.
Public deposits do not create any charge on the assets of the company, leaving assets free to be used as security for other borrowings.

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Question 13

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What is a Commercial Paper (CP)? State any two conditions for its issue.

A Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note by highly rated corporate borrowers to raise short-term funds.
CP can be issued for maturities between a minimum of 7 days and a maximum of one year in denominations of Rs. 5 lakh or multiples thereof.
Only financially sound companies with good credit ratings can issue CP; its regulation comes under the purview of the Reserve Bank of India.

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Chapter sources-of-business-finance: Sources of Business Finance | Short Questions

What is meant by business finance?

Distinguish between fixed capital requirements and working capital requirements of a business.

What are the three bases on which sources of business finance can be classified?

What is meant by retained earnings and why is it called 'ploughing back of profits'?

State any three merits of retained earnings as a source of business finance.

What is trade credit? In whose records does it appear, and how?

Explain any three limitations of trade credit as a source of finance.

What is factoring? Briefly explain recourse and non-recourse factoring.

What is lease financing? Explain the roles of lessor and lessee.

Mention any three limitations of lease financing.

What are public deposits? How are they regulated?

State any three merits of public deposits as a source of finance.

What is a Commercial Paper (CP)? State any two conditions for its issue.

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