Hira Ltd, is a company dealing in organic products. The company requires funds for short term, in order to meet the additional demands during festival season. The financial manager of the company has suggested that the company can borrow funds from Panna Ltd. Panna Ltd is a company dealing in glassware.
(a) Name the source of raising funds that had been suggested by the financial manager of the company.
(b) Also state any three features of the source of finance as identified in part(a) of the question.
4 marks question
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Answers
1. Income Method GNPFC = Compensation of employees + Rent + Interest + Undistributed Profits + Dividend + Net
Factor Income from Abroad + Consumption of fixed capital = 1850 + (400 +500 +900 + 200) + (-) 50+ 100 = 3900
CRORE Note: o GNPFC = NNPFC + Consumption of fixed capital o NNPFC = Compensation of employees + Rent +
Interest + Undistributed Profits + Dividend + Net Factor Income from Abroad o Compensation of employees is
income from work which includes wages and salaries in kind and cash, and contribution to social securities
(a) Trade credit, commercial bank loans, commercial paper, a particular kind of promissory note, and secured loans are the primary sources of short-term financing.
Trade credit: Typically, a business purchases its supplies and materials from other businesses on credit and records the debt as an account payable.
Commercial bank loans: In the short- and intermediate-term money markets, banks play a crucial role.
Commercial paper: Commercial paper is made up of promissory notes from well-known companies that are primarily sold to banks, insurance firms, pension funds, and other businesses.
Secured loans: The majority of short-term business loans are unsecured, so a well-established company's credit score determines whether it is eligible for a loan. Often, a borrower's credit score is insufficient to support an unsecured loan.
(b) Features of Short term financing are:
1) Accessibility: One important aspect of short-term financing is the ease with which funds are made available. Making arrangements for short-term financing is simple.
2) Lower Cost: Short-term financing sources are typically more affordable. It can be made available at a very low-interest rate or interest-free.
3. Flexible: Because it gives the borrower more latitude, short-term financing is flexible. Bank credit is flexible because banks provide a variety of working capital financing options.
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