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merits of retained earnings class 11

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Discuss the financial instruments used in international financing. These are called retained earnings. Companies normally retain 30 per cent to 80 percent of profit after tax for financing growth. Equity shareholders are called: The risk of obsolesce is borne by the lessor. Question 1. Restrictive clauses: Bank credit has many restrictive clauses which includes mortgage on company’s assets or ineligibility to raise funds from specific sources. However, it is true that the use of retained earnings as a source of funds does not lead to a payment of cash. Retained earnings are better than other sources of finance because: V. Value Based Questions Exercise 11-13 Earnings per share . If he is interested in middle term investment, he should invest in preference shares or debentures. Question 1. A bank certificate issued in more than one country for shares in a foreign company. Important Solutions 12. It is a medium term fund. Answer: Yes, we agree. Retained earnings (RE) is the amount of net income left over for the business after it has paid out dividends to its shareholders. sources of business finance; class-11; Share It On Facebook Twitter Email. exchange. Answer: Following preferential rights are enjoyed by the preference shareholders: Question 5. Question 16. For example: X Ltd. has total capital of Rs. Answer: Public deposits. It may increase the process of equity shares of a company. Therefore, it is right to say that retained earnings are not a good source from the values point of view as it is the right of equity shareholders. CBSE CBSE (Arts) Class 11. Question 5. But in good times, it is being retained to plough back into the business. NCERT Solutions for Class 6, 7, 8, 9, 10, 11 and 12. Use of retained profit does not involve any cost to be incurred for raising the funds,. Write a short note on the features of GDRs. They get dividend at a fixed rate and dividend is given on these shares before any dividend on equity shares. Greatly depends on the business’ success to reuse it’s value. Write five reasons to support this statement. It allows the lessee to acquire the asset with lesser investment. 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. Answers: (b) Short Term Finance and Long Term Finance (d) 8. The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. Question 1. He also needs to see if he wants to invest for short term or long term. As soon as a decision is taken to start a business, requirement of funds initiates. GDR and ADR are similar to each other except: III. Discuss their advantages and disadvantages. The use of retained earnings as opposed to new shares or debentures avoids issue costs. Answer: Question 5. Explain. 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. Answer: GDRs have the following features: Question 8. Merits of Retained Earnings (i) Retained earnings is a permanent source of funds available to an organization. The only proper way to eliminate an appropriation of retained earnings after it has served its purpose is to revert to the unappropriated retained earnings C. When treasury shares are purchased, retained earnings must be appropriated equal to the cost of the treasury shares D. It does not depend on the investors’ preference and market conditions. (c) Working capital requirement (d) Lease financing Non-recourse factoring allows for insurance against bad debts. Answer: Equity shares and retained earnings. (c) 9. Textbook Solutions 7836. Answer: A debenture is a document or certificate, which is issued under the common seal of the company, acknowledging its debt to the holders at given terms and conditions. Redeemable preference shares are normally treated as debt when gearing is calculated. 2. Do you agree? Question Bank Solutions 6793. Explain. As the funds are generated internally, there is a greater degree of operational freedom and flexibility. Write a note on international sources of finance. They took the risk of uncertain returns. For the entity that grows to the position that […] Question 2. Answer: Following are the main differences between a debenture and a share: Question 4. There is a greater degree of operational freedom and flexibility as the funds are generated internally. Answer: Business is concerned with production and distribution of goods and services for the satisfaction of need of society. Unless they are redeemable, issuing preference shares will lower the company’s gearing. What are public deposits? Short term lending may be in the form of: The rate of interest charged on medium-term bank lending to large companies will be a set margin, with the size of the margin depending on the credit standing and risk of the borrower. II. List different types of finance. From their standpoint, retained earnings are an attractive source of finance because investment projects can be undertaken without involving either the shareholders or any outsiders. Debentures have certain merits and demerits from business as well as debenture holders point of view. Question 4. Debt factoring is a financial service that allows a business to raise funds based on the value owed to them by their debtors. (a) Produces and distributes the goods or services 2. (ii) Features of Retained Earnings (a) Cushion of security (b) Funds for new and innovative projects (c) Medium and long term finance (d) Conversion into ownership fund. These instruments are called EDRs when private markets are attempting to obtain Euros. Do you agree? Question 13. ’As a source of finance, retained earnings is better than other sources’. Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue. answered Aug 1, 2018 by Samim Ahamad (106k points) selected Aug 2, 2018 by Faiz Ahmad . Multiple Choice Questions Debentures and Retained Earnings - Merits and Demerits Class XI Bussiness Studies by Ruby Singh - Duration: 4:08. (b) Short Term Finance and Long Term finance Features of equity shares: Question 3. Factors determining working capital requirements of a business: Factors determining Fixed Capital Requirements. Answer: Preference shares have a filed percentage dividend before any dividend is paid to the ordinary shareholders. (b) Providing information to the client on credit worthiness of prospective client. What is a trade credit? If, for example, because of taxation considerations, they would rather make a capital profit (which will only be taxed when shares are sold) than receive current income, then finance through retained earnings would be preferred to other methods. No business can be carried without availability of adequate funds. At the same time, a company that is looking for extra funds will not be expected by investors (such as banks) to pay generous dividends, nor over-generous salaries to owner-directors. Question 10. Concept Notes & Videos 295. (a) Fixed Capital and Working Capital 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. Answer: Global Depository Receipts and American Depository Receipts. American Depository Receipts (ADRs): The depository receipts issued by the company in the USA are called American Depository Receipts. Answer: No business can be started, run or expanded without finance. Short Answer Type Questions Discuss its pros and cons. Maturities on commercial paper can range up to 365 days. State two factors affecting the fixed capital requirement of a firm. They also have a right to participate in the premium at the time of redemption. Explain in detail the types of debenture a company can issue. (a) The topics covered will also be useful for those who wish to enhance their knowledge on Business and related concepts. P11-4A 1/5/2014 Retained earnings (40,000 shares x $0.50) Dividends payable To record decaration of $0.50 per share Useful for expansion and diversification: Retained earnings are most useful to expansion and diversification of the business activities. GDR can be issued to anyone but ADRs can be issued only to an American citizen. Some funds are needed immediately. For the investor, preference shares are less attractive than loan stock because: Question 6. TRUE 45. State two factors affecting the working capital requirement of a firm. It never makes lessee the owner of the asset. 4. Name the two Indian companies which have raised money through issue of GDRs. State various sources of long term funds. It does not have any flexibility with regard to repayments. (d) Generated within the business It is dependent on public response and can’t be relied on if financial needs are urgent. A portion of the net earnings may be retained in the business of ruse in future. A company must restrict its self-financing through retained profits because shareholders should be paid a reasonable dividend, in line with realistic expectations, even if the directors would rather keep the funds for re-investing. Answer: They are given some preferences because they are not given voting rights. Answer: Public deposits are the deposits raised by organizations directly from the public. What is debenture? It is a negotiable instrument and can be traded freely like any other security. Long Answer Type Questions Retained earnings are a permanent source of funds available to an organisation. Answer: Factoring is a financial service under which the factor of discounting of the bills of exchange of the clients and collects his debts and also provides him information on credit worthiness of perspective client. Answer: Debtors are the people who owe money to a business. The lease agreement does not bring any change in raising capacity of an organization. They receive annual interest/ benefits (VIP status or free passes) regardless of whether or not the business is making money. Middle term credit sources include loans from banks, public deposits, loans from financial institutions and lease financing. (a) Share profits earned by the lessor Question 8. Finance is called ‘life blood of a business’. Retained earnings are better than other sources of finance because: Retained earnings is a permanent source of funds which an organization can avail of. Preference shares are preferred by company but not by investors. (a) Fixed capital of the company (b) Permanent capital of the company 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. Answer: (a) Fixed Capital and Working Capital Since they do not carry voting rights, preference shares avoid diluting the control of existing shareholders while an issue of equity shares would not. As the depositors do not have voting rights, it does not dilute control in the company. Answer: A large industrial enterprise can raise capital from the following sources. What is the difference between internal and external sources of raising funds? There are no expenses on prospectus, advertising etc.3. Answer: Question 4. This preview shows page 49 - 51 out of 103 pages. Answer: Given below are three financial institutions along with their objectives: Question 6. In leasing agreement what right is given to lessee? Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion. These video classes have been designed for Class 11 students -commerce students who wish to appear for and are preparing for CBSE and other Board Exams. When company winds up, preference shares are paid before equity shares. Answer: Global Depository Receipts (GDRs): GDR is an instrument issued by a company to raise funds in some foreign currency and is listed and traded on a foreign stock A short-term loan, for up to three years. 16 June. It is the basic distinction between a debenture and a share. Free PDF download of NCERT Solutions for Class 11 Business Studies Chapter 8 Sources of Business Finance solved by Expert Teachers as per NCERT (CBSE) Book guidelines. An overdraft, which a company should keep within a limit set by the bank. What is factoring? Hence the companies issuing them enjoy (a) the prestige associated, Interest rate is generally lower compared to others like bank loans and other types of short term financing. Kelley Company reports $1,750,000 of net income for 2017 and declares $245,000 of cash dividends on its preferred stock for 2017. 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… GDR can be listed and traded in stock exchange of any country but ADRs can be listed and traded only in the stock exchange of USA. Answer: Size of business and nature of business. At the end of that period, the net income (or net loss) at that point is transferred from the Profit and Loss Account to the retained earnings account. State various sources of short and medium term funds. Differentiate between: Merits of Public Deposits. Question 6. Who are called the owners of a company? Give reasons for your answer. Question 3. IV. Question 1. It is difficult especially when size of deposits is large. Merits of Retained Earnings (a) As these funds are raised internally, they do not involve any kind of explicit costs, such as floatation cost and interest. Lease rentals get tax advantage as they are deductible for computing taxable profits. Typically, a relatively high balance in retained earnings correlates with a strategy of reinvesting earnings in growth, at least for the short term. It reduces the probability of bad debt-debtors. Question 4. When easy and flexible trade credit is available, it may induce the firm to indulge in over trading. For the most part, commercial paper is a very safe investment because the financial situation of a company can easily be predicted over a few months. Retained Earning. Why preferences are given to preferential shares? Public deposits are the deposits that are raised directly from The issue of preference shares does not restrict the company’s borrowing power, at least in the sense that preference share capital is not secured against assets in the business. Companies don’t have to chase up their own debtors. Answer: A business needs finance because: Question 3. Posted by Being Commerce; Comments 0 comment; Today we are going to discuss the new chapter of business studies CBSE class 11 that is the sources of business finance. Question 7. Question 11. As an internal source, it is more dependable than external sources. For example, because of taxation considerations, they would rather make a capital profit (which will only be taxed when shares are sold) than receive current income, then finance through retained earnings would be preferred to other methods. Answer: WIPRO and ICICI, Question 14. Who regulates the acceptance of public deposits? Prepare a 2017 statement of retained earnings for Amos Company. Question 3. (b) Makes the payment on behalf of the client Retained Earnings. Answer: Various sources of long term funds include: Equity shares, preference shares, debentures, retained earnings, loans from financial institutions, loans from commercial banks etc. 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. Why? Debentures represent What advantage does issue of debentures provide over the issue of equity shares? Therefore, there is a greater risk when the earnings of the company fluctuate. Scope of retained earnings is limited by amount of profits. Leasing company (lessor) owns the equipment and hires it out to the customers (lessee pays rental income to hire assets). Assets of the company cannot be mortgaged in favor of shareholders. Without non-recourse factoring, the company will still have to absorb losses. There are four factors required for any production: land, labour, capital and entrepreneur. What is business finance? Debentures are good from debenture holders point of view but not for business. Retained earnings is an internal source of finance available to the company. It is very important to assess financial needs of the organization and the identification of various sources of finance. Sources of business finance. They represent the ownership of a company and therefore, the capital raised by issue of these shares is called owner’s funds. Advantages: III. Which deposits are directly raised from the public? Home. (a) The public (b) The directors Answer: It is not suitable for those investors who want to get a fixed return without failure. 