The following are a few major types of assets. The basic difference between these two lies in the fact that how liquid the assets are, i.e. A short-term loan, for up to three years. Give reasons for your answer. It makes its procedure difficult. Answer: Equity shareholders get return only when profits is left after paying interest on debentures and fixed return on preference shares. It is calculated by dividing the total value of all the assets in a portfolio, minus all its liabilities. Answer: Debenture holders are creditors of the company. Short Answer Type Questions These funds are required to prepare and implement a rectification plan by 30 June 2021. Debentures represent Reserve Margin Working Capital is nothing but the amount of capital kept aside apart from the regular working capital. (c) Owner’s Funds and Borrowed Funds All these factors need to be paid for their services. Question 6. Answer: Trade credit is the credit extended by one trader to another for the purchase of goods and services. That is, how efficiently a business utilizes its short term assets to meet its day-to-day cash requirements. (d) Internal Sources and External Sources It reduces the probability of bad debt-debtors. Current Assets . In addition to the balance sheet presentation, note disclosure regarding the method of accounting for inventory should be made. Question 1. Name any three special financial institutions and state their objectives. Some current assets are expected to be used and converted into cash for less than one year. Preference shares are not suitable for which kind of investors? Mutual fund. II. What do you mean by discounting of bills of exchange? Explain. Since they do not carry voting rights, preference shares avoid diluting the control of existing shareholders while an issue of equity shares would not. (c) Executives of the company (d) Guardian of the company Current assets are the group of liquidity assets or resources controlled by the entity and have a useful life for less than one year. Bank lending is still mainly short term, although medium-term lending is quite common these days. Firm increases the amount of long-term liabilities raising the amount of interest payments to the lenders. This guide is designed to help you as a self-managed super fund (SMSF) trustee when valuing assets for superannuation purposes. It is a negotiable instrument and can be traded freely like any other security. Answer: Question 5. GDR can be issued to anyone but ADRs can be issued only to an American citizen. Answer: A business needs finance because: Question 3. Answer: No business can be started, run or expanded without finance. 5,00,000 in exchange for machinery worth Rs. In other words, it is the cost of purchasing a substitute asset for the current asset being used by a company. It is difficult especially when size of deposits is large. They do this by taking the current value of all a fund's assets, subtracting the liabilities, and dividing the result by the total number of outstanding shares.. A fund's share price is known as the net asset value (NAV). 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. (a) Produces and distributes the goods or services The use of retained earnings as opposed to new shares or debentures avoids issue costs. (c) Equity shares (d) Public deposits Answer: Equity shares are the most important sources of raising long term capital by a company. No business can be carried without availability of adequate funds. What is lease financing? The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. State the merits and demerits of public deposits and retained earnings as methods of business finance. What is the difference between internal and external sources of raising funds? Answer: Debentures are similar to shares, however, debenture holders do not have voting rights on how the business is run. Explain. Current asset accounts include the following: Cash in Checking: Any company’s primary account is the checking account used for operating activities. Commercial paper is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. It emphasizes accountability rather than profitability, and is used by Nonprofit organizations and by governments. So, for example, less-risky investments like certificates of deposit (CDs) or savings accounts generally earn a low rate of return, and higher-risk investments like stocks generally earn a higher rate of return. Differentiate between: Net assets can now be combined into these three categories and you are no longer required to track each fund individually. Fund accounting is an accounting system for recording resources whose use has been limited by the donor, grant authority, governing agency, or other individuals or organisations or by law. The risk of obsolesce is borne by the lessor. Question 20. Definition: Replacement cost is the amount of money required to replace an existing asset with an equally valued or similar asset at the current market price. Question 2. Funds required for purchasing current assets is an example of The fair market value of the target assets is often greater than the historical cost tax basis of the target assets (i.e., a “step-up” in the asset tax basis). If he wants perfect certainty, he should invest in public deposits or debentures as rate of return is pre fixed. The financial need of a business can be categorized in the following ways: Question 2. Current Restricted Funds: A restricted fund holds donated assets with the expectation that they’ll be used for a particular purpose. Used to fund long-term or future needs. Should he invest in equity shares, preference shares, public deposits or debentures? Bank Credit: Borrowings from banks are an important source of finance to companies. There can be mortgage debentures i.e. Typically only companies with high credit ratings and creditworthiness issue commercial paper. List different types of finance. The normal business operations may be affected if lease is not renewed. You may need to download version 2.0 now from the Chrome Web Store. In an NGO's annual audited financial statements, fixed assets are commonly accounted for in a variety of ways by different NGOs around the world. The debt is usually issued at a discount, reflecting prevailing market interest rates. Required Capital Asset Disclosures Capitalization policy Policy for estimating useful lives of assets Beginning and end of the year balances, including accumulated depreciation Acquisitions during the year Sales or other dispositions during the year Depreciation expense for the current period Why collections (e.g., works of art or What are retained earnings? What is the status of debenture holders? 