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Assam ASSEB HSLC Elective Commerce study materials
Assam ASSEB HSLC Elective Commerce study resources

Assam ASSEB HSLC Elective Commerce practice questions

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Question 1Introduction to Commerce and Business Environment

Which activity is the primary function of commerce rather than of industry?

  1. Manufacturing of finished goods in a factory
  2. Extraction of raw materials from natural sources
  3. Distribution of goods from producers to consumers Correct answer.
  4. Generation of electricity in a power plant

Explanation

Commerce covers trade and the auxiliaries to trade that move goods and services from producers to final users. Industry, by contrast, is concerned with production, whether through extraction, manufacturing or construction. Distribution therefore belongs to commerce.

Question 2Introduction to Commerce and Business Environment

A trader in Guwahati buys tea directly from a garden and sells it to a wholesaler in Kolkata. Which type of trade is this?

  1. Wholesale trade Correct answer.
  2. Retail trade
  3. Entrepot trade
  4. Foreign trade

Explanation

Wholesale trade involves buying goods in large quantities and reselling them to other traders rather than to final consumers. The trader here buys from the producer and sells onward to a wholesaler, so the transaction is a link in the wholesale chain. Retail trade would require selling to ultimate consumers.

Question 3Introduction to Commerce and Business Environment

Which of the following is an auxiliary to trade rather than a branch of trade?

  1. Import trade
  2. Insurance Correct answer.
  3. Retail trade
  4. Entrepot trade

Explanation

Auxiliaries to trade are supporting services such as insurance, transport, banking, warehousing and advertising that facilitate trade without being trade itself. Import, retail and entrepot trade are all actual buying and selling activities. Insurance therefore stands apart as a facilitator.

Question 4Introduction to Commerce and Business Environment

Which feature best distinguishes a joint stock company from a sole proprietorship?

  1. The business has a separate legal identity from its owners Correct answer.
  2. Profits are shared equally among all employees
  3. The owner bears unlimited liability for business debts
  4. The business must be owned by a single individual

Explanation

A company is incorporated, so it becomes a legal person distinct from its shareholders, can own property and sue in its own name. A sole proprietorship has no such separate identity; the proprietor and the business are the same in law. This separation is the defining structural difference.

Question 5Introduction to Commerce and Business Environment

In a partnership firm, a partner who does not take part in management but whose capital is invested in the business is called a:

  1. Nominal partner
  2. Dormant partner Correct answer.
  3. Partner by estoppel
  4. Minor partner

Explanation

A dormant partner contributes capital and shares profits and losses but does not participate in day-to-day management. This distinguishes the role from nominal and estoppel partners, who are known publicly but contribute no capital. The feature of silent capital contribution is what defines dormancy.

Question 6Introduction to Commerce and Business Environment

Which document of a company sets out the objects for which it was formed and the scope of its activities?

  1. Prospectus
  2. Memorandum of Association Correct answer.
  3. Articles of Association
  4. Certificate of Incorporation

Explanation

The Memorandum of Association is the charter that defines the company's name, registered office, objects and liability of members. Anything outside the objects clause is ultra vires and void. The Articles govern internal management, while the prospectus invites public subscription.

Question 7Introduction to Commerce and Business Environment

A cooperative society formed by small weavers to buy yarn in bulk and sell their cloth jointly is best described as a:

  1. Producers' cooperative society
  2. Credit cooperative society
  3. Consumers' cooperative society
  4. Marketing cooperative society Correct answer.

Explanation

A marketing cooperative helps members sell their output collectively, often combining bulk purchasing of inputs with joint sale of produce. Its core purpose is improving members' bargaining position in the market. Consumers' cooperatives instead buy for members' personal consumption.

Question 8Introduction to Commerce and Business Environment

Which of these is an internal factor of the business environment?

  1. Technological changes in the industry
  2. Human resources of the firm Correct answer.
  3. Government fiscal policy
  4. Political stability of the country

Explanation

Internal factors are those within the firm's control, such as its human resources, capital, plant and organisational culture. Government policy, technology trends and political conditions lie outside the firm and cannot be controlled by it. Human resources therefore belong to the internal environment.

Question 9Introduction to Commerce and Business Environment

A sudden increase in the income tax rate reduces the disposable income of households and lowers demand for consumer durables. This illustrates the influence of which environment?

  1. Economic environment Correct answer.
  2. Natural environment
  3. Legal environment
  4. Social environment

Explanation

Taxation and income levels are components of the economic environment, which shapes purchasing power and demand. A change in disposable income directly alters consumption patterns. Legal environment would concern laws and regulations themselves rather than the income effect.