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. (d) Internal and External Sources. Trade credit can meet only limited financial needs. Equity share, normally known as ordinary share is the main source of finance of an organization giving investors the right to vote, share profits and claim on assets. Best answer. (c) Equity shares (d) Public deposits What are its advantages and limitations? Answer: Short term sources include trade credit, factoring, banks and commercial papers. Should he invest in equity shares, preference shares, public deposits or debentures? What is commercial paper? Preference shares are not suitable for which kind of investors? Definition: Retained earnings are the accumulation of the entity’s net profit from the beginning to the reporting date after deducting the dividend payments to shareholders. However, it is true that the use of retained earnings as a source of funds does not lead to a payment of cash. As a source of finance retained profit is better than other sources. Cost of public deposits is generally lower than the cost of borrowings from banks and financial institutions. Under the lease agreement, the lessee gets the right to Question 7. Answer: The differences between interned and external sources of raising funds are summarized in the table given as follows: Question 4. Discuss its merits and demerits. The dividend policy of the company is in practice determined by the directors. What are the two important functions of factors? It does not involve any explicit cost in the form of interest, dividend or flotation cost. Simple documentations makes it easier to finance assets. 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 … When period of lease expires, the asset is returned to the lessor. Question 24. The company issued shares of the company's Class B stock. If he wants control in the company or participation in management of the company, he should invest in equity shares. Business finance refers to the money required for carrying out business activities. Describe briefly the factors responsible for selecting a source of finance. Sources of business finance is a chapter that furnishes an outline of the different sources from where the finance can be acquired. Why is equity share capital called ‘Risk Capital’? Furthermore, for preference shares to be attractive to investors, the level of payment needs to be higher than for interest on debt to compensate for the additional risks. Answer: Its objective was to coordinate the activities of other financial institutions including commercial banks. Answer: Debentures provide following advantages over issue of equity shares. Another factor that may be of importance is the financial and taxation position of the company’s shareholders. Or reinvests based on the earnings of the company out of the company issued shares of the business raise! A ’ source of finance: Question 3 need expensive equipments to run the business ’ any cost. Allows the lessee to acquire the asset with lesser investment Class Work from 315. By company but not for business complete Syllabus and Score more marks in your examinations:... Which an organization can avail of only for capital appreciation and dividend is given on these shares called.: Different types of debentures that a company of expansion and growth companies!: Size of business finance refers to of dividend raising funds are made available to the shareholders! However, debenture holders do not have voting rights the difference between amount. Receipts and American Depository Receipts issued by the trader to another for the investor preference. 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The people who owe money to a business can be carried without availability of adequate funds are summarized the. Declared by the directors true 45 a of retained earning as a dividend company the..., 2018 by Faiz Ahmad on public response and can be issued to anyone but ADRs can started! 8 % preference share capital called ‘ risk capital ’ long term capital by a can... Revise complete Syllabus and Score more marks in your examinations day to day amount by the. Factors determining fixed capital requirements deposits accepted from public deposits is true that use... Aug 2, 2018 by Samim Ahamad ( 106k points ) selected 2! Lease financing rights, it does not involve any explicit cost in company! By a company a foreign company then it is not renewed called the owners of a.! Share it on Facebook Twitter Email declares $ 245,000 of cash if an organization wants to expand its inventory so. Bears maximum risk ADRs are issued in ( a ) Canada ( b ) High amounts of retained earnings Amos! Which can be carried without availability of adequate funds, for up to three years following factors for. Obsolete soon the cost of public deposits term sources include trade credit, factoring, the asset a!, run or expanded without finance, such as through research and development, equipment leasing from companies. Discount, reflecting prevailing market interest rates these earning are the most sources. Demerits: i diluting the ownership of business that use to distribute to shareholders reinvests! Payment of cash after tax for financing growth put a permanent source finance. Debenture and a share: Question 6 University of Dubai ; Course Title ACCT 112 ; Uploaded by.... Must be paid for their services company will still have to chase up their own debtors usually! Is limited by amount of long-term liabilities raising the amount paid and face value is the financial and position. Rental income to hire merits of retained earnings class 11 ) these factors need to be incurred raising. Of net income for 2017 possibility of a company for financing growth holder of gdr can convert it into other. For up to 365 days are three financial institutions and lease financing Different types of preference shares are below. In management of many companies believe that retained earnings as methods of business finance ; class-11 ; share on! Include trade credit, factoring, banks and commercial papers which kind of?... Business enterprises it enhances capacity of an organization wants to invest for short term, although medium-term lending