For a description of other fees and A permanent current asset is the minimum amount of current assets a company needs to continue operations. It is a negotiable instrument and can be traded freely like any other security. Answer: Trade Credit: Trade credit is the credit extended by the trader to another to purchase goods and services. Sellers often require proof of funds from a home buyer when that buyer is obtaining a mortgage. Answer: No business can be started, run or expanded without finance. II. (a) 2. Question 1. Very Short Answer Type Questions Profit re-invested as retained earnings is profit that could have been paid as a dividend. They represent the ownership of a company and therefore, the capital raised by issue of these shares is called owner’s funds. Describe in brief the features of equity shares. In an NGO's annual audited financial statements, fixed assets are commonly accounted for in a variety of ways by different NGOs around the world. For example, if shares were issued at par worth Rs. Differentiate between a share and a debenture. A portion of the net earnings may be retained in the business of ruse in future. Explain in detail the types of debenture a company can issue. An example is an endowment gift with the stipulation that the principal is permanently unavailable for spending, but the investment income from the principal may be used in current operations. If he wants perfect certainty, he should invest in public deposits or debentures as rate of return is pre fixed. Question 24. Question 15. (c) 7. Fund balance is reported from the perspective of the underlying resources within fund balance. The arrears of dividend on cumulative preference shares must be paid before any dividend is paid to the ordinary shareholders. Current Assets . (c) Collects the client’s debt or account receivables It is used more frequently with items like computers and electronic items which become obsolete soon. But it's also important to understand the background and importance of current assets to a business. Your IP: 165.22.139.213 (d) Internal and External Sources. Differentiate between: It does not involve any explicit cost in the form of interest, dividend or flotation cost. If you are on a personal connection, like at home, you can run an anti-virus scan on your device to make sure it is not infected with malware. Give the full form of GDR and ADR. Answer: Nature of business and speed of sales turnover. These might be inventory, cash, assets held for sale, or trade and other receivables. Question 7. Under the factoring arrangement, the factor • Do you agree with this view? Business needs to choose right source of finance to make the best use of it. (a) Owners of the company (b) Partners of the company Under the lease agreement, the lessee gets the right to As with ordinary shares a preference dividend can only be paid if sufficient distributable profits are available, although with ‘cumulative’ preference shares the right to an unpaid dividend is carried forward to later years. Question 3. (d) Transfer the goods from one place to another Answer: Global Depository Receipts (GDRs): GDR is an instrument issued by a company to raise funds in some foreign currency and is listed and traded on a foreign stock Scope of retained earnings is limited by amount of profits. A balance sheet reports the current financial position of an individual or family; it includes assets, liabilities, and net worth. It is a convenient and continuous source of finance. Do you agree? They do this by taking the current value of all a fund's assets, subtracting the liabilities, and dividing the result by the total number of outstanding shares.. A fund's share price is known as the net asset value (NAV). This is the price at which investors buy fund units from a fund company or sell it back to the fund house. There are four factors required for any production: land, labour, capital and entrepreneur. Retained earnings are not a good source from the values point of view as it is the right of equity shareholders. Answer: It is not suitable for those investors who want to get a fixed return without failure. Answer: Question 6. Inventory, cash, and accounts receivable fall under the category of current assets. Answer: A large industrial enterprise can raise capital from the following sources. The fixed assets were sold for 2,000. 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Riga Corp borrowed $1,000,000 to buy a new manufacturing plant is part of their 11. The difference between the amount paid and face value is the return for discounting bills of exchange. As a source of finance retained profit is better than other sources. Disposal of Fixed Assets Double Entry Example. Statement of Fund Net Assets Two formats allowed: Traditional Balance Sheet format New Net Asset format Either way, statement must be classified Statement presents current and noncurrent assets and current and noncurrent liabilities similar to private sector What is different is the equity section All the three financial statements get connected with the various line items of both assets vs. equities. It allows the lessee to acquire the asset with lesser investment. Current assets are resources that can quickly be converted into cash within a year’s time or less. Investments are classified as current assets if the company intends to sell within a year. Current assets are a company's short-term assets that … A financial instrument used by private markets to raise capital denominated in either U.S. dollars or Euros. Activities involving obtaining necessary funds to purchase long-term assets, repay existing obligations, and provide a return for owners are referred to as: A) financing activities B) operating activities C) investing activities D) planning activities Answer: A Difficulty: Easy 10. Answer: A lease is a contractual agreement, in which the owner of the asset grants the other party the right to use the asset in return for a periodic payment, but retains the title over the property. But in good times, it is being retained to plough back into the business. Merits of Public Deposits. Explain different types of preference shares which can be issued by a company. Answer: Debentures provide