Question 10Introduction to Commerce and Business Environment

Which dimension of the business environment includes customs, values and family structure that shape consumer preferences?

  1. Legal environment
  2. Social environment Correct answer.
  3. Technological environment
  4. Political environment

Explanation

The social environment comprises traditions, customs, values, beliefs and family structure that influence what people buy and how they live. Businesses must adapt products and advertising to these expectations. Technological and legal environments deal with innovation and rules respectively.

Question 11Introduction to Commerce and Business Environment

A firm installs automated looms that reduce labour needs and raise output per worker. Which feature of the business environment does this best illustrate?

  1. The environment is entirely within the firm's control
  2. The environment is static and predictable
  3. The environment is dynamic and requires adaptation Correct answer.
  4. The environment has no effect on business decisions

Explanation

Business environments change continuously, and technological advancement is one of the strongest drivers of that change. Firms that adopt new technology stay competitive, while those that ignore it lose ground. This demonstrates the dynamic nature of the environment.

Question 12Introduction to Commerce and Business Environment

Which of the following correctly states a difference between business and a profession?

  1. Business requires membership of a statutory body
  2. Professions are governed by a code of conduct and specialised knowledge Correct answer.
  3. Professions are always unregulated by law
  4. Business activities cannot be carried on for profit

Explanation

Professions rest on specialised knowledge, formal training and a code of conduct enforced by a professional body. Business, in contrast, may be started without such prescribed qualifications or regulatory bodies. Profit motive applies to both, so it does not distinguish them.

Question 13Introduction to Commerce and Business Environment

Which risk is an example of a speculative business risk?

  1. Theft of cash from the office safe
  2. Loss of stock due to fire
  3. Damage caused by an earthquake
  4. Loss arising from a fall in share prices Correct answer.

Explanation

Speculative risks offer the possibility of gain as well as loss, and price movements in securities are a standard example. Fire, earthquake and theft can only cause loss, so they are pure risks. Business decisions involving investment therefore carry speculative risk.

Question 14Introduction to Commerce and Business Environment

An entrepreneur converts an idea into a product, arranges finance, hires workers and bears the uncertainty of the venture. Which function of the entrepreneur is highlighted by bearing uncertainty?

  1. Innovation function
  2. Coordination function
  3. Management function
  4. Risk-bearing function Correct answer.

Explanation

The risk-bearing function means accepting the possibility of loss in return for the chance of profit. Since the entrepreneur commits resources without guaranteed returns, uncertainty falls on them. Innovation, management and coordination are separate functions concerned with new ideas and organising resources.

Question 15Introduction to Commerce and Business Environment

Which institution was set up as India's apex bank for regulating the banking system and issuing currency?

  1. Reserve Bank of India Correct answer.
  2. Life Insurance Corporation of India
  3. State Bank of India
  4. Securities and Exchange Board of India

Explanation

The Reserve Bank of India is the central bank, responsible for monetary policy, currency issue and supervision of banks. It was established in 1935 and nationalised in 1949. The State Bank is a commercial bank, while SEBI regulates securities markets.

Question 16Introduction to Commerce and Business Environment

A firm wants to raise long-term funds without issuing shares or taking a bank loan, and instead invites the public to subscribe to its debt securities. This method of raising finance is:

  1. Issue of debentures Correct answer.
  2. Retained earnings
  3. Trade credit
  4. Issue of equity shares

Explanation

Debentures are debt instruments that carry a fixed rate of interest and must be repaid after a stated period, without conferring ownership rights. Issuing them raises long-term funds from the public. Equity shares would dilute ownership, while trade credit and retained earnings are short-term or internal sources.

Question 17Introduction to Commerce and Business Environment

Which of the following best explains why a company's business environment matters for strategy?

  1. It applies only to large manufacturing firms
  2. It determines the exact profit the firm will earn each year
  3. It removes all uncertainty from business operations
  4. It provides opportunities and threats that shape planning and decisions Correct answer.

Explanation

The environment presents opportunities to exploit and threats to guard against, and identifying them is the starting point of strategic planning. Firms scan the environment to align resources with external conditions. It does not guarantee outcomes or eliminate uncertainty.

