NIOS Class 12 Business Studies Chapter 11 Short Term Sources of Finance Solutions to each chapter is provided in the list so that you can easily browse throughout different chapters NIOS Class 12 Business Studies Chapter 11 Short Term Sources of Finance and select need one. NIOS Class 12 Business Studies Chapter 11 Short Term Sources of Finance Question Answers Download PDF. NIOS Study Material of Class 12 Business Studies Notes Paper 319.
NIOS Class 12 Business Studies Chapter 11 Short Term Sources of Finance
Also, you can read the NIOS book online in these sections Solutions by Expert Teachers as per National Institute of Open Schooling (NIOS) Book guidelines. These solutions are part of NIOS All Subject Solutions. Here we have given NIOS Class 12 Business Studies Chapter 11 Short Term Sources of Finance, NIOS Senior Secondary Course Business Studies for All Chapter, You can practice these here.
Short Term Sources of Finance
Chapter: 11
Module – 3 Business Finance
INTEXT QUESTIONS 11.1
1. The formula used to calculate Working Capital is–
(i) Current assets – Current liabilities.
(ii) Current liabilities – Current assets.
(iii) Inventory / Current liabilities.
(iv) Current liabilities / Inventory.
Ans: (i) Current assets – Current liabilities.
2. _________ is concerned with the acquisition, financing, and management of assets with some overall goal in mind.
(i) Financial management.
(ii) Profit maximization.
(iii) Agency theory.
(iv) Social responsibility.
Ans: (i) Financial management.
INTEXT QUESTIONS 11.2
1. Complete the following sentences with appropriate choice.
(a) Short-term finance is essential for ________________ day-to-day expenditure (meeting, adjusting).
Ans: Meeting.
(b) Raising funds for short-term purposes is ____________ (costly, economical).
Ans: Economical.
2. Trade Credit can best be described as a form of:
(i) Long-term Capital.
(ii) Medium-term Capital.
(iii) Short-term capital.
(iv) Long-term security.
Ans: (iii) Short-term capital.
INTEXT QUESTIONS 11.3
1. Complete the following sentences with appropriate words/phrases.
(a) While making payment on discounted bill, banks deduct ______________ which is equal to the amount of interest for the period of bill.
Ans: Discount.
(b) When suppliers extend credit to the buyers it is called __________.
Ans: Trade Credit.
(c) Trade credit is for a _________ period of time but bank creditmay be extended. (Specific, uncertain).
Ans: Specific.
(d) Discounting of bill ___________ cash immediately (provides/doesnot provide).
Ans: Provides.
(e) Banks ask for _________________ security while granting cash credit. (collateral/advance).
Ans: Collateral.
2. Which of the following is the best explanation of short-term financing?
(i) Use of money to finance short-term projects.
(ii) Use of credit to finance short-term projects.
(iii) Use of credit that must be paid pack within five years.
(iv) Use of credit that must be paid back within one year.
Ans: (iv) Use of credit that must be paid back within one year.
3. Under the factoring arrangement, the factor:
(i) Produces and distributes.
(ii) Makes the payment on the goods or services behalf of the client.
(iii) Collects the client’s debt.
(iv) Transfer the goods from or account receivables one place to another.
Ans: (ii) Makes the payment on the goods or services behalf of the client.
| TERMINAL EXERCISE |
1. List the various needs of the Business for which funds are required.
Ans: The capital requirements for business are divided into two classes which are discussed as under:
(i) Fixed Capital Every business requires a sufficient amount of fixed capital for beginning its operational activities. As the name indicates, the amount of capital invested in various fixed or permanent assets, which are necessary for conducting the operation of a business is known as fixed capital. These fixed assets might be land, building, machinery, equipment etc. The fixed assets normally do not change their form and cannot be withdrawn from the business at a short notice. They can, however be disposed off. Fixed capital thus are the funds required for the purchase of those assets that are to be used over and over for a long period of time in business.
(ii) Working Capital In balance sheet terms, working capital is the difference between current assets and current liabilities of a business. Current assets refer to those assets, which can be easily changed into cash within a short period of time in the business, in an accounting year. It consists of cash in hand and bank balances, bills receivable, short term investments, and inventories of stocks. While on the other hand, current liabilities are those which are intended to be paid within a short period of one accounting year out of the current assets. It consists of bills payable, short term loans, bank overdraft, dividends payable, taxes payable etc.
2. State the Merits & Demerits of Short-term Capital.
Ans: Merits of short-term Finance:
(a) Economical: Finance for short-term purposes can be arranged at a short notice and does not involve any cost of raising. The amount of interest payable is also affordable. It is, thus, relatively more economical to raise short-term finance.
(b) Flexibility: Loans to meet short-term financial need can be raised as and when required. These can be paid back if not required. This provides flexibility.
(c) No interference in Management: The lenders of short-term finance cannot interfere with the management of the borrowing concern. The management retains their freedom in decision- making.
(d) May also Serve Long-term Purposes: Generally business firms keep on renewing short-term credit. For example, cash credit is granted for one year but it can be extended up to 3 years with annual review. After three years it can be renewed. Thus, sources of short-term finance may sometimes provide funds for long-term purposes.
Short-term finance suffers from a few demerits which are listed below:
(a) Fixed Burden: Like all borrowings interest has to be paid on short-term loans irrespective of profit or loss earned by the organisation. That is why business firms use short-term finance only for temporary purposes.