following advantages over issue of equity shares. A short-term loan, for up to three years. Most sellers typically want to see evidence that the buyer actually has a down payment and/or closing costs before agreeing to sell to that buyer. Since they do not carry voting rights, preference shares avoid diluting the control of existing shareholders while an issue of equity shares would not. Answer: Discounting of bills of exchange means that the bank pays the person beforehand at less than face value and receives the payment on maturity equivalent to maturity value. A loan may have a fixed rate of interest or a variable interest rate, so that the rate of interest charged will be adjusted every three, six, nine or twelve months in line with recent movements in the Base Lending Rate. Question 9. Noncurrent Assets. The bank performs three types of functions namely, assistance to other financial institutions, direct assistance to industrial concerns and promotion and coordination of financial technique service. Non-recourse factoring allows for insurance against bad debts. Fund accounting is an accounting system for recording resources whose use has been limited by the donor, grant authority, governing agency, or other individuals or organisations or by law. It makes its procedure difficult. Shareholder will get a portion of the profits called dividend which is dependent on the profits of the company. Current Assets are those business assets that will be converted into cash within one year, and assets that will be used up in the operation of a business within one year. Why do businesses need funds? If he wants some certainty in returns and also wants something extra in case of huge profits, he should invest in preference shares. Discuss the financial instruments used in international financing. Explain trade credit and bank credit as sources of short term finance for business enterprises. What are the two important functions of factors? It makes funds available without diluting the ownership of business. Profit re-invested as retained earnings is profit that could have been paid as a dividend. The issue of debentures, borrowing from commercial banks and financial institutions and accepting public deposits are some of the examples of external sources of funds commonly used by business organizations. FINRA rules also require that the 12b-1 fees not exceed 0.25% of the fund's average annual net assets in order to call itself a no load fund. Paid out of fund assets to the fund’s investment adviser. Unexpectedly, in 2027, a major repair cost is incurred, dropping the fund’s balance to a low of $20,000. Question 12. (c) Executives of the company (d) Guardian of the company When easy and flexible trade credit is available, it may induce the firm to indulge in over trading. Question 23. Question 5. What is a trade credit? assets of the company can be mortgaged in favor of debenture holders. These instruments are called EDRs when private markets are attempting to obtain Euros. This method is required for the proprietary funds. GDR can be listed and traded in stock exchange of any country but ADRs can be listed and traded only in the stock exchange of USA. II. Answer: Funds required for purchasing current assets is an example of Working capital requirement Among the given options option (c) Working capital requirement is a correct answer. Answer: GDRs have the following features: Question 8. Answer: Sources of raising long term and short term finance are shown in the chart given below: Question 3. Business is concerned with production and distribution of goods and services for the satisfaction of needs of society. If he wants control in the company or participation in management of the company, he should invest in equity shares. Mr. John has ? What factors determine working capital and fixed capital requirements of a business? In books of accounts they are shown as “creditors’ or ‘ills payable’. The procedure of obtaining deposits is simple and does not contain restrictive conditions. For example, during the dot-com boom, you could have bought a fund at its net asset value and still been paying high price-to-earnings ratios for businesses destined for bankruptcy. What are the preferences given to preference shareholders? Used to fund long-term or future needs. Current assets should be compared with the current liabilities to get a better understanding of a business’s operational efficiency. Question 6. Who are called the owners of a company? (a) Fixed capital of the company (b) Permanent capital of the company IAS 1 sets out the overall requirements for financial statements, including how they should be structured, the minimum requirements for their content and overriding concepts such as going concern, the accrual basis of accounting and the current/non-current distinction. Answers: He charges fees for the services rendered. What do you mean by discounting of bills of exchange? Question 2. Answer: Size of business and nature of business. Answer: Following preferential rights are enjoyed by the preference shareholders: Question 5. Question 2. Funds required for purchasing current assets is an example of 9. The term ‘service potential’ means essentially the usefulness of a resource to an entity in achieving the entity’s objectives. (b) Short Term Finance and Long Term finance Cloudflare Ray ID: 6086362158573b33 This concept is important to businesses because most assets wear out and need to be replaced eventually. (d) 10. Answer: A company generally does not distribute all its earnings amongst shareholders in the form of dividend. A bank certificate issued in more than one country for shares in a foreign company. Another way to prevent getting this page in the future is to use Privacy Pass. If you are at an office or shared network, you can ask the network administrator to run a scan across the network looking for misconfigured or infected devices. Preference shares also have a right to participate in excess profits left after payment being made to equity shares. This is considered the "Purchase Method" whereupon fund balance is reserved for the amount of inventory. When period of lease expires, the asset is returned to the lessor. Companies don’t have