Borrowed Funds- Other sources- Part 1

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  • Q1

    What are ICDs?

    Marks:4
    Answer:

    Inter Corporate Deposits are unsecured short term deposits made by a company with another company.

    They are usually borrowed by companies to tide over short term insufficiency of funds

    The rate of interest on these deposits is higher than that of banks, thus, lending companies stand to benefit.

    They can be classified into:

    i. 3 month deposits- Usually taken to tide over working capital requirement problems. The rate of interest is 12% p.a.

    ii. 6 month deposits- Generally made by companies with high credit rating & goodwill. Rate of interest charged is 15% p.a.

    iii. Call deposits- This deposit can be withdrawn by lender giving a day’s notice. The rate of interest charged is 10% p.a.

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  • Q2

    Shalom Ltd has raised deposits from the public for financing the construction of their new plant. Why have they preferred public deposits as a source of finance?

    Marks:4
    Answer:

    Shalom Ltd. have preferred public deposits as a source of finance due to the following merits:

    1. The procedure of obtaining public deposits is easy and simple in comparison to other sources of external finance. It does not contain restrictive conditions as are generally there in a loan agreement.
    2. It is an economical source of finance as cost of public deposits is generally lower than the cost of borrowings from banks and financial institutions.
    3. Public deposits do not usually create any charge on the fixed assets of the company. This increases the capacity of the company to raise further loan as the assets can be used as security for raising loans from other sources.
    4. Investors through public deposits do not have any voting rights or right to take part in the meetings. Thus, the control of the company is not diluted.

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  • Q3

    Y Co wants to raise public deposits for its expansion plans. From where can the company raise them?

    Marks:1
    Answer:

    The company can raise the deposits from the Public.

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  • Q4

    State 2 advantages of Public deposits.

    Marks:1
    Answer:

    Advantages of Public deposits are:
    i. They are economical, since interest paid is cheaper than those charged by banks & financial institutions.
    ii. They do not carry a charge on the company’s assets.

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  • Q5

    What are Customer Advances?

    Marks:1
    Answer:

    Customer Advances are a part of the price of goods or services ordered, which are to be deposited in advance by the business. These are generally asked for where the production cycle is long, resulting in waiting period or where the products are in short supply. At time of delivery of goods, the advance is adjusted against the payment to be made.

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