(b) Charge on Assets: Generally short-term finance is raised on the basis of security of moveable assets. In such a case the borrowing concern cannot raise further loans against the security of these assets nor can these be sold until the loan is cleared (repaid).
(c) Difficulty of Raising Finance: When business firms suffer intermittent losses of huge amount or market demand is declining or industry is in recession, it loses its creditworthiness. In such circumstances they find it difficult to borrow from banks or other sources of short-term finance.
(d) Uncertainty: In cases of crisis business firms always face the uncertainty of securing funds from sources of short-term finance. If the amount of finance required is large, it is also more uncertain to get the finance.
(e) Legal Formalities: Sometimes certain legal formalities are to be complied with for raising finance from short-term sources. If shares are to be deposited as security, then transfer deed must be prepared. Such formalities take a lot of time and create lots of complications.
3. Why is short-term finance a necessity for business enterprises?
Ans: Short-term Finance/Capital refers to financing for a small period normally less than a year. It is also known as Working Capital Financing. Short-term Finance is used for working capital requirement. The availability of short-term funds is essential. Inadequacy of short-term funds may even lead to closure of business. A business might make use of short-term finance to take advantage of an opportunity that may pass them by, otherwise to cover unexpected costs, or to resolve a cash flow issue.
4. List the various sources of short-term finance.
Ans: The various sources of short-term finance are:
(i) Trade credit: Trade credit refers to credit granted to manufactures and traders by the suppliers of raw material, finished goods, components, etc. Usually business enterprises buy supplies on a 30 to 90 days credit. It is the credit extended by the accounts payables.
(ii) Bank credit: Commercial banks grant short-term finance to business firms which are known as bank credit. When bank credit is granted, the borrower gets a right to draw the amount of credit at one time or in instalments as and when needed. Bank credit may be granted by way of loans, cash credit,overdraft and discounted bills.
(iii) Factoring: It is also a similar arrangement like invoice discounting where the accounts receivables of a business are sold to a third party at a price which is lower to the realizable value of the accounts receivable. This purchasing party is commonly known as a factor. These factoring services are provided by both banks and other financial institutions. There are many types of factoring like with recourse or without recourse etc.
(iv) Instalment credit: It is a system under which a small payment is made at the time of taking possession of the goods and the remaining amount is paid in instalments. Instalment money is inclusive of interest.
5. Enumerate the various points of difference between cash credit and bank overdraft.
Ans:
| Cash credit | Bank overdraft |
| It is an arrangement whereby banks allow the borrower to withdraw money up to a specified limit. This limit is known as cash credit limit. Initially this limit is granted for one year. This limit can be extended after review for another year. However, if the borrower still desires to continue the limit, it must be renewed after three years. Rate of interest varies depending on the amount of limit. | When a bank allows its depositors or account holders to withdraw money in excess of the balance in his account up to a specified limit, it is known as overdraft facility. This limit is granted purely on the basis of creditworthiness of the borrower. Banks generally give the limit up to Rs.20,000. In this system, the borrower has to show a positive balance in his account on the last Friday of every month. Interest is charged only on the overdrawn money. Rate of interest in case of overdraft is less than the rate charged under cash credit. |
6. State the merits and demerits of Factoring and Instalment Credit as methods of business finance.
Ans: Merits of Factoring
The merits of factoring as a source of short-term finance are as follows:
(i) Obtaining funds through factoring is cheaper than financing through other means such as bank credit.
(ii) With cash flow accelerated by factoring, the client is able to meet his/her liabilities promptly as and when these arise.
(iii) Factoring as a source of funds is flexible and ensures a definite pattern of cash inflows from credit sales. It provides security for a debt that a firm might otherwise be unable to obtain.
(iv) It does not create any charge on the assets of the firm.
(v) The client can concentrate on other functional areas of business as the responsibility of credit control is shouldered by the factor.
Demerits of Factoring
The demerits of factoring as a source of short-term finance are as follows:
(i) This source is expensive when the invoices are numerous and smaller in amount.
(ii) The advance finance provided by the factor firm is generally available at a higher interest cost than the usual rate of interest.
(iii) The factor is a third party to the customer who may not feel comfortable while dealing with it.
Merits of Instalment Credit:
(i) Immediate Possession of Assets: Delivery of assets is assured immediately on payment of initial instalment (down payment).
(ii) Convenient Payment for Assets and Equipment: Costly assets and equipment which cannot be purchased due to inadequacy of long-term funds can be conveniently purchased on payment by instalments.
(iii) Saving of One Time Investment: If the value of asset or equipment is very high, funds of the business are likely to be blocked if lumpsum payment is made. Instalment credit leads to saving on one time investment.
(iv) Facilitation of Expansion and Modernization of Business and Office: Business firms can afford to buy necessary equipment and machines when the facility of payment in instalments is available. Thus, expansion and modernization of business and office are facilitated by instalment credit.
Demerits of Instalment Credit:
(i) Committed Expenditure: Payment of instalment is a commitment to pay irrespective of profit or loss in the business.
(ii) Obligation to Pay Interest: Under instalment credit system payment of interest is obligatory. Generally sellers charge a high rate of interest.
(iii) Additional Burden in Case of Default: Sellers sometimes impose stringent conditions in the form of penalty or additional interest, if the buyer fails to pay the instalment amount.
(iv) Cash Does Not Flow: Like trade credit, instalment credit facilitates the purchase of assets or equipment. It does not make cash available which can be utilised for all needful purposes.