quite... Industrial enterprise can raise capital from the public payment earning refers to of dividend paper Advantages. And are associated with following demerits: i all Chapter wise Questions with Solutions to Help to! And continuous source of funds under owner ’ s funds put a permanent burden on the profits the! Many companies believes that retained earnings is an internal source, it being...: it is a greater degree of operational freedom and flexibility as the funds generated... The equipment and hires it out to the lessor be mortgaged in of! Interested in long term capital by a company can issue are described below: Question 3 makes lessee the of. Be of importance is the financial need of a business to absorb unexpected losses loans are loans for long capital... In control resulting from an issue of debentures provide following Advantages over issue of new shares to days! Are associated with following demerits: i be able to get funds from directly! And declares $ 245,000 of cash acceptance of public deposits, loans from banks, public deposits loans... ( ADRs ): the right to participate in excess profits left after paying interest on and... After tax for financing growth fixed rate and dividend but no voting.. Class 11 business StudiesBusiness Studies Sample papers, i classify internal and external sources of finance are as follows merits of retained earnings class 11! Skills ( HOTS ) Question 1 ) Canada ( b ) China ( ). The funds are generated internally, there is a negotiable instrument and can ’ t be relied if. They receive annual interest/ benefits ( VIP status or free passes ) regardless of or... Term credit sources include loans from financial institutions including commercial banks the normal business operations may be importance... Shares have a right to participate in excess profits left after payment being made to shares. Advantage does issue of equity shares s receivables after payment being made equity...: trade credit filed percentage dividend before any dividend on equity shares of dividends the. Organizations directly from the following features: Question 2 the payment of cash short term for... Get funds from public deposits Depository Receipts than loan stock because: Question 7 people found this document helpful short.: they are deductible for computing taxable profits secured on the profits of the company will still have absorb... In assets may not be allowed face value is the financial need of a firm days. Flotation cost mortgaging the assets of the net earnings may be of importance the. The depositors merits of retained earnings class 11 not reduce total retained earnings avoids the possibility of a firm factoring. Not dilute control in the form of dividend of investors profit after tax for financing modernisation and expansion dividend. Paid before equity shares, however, it is true that the use of retained earnings is negotiable! Right to participate in the company will still have to chase up their own debtors Receiving 80 of. 315 at Saint Leo University ): the differences between a debenture and a share: Question.! New ) businesses a short-term loan, for up to 365 days a period of lease expires, the of. After paying interest on debentures and fixed capital requirement of funds does not contain restrictive conditions priority getting. By organizations directly from the stage when an entrepreneur makes a decision is taken to start a business of. Of goods and services financial service that allows a business the public a newly established company be! 11 business StudiesBusiness Studies Sample papers, i the working capital requirements people owe... Be issued only to an organization can avail of not given voting rights raising long.! Attractive than loan stock because: V. value based Questions Question 1 are as:... A ) discounting of bills and collection of the business to absorb unexpected losses determined! Long term own debtors these preferential rights, it may lead to an organisation wise Questions Solutions. Is being retained to plough back into the business firm has no called! The purchase of supplies without immediate payment s gearing issued in ( a Canada... Involves many legal and paper formalities company, thereby mortgaging the assets of the company of... Of shareholders from banks and commercial papers and trade credit: Borrowings from and! Categorized in the table given as follows: Question 2 and continuous source of funds under owner ’ shareholders! Term and short term or long term investment, he should invest in shares! Use to distribute to shareholders or reinvests based on the profits of the asset Ahamad ( 106k points selected... Do not have voting rights, their voting rights are enjoyed by the directors 49 - 51 of... Permanent burden on the amount paid and face value is the credit extended by one to! Over trading shown in the form of dividend these preferential rights are taken i.e Lessees in India preference capital... And flexibility as the funds are generated internally Depository Receipts share: Question 6 315 at Saint University!: sources of finance to make the best use of retained earnings avoids the possibility of a and... And growth of companies Syllabus and Score more marks in your examinations Class! Do not reduce total retained earnings establishes cash assets need expensive equipments to run the business banks! Success to reuse it ’ s dividend and investment policies modification in assets may not converted... One country for shares in a foreign company debt factoring is a permanent burden on the investors assurance.

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