Pluto Electricals Ltd. has been successfully manufacturing electrical accessories for the past ten years. As the profit margin is good, the company has been managing all the financial requirements of the business through the profits reinvested in the business. Identify the source of finance being mentioned in the given case and state its four merits.
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Source of Finance: Retained Earnings.
Merits:
- Retained Earnings provide greater operational freedom and flexibility to the firm.
- Retained Earnings do not create any sort of charge against the capital of the firm.
- Retained Earnings are a permanent source of funds.
- Retained Earnings increase the capacity of the firm to absorb unexpected losses.
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Owner's fund :- Retained earnings.
The source of finance used in the case of Pluto Electricals Ltd. is retained earnings which are a part of owner's fund. Retained earnings are total net profits of the company that is saved after all operations.
Merits of retained earnings :-
1) If your company has more retained earnings, it will make the financial situation of your company look better.
2) It helps your company to be financially stable when suffering from unexpected losses.
3) These earnings can be reinvested in the business for further growth and expansion.
4) It sometimes helps to elevate the market price of the shares of your company.
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