Question 18Introduction to Commerce and Business Environment

A company's memorandum states its objects, but the board enters into a contract wholly unrelated to those objects. Under company law, such a contract is:

  1. Voidable at the option of the shareholders
  2. Valid only if approved by the registrar
  3. Ultra vires the company and therefore void Correct answer.
  4. Valid because the board has authority to contract freely

Explanation

Acts outside the objects clause of the memorandum are ultra vires the company and cannot bind it, because the company has no legal capacity to perform them. The objects clause limits corporate power. Shareholder approval cannot cure an act beyond the company's capacity.

Question 19Introduction to Commerce and Business Environment

A firm faces rising costs because a new environmental law requires effluent treatment. Which pair of environments is most directly involved?

  1. Legal and technological
  2. Social and political
  3. Legal and economic Correct answer.
  4. Natural and technological

Explanation

The law itself belongs to the legal environment, while its effect on costs and prices operates through the economic environment. Together they explain the compliance burden and its financial consequences. Technology is not the source of the requirement here, and social or political factors are only indirect.

Question 20Introduction to Commerce and Business Environment

A sole proprietor wants to admit a partner but also wants to keep liability limited to the capital contributed. Which form of organisation best meets both aims?

  1. Sole proprietorship continued with a sleeping partner
  2. Ordinary partnership under the Indian Partnership Act
  3. Hindu Undivided Family business
  4. Limited Liability Partnership Correct answer.

Explanation

A Limited Liability Partnership is a body corporate with perpetual succession in which partners' liability is limited to their agreed contribution, while they retain the flexibility to share management. An ordinary partnership gives unlimited joint and several liability. The LLP therefore satisfies both the desire for partners and for limited liability.

Question 21Forms of Business Organisation

Under the Indian Partnership Act, 1932, what is the maximum number of partners a firm engaged in banking business may have?

  1. There is no statutory maximum Correct answer.
  2. Ten
  3. Twenty
  4. Fifty

Explanation

The Companies (Miscellaneous) Rules, 2014 removed the earlier ceilings of ten partners for banking and twenty for other businesses. Since then the Partnership Act prescribes no upper limit on the number of partners in a firm. The practical constraint comes from other laws, not from a fixed numerical cap in the Act.

Question 22Forms of Business Organisation

In a Hindu Undivided Family business governed by the traditional Hindu law, which feature distinguishes it from a partnership firm?

  1. Profits are shared equally regardless of the number of coparceners
  2. The karta must obtain written consent from every member before trading
  3. Membership arises by birth in the family, not by contract Correct answer.
  4. The business must be registered with the Registrar of Firms

Explanation

A joint Hindu family business is created by status, meaning a person becomes a member simply by being born into the family. A partnership, by contrast, arises only from an agreement between competent persons. This status-versus-contract distinction is the defining legal difference between the two forms.

Question 23Forms of Business Organisation

Which document of a company contains the rules governing its internal management, such as the conduct of board meetings and the appointment of officers?

  1. Articles of Association Correct answer.
  2. Certificate of Incorporation
  3. Memorandum of Association
  4. Prospectus

Explanation

The Articles of Association form the internal rulebook of a company and regulate matters such as meetings, voting, directors and share transfers. The memorandum governs the company's external relations and defines its scope of activity. Together they constitute the constitution of the company.

Question 24Forms of Business Organisation

A firm wishes to raise capital from the public but also wants to keep its shares freely transferable on a recognised stock exchange. Which form of organisation is designed for this purpose?

  1. Private limited company
  2. Public limited company Correct answer.
  3. Limited liability partnership
  4. Cooperative society

Explanation

A public limited company may invite the public to subscribe to its securities and its shares are generally freely transferable. A private company restricts both public subscription and share transfer through its articles. This makes the public company the appropriate vehicle for raising funds from the market.

Question 25Forms of Business Organisation

Which of the following is a consequence of the separate legal personality of a company?

  1. Directors are personally liable for every contract signed by the company
  2. The company ceases to exist when a shareholder dies
  3. The company can own property in its own name and sue and be sued in its own name Correct answer.
  4. The company's debts are automatically the personal debts of the shareholders

Explanation

Because a company is a legal person distinct from its members, it can hold property, enter contracts, and sue or be sued in its own name. Shareholders' liability is normally limited to the unpaid amount on their shares. This separation is the foundation of the corporate form.

Question 26Forms of Business Organisation

In a cooperative society registered under the Cooperative Societies Act, what is the usual basis on which voting rights are exercised at the general body meeting?

  1. One vote for each share held
  2. Votes weighted by the period of membership
  3. Votes proportionate to the capital contributed
  4. One vote for each member, irrespective of shareholding Correct answer.

