Very Short Question and Answers - Sources of Finance - Part 1

Retained earnings are a portion of the net earnings that is kept or retained in the business for future use instead of being distributed as dividends to shareholders.

Trade credit is provided by one trader to another for the purchase of goods and services on credit.

A lease is a contractual agreement in which the owner of an asset allows another party to use that asset in exchange for periodic payments.

Public deposits are raised directly from the public by organisations.

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.

Businesses retain earnings to use them for future expansion, development, or meeting unforeseen expenses.

Trade credit is a short-term source of finance.

The lessor is the owner of the asset who grants the right to use the asset to another party in a lease contract.

The main advantage of public deposits is that they provide companies with funds without diluting ownership or requiring collateral.

Commercial Paper is an unsecured financial instrument.

One benefit of retained earnings is that it does not involve any cost of raising funds such as interest or issuance expenses.

Yes, trade credit helps businesses manage their working capital by allowing them to buy goods and pay for them later, thus easing cash flow.

The periodic payment made in a lease agreement is called lease rent or lease payment.

Organisations, particularly companies, can raise public deposits.

The typical maturity period for Commercial Paper ranges from 7 days to one year.

Retained earnings are shown under the shareholders' equity section in the balance sheet.

Trade credit is important because it provides immediate goods or services without immediate payment, helping businesses run smoothly.

At the end of a lease term, the asset is typically returned to the owner (lessor), or the lessee may have the option to purchase the asset.

Commercial Paper is issued in the form of a promissory note.

One limitation is that retained earnings may not be sufficient for large financial requirements, as they depend on the firm's profitability.