Source of Business Finance (SAQs)

Commerce-1 | 9. Source of Business Finance – SAQs:
Welcome to SAQs in Chapter 9: Source of Business Finance. This page includes the most important FAQs from previous exams. Each answer is provided in simple English, followed by a Telugu explanation, and then presented in the exam format. This approach helps you prepare effectively and aim for top marks in your final exams.

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SAQ-1 : What are the sources of short term finance?

Introduction

Understanding the sources of short-term finance is crucial for businesses to manage their immediate or short-term financial needs effectively.

Sources of Short-Term Finance

1. Trade Credit: Trade credit is a common source where suppliers allow businesses to buy now and pay later, typically within a short period.
2. Bank Overdraft: A bank overdraft allows businesses to withdraw more money than what is available in their accounts, up to an agreed limit.
3. Cash Credit: Cash credit is an arrangement where businesses can borrow up to a certain limit against their inventory or receivables.
4. Short-Term Loans: Banks and financial institutions offer short-term loans that are payable within a year or less.
5. Commercial Paper: Commercial paper is an unsecured, short-term debt instrument issued by corporations, typically for the financing of accounts receivable, inventories, and meeting short-term liabilities.
6. Factoring: Factoring involves selling accounts receivables to a third party at a discount to obtain immediate cash.
7. Accrued Expenses: Utilizing accrued expenses involves delaying payments for expenses that have been incurred but not yet paid.
8. Working Capital Loans: Working capital loans are specifically meant to finance the everyday operations of a company.

Summary

The selection of appropriate short-term finance sources depends on the specific needs, financial condition, and strategic goals of a business. Common sources include trade credit, bank overdraft, cash credit, short-term loans, commercial paper, factoring, accrued expenses, and working capital loans. Each of these sources provides flexibility and immediate financial support to meet short-term obligations.

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SAQ-2 : Differentiate between the equity shares and preference shares. (OR) write the differences between the equity shares and preference shares. (OR) Differentiate between the equity shares and preferential shares.

Introduction

Understanding the differences between equity shares and preference shares is essential for investors and students of finance, as these shares represent different forms of ownership and rights in a company.

Differences between Equity Shares and Preference Shares

1. Voting Rights:
   • Equity Shares: Holders have voting rights in company meetings.
   • Preference Shares: Generally do not carry voting rights.
2. Dividend Payment:
   • Equity Shares: Dividends are variable and depend on the company’s profits.
   • Preference Shares: Dividends are paid at a fixed rate and have priority over equity shares.
3. Capital Repayment:
   • Equity Shares: Repayment of capital is done after the repayment to preference shareholders in the event of liquidation.
   • Preference Shares: Capital is repaid before equity shareholders during liquidation.
4. Risk and Returns:
   • Equity Shares: Higher risk but potential for higher returns.
   • Preference Shares: Lower risk with fixed returns.
5. Arrears of Dividend:
   • Equity Shares: Dividends are not cumulative; unpaid dividends do not accumulate.
   • Preference Shares: Often have cumulative dividends, where unpaid dividends accumulate until paid.
6. Convertible:
   • Equity Shares: Non-convertible.
   • Preference Shares: May be convertible into equity shares.

Summary

Equity shares and preference shares differ in aspects such as voting rights, dividend payments, capital repayment, risk and returns, arrears of dividend, and convertibility. Equity shares offer voting power and potentially higher returns but come with greater risk, while preference shares provide fixed dividends and priority in capital repayment but usually lack voting rights and offer lower risk. Understanding these differences is crucial for making informed investment decisions.

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SAQ-3 : Differentiate between a share and a Debenture. (OR) Write the differences between shares and Debentures. (OR) Differentiate between shares and debentures.

Introduction

Understanding the differences between shares and debentures is vital for students and investors, as these are two fundamental financing instruments used by companies.

Differences between Shares and Debentures

1. Nature of Instrument:
   • Shares: Represent ownership in a company.
   • Debentures: Are a form of debt.
2. Return on Investment:
   • Shares: Dividends depend on the company’s profits.
   • Debentures: Interest is paid at a fixed rate regardless of profit.
3. Repayment:
   • Shares: Not repayable during the lifetime of the company.
   • Debentures: Repayable after a fixed period.
4. Voting Rights:
   • Shares: Shareholders have voting rights in company meetings.
   • Debentures: Debenture holders do not have voting rights.
5. Risk:
   • Shares: Higher risk due to variability in dividends.
   • Debentures: Comparatively lower risk as interest payments are fixed.
6. Security:
   • Shares: Generally not backed by any collateral.
   • Debentures: Often secured by a charge on the company’s assets.
7. Status in Liquidation:
   • Shares: Shareholders are last to be paid in the event of liquidation.
   • Debentures: Debenture holders are paid before shareholders.

Summary

Shares and debentures differ significantly in their nature, returns, repayment terms, voting rights, risk level, security against assets, and status in company liquidation. Shares represent ownership and offer potential for higher returns but with greater risk, while debentures are a form of debt with fixed returns and lower risk but no ownership or voting rights. Understanding these differences is key to making informed investment and financing decisions.