{"id":22820,"date":"2024-01-27T17:22:48","date_gmt":"2024-01-27T11:52:48","guid":{"rendered":"https:\/\/apboardsolutions.in\/?p=22820"},"modified":"2024-01-29T16:03:34","modified_gmt":"2024-01-29T10:33:34","slug":"ap-inter-1st-year-commerce-study-material-chapter-8","status":"publish","type":"post","link":"https:\/\/apboardsolutions.in\/ap-inter-1st-year-commerce-study-material-chapter-8\/","title":{"rendered":"AP Inter 1st Year Commerce Study Material Chapter 8 Sources of Business Finance-I"},"content":{"rendered":"

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material<\/a> 8th Lesson Sources of Business Finance-I Textbook Questions and Answers.<\/p>\n

AP Inter 1st Year Commerce Study Material 8th Lesson Sources of Business Finance-I<\/h2>\n

Essay Answer Questions<\/span><\/p>\n

Question 1.
\nWhat is business finance? Explain its need and significance in business organizations. [Mar. 2018, 17, 15 – A.P. & T.S.; May 17 – A.P. & T.S.]
\nAnswer:
\nFinance is considered as the life blood of any organisation. The requirements of funds by business firm to accomplish its various activities is called business finance. According to B.O. Wheeler “Finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of a business enterprise.”<\/p>\n

Need and significance in business finance:
\n1) For the fixed capital requirements of business :
\nIn order to start a business, finance is required to purchase fixed assets like land and buildings, plant and machinery, furniture and fixture, etc.<\/p>\n

2) For the working capital requirements of business :
\nWorking capital is utilised for holding current assets such as the purchase of material, payment of wages, transporta\u00action charges, etc.<\/p>\n

3) For expansion and growth of business :
\nFinance is required to increase produc\u00action, to install more machines to set up a R & D centre etc.<\/p>\n

4) For diversification :
\nBusiness finance is needed to start new activity in business. Entering into new business and new lines of activities is known as diversification.<\/p>\n

5) For Survival :
\nBusiness finance is required to carry out the various business operations in continuity. Without the required finance, organisations cannot survive for long.<\/p>\n

6) For liabilities :
\nTo meet liabilities of business, be it long-term or short, a business requires sufficient finance, e.g. for payment of loan installments, creditors, etc.<\/p>\n

7) For payment of expenses :
\nBusiness finance is needed for paying salaries, wages, taxes, advertisements and other expenses like rents, etc.<\/p>\n

\"AP<\/p>\n

Question 2.
\nWhat are the various factors that determine the selection of sources of finance? [Mar. 2019 – T.S. Mar. 17 – A.P.]
\nAnswer:
\nFinancial needs of business are of different types-long term, short term, fixed and fluctuating. Therefore, business firms resort to different types of sources for raising funds.<\/p>\n

i) Cost :
\nThe fact of cost is of two types i) cost of procurement of funds ii) cost of utilising funds. These cost factors deciding about the source of funds will be utilised by an organisation.<\/p>\n

ii) Financial strength and stability of operations:
\nIn the choice of source of funds for business should be in a sound financial position so as to be able to repay the principal amount and interest on the borrowed amount.<\/p>\n

iii) Form of organisation and legal status :
\nThe form of unit organisation and status influences the choice of a source for raising money.
\nEx : A partnership firm cannot raise money by issue of equity shares.<\/p>\n

iv) Factor of time period :
\nBusiness units should plan according to the time period for which the funds are required. Ex : Short term need purposes depend upon by the business unit through trade creditors for long term finance sources such as issue of shares and debentures.<\/p>\n

v) Risk profile factor:
\nBusiness should evaluate each of the source of finance in terms of the risk involved Ex: Issued equity shares, these are to be repaid only at the time of winding up and dividends are not paid if the profits are not available. There is little risk involved. On the other hand a loan is to be repaid as per schedule and the interest is to be paid whether the firm earns profit or not.<\/p>\n

