ACCN3 Sources of Finance

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Flashcards by umer.sabir, updated more than 1 year ago
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Accounting Flashcards on ACCN3 Sources of Finance, created by umer.sabir on 05/17/2014.

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What is internal finance? When owner of a business looks within the business for possible sources of finance e.g. retained profits or personal savings (capital)
Advantages of internal finance? 1. No interest is to be paid 2. No loss of control outside business
Disadvantages of internal finance? 1. May not have enough funds for what you want to do. 2. May conflict with what stakeholder wants e.g. shareholders want short-term profits (dividends) whereas the managers of a business want to invest money back into business
Advantages of ordinary shares? 1. Dividends don't have to be paid if there isn't enough cash or profit. 2. Large amounts of funds can be raised that don't have to be repaid
Disadvantages of ordinary shares? Loss of control
Preference shares 1. Dividends have to be paid, if one year there isn't enough cash/profit, dividends will accumulate. 2. Dividends paid before ordinary shareholders. 3. Don't have the right to vote at annual meetings.
Debentures 1. Long-term loans e.g. 7% debentures until 2025 means that 7% interest will be paid each year and the original amount of the loan is paid in full in 2025. 2. Interest is not optional and has to be paid no matter what the financial position of the business is at that time. 3. Debenture holders may secure the loan against assets for security.
Bank Loan 1. Can be medium or long-term 2. Has to be repaid along with interest 3. Interest will reduce profits as it is an expense. 4. Could be secured against assets in case loan can't be repaid. 5. Would increase risk and gearing
Bank overdraft 1. Short-term finance. 2. Interest rate usually higher than bank loan. 3. Used for day-to-day expenses and not for big projects. 4. It is flexible. 5. Interest is only paid on amount outstanding.
Mortgages 1. Only applies to purchase of land and buildings. 2. Is a long-term liability. 3. Interest will be paid which will reduce profits. 4. Increases risk and gearing. 5. Mortgage can be secured against premises and can be repossessed if borrower defaults.
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