Classification of sources of finance - class-XI

Public deposits refer to the deposits that are raised by the company or an organization directly from the public. Public deposits are an important source of financing the medium term and long term requirements of a company.

As per the accounting principles to ascertain the profits of the firm, depreciation on fixed assets should be charged against the revenue of the fir by debiting to the profit and loss account. This reduces the profits of the firm. But charging depreciation does not involves any fund. Therefore, the amount of depreciation charged against the revenue of the firm should be  added back to the net profit to estimate the funds from operations, which is a source of fund. Decrease in net working capital is a source of fund.

Share holder's funds = equity share capital + Pref. shares + reserves and surplus - losses
Share holder's fund = net worth = proprietary fund = equity
Equity share holder's fund = share holders fund - pref. shares.

The Asian Development Bank (ADB) has its headquarters in Manila, Philippines. The other options are incorrect: RBI is in Mumbai, IMF is in Washington D.C., and IDA is in Washington D.C.

Early-stage firms often rely on a mix of equity capital (from founders or investors) and short-term debt (like trade credit or bank loans) to manage initial operations.

Operating cycle period = Raw material storage period + Conversion period + Finished goods storage period + average collection period - average payment period.
Increase in WIP (or conversion) period will increase the operating cycle period and this will lead to delay in the operating cycle.

Trading on equity, which is also referred to as financial leverage occurs when a corporation uses bonds, other debt, and prefered stock  to increase its earnings on its common stock.

LEAPS (Long-term Equity Anticipation Securities) are options contracts with expiration dates longer than one year, making them long-term options.

Financing a plan requires aligning the available financial resources with the physical targets set in the plan to ensure feasibility.

Equity shares represent permanent capital (long-term), not medium-term financing. Preference shares and term loans are standard instruments for medium-term capital.

Working capital of an enterprise is used for holding current assets such as stock of material and bills receivables. Working capital refers to the capital which are needed to run day-to-day activities.

A trading concern for example, may require small amount of fixed capital as compared to a manufacturing concern since trading does not involve physical assets for production purpose. Whereas, manufacturing sector requires huge amount of investment.

A stock dividend is a distribution of additional shares to shareholders, which is accounted for by transferring an amount from retained earnings to paid-in capital.

Short term finance is type of business financing where it is obtained for a year or less. The sources of short term finance are: trade credit, cash advance loan and short term borrowings.

Banks typically categorize borrowers into a spectrum of risk, ranging from excellent/good to below average/unsatisfactory, to determine creditworthiness.

A source of funds occurs when there is a decrease in current assets (releasing cash) or an increase in current liabilities (borrowing cash).

Trading on equity refers to the strategy of using debt (borrowed capital) to increase the return on equity for shareholders, provided the return on assets exceeds the cost of debt.

A letter sent to the applicant to whom shares are not allotted is known as Letter of Allotment- this is a true statement. The letter of allotment is mainly useful to the buyer. It contains the details regarding the purchase or sell of the shares.

The process of estimating the fund requirements for a business and specifying the sources of funds is called the financial management for a business. The main sources of funds available to a business are shareholder funds and borrowed funds. The public investment in a company can be done by accumulating capital through equity issue to the public or borrowed funds by issuing debentures and public deposits.

A minimum amount of capital to be collected by company at initial stages is minimum subscription- this is a true statement. The minimum shares the company needs to get from the public out of the total issue by the date of closure is known as minimum subscription.

The classification of funds on the basis of ownership of funds raised by a business or a company are: 

The sources of funds can be categorized on the basis of:

Medium-term sources of funds are usually for a period of more than one year but not exceeding five years in duration. These finances include, loan from commercial banks or financial institutions, lease financing, public deposits, etc.

Every business needs to invest into in current assets. These assets are also known as working capital to facilitate smooth working of day-to-day activities. Short term financing  is raised to cope up with these day-to-day activites to run a business and has to be repaid within a year's time.

Sources of funds that provide funds for a duration of less than one year are:

The funds that are borrowed for less than a year's period of time are known as short-term finances. Some of the sources of short term finances are trade credits, bank credits, customer's advances, cash credit, overdrafts, etc.

Sources of funds can be classified into three categories on the basis of the duration of the financing available. They are : 

Sources of funds can be classified into three categories on the basis of the duration of the financing available. They are : 

The long-term sources fulfil the
financial requirements of an enterprise
for a period exceeding 5 years and
include sources such as shares and
debentures, long-term borrowings and
loans from financial institutions.

The classification of sources of funds on the basis of period are related to the duration of time. The medium-term sources of funds are the ones that provide financing for a time period of more than a year and not exceeding five years of time.

Long-term finance is that which is required for a long period of time, i.e. no less than 5 years . These long-term sources are generally required for the acquisition of fixed assets as these fixed assets are purchased for a long period and are also very expensive than current assets. 

The funds that are required for a long period of time are known as long-term financing. These types of financing is required for a period exceeding 5 years.