CUET Entrepreneurship-Chapter-Short, medium and long

(b)

Exp: Fixed capital refers to the capital that is invested in the buying of those business assets which are used for a long period in the business such as, furniture, land, building, plant and machinery etc.

(a)

Exp: Working capital refers to the capital needed for fulfilling the everyday requirements of the enterprise such as raw materials, wages of workers, maintenance charges etc.

(c)

Exp: As working capital remains in active circulation in an enterprise for fulfilling its routine requirements. Thus, is known as circulating capital.

(a)

Exp: The size of the business may be one of the determining factors of the working capital requirements of an enterprise. The larger the size of the firm, more can be its working capital requirements.

(b)

Exp: The time period needed for the conversion of raw materials into the finished products ready to be sold is termed as operating cycle. The length of the operating cycle also determines the working capital requirements of an enterprise.

(a)

Exp: As an enterprise can realize cash only when the finished goods are sold or payment is collected from the debtors, thus an efficient enterprise aims at maintaining a short operating cycle.

(a)

Exp: An enterprise sells goods on cash as well as on credit basis. So, when its major portion of sales is on credit basis then it would require more working capital. Moreove, if the credit period is longer, then the working capital requirements increase.

(c)

Exp: If the level of sales turnover of an enterprise is high, then it realizes cash from sales faster. This enables it to maintain a low working capital as the amount available from sales of goods can be invested back into the enterprise.

(a)

Exp: If an enterprise maintains a large stock of raw materials, stock or inventory then it would require maintaining a higher level of working capital.

(b)

Exp: Current assets are those assets of the business which are kept temporarily for resale or for converting into cash. These assts are likely to be realized within a period of one year or during the normal operating cycle.

(b)

Exp: An efficient management of current assets such as cash, stock, bills receivables etc. in an enterprise enables it to invest less into its working capital for carrying on the business.

(a)

Exp: It is very important for an enterprise to have adequate provisions for taxes as it affects its working capital directly. An enterprise has to meet the increased tax liability from its working capital. This increases its working capital requirements.

(a)

Exp: Owner’s capital or owner’s fund is the amount of capital invested by the owners of the companies. As, owner’s fund in a sole tradership form of organization refers to the capital invested by the owner or the sole trader of the company.

(a)

Exp: The amount of capital which is invested by the owner of the business is known as owner’s funds. In a sole tradership form of organisation this is referred to the contribution made by the sole trader as well as the profit reinvested by him.

(a)

Exp: The amount of capital which is invested by the owner of the business is known as owner’s funds. Thus, in a partnership form of organisation, owner’s capital is the capital which is contributed by the partners of the business, who are the owners of the business, and the profit reinvested by them in the enterprise.

(c)

Exp: The amount of capital which is invested by the owner of the business is known as owner’s funds. The owners in a joint stock company are its shareholders thus; the capital realised through issue of shares and the net reserves plus the surplus of the business form the owner’s capital.

(b)

Exp: When an enterprise raises funds by borrowing it from banks or other financial institutions etc. then such fund is referred as borrowed capital.

(a)

Exp: Borrowed funds are the amount of capital borrowed by the entrepreneurs from banks or other financial institutions etc. In a sole tradership enterprise, the loans raised by the sole trader with or without security from friends, relatives and banks represent its borrowed capital.

(a)

Exp: Borrowed funds are the amount of capital borrowed by the entrepreneurs from banks or other financial institutions etc. In a partnership form of organisation, the loans raised by the partner’s wife, friends, relatives and banks represent the enterprise’s borrowed capital.

(c)

Exp: Borrowed funds in a joint stock company are referred to the issue of secured or unsecured debentures, through credit or loans from the banks or other financial institutions.

(a)

Exp: The amount of capital which is invested by the owner of the business is known as owner’s funds. The owner’s funds are not refundable and it provides permanent capital which is used by the entrepreneur(s) for purchasing fixed assets and permanent working capital.

(a)

Exp: Owner’s capital provides risk capital to the enterprise. It is called risk capital because it is the owner who bears the risk in the business due to loss or low profit.

(c)

Exp: The amount of capital which is invested by the owners of the enterprise is known as the owner’s capital. But, in case of lower growth prospects and profit earning capacity, it is difficult to raise owner’s funds.

(a)

Exp: Short term capital is required to hold stock of raw materials, work in progress and finished goods, to meet the manufacturing, administrative, selling and distribution expenses. It is invested in the business for a short period not exceeding one year.

(c)

Exp: Short term capital is required to grant credit to the customers by keeping in mind better marketing and competition in the market. The trade credit ranges from one month to six months.

