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Samacheer Kalvi 11th Commerce Solutions Chapter 19 Sources of Business Finance
Get the Questions and Answers, in Tamilnadu State Board 11th Commerce Solutions for Chapter 19 Sources of Business Finance. Learn the concepts of 11th Commerce Chapter-Wise by referring to the Tamilnadu State Board Solutions for Chapter 19 Sources of Business Finance Questions and Answers. Hence we suggest the students to Download Samacheer Kalvi 11th Commerce Book Solutions Questions and Answers pdf to enhance your knowledge.
Samacheer Kalvi 11th Commerce Sources of Business Finance Textbook Exercise 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) 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
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:
(b) Owners
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 a short notes on debentures.
Answer:
Debentures are an important instrument for raising long term debt capital. A company can raise funds through issue of debentures which bear a fixed rate of interest.
Question 2.
What do you mean by public deposits?
Answer:
Debentures are an important instrument for raising long term debt capital. A company can raise funds through issue of debentures which bear a fixed rate of interest.
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:
- Retained earnings
- Collections form receivables
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:
“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
Question 2.
What is 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
- Clean Loan
- Commercial Paper (CP)
- Hire Purchase Finance
- Factoring
Sources of Long Term Finance:
- Shares (i) Equity Shares (ii) Preference 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 requirement. Fixed capital requirements include purchase of plant, machinery, furniture, fixtures, vehicles, and so on.
Question 5.
What do you mean by working capital requirement of business?
Answer:
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.
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
(i) period basis
(ii) ownership basis
(iii) source of generation basis.
On the basis of period:
- Short term finance
- Medium term finance
- Long term finance
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
Sources of Medium Term Finance:
- Loans from Banks
- Loan from Financial Institutions
- Lease Financing
Sources of Long Term Finance:
- Shares (i) Equity Shares (ii) Preference Shares
- Debentures
- Retained Earnings
- Public Deposits
- Long Term Loan from Commercial Banks
- The Loans from Financial Institutions
On the Basis of Ownership:
- Owner’s Funds
- Borrowed Funds
On the Basis of Generation of Funds:
- 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 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.
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, creditor (banker) will auction the article pawned and adjust the outstanding loan from the sale proceeds.
6. Hypothecation:
This is loan taken by depositing 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
- Retained Earnings
- Lease financing
Answer:
1. 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.
2. 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. 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 lessee pays a fixed rent on agreed basis to the lessor for the use of the asset. The terms and conditions like lease period, rent fixed, mode of payment and allocation of maintenance, are mentioned in the lease contract.
At the end of the lease period, the asset goes back to the lessor. Alternatively lessee can own the asset taken on lease by paying the balance of price of asset concerned to lessor. Hence lease finance is a popular method of medium term business finance.
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 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.
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 specific period before which the fund is to be returned. 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 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.
2. 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.
3. 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.
4. 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.
Samacheer Kalvi 11th Commerce Sources of Business Finance Additional 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.
The various sources of business finance can be classified into ………………
(a) three
(b) two
(c) four
(d) five
Answer:
(a) three
Question 3.
Business people hypothecate goods or equipment to get ……………… type of loan. It is a loan taken on the security of movable asset.
(a) Hypothecation
(b) Pledge
(c) Trade credit
(d) Bank overdraft
Answer:
(a) Hypothecation
Question 4.
……………… is a type of loan taken form the bank by lodging with the bank title deeds of immovable assets like land and building.
(a) Hypothecation
(b) Mortgage
(c) Clean loan
(d) Factoring
Answer:
(b) Mortgage
Question 5.
Source of Medium Term Finance is ………………
(a) share
(b) debentures
(c) Bank overdraft
(d) lease finance
Answer:
(d) lease finance
Question 6.
Which one is the internal source?
(a) Retained earnings
(b) Shares
(c) Debentures
(d) Public deposits
Answer:
(a) Retained earnings
Question 7.
Which one is the owner’s funds?
(a) Debentures
(b) Loan from banks
(c) Equity shares
(d) Commercial papers
Answer:
(c) Equity shares
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 Mutual Funds?
Answer:
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.
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.
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 organisation 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.
What is meant by preference shares?
Answer:
The fund raised by 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 shareholder are settled at the time of liquidation of company. However they do not have voting rights.
Case Study
Gokul Steel Ltd is a large and creditworthy 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.
(b) What is the duration for which the company can get funds through the instrument?
(c) State any other purpose for which this instrument can be used.
Answer:
The company can issue equity shares with premium. If the shares issue at premium value, the share can be subsided easily because the company has already created a credit worthy less. So it can easily raise their capital and get more funds and solve the huge requirement of funds.
(a) NSE (National Stock Exchange) – Gokul Steel Ltd.
BSE (Business Stock Exchange) – Equity shares
(b) Equity share capital for long term source of the company. One year, two years or life time of the company.
(c) In the future the shares can be used to change the value of shares. In the future this investment can be surrendered and get back the cash also with dividends.
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