Capital- Fixed & Working

Question 1

___________ refers to the money and credit employed in business firms.

Answer 1

Business finance

Question 2

Give two points to explain the nature of business finance?

Answer 2

• it includes all types of capital or find used in business.
• it is needed in all types of business.

Question 3

What is business finance?

Answer 3

It is the money or credit employed in business to carry out business operations smoothly.

Question 4

____________ helps to bridge the gap between production and sales.

Answer 4

Finance

Question 5

If the business has adequate funds, what will happen to its current liabilities and current assets?

Answer 5

If the current liabilities need to be paid, they can be outside on time and if needed, new current assets can be purchased.

Question 6

What is financial planning?

Answer 6

Financial planning is the process of estimating the financial requirements of an organisation, choosing the sources of funds and deciding how the funds are to be utilised.

Question 7

Give any 3 features of financial planning.

Answer 7

• it involves deciding when, how and why of financial activities.
• it is future oriented and involves forecasting.
• it involves deciding objectives, policies, procedures, methods and programs concerning funds.

Question 8

What is capital gearing?

Answer 8

The ratio between equity (owned funds) and debt (borrowed funds) is called capital gearing.

Question 9

Another name for capital gearing?

Answer 9

Financial leverage

Question 10

Mention the terms used for the following equations-:

a) Equity > Debt
b) Equity < Debt

Answer 10

a) Low gearing or Trading on thick equity
b) High gearing or Trading on thin equity

Question 11

What is trading on equity?

Answer 11

When a company uses borrowed funds in the regular conduct of business along with equity capital, it is said to be trading on equity.

Question 12

Another name for trading on equity?

Answer 12

Financial leverage

Question 13

What are the three conditions when trading on equity is desirable?

Answer 13

• rate of earnings is higher than rate of interest and rate of preference dividend.
• the companies earnings are stable and regular.
• there are sufficient fixed assets to offer as security to the lenders.

Question 14

How does exercise of control affect capital structure?

Answer 14

In a company equity shareholders have voting rights and control of the company lies in their hands. If promoters want to retain control in their hands they may not issue additional equity shares, and more funds can be raised by issuing debentures and preference shares.

Question 15

Which companies can afford to have:

a) high gearing
b) low gearing

Answer 15

a) - Public Utilities companies & new companies
b) - Manufacturing companies

Question 16

A good capital structure should be flexible. Throw light on the statement.

Answer 16

A good capital structure should be flexible because whenever the company feels necessary, debenture holders and preference shareholders can be paid off. While raising debt, the company should ensure that there are minimum restrictions in loan agreements.

Question 17

In a good financial structure, the cost of capital should be reasonably __________.

Answer 17

Low

Question 18

_________________ are prohibited from issuing any type of security except equity shares.

Answer 18

Banking companies

Question 19

Which act must be observed while raising funds from the public?

Answer 19

Companies Act, 2013

Question 20

________________ refers to the funds required for acquisition of fixed assets and are meant for generating income.

Answer 20

Fixed capital

Question 21

Another name for fixed capital and why is it called such?

Answer 21

Block capital

It is known as block capital because the funds are blocked up in the fixed assets for the lifetime of the enterprise.

Question 22

Full form of TISCO?

Answer 22

Tata Iron and Steel Company

Question 23

How does the nature of business affect fixed capital?

Answer 23

Manufacturing enterprises as well as public utility undertakings require heavy investment in fixed assets, therefore they need more fixed capital.

Training concerns, require less investment in fixed capital.

Question 24

How does method of production affect fixed capital?

Answer 24

Capital-intensive techniques of production such as automatic machinery require higher amount of fixed capital as compared to a company employing labour-intensive techniques such as hand tools.

Question 25

What is working capital?

Answer 25

Working capital means the capital invested in working assets or current assets. It represents the liquid funds which are required for the day to day operations of an enterprise.

Question 26

Other names for working capital and why is it called such?

Answer 26

Working capital is also known as circulating capital or revolving capital because it keeps on circulating or revolving in business. It is invested, recovered and reinvested repeatedly during the operating cycle.

Question 27

What is the major difference between gross working capital and net working capital?

Answer 27

Gross working capital refers to the total amount of funds invested in current assets.

Networking capital represents the excess of current assets over current liabilities.

Question 28

What are the two types of working capital?

Answer 28

1. Permanent working capital - it refers to the working capital required permanently to operate minimum level of business activity.
2. Temporary working capital -it refers to the addition to the permanent working capital.

Question 29

What are the two types of permanent working capital?

Answer 29

• Initial working capital- it is required at the time of commencement of business.
• Regular working capital- it is required for continuous business operations.

Question 30

What are two types of temporary working capital?

Answer 30

• Seasonal working capital- it refers to the extra working capital required during the particular season.
• Special working capital - it refers to the extra funds required to meet future contingencies that may arise in business

Question 31

How does the nature of business affect working capital?

Answer 31

Manufacturing firms require considerable working capital because they have to build up stock of raw materials and finished products.

Public utility undertakings required less working capital as they do not have to maintain inventory.

Question 32

How does the manufacturing cycle affect working capital?

Answer 32

Longer is the time gap between purchase of raw materials and production of finished goods, higher is the need for working capital.

Question 33

If a company purchases goods and services on credit and sells them in cash, would it require less working capital or more working capital?

Answer 33

It would require less working capital.

Question 34

In case of a liberal credit policy, what will be the condition of working capital?

Answer 34

More working capital is required.

Question 35

How does seasonal variations affect working capital?

Answer 35

Working capital requirements are subject to seasonal variations and are comparatively high during a particular season.

Question 36

How does cyclical fluctuations affect working capital?

Answer 36

Cyclical changes create emergency demands for working capital. During boom period there is need for larger working capital to support higher.

Question 37

What are the sources of fixed capital?

Answer 37

Shares, debentures, long-term loans, etc

Question 38

What are the sources of working capital?

Answer 38

Public deposits, trade credit, short-term loans from banks, etc

Question 39

Which process enables the management to foresee the fund requirements?

Answer 39

Financial planning

Question 40

You completed this chapter, also what will you say to yourself?

Answer 40

YIPPEEEEEEEEEEEEEEE 🎉🥂