DIP – Sources of finance QUIZ *solutions*Lim Sei Kee @ cK

Matching exercise to test your understanding of the various sources of finance

Section A

1. Trade creditor

Supplier – buy goods now and pay later

2. Bank loan

Fixed sum borrowed for a fixed period from bank

3. Bank overdraft

Facility available from the bank

4. Own money

Entrepreneur invests own cash

5. Hire purchase

Pay for things in instalments

6. Shares

Sell a stake in the company

7. Leasing

Use the machine but do not own it

Answer ALL the following multiple choices questions.

Section B

1. Which of the following is a disadvantage of Capital contributions?

A. High interest charges B. The business only has 30 – 60 days to repay the

owner C. Limited to personal resources D. Interest free because you own the money

1. Which of the following is a disadvantage of Capital contributions?

A. High interest charges B. The business only has 30 – 60 days to repay the

owner C. Limited to personal resources D. Interest free because you own the money

2. No set repayment and no interest charges are advantages of which of the following sources of finance?

A. Internal B. External C. Term loan D. Capital contributions only

2. No set repayment and no interest charges are advantages of which of the following sources of finance?

A. Internal B. External C. Term loan D. Capital contributions only

3. Which of the following is an advantage of a term loan?

A. Readily accessible B. It makes it possible to purchase expensive items C. No interest charges D. Repayment can put pressure on cash flow

3. Which of the following is an advantage of a term loan?

A. Readily accessible B. It makes it possible to purchase expensive

items C. No interest charges D. Repayment can put pressure on cash flow

4. Which of the following statements is False?

A. Internal sources of finance originate from within the business.

B. External sources of finance are usually liabilities C. Bank overdrafts can be used by the business for

any purpose D. There is never any interest charged for the use of

trade credit

4. Which of the following statements is False?

A. Internal sources of finance originate from within the business.

B. External sources of finance are usually liabilities C. Bank overdrafts can be used by the business for

any purpose D. There is never any interest charged for the

use of trade credit

5. Define Trade Credit:

A. Form of external finance that banks and other lenders provide for a specific purpose, paid over a period of time.

B. An internal source of finance referring to the amount of money contributed to the business from the business owners personal resources

C. An external source of finance provided by a bank which allows the account holder to withdraw more than their current account balance

D. A facility offered by some suppliers which allows customers to purchase goods/ services and pay at a later date

5. Define Trade Credit:

A. Form of external finance that banks and other lenders provide for a specific purpose, paid over a period of time.

B. An internal source of finance referring to the amount of money contributed to the business from the business owners personal resources

C. An external source of finance provided by a bank which allows the account holder to withdraw more than their current account balance

D. A facility offered by some suppliers which allows customers to purchase goods/ services and pay at a later date

6. Which of these is a form of an asset that is paid for a certain length of time which allows the business to control and to use it

A. Term loan B. Retain earnings C. Leasing D. Capital contributions

6. Which of these is a form of an asset that is paid for a certain length of time which allows the business to control and to use it

A. Term loan B. Retain earnings C. Leasing D. Capital contributions

 7. Which of the following sources of finance has the least risk?

A. Capital contributions B. Trade credit C. Term loan D. Bank overdraft

 7. Which of the following sources of finance has the least risk?

A. Capital contributions B. Trade credit C. Term loan D. Bank overdraft

8. Reduction of initial payment to acquire assets, little maintenance and repair costs but no ownership of assets is which of the following?

 A. Trade credit B. Bank overdraft C. Retained earnings D. None of the above

8. Reduction of initial payment to acquire assets, little maintenance and repair costs but no ownership of assets is which of the following?

 A. Trade credit B. Bank overdraft C. Retained earnings D. None of the above

9. Which of these is a short term source of finance?

A. Mortgage B. Share issue C. Bank overdraft D. Debenture

9. Which of these is a short term source of finance?

A. Mortgage B. Share issue C. Bank overdraft D. Debenture

10. Which of these sources of finance must be paid back?

A. Retained profit B. Share issue C. Grant D. Bank loan

10. Which of these sources of finance must be paid back?

A. Retained profit B. Share issue C. Grant D. Bank loan

Decide whether each of the 15 sources of finance given can be classed as either Internal or External methods.

Section C

INTERNAL

Selling assets Chasing debtors Owner funds Retained profits Reducing stocks Share capital

EXTERNAL

Issuing shares Leasing Mortgage Overdraft Government grants Hire purchase Loans Trade credit Venture capital

Complete the paragraph so that it makes sense by selecting the correct word from each menu

Section D

There are two main types of finance available to a business. The easiest to use is [ external finance / short term finance / long-term finance / internal finance ]. An example of this would be [ share capital / government grant / retained profit / bank overdraft / bank loan ].

Alternatively a business can use [ external / internal / short term / medium term ] sources of finance, such as [ the sale of assets / owners fund / retained profit / a bank loan ].

If a business is providing jobs in an area of high unemployment they may be able to obtain [ bank loan / trade credit / a mortgage / a government grant ]. The sources of finance used can affect the costs of a business.

For example, if a business obtained computers by using [ trade credit / a lease / owners funds / retained profits ] then they would have to make regular payments. This would make them a [ running cost / start up cost ] rather than a [ running cost / start up cost ]