Merits : The merits of retained earning as a source of finance are as follows : 1. 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. (a) Canada (b) China Business is concerned with production and distribution of goods and services for the satisfaction of needs of society. (a) Produces and distributes the goods or services They also have a right to participate in the premium at the time of redemption. A financial instrument used by private markets to raise capital denominated in either U.S. dollars or Euros. What factors determine working capital and fixed capital requirements of a business? Debenture put a permanent burden on the earnings of a company. assets of the company can be mortgaged in favor of debenture holders. Describe briefly the factors responsible for selecting a source of finance. For example, alternation and modification in assets may not be allowed. Retained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company and it is shown as the part of owner’s equity in the liability side of the balance sheet of the company. Describe in brief the features of equity shares. Chapter 7.18 - Merits/Advantages of Retained Earnings - Class 11th Business Studies Sources of Business Finance In this video we'll learn about - Merits of Retained Earnings… It may increase the process of equity shares of a company. Advantages of Retained Earnings. These are called retained earnings. A bank certificate issued in more than one country for shares in a foreign company. Answer: Equity shareholders get a return only when profits are left after giving interest to debenture holders and preferential dividend to preference shareholders. What are its advantages and limitations? Concept Notes & Videos 295. It renders safety to their investment in the company as the company as the company can withstand the shocks of trade cycles and the uncertainty of the financial market with ease, preparedness and economy. Retained earnings is the part of profits of the company that is retained out of profits of the company for future use thus reinvestment also called ploughing back of profits or retention of profit. Without non-recourse factoring, the company will still have to absorb losses. Merits : The merits of retained earning as a source of finance are as follows : Powered by Discourse, best viewed with JavaScript enabled, Explain any five merits of 'retained earnings' as a ' source of finance. Question 25. The dividend yield traditionally offered on preference dividends has been too low to provide an attractive investment compared with the interest yields on loan stock in view of the additional risk involved. Specify the objective of I.D.B.I. (d) Sell the assets Answer: Retained Profits: For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. 1 answer. The retained earnings (also known as plowback) of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period. 50,00,000 which consists of 10% Debt of Rs.20,00,000, 8% preference share capital Rs. Best answer. Business needs to choose right source of finance to make the best use of it. (b) Short Term Finance and Long Term Finance Question 5. Question 9. Question 5. IV. Business finance refers to the money required for carrying out business activities. 1,00,000 for investment purposes. Simple documentations makes it easier to finance assets. Answer: Different types of debentures that a company can issue are described below: Question 7. Preference shares are not suitable for which kind of investors? List sources of raising long-term and short term finance. State various sources of short and medium term funds. If he wants control in the company or participation in management of the company, he should invest in equity shares. A. Appropriation do not reduce total retained earnings B. TRUE 45. Question 18. (b) Short Term Finance and Long Term finance Pages 103; Ratings 100% (9) 9 out of 9 people found this document helpful. Write a short note on the features of GDRs. If he wants some certainty in returns and also wants something extra in case of huge profits, he should invest in preference shares. P11-4A 1/5/2014 Retained earnings (40,000 shares x $0.50) Dividends payable To record decaration of $0.50 per share (a) 2. There are no restrictions on the issue of debentures at a discount, whereas shares at discount can be issued only after observing certain legal formalities. Bank lending is still mainly short term, although medium-term lending is quite common these days. Redeemable preference shares are normally treated as debt when gearing is calculated. It does not involve any explicit cost in the form of interest, dividend or floatation cost. What are the differences between Equity Shares and Preference Shares? Discuss the financial instruments used in international financing. All Chapter wise Questions with Solutions to help you to revise complete Syllabus and Score More marks in your examinations. Retained earnings are better than other sources of finance because: Retained earnings is a permanent source of funds which an organization can avail of. Question 7. If he is interested in long term investment, he should invest in equity shares. Explain briefly the merits of retained earnings as sources of business finance. 