vi) Control:
\nA particular source of fund may affect the control and power of the owners on the management of a firm. As equity shareholders enjoy voting rights, financial institutions may take control of the assets or impose conditions as part of the loan agreement.<\/p>\n

vii) Effect on credit worthiness :
\nDepending on certain sources of finance may affect the credit worthiness in the market. Ex: Issue of secured debentures may affect the interests of the creditors and they may not be willing to extend further loans to the company.<\/p>\n

viii) Flexibility and ease :
\nAnother aspect affecting the choice of a source of finance is the flexibility and ease of obtaining funds. Restrictive provisions, detailed investigation and documentation in case of borrowings from banks and financial institutions for example may be the reason that business organisations may not prefer it, if other options are readily available.<\/p>\n

ix) Tax benefits :
\nVarious sources may also be weighed in terms of their tax benefits. Tax is not deducted on dividend of preference shares. Interest paid on loans and debentures is tax deductible. In order to take advantages of tax benefits firms may issue debentures to take loans.<\/p>\n

Short Answer Questions<\/span><\/p>\n

Question 1.
\nWhat are the various types of capital required for business enterprises?
\nAnswer:
\nNature of Business Fiances :
\nWhether it be manufacturing or trading concern business finance is required which is called initial capital. The amount of capital required depends upon the nature and size of business. It consists of owner’s contribution and borrowing from different sources.<\/p>\n

On the basis of the purpose of financial requirements of a business, business finance may be classified into two types.<\/p>\n

1) Fixed capital:
\nThe capital which is used to acquire fixed assets such as land and buildings, plant and machinery, etc. is called the “Fixed Capital”. These assets remain with the business for a long period. Capital required by the business concern to meet its long term needs is known as fixed capital. It is permanently kept in the business. It cannot be easily realised.<\/p>\n

2) Working capital:
\nThe capital required by a business organisation to run its day- to\u00acday operations such as payment of wages, salaries, electricity bills, purchase of raw-material, etc. is called working capital. The capital used in current assets is called working capital.<\/p>\n

Current assets are those which can be converted into cash within a period of one year. Therefore it is also called circulating or revolving capital.<\/p>\n

The working capital of the business concern depends on the nature of the business, size of business, production policy, etc.<\/p>\n

\"AP<\/p>\n

Question 2.
\nExplain the classification of sources of finance.
\nAnswer:
\nA brief explanation of classifications and the sources of finance is given below.<\/p>\n

1) On the basis of period:
\nOn the basis of period, sources of funds can be categorized into 1) Long term 2) Medium-term finance 3) Short-term finance. The long-term sources fulfil the financial requirements of an enterprise for a period exceeding five years. Such financing is generally required for the acquisition of fixed assets. Where the funds are required for a period more than one year but less than five years, medium-term sources of finance are used. Short term funds are those which are required for short duration i.e. a period not exceeding one year.
\nEx : Trade credit, Bank Overdrafts, etc.<\/p>\n

2) On the basis of ownership :
\nOn the basis of ownership, the sources can be classified into owner’s funds and borrowed funds. Owner’s funds are those which are provided by the owners which include issue of equity shares and retained earnings. Borrowed funds refer to the funds raised through loans or borrowings. The sources include loans from commercial banks, loans from financial institutions, issue of debentures, public deposits, and trade credit.<\/p>\n

3) On the basis of generation :
\nSources of finances can be generated from internal or from external sources. Internal sources of funds are those that are generated from within the business. Ex : Retained earnings, depreciation of funds, etc. External sources of funds include those sources that lie outside an organisation. E.g: Shares, debentures, public deposits, etc.<\/p>\n

Very Short Answer Questions<\/span><\/p>\n

Question 1.
\nBusiness finance:
\nAnswer:
\nThe term finance means money for funds. Financing means making money available when it is needed. It refers to money required for business purposes. Finance is the life blood of every organisation. The prosperity of a business unit mainly depends upon the availability of finance.<\/p>\n