(b)

Exp: The suppliers of raw materials, stores and spare parts, components and finished goods provide the facility to their customers to pay the amount due within the credit period allowed by them. This arrangement is known as the trade credit.

(a)

Exp: The availability of trade credit depends upon a number of factors like prevailing economic conditions, credit worthiness of the enterprise, nature and size of the business, the credit policy of the suppliers etc.

(c)

Exp: The medium term capital such as public deposits, loans from commercial banks etc. are required to meet expenses on heavy advertising, on renovation of building etc. These remain invested in the business for a period of more than one year but not exceeding five years.

(a)

Exp: The facility of cash credit is provided by the bank to the entrepreneurs against the security of stock, marketable securities or instruments or personal security. The amount limit can be adjusted by the bank according to the requirements of the entrepreneurs and the banking provisions.

(a)

Exp: Bank overdraft is one of the widely used source of short term capital. It is an arrangement between the bank and the entrepreneurs. Entrepreneurs are allowed to overdraw from their bank account within a specified limit, against the securities of assets or personal security.

(a)

Exp: When the manufacturers, suppliers and traders sell the goods to the customers on credit, they generally draw bills of exchange on them who are required to accept them. The term of these bills of exchange may be between three to six months.

(a)

Exp: When the manufacturers, suppliers and traders sell the goods to the customers on credit, they generally draw bills of exchange on them who are required to accept them. Discounting of bills of exchange is a very simple and popular source of short term finance.

(c)

Exp: After the acceptance of bill of exchange by the customers, instead of holding the bill of exchange till the maturity date, the entrepreneurs prefer to get them discounted from the bank. For providing this facility the bank charges an interest from the entrepreneurs.

(b)

Exp: Medium term capital is the amount which is invested in the business for a period of more than one year but not exceeding five years.

(c)

Exp: long term capital is the amount of capital invested in the business for a period of twenty five years and not more than that. It is generally required to finance the permanent working capital.

(a)

Exp: Long term capital which is invested in the business for a long period of time exceeding five years but not exceeding twenty five years is required in the business to finance the fixed assets such as the land, building, furniture, plant and machinery etc.

(b)

Exp: An enterprise raises its long term capital through the sources such as issue of equity shares, issue of preference shares, debentures, term loans and retained profits.

(a)

Exp: Equity shares are those shares which are not preference shares. Equity shares participate in the profits of an enterprise after all preferential rights have been satisfied. The specialty of equity shares is that the company is not bound to pay dividend or profit.

(c)

Exp: The Company gets permanent capital in the form of equity share capital because in case of these shares, money is repaid by the company to the shareholders only on liquidation.

(a)

Exp: The equity shareholders are the virtual owners of the company. They have the right to participate in the management affairs of the company. In other words, they have the powers to control the company.

(a)

Exp: The equity shareholders posses the right to exercise control over the company. They can participate in the management of the company and can exercise their voting rights in the annual general meeting of shareholders.

(c)

Exp: The floatation cost of new equity shares is higher than other sources of finance. The issue of equity shares is a long as well as cumbersome process involving adherence of several rules and regulations.

(a)

Exp: The preference shares are redeemable during the life time of the company. Also, the preference shares are those shares which are entitled to a priority in the return of capital in the event of winding up of the company.

(b)

Exp: Cumulative shares are the shares on which year’s dividend will be paid from the next year’s profit, in case the company does not earn any profit during the year. Unless otherwise stated, preference shares are always deemed to be cumulative shares.

(a)

Exp: Preference shareholders are entitled to a priority in the payment of dividends at a fixed rate before any dividend is paid to equity shareholders.

(b)

Exp: The redeemable preference shares are those shares which are redeemable in accordance with the provisions of sections 80 and 80 A of the companies Act. 1956. These shares are redeemable after a certain period of time by the company i.e. the company takes back them and pays their value to their shareholders.

(a)

Exp: The holders of convertible preference shares have the right to convert their shares into equity shares within a certain time period. Unless stated otherwise, preference shares are always deemed to be non-convertible.

(c)

Exp: Participating preference shares are those shares which in addition to preferential rights, carry the rights to something over and above their fixed dividend and/ or to participate in the surplus assets left after the repayment of capital to equity shareholders on winding up of the company.

(a)

Exp: Palmer defined debenture as a certificate of acceptance of loan which is given under the company’s stamp and it carries an undertaking that the company will return the principal on a certain date.

(a)

Exp: Public deposits are one of the ways in which companies raise term loans. In case of public deposits, maximum period can not exceed 36 months. These deposits are free from any charge on company’s assets as well as are not insured.