Explanation

Cooperative societies follow the principle of one member, one vote, regardless of how much capital a member has contributed. This reflects the democratic character of the cooperative form and distinguishes it from a company, where voting is generally proportionate to shareholding.

Question 27Forms of Business Organisation

A sole proprietor wants to bring in two friends as co-owners while retaining the flexibility to change the profit-sharing ratio without notifying any public authority. Which form best suits this need?

  1. Statutory corporation
  2. Partnership firm Correct answer.
  3. Cooperative society
  4. Public limited company

Explanation

A partnership is created by agreement, and the partners may alter the profit-sharing ratio by mutual consent without filing it with a public authority. Companies and cooperatives require formal constitutional documents and public filings for such changes. The partnership form therefore offers the greatest contractual flexibility.

Question 28Forms of Business Organisation

Which of the following statements about the liability of the karta in a joint Hindu family business is accurate?

  1. The karta has unlimited liability while the other coparceners have limited liability Correct answer.
  2. Only the youngest coparcener bears unlimited liability
  3. All members, including the karta, have liability limited to their share
  4. The karta has limited liability while the coparceners have unlimited liability

Explanation

The karta, as the manager of the joint family business, bears unlimited personal liability for its debts. The other coparceners are liable only to the extent of their interest in the joint family property. This asymmetry of risk is a recognised weakness of the form.

Question 29Forms of Business Organisation

A company proposes to alter the object clause of its memorandum of association. Which approval is legally required for this alteration?

  1. Consent of the company's bankers and auditors
  2. Special resolution of the members plus approval of the Central Government Correct answer.
  3. Approval of the Registrar of Companies alone
  4. Ordinary resolution of the board of directors

Explanation

Alteration of the object clause requires a special resolution passed by the members and, as prescribed under the Companies Act, approval of the Central Government through the prescribed route. This protects shareholders and creditors by ensuring that the change in the company's scope is deliberate and supervised.

Question 30Forms of Business Organisation

Which of the following is a characteristic feature of a limited liability partnership (LLP) under the LLP Act, 2008?

  1. The LLP must have at least seven partners
  2. Partners' liability is limited to their agreed contribution, except for their own wrongful acts Correct answer.
  3. The LLP must issue shares to the public to raise capital
  4. Every partner is liable without limit for the wrongful acts of other partners

Explanation

In an LLP, a partner's liability is limited to the contribution agreed upon, and a partner is not personally liable for the wrongful acts of other partners. However, a partner remains personally liable for his own wrongful acts or omissions. This hybrid of partnership flexibility and limited liability is the essence of the LLP.

Question 31Forms of Business Organisation

A business form in which the owner is personally liable for all debts but is not required to share profits or decision-making with anyone is best described as:

  1. Partnership at will
  2. Private limited company
  3. Joint Hindu family business
  4. Sole proprietorship Correct answer.

Explanation

A sole proprietorship is owned and controlled by one person who enjoys all profits and bears unlimited personal liability for the business's debts. No sharing of profits or authority arises because there are no co-owners. This combination of full control and full risk is its defining trait.

Question 32Forms of Business Organisation

Which of the following best explains why a cooperative society often struggles to attract large-scale private investment?

  1. Its members have unlimited liability for the society's debts
  2. It is prohibited from earning any surplus on its operations
  3. It cannot own property in its own name
  4. It operates on the principle of service and one member one vote, limiting returns and control proportionate to capital Correct answer.

Explanation

Cooperative societies are organised around mutual service and democratic control, so voting power and influence are not proportionate to capital contributed. Investors seeking returns and control in proportion to their investment therefore find the form unattractive. This principle of service over profit is the main reason for limited large-scale private capital.

Question 33Forms of Business Organisation

What is the minimum number of members required to form a public limited company under the Companies Act, 2013?

  1. Five
  2. Two
  3. Seven Correct answer.
  4. Ten

Explanation

A public limited company requires a minimum of seven members, while a private company requires only two. This difference reflects the public company's wider ownership base and ability to raise funds from the public. The threshold is prescribed in the Companies Act, 2013.

Question 34Forms of Business Organisation

A partner in a firm contributes capital but, under the partnership deed, takes no part in management and does not represent the firm to outsiders. Such a partner is known as:

  1. Sleeping partner Correct answer.
  2. Partner by estoppel
  3. Active partner
  4. Nominal partner

Explanation

A sleeping partner contributes capital and shares profits and losses but does not participate in management and has no apparent authority to bind the firm. An active partner, by contrast, takes part in management and represents the firm. The distinction turns on participation in management, not on capital contribution.

