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Sources of Business Finance Test - 34

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Sources of Business Finance Test - 34
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Weekly Quiz Competition
  • Question 1
    1 / -0
    Primary functions of commercial bank _________.
  • Question 2
    1 / -0
    Which of the following can be treated as type of shares?
    Solution
    A business can raise funds from various sources. Each of the source has unique characteristics, raising through shares is a type of source of funds. The capital obtained by issue of shares is known as share capital. Equity shares and preference shares are treated as types of shares. Equity shares are owner's share capital 
  • Question 3
    1 / -0
    When shares are issued at a price less than the face value, they are said to be issued at __________.
    Solution
    Issue of shares at discount: When the shares are issued at a price lower than the face value, they are said to be issued at discount.
    Any company could not offer the shares at discount when
    • It is a new company
    • It is a new class of shares even though of an old company
    The discount on issue of shares is treated as a loss of capital nature.
    For e.g.
    Let the share is issued at Rs. 90 then it is called that share is issued at the discount of Rs 10 (Rs 100 –Rs. 90).
  • Question 4
    1 / -0
    If the numbers of shares issued for is more than the number of shares applied the shares are said to be ___________.
    Solution
    Undersubscribed:-

    The number of shares for which applications were invited and the number of shares for which applications were received are exactly the same. However, in practice, these two figures will rarely coincide. The number of shares for which applications are received may be more or less than the number of shares for which applications are invited.
    If the number of shares applied by the public is less, the issue is said to be under-subscribed, if more, then it is said to be over-subscribed; for example if a company invites applications for 10,000 shares and applications are received from public for 8,000 shares the issue is said to be under- subscribed.
  • Question 5
    1 / -0
    When shares are not payable in a lump sum, third instalment is called ______________.
    Solution
     Final call: The remaining amount of the shares allotted is called up by writing a letter to the shareholders which are known as calls on the share. Such remaining amount is called up after receiving the allotment money. The balance of share money can be called up either in one or two installments. If the entire balance of share is called up at once, it is called ‘first and final call’. However, if the balance of share is called up in two different installments, it is called first call and second and final call respectively.
  • Question 6
    1 / -0
    When shares are issued at a price higher than the face value, they are said to be issued at ____________.
    Solution
    Issue of Shares at Premium: When shares are issued at a price higher than the face value then it is called as the issue of shares at premium. The excess of issue price over the face value is the amount of premium. The premium on issue of shares is treated as revenue profits.
    For e.g.
    Let the share is issued at Rs. 120 then it is called that share is issued at a premium of Rs 20 (Rs 120 –Rs. 100).
  • Question 7
    1 / -0
    ________means the appropriation of a certain number of shares to an applicant who has applied shares in public issue by the board of directors in consultation with stock exchange.
    Solution
    The allotment of shares is the issuing of new shares to the existing shareholders or to third parties. The Directors of a Company may allot shares in the capital of the Company, if they have the authority to do so. Some examples where allotment of shares may be used are as follows:
    • To raise money for the Company
    • To introduce new investors such as BES investors
    • To allow Enterprise Ireland or Enterprise Board Investors
    • To convert loans to share capital
    • To introduce a golden share
    • To put in place a group structure
    • To fund a redemption of shares
    • To implement a bonus issue of shares
    Directors may not allot shares unless they have the power to do so. The Directors power to allot shares expires 5 years from the date of incorporation or 5 years from the last renewal of the power to allot. If the authority to allot shares has not been renewed in the last 5 years then it should be renewed prior to any proposed allotment. This can be renewed by the Members passing an Ordinary Resolution prior to the allotment.
    A company must have sufficient unissued authorised share capital before new shares may be allotted by the Directors. If the Company does not have sufficient unissued share capital or is setting up a new share class this must be approved by the members passing a special resolution.
    The Memorandum and Articles of Association and any shareholder agreements should be reviewed for regulations on pre-emption rights, unissued share capital and other provisions that may affect the allotment of shares. The shares may be allotted for cash, non-cash and may be allotted at a premium.
  • Question 8
    1 / -0
    If the number of shares applied for is more than the number of shares issued the shares are said to be ____________.
    Solution
    Oversubscribed:-
    Over subscription of shares refers to the situation when the number of shares applied for is more than the number of shares offered for subscription. But it is also true that company cannot allot shares more than those offered for subscription. In case of over-subscription, a company cannot allot shares more than those offered for subscription.
    In the case of over-subscription, the company cannot allot shares to all the applicants in full. To deal with the situation, three alternatives are:

    • First Alternatives- Some applications are accepted in full and excess applications are rejected and money is refunded instantly. This is known as Rejection of Applications. For example, company invites application for 60,000 shares. However the application received are for 80,000 shares. In this alternative, the excess application that is 20,000 will be outright rejected.

    • Second Alternatives- Applicants may also be allotted shares in fixed proportions. This is known as Pro rata Allotment or Partial allotment. For example, in the above case, allotment of shares in the ratio of 6 shares for 8 applied.

    • Third Alternatives- A combination of above two alternatives can also be adopted. In this, a company may accept some applications and reject some. Then proportional allotment may be made to the remaining. Considering above example, instead of rejecting 20,000 applications, company can give shares to 10000 applicants on pro rata basis and reject the remaining applications.
  • Question 9
    1 / -0
    When shares are not payable in a lump sum, second instalment is called ____________.
    Solution
     Allotment Money: The company allots the shares among different applicants after receiving their share application money. The allotment of shares implies that the company has accepted the application of the subscribers and decided to give shares to them. The company sends letters to the applicants intending to subscribe the shares which are called ‘Letter of Allotment’. The letter of allotment provides the information about the number of shares allotted to the subscribers and the amount to be paid by them as the allotment money.
  • Question 10
    1 / -0
    Securities premium account must be shown separately on the liabilities side of the balance sheet under  _______ with the account name  _________. 
    Solution
    Reserve and Surplus:-
    Reserve means a provision for a specific purpose. There are lots of unknown expenditures which can occur in current year or in future. To meet such type of expenses the business firm has to make the reserves. 
    By maintaining the reserves, actual position of the profit and loss of any accounting year does not disturb. For example:- share premium account, provision for bad debts or capital redemption reserves. Capital redemption reserve can be used as bonus shares and converted into share capital. Reserves are also the part of capital of company other than share capital. These reserves can not be distributed among the shareholders as dividend.

    Surplus is the credit balance of the Profit and Loss Account after providing for dividends, bonus, provision for taxation and general reserves etc.  Surplus profit may also be earmarked for special purposes such as reserves for obsolescence of plant and machinery. Balance of profit is carried forward in next year as retained earning. General reserve can be used for distribution of dividend among shareholders when profit is insufficient.
    Reserves and surpluses are shown in liabilities side of balance sheet.
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