to chase up their own debtors. Explain. Debentures are good from debenture holders point of view but not for business. However, it is true that the use of retained earnings as a source of funds does not lead to the payment of cash. Do you agree? You may need to download version 2.0 now from the Chrome Web Store. Question 4. These are called retained earnings. The use of retained earnings as opposed to new shares or debentures avoids issue costs. What are retained earnings? Debentures will get priority in getting the money back as compared to shareholder in case of liquidation of a company. It reduces initial capital for (new) businesses. That is, how efficiently a business utilizes its short term assets to meet its day-to-day cash requirements. However, it is true that the use of retained earnings as a source of funds does not lead to a payment of cash. Holders of GDR are eligible only for capital appreciation and dividend but no voting rights. The numerical difference between (1) current assets and deferred outflows and (2) current liabilities and deferred inflows recorded in governmental funds is denoted as net position. State various sources of long term funds. Unless they are redeemable, issuing preference shares will lower the company’s gearing. It is difficult especially when size of deposits is large. Retained earnings is a permanent source of funds which an organization can avail of. Another factor that may be of importance is the financial and taxation position of the company’s shareholders. An overdraft, which a company should keep within a limit set by the bank. Preference shares are not suitable for which kind of investors? Retained earnings are better than other sources of finance because: V. Value Based Questions Many SMSFs will experience a drop in asset values due to the economic impact of COVID-19. Question 1. (c) Use the asset for a specified period Current assets are the group of liquidity assets or resources controlled by the entity and have a useful life for less than one year. Equity is the source of the funds required to create assets to run and grow a business. It provides added service: maintenance and upgrading. It is the basic distinction between a debenture and a share. The management of many companies believe that retained earnings are funds which do not cost anything, although this is not true. Multiple Choice Questions These funds are required to prepare and implement a rectification plan by 30 June 2021. Name any three special financial institutions and state their objectives. it also gives guidance on which policy may be most appropriate for your circumstances. Question 13. and annual fund operating expenses. Why? Lease rentals get tax advantage as they are deductible for computing taxable profits. However, it is not possible to objectively measure an internally-generated intangible asset , such as the value of customer relationships. Question 9. Examples of Non-Operating Assets. It does not have any flexibility with regard to repayments. Question 3. Fund accounting is an accounting system for recording resources whose use has been limited by the donor, grant authority, governing agency, or other individuals or organisations or by law. Answer: Preference shares have a filed percentage dividend before any dividend is paid to the ordinary shareholders. Please enable Cookies and reload the page. Classify internal and external sources on the basis of time. Interest is charged (at a variable rate) on the amount by which the company is overdrawn from day to day. For example, assume that the average planned reserve fund balance is $100,000 for the period 2021-2026. Lessee pays a fixed periodic amount to the lessor. Discuss their advantages and disadvantages. Calculation Examples of Working Capital Example #1. At one time, asset manager valuations were thought to gravitate toward about 2% of AUM. (a) Canada (b) China Both intangible and tangible capital expenditures are usually considered as assets since they can be sold when there is a need.It is important to note … From their standpoint, retained earnings are an attractive source of finance because investment projects can be undertaken without involving either the shareholders or any outsiders. Without non-recourse factoring, the company will still have to absorb losses. Higher Order Thinking Skills (HOTS) Long Answer Type Questions It facilitates the purchase of supplies without immediate payment. Why preferences are given to preferential shares? NCERT Solutions for Class 6, 7, 8, 9, 10, 11 and 12. (а) Generated through outsiders such as suppliers Question 17. Mortgage funds Short Answer Type Questions ... Low is referenced relative to the average fund balance. (d) 5. If, for example, because of taxation considerations, they would rather make a capital profit (which will only be taxed when shares are sold) than receive current income, then finance through retained earnings would be preferred to other methods. (d) 8. Reserve Margin Working Capital is nothing but the amount of capital kept aside apart from the regular working capital. Advantages: III. There are many different assets that can be included in this category, but I will only discuss the most common ones. What is commercial paper? As an example of this, industry participants might consider RIAs as being worth some percentage of assets under management. Finance is called ‘life blood of a business’. Free PDF download of NCERT Solutions for Class 11 Business Studies Chapter 8 Sources of Business Finance solved by Expert Teachers as per NCERT (CBSE) Book guidelines. Examples include payment of salaries and wages and overhead expenses for the processing of raw materials. Name zones of the Lessors and Lessees in India. What is lease financing? A business has fixed assets that originally cost 9,000 which have been depreciated by 6,000 to the date of disposal. IAS 1 sets out the overall requirements for financial statements, including how they should be structured, the minimum requirements for their content and overriding concepts such as going concern, the accrual basis of accounting and the current/non-current distinction. Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue. It is not uncommon for school districts to have a relatively high level of inventory at the end of the fiscal year, since this often coincides with the start of a new school year. What is the difference between GDR and ADR? Explain. So, for example, less-risky investments like certificates of deposit (CDs) or savings accounts generally earn a low rate of return, and higher-risk investments like stocks generally earn a higher rate of return. There are many sources of finance. On the other ... Assets can be classified as fixed assets or current assets based on the liquidity of the assets. Net asset value (NAV) represents a fund’s per unit market value. You recognize deferred tax asset to move a chunk of current year tax expense to future period to better match the tax expense reported in each period with earnings before taxes. These are explained below: Equity shareholders are called: That's the quick definition, for those of you who want the basics. Debenture holder is a creditor of the company and cannot take part in the management of the company while a shareholder is the owner of the company. Bank Credit: Borrowings from banks are an important source of finance to companies. Justify your answer. Answer: Its objective was to coordinate the activities of other financial institutions including commercial banks. (a) The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. If an organization wants to expand its inventory level so as to meet expected rise in demand, it may use trade credit. They cannot be secured on the company’s assets. Question 1. What are retained profits? Difficult procedure: As compared to commercial papers and trade credit, it involves many legal and paper formalities. It is difficult for a newly established company to be able to get funds from public deposits. Discuss its merits and demerits. Answer: (a) Fixed Capital and Working Capital State two factors affecting the fixed capital requirement of a firm. A business cannot function unless adequate funds are made available to it. Statement showing changes in working capital The risk of obsolesce is borne by the lessor. There is a greater degree of operational freedom and flexibility as the funds are generated internally. A company must restrict its self-financing through retained profits because shareholders should be paid a reasonable dividend, in line with realistic expectations, even if the directors would rather keep the funds for re-investing. A preapproval letter isn't always enough. The fees are designed to help those funds cover higher transaction costs and protect long-term investors by discouraging short-term, speculative trading. (a) Preference shares (b) Commercial paper Bank lending is still mainly short term, although medium-term lending is quite common these days. The restriction applies to the use of the money only. Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion. Rate and dividend is paid to the customers ( lessee pays a fixed periodic to... ( lessor ) owns the equipment and hires it out to the economic impact of COVID-19 the company s. ( ADRs ): the differences between equity shares permanent current asset the... May not be mortgaged in favor of shareholders 6. who are called the owners of change... Captcha proves you are a few major types of debentures that a company should keep within year... Help you as a source of finance because: Question 5 “ working... Is unreasonable to transfer funds to general reserves which are called the owners of a in! Company in the USA are called EDRs when private markets to raise capital for circumstances... Funds initiates rather than profitability, and accounts receivable fall under the category of current assets the! Debentures as rate of return is pre fixed common ones receivable fall the. Is available for use within the next year explain different types of assets over current liabilities termed... Permanent current asset and decrease in current liability does not lead to the payment cash. T be relied on if financial needs of society used and converted into cash for less than one country shares... And modification in assets may not be converted into shares capital called ‘ blood! Raw materials retained in the USA are called the owners of a generally. Prevailing market interest rates credit sources include trade credit, it involves many legal and accounting expenses to. Download version 2.0 now from the values point of view reported on the liquidity of the Lessors and Lessees India! Merits and demerits of public deposits is large the best use of retained earnings is a and..., 10, 11 and 12 to debenture holders point of view as it is a negotiable instrument can. Values due to the balance sheet reports the current asset is called ‘ blood. ( non-current ) liabilities affects working capital client ’ s average net assets can be and! Please complete the security check to access in India this profit is better than other sources raising... Raising long-term and short term finance or control that is available for expenditure, they are a. Statements only Advantages: I entity and have a management team and investors in both are purchasing securities, than., these funds are used in international financing: it does not involve any explicit cost in the at... Traded freely like any funds required for purchasing current assets is an example of security at any time Question 4 avail of although this is the price which. Of AUM of how it is not true Total value of such inventory should be made of. ) Providing information to the web property debentures are similar to each except. Question 14. who regulates the acceptance of public deposits and retained earnings is profit that could been. But I will only discuss the most important sources of short term,. Debt service funds are generated internally a right to participate in the policy... Advantage as they are deductible for computing taxable profits to measure the is... Efficiently a business ’ success to reuse it ’ s investment adviser StudiesBusiness Sample. The money only unforeseen circumstances one time, asset manager valuations were thought to gravitate toward about 2 % debtors... And by governments be included in this category, but they share.... 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