1. [[For example, legal and accounting expenses. 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Explain. Question 10. Question 1. Maturities on commercial paper can range up to 365 days. Redeemable preference shares are normally treated as debt when gearing is calculated. Answer: IDR is an instrument in the form of a depository receipt created by the Indian depository in India against the underlying equity shares of the issuing company. 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 The fixed assets were scrapped and written off as having no value. Answer: The differences between interned and external sources of raising funds are summarized in the table given as follows: Question 4. The dividend policy of the company is in practice determined by the directors. Question 7. Therefore, it is called risk capital as it bears maximum risk. In lieu of these preferential rights, their voting rights are taken i.e. Question 25. What is business finance? Sellers often require proof of funds from a home buyer when that buyer is obtaining a mortgage. Question 3. Example: Receiving 80% of debtors’ outstanding debt on selling fabric abroad. Question 8. (a) 3. Short Answer Type Questions Debt service funds are used to report current financial resources, not long-term debt. (c) Owner’s Funds and Borrowed Funds Both intangible and tangible capital expenditures are usually considered as assets since they can be sold when there is a need.It is important to note … Debenture holder is a creditor of the company and cannot take part in the management of the company while a shareholder is the owner of the company. Each example of the Working Capital below states the topic, the relevant reasons, and additional comments as needed. Discuss its pros and cons. 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. Assets of the company cannot be mortgaged in favor of shareholders. They cannot be secured on the company’s assets. However, it is true that the use of retained earnings as a source of funds does not lead to the payment of cash. Recommended Articles. It never makes lessee the owner of the asset. assets of the company can be mortgaged in favor of debenture holders. if they can be converted into cash within one year, then they are considered as current asset while when the asset took long time for transforming into cash, then it is known as fixed assets. they are not eligible for voting. It facilitates the purchase of supplies without immediate payment. 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. A segregated fund or seg fund is a type of investment fund administered by Canadian insurance companies in the form of individual, variable life insurance contracts offering certain guarantees to the policyholder such as reimbursement of capital upon death. (d) 5. Answer: Retained Profits: For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. Answer: Size of business and nature of business. (a) Fixed capital requirement (b) Ploughing back of profits Answer: A large industrial enterprise can raise capital from the following sources. Merits of Trade Credit. Under GASB 34 , these noncurrent activities are reported on the government-wide statements only. The example below demonstrates the problematic nature of this particular rule of thumb for two RIAs of similar size, but widely divergent fee structures and profit … (c) 4. Many SMSFs will experience a drop in asset values due to the economic impact of COVID-19. 7. it also gives guidance on which policy may be most appropriate for your circumstances. Both the concepts of working capital have their own points of importance. Current assets are the key assets that your business uses up during a 12-month period and will likely not be there the next year. Answers: If the amount of inventory on hand at year-end is significant, the value of such inventory should be recorded as an asset. A preapproval letter isn't always enough. Debt factoring is a financial service that allows a business to raise funds based on the value owed to them by their debtors. Describe briefly the factors responsible for selecting a source of finance. Return to main page. Question 19. Answer: Various sources of long term funds include: Equity shares, preference shares, debentures, retained earnings, loans from financial institutions, loans from commercial banks etc. If transactions are not a current resource or use, they are not reported in the operating fund of the fund financial statement (for example, capital assets or long-term liabilities). (a) Share profits earned by the lessor 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. Identifying non-operating assets is an important step when determining the current value of a company since such assets are often left out when calculating the net worth of a business based on its earnings potential. Long-Term debt they do not get a fixed rate and dividend is given these. Whereas debentures can be started, run or expanded without finance amount by which the company is in determined... 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