1 Answer. Question 4. Write five reasons to support this statement. The company issued shares of the company's Class B stock. Answer: Following factors responsible for selecting a source of finance: Question 8. Scope of retained earnings is limited by amount of profits. The portion of profits of a business that are not distributed as dividends to shareholders but are reserved for reinvestment back into business is called Retained Earnings. … II. It is difficult for a newly established company to be able to get funds from public deposits. Middle term credit sources include loans from banks, public deposits, loans from financial institutions and lease financing. (c) 4. Justify your answer. It enhances capacity of the business to absorb unexpected losses. Answer: Question 10. asked Feb 1 in Business Studies by Sujata01 (62.1k points) class-11; Welcome to Sarthaks eConnect: A unique platform where students can interact with teachers/experts/students to … List different types of finance. While it is arrived at through the income statement, the net profit is also used in both the balance sheet and the cash flow statement. Answer: Equity shares and retained earnings. A portion of the net earnings may be retained in the business of ruse in future. Answer: Public deposits. Question 1. Answer: They are given some preferences because they are not given voting rights. Sources of business finance is a chapter that furnishes an outline of the different sources from where the finance can be acquired. Provides good long-term finance without losing control of the business. Prepare a 2017 statement of retained earnings for Amos Company. Debentures have certain merits and demerits from business as well as debenture holders point of view. Economical sources of finance: Retained earnings are one of the least costly sources of finance since it does not involve any floatation cost as in the case of raising of funds by issuing different types of securities. For example: X Ltd. has total capital of Rs. Answer: Debenture holders are creditors of the company. (b) Makes the payment on behalf of the client Answer: GDRs have the following features: Question 8. Should he invest in equity shares, preference shares, public deposits or debentures? Restrictive clauses: Bank credit has many restrictive clauses which includes mortgage on company’s assets or ineligibility to raise funds from specific sources. It reduces the probability of bad debt-debtors. It is the basic distinction between a debenture and a share. It can be declared by the directors of the company out of profits only. The use of retained earnings as opposed to new shares or debentures avoids issue costs. The management of many companies believe that retained earnings are funds which do not cost anything, although this is not true. The normal business operations may be affected if lease is not renewed. It may result in higher payout obligations in case the equipment is not found useful and the lessee chooses for premature termination of the lease contact. Retained Earnings (RE) are the portion of a business’s profits Net Income Net Income is a key line item, not only in the income statement, but in all three core financial statements. Retained earnings are better than other sources of finance because: V. Value Based Questions Multiple Choice Questions When easy and flexible trade credit is available, it may induce the firm to indulge in over trading. What is factoring? Short Answer Type Questions NCERT Solutions Class 11 Business StudiesBusiness Studies Sample Papers, I. Types of Debenture 1. Medium-term loans are loans for a period of three to ten years. Terms in this set (11) ... A decrease in the balance of retained earnings ; the only impact on shareholders' equity accounts of treasury stock transactions are: PIC - treasury stock may either increase or decrease, and retained earnings may decrease. What is commercial paper? When period of lease expires, the asset is returned to the lessor. Question 23. Answer: It is not suitable for those investors who want to get a fixed return without failure. Generally, these funds are for working Capital and fixed asset purchases or allotted for debt obligations.. (i) Retained Earning Retained undistributed profits after payment earning refers to of dividend and taxes. Answer: The Lessors. What is the difference between internal and external sources of raising funds? GDR and ADR are similar to each other except: III. sources of business finance; class-11; Share It On Facebook Twitter Email. Answer: Yes, we agree. Merits. Use of retained profit does not involve any cost to be incurred for raising the funds,. Answer: Global Depository Receipts and American Depository Receipts. In lieu of these preferential rights, their voting rights are taken i.e. Example: Receiving 80% of debtors’ outstanding debt on selling fabric abroad. The owner of the asset is called lessor and the party who uses the assets is called lessee. Question 13. Convertible debentures which can be converted into shares at the option of debenture holder can be issued whereas shares convertible into debentures cannot be issued. (d) 5. Give reasons for your answer. He charges fees for the services rendered. What is factoring? If he is interested in short term investment, then he should choose public deposits. Answer: Equity shareholders get return only when profits is left after paying interest on debentures and fixed return on preference shares. Therefore, it is unreasonable to transfer funds to general reserves which are called retained profits if there are exceptionally good profits. Cost of public deposits is generally lower than the cost of borrowings from banks and financial institutions. retained earnings class 11. (b) Participate in the management of the organization Explain in detail the types of debenture a company can issue. Merits The merits of retained earning as a source of finance are as follows: (i) Retained earnings is a permanent source of funds available to an organisation; (ii)It does not involve any explicit cost in the form of interest, dividend or floatation cost; (iii) As the funds … Answer: Equity shares are the most important sources of raising long term capital by a company. Explain. A lessee agreement imposes restrictions on usage of assets.