Question 35Forms of Business Organisation

Which of the following is true of the liability of members of a company limited by guarantee?

  1. Members' liability is limited to the face value of shares they hold
  2. Members' liability is limited to the amount they have guaranteed to contribute on winding up Correct answer.
  3. Members are liable for the full debts of the company without any limit
  4. Members bear no liability whatsoever under any circumstances

Explanation

In a company limited by guarantee, members undertake to contribute a specified amount in the event of winding up, and their liability is confined to that guaranteed amount. Such companies often serve non-profit or promotional purposes and may or may not have share capital. The guarantee amount is the ceiling of each member's liability.

Question 36Forms of Business Organisation

A group of farmers wants to pool their produce, obtain better input prices and share storage facilities, with profits distributed according to use rather than capital. Which form of organisation is most appropriate?

  1. Sole proprietorship
  2. Limited liability partnership
  3. Cooperative society Correct answer.
  4. Public limited company

Explanation

A cooperative society is built on mutual help and distributes surplus in proportion to members' transactions rather than their capital. Pooling produce, purchasing inputs jointly and sharing storage are classic cooperative activities. The service motive and one-member-one-vote rule make it the natural fit for the farmers' objectives.

Question 37Forms of Business Organisation

Which of the following describes the doctrine of perpetual succession in relation to a company?

  1. The company must renew its registration every year to remain in existence
  2. The company's existence ends when its managing director resigns
  3. The company continues to exist despite the death, insolvency or exit of its members Correct answer.
  4. The company's shareholders must be replaced within a year of death

Explanation

Perpetual succession means a company is an artificial legal person whose existence is independent of its members. Death, insolvency, insanity or transfer of shares by a member does not affect the company's continuity. The company continues until it is wound up according to law.

Question 38Forms of Business Organisation

A partnership firm has been formed without any provision in its deed about its duration. How is such a firm classified?

  1. Limited liability partnership
  2. Illegal partnership
  3. Partnership at will Correct answer.
  4. Particular partnership

Explanation

Where no provision fixes the duration of a partnership, or the deed allows it to be dissolved at the will of any partner, the firm is a partnership at will. Such a firm can be dissolved by any partner giving notice to the others. A particular partnership, in contrast, is formed for a specific venture or period.

Question 39Forms of Business Organisation

Which of the following is a document that a company must file to offer its securities to the public for subscription?

  1. Articles of Association
  2. Annual return
  3. Prospectus Correct answer.
  4. Board resolution

Explanation

A prospectus is any document that invites the public to subscribe to a company's securities and must comply with prescribed disclosure requirements. It gives investors the information needed to make an informed decision. The articles, annual return and board resolutions serve different legal purposes.

Question 40Forms of Business Organisation

A company's articles contain a clause that conflicts with a mandatory provision of the Companies Act, 2013. What is the legal position of that clause?

  1. The clause prevails if all shareholders have signed the articles
  2. The clause prevails because the articles are a contract among members
  3. The clause prevails unless the Registrar objects in writing
  4. The clause is void to the extent of the conflict, and the statutory provision prevails Correct answer.

Explanation

The articles are subordinate to the Companies Act, and any provision inconsistent with a mandatory statutory requirement is void to that extent. The Act always prevails over the internal regulations of the company. Shareholders' signatures cannot validate a clause that contravenes the statute.

Question 41Forms of Business Organisation

The liability of a member of a company limited by shares is best described as:

  1. Limited to the amount of dividend received in the previous year
  2. Limited to the market value of the shares on the date of winding up
  3. Limited to the unpaid amount on the shares held Correct answer.
  4. Unlimited, extending to all debts of the company

Explanation

In a company limited by shares, a member's liability is confined to the amount remaining unpaid on the shares he holds. Once the shares are fully paid, no further liability attaches to the member. This limited liability is a major advantage of the corporate form.

Question 42Forms of Business Organisation

Which of the following is a recognised advantage of a sole proprietorship over a partnership firm?

  1. The owner can raise capital from a wider circle of investors
  2. The business enjoys perpetual succession
  3. The owner enjoys complete secrecy of business affairs and full decision-making authority Correct answer.
  4. The owner's liability for business debts is limited

Explanation

A sole proprietor is not obliged to share information with co-owners or file public documents, so business secrecy is preserved. Decision-making is also prompt because no consultation with partners is required. These advantages come at the cost of unlimited liability and limited capital.

