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Business Finance

Q. Define Business Finance.

Ans: -  According to Howard and Upton, "Business Finance involves a set of administrative functions in an organisation which relate with the arrangement of cash and credit so that the organisation may have the means to carry out its objectives as satisfactorily as possible”.

 Q. Why do business needs funds?

Ans: - Business needs funds to purchase assets and to run day to day operations of the business for the smooth functioning. The needs of the business can be classified as:

  • Fixed capital needs
  • Working Capital Needs

 Q. What are the benefits of Business Finance?

Ans:- (i) Finance helps the firm to meet its liabilities on time.

          (ii) Smooth flow of business activities.

          (iii) Use of Business opportunities.

 Q. What are the source of Business Finance?

Ans: - There are two sources of finance :

(i)      Owner’s Fund.

(ii)    Borrowed Fund.

 Q. Define owner’s fund and Borrowed fund with merits and demerits.

Ans: -   Owner’s Fund: Owner’s fund consists of funds contributed by owners and accumulated profits.

                Features of owner’s fund:

a.       Source of permanent capital.

b.      No security.

c.       Provision of risk capital.

Merits of Owner’s Fund:

a.       Permanent capital.

b.      No security.

c.       Improve credit-worthiness.

Demerits of owner’s fund:

a.       Diffusion of control

b.      Under-utilisation of capital

              Borrowed Fund: It refers to the borrowings of the firm.

                Features of Borrowed fund:

a.       Finance for fixed time

b.      Security required

c.       Regular payment of interest.


Merits of Borrowed Fund:

a.       No interference in decision making.

b.      Interest as an expense.

c.       Fixed rate of interest.

Demerits of Borrowed  fund:

a.       Adequate security required

b.      Fixed liability.


Q. What is the difference between Owners Capital and Borrowed Capital?

Ans: - The difference between Owners Capital and Borrowed Capital is given here:




i.                    TIME

It is specific to time period. It is refundable after sometime.

It is permanent source of capital. It is refundable only in case of winding up.

ii.                  SECURITY

It requires assets of the company.

It does not require any security.

iii.                RISK

Borrowed capital is not risky.

Ownership capital is subject to risk.

iv.                 CONTROL

No control over management.

It has right to control over management.

v.                   RETURN

Interest is the return.

Profit is the return and it is paid when company earns profit.


 Q. What is the source of Long term & short term finance?

Ans: - Sources of Long term Finance:

  • Equity Shares
  • Preference Shares
  • Retained Shares
  • Debentures
  • Loan from Banks and Financial institutions

Sources of Raising Short term Finance

  • Trade credit
  • Factoring
  • Loan from Banks
  • Commercial paper

 Q. What do the debentures represent?

Ans: - Borrowed Capital of the company.

 Q. For what the term redeemable is used for?

Ans: - Preference Shares.

 Q. What is the source of raising the Public Deposits?

Ans: - The Public.

  Q. What is equity shareholders called?

Ans: - Owners of the company.

 Q. What is the maturity period of Commercial Papers?

Ans: - The maturity period of commercial paper ranges from 90-364 days.

 Q. From where internal source of capital is generated?

Ans: - It is generated within the business.

 Q. Funds required for purchasing current assets comes under which head?

Ans: - Working capital Requirement

 Q. Define the term convertible debentures.

Ans: - Convertible debentures are when the debenture holders get the right to convert equity shares into debentures at the time of issue of debenture.

 Q. Define Shares. What are two types of Share?

Ans: - When the capital of a firm is divided into certain number of units .These units are called shares. The share of a company is a movable property, transferable in the manner provided by the articles of the company.

The share capital is regarded as owned capital. It is permanent source of finance. It can meet the fixed capital requirement. Shares may be of two types:

                     I.      Preference Shares

                    II.      Equity Shares 

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