Source of Business Finance (VSAQs)
Commerce-1 | 9. Source of Business Finance – VSAQs:
Welcome to VSAQs in Chapter 9: Source of Business Finance. This page includes the most important FAQs from previous exams. Each answer is provided in simple English and presented in the exam format. This approach helps you prepare effectively and aim for top marks in your final exams.
VSAQ-1: What are Retained Earnings?
Retained Earnings, also known as retained profits, are like a business’s savings account. Imagine you have a lemonade stand, and at the end of the day, you made some profit after covering all your costs. Instead of spending all that profit, you decide to keep some of it aside to buy more lemons and sugar for the future, or maybe even save up to buy a bigger stand. In a company, retained earnings work the same way. It’s the portion of profits that the company doesn’t give out as dividends to its shareholders but instead keeps within the business. This money can be used for reinvesting in the company, like expanding the business, buying new equipment, or even saving for tough times. It’s a way for the company to finance its growth from within, without needing to borrow money from outside sources.
VSAQ-2: What is Long-Term Finance?
Long-Term Finance is like planning for the future. Think about when you or your family takes out a loan to buy a house. You don’t plan to pay it all back within a year, right? You spread the payments over many years. Similarly, in business, long-term finance is money that a company borrows or raises with the understanding that it will be repaid over a longer period, usually more than a year. This type of finance is used for big, important projects like building new factories, expanding operations, or investing in new technology. Examples of long-term finance include long-term loans, bonds, and equity investments. These funds give the company the financial strength to pursue its long-term goals and support its growth over time.