Question 43Forms of Business Organisation

In the context of a joint stock company, what does the term 'common seal' traditionally signify?

  1. The symbol printed on share certificates only
  2. The certificate issued by the Registrar on incorporation
  3. The official emblem used to authenticate documents executed by the company Correct answer.
  4. The official signature of the managing director

Explanation

A company, being an artificial person, traditionally authenticated its documents by affixing its common seal. The seal represented the company's official will and was used as the corporate signature. Modern law permits authorised signatories to execute documents in specified cases, but the seal's historical role remains the authentication of corporate acts.

Question 44Forms of Business Organisation

A partnership deed is silent on how profits and losses are to be shared. Under the Indian Partnership Act, 1932, how should they be shared?

  1. According to the seniority of partners
  2. In proportion to the time devoted to the business
  3. Equally among all partners Correct answer.
  4. In proportion to capital contributed

Explanation

In the absence of an agreement, the Partnership Act provides that profits and losses shall be shared equally by the partners. Capital contribution and time devoted do not determine the share unless the deed so provides. This default rule applies only when the deed is silent.

Question 45Business Finance and Sources of Capital

A firm needs funds for only three months to pay for a seasonal stock of goods. Which source of finance is most appropriate?

  1. A public issue of preference shares
  2. A trade credit from suppliers Correct answer.
  3. An issue of equity shares
  4. A ten-year debenture issue

Explanation

Short-term needs are best matched with short-term sources so that repayment falls due when the seasonal stock is sold. Trade credit arises naturally in the ordinary course of buying goods and is repaid within weeks or months. Equity and long-term debt instruments commit the firm to a permanent or long repayment horizon, which mismatches the three-month requirement.

Question 46Business Finance and Sources of Capital

Which of the following is a characteristic of equity share capital?

  1. It carries voting rights and no fixed return Correct answer.
  2. It carries a fixed rate of dividend
  3. It is secured by a charge on assets
  4. It is repaid after a fixed period

Explanation

Equity shareholders are the residual owners of the company: they vote at general meetings and receive dividends only when profits are available and declared. There is no predetermined dividend and no fixed maturity. Because they bear the ultimate risk, they rank last on winding up rather than holding security.

Question 47Business Finance and Sources of Capital

A company wishes to raise funds without diluting the voting control of existing equity shareholders. Which instrument best meets this objective?

  1. Issue of bonus shares
  2. Conversion of debentures into equity shares
  3. Further issue of equity shares to the public
  4. Issue of debentures to the public Correct answer.

Explanation

Debenture holders are creditors, not owners, so issuing debentures raises money without adding any voting members to the company. Equity issues, bonus issues and forced conversion all increase the number of equity shares and therefore dilute existing control. Debenture finance thus preserves the promoters' voting position.

Question 48Business Finance and Sources of Capital

Which of the following best describes retained earnings as a source of business finance?

  1. A loan taken from a commercial bank
  2. Capital contributed by the promoters at incorporation
  3. Profits ploughed back into the business instead of being distributed Correct answer.
  4. Money raised by selling fixed assets

Explanation

Retained earnings, also called ploughing back of profits, are the undistributed profits kept in the business for expansion or working capital. They are an internal source and involve no flotation cost or interest. Bank loans, asset sales and promoters' capital are separate sources with different legal and cost consequences.

Question 49Business Finance and Sources of Capital

Which source of finance is most suitable for financing a permanent working capital requirement?

  1. Bill discounting
  2. Trade credit from suppliers
  3. Cash credit from a bank
  4. Long-term funds such as equity or term loans Correct answer.

Explanation

Permanent working capital is the minimum level of current assets the firm must always maintain, so it should be financed by long-term funds that do not fall due for repayment. Short-term tools like cash credit, bill discounting and trade credit suit temporary, fluctuating needs. Using short-term funds for permanent needs creates a repayment mismatch.

Question 50Business Finance and Sources of Capital

Under the Companies Act, 2013, a company may issue sweat equity shares to its employees. What is the essential nature of such shares?

  1. Shares issued at a discount to creditors
  2. Debentures convertible into equity at a premium
  3. Equity shares issued at a discount or for consideration other than cash for know-how or intellectual property Correct answer.
  4. Preference shares issued to directors as remuneration

Explanation

Sweat equity shares are equity shares issued to employees or directors at a discount, or for consideration other than cash, in recognition of their contribution of know-how, intellectual property or value addition. They must be authorised by a special resolution and are subject to a lock-in period. They are equity, not preference capital or debt.