Question 2.
\nFixed Capital [Mar. 2019 – A.P. m Mar. 2018, 17 – T.S. ; May 17 – A.P.]
\nAnswer:
\nThe capital which is used to acquire fixed assets such as land and buildings, plant and machinery, etc. is called “Fixed Capital\u201d. These assets remain with the business for a long period. These items are not purchased for sale. In other words, capital required by the business concern to meet its long term needs is known as ‘Fixed capital’. It is permanently kept in the business. It cannot be easily realised.<\/p>\n

Question 3.
\nWorking Capital: [Mar. 2019; May 17 – T.S.]
\nAnswer:
\nThe capital required by a business organisation to run its day- to-day operation such as payment of wages, salaries, electricity bills, purchase of raw-material, etc. is called “Working Capital”. The capital used in current assets is also called “Working capital”.<\/p>\n

Current assets are those which can be converted into cash within a period of one year. Therefore it is also called circulating or revolving capital.<\/p>\n

The working capital of the business concern depends on the naturee of the business, size of the business, production policy, etc.<\/p>\n

Question 4.
\nLong – term finance :
\nAnswer:
\nThe capital required for long period are termed as long term finance. This is usually required for period between 7 years to 20 years. This type of capital is used to acquire fixed assets such as land and buildings, plant and machinery, for working capital and also for expansion and modernization of the business. Long term finance can be raised through issue of shares, issues of debentures, loan from banks and other financial institutions, retained earnings, etc.<\/p>\n

Depending upon the need any one of the above sources can be conveniently used to procure long term capital or finance.<\/p>\n

Question 5.
\nShort – term finance :
\nAnswer:
\nFunds raised for a period not exceeding one year is called short-term capital or short-term finance. This type of finance is used to meet day-to-day operating expenses of business such as purchase of raw materials, wages, salaries, etc. The amount of funds required depends upon nature of business, time gap between order and delivery of stocks, operating cycle and the volume of business.<\/p>\n

It can be raised through Trade credit, Bank Credit, Advances from Customers, Bank Loans, Retained earnings and Bills of Exchange.<\/p>\n

\"AP<\/p>\n

Question 6.
\nInternal sources of finance :
\nAnswer:
\nInternal sources of funds are those which are generated from within the business. E.g.: Ploughing back of profits, retained earnings, collection of receivables disposing of surplus inventories, and depreciation of funds, etc.<\/p>\n

Question 7.
\nExternal sources of finance :
\nAnswer:
\nExternal sources of funds include those sources that lie outside an organisation, such as shares, debentures, public deposits, borrowing from commercial banks and financial institutions, suppliers, lenders, and investors.<\/p>\n","protected":false},"excerpt":{"rendered":"

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 8th Lesson Sources of Business Finance-I Textbook Questions and Answers. AP Inter 1st Year Commerce Study Material 8th Lesson Sources of Business Finance-I Essay Answer Questions Question 1. What is business finance? Explain its need and significance in business organizations. [Mar. 2018, 17, 15 – … Read more<\/a><\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"spay_email":""},"categories":[14],"tags":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/apboardsolutions.in\/wp-json\/wp\/v2\/posts\/22820"}],"collection":[{"href":"https:\/\/apboardsolutions.in\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/apboardsolutions.in\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/apboardsolutions.in\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/apboardsolutions.in\/wp-json\/wp\/v2\/comments?post=22820"}],"version-history":[{"count":1,"href":"https:\/\/apboardsolutions.in\/wp-json\/wp\/v2\/posts\/22820\/revisions"}],"predecessor-version":[{"id":22821,"href":"https:\/\/apboardsolutions.in\/wp-json\/wp\/v2\/posts\/22820\/revisions\/22821"}],"wp:attachment":[{"href":"https:\/\/apboardsolutions.in\/wp-json\/wp\/v2\/media?parent=22820"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/apboardsolutions.in\/wp-json\/wp\/v2\/categories?post=22820"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/apboardsolutions.in\/wp-json\/wp\/v2\/tags?post=22820"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}