Business ownership and sources of finance

Topic 1: Business Ownership and Sources of Finance — 50 Hard MCQs

1. Which statement about a sole trader is correct?

A A sole trader must publish financial statements.
B A sole trader has unlimited liability.
C A sole trader has a separate legal identity from the owner.
D A sole trader must share profits with employees.

2. Which disadvantage applies to a partnership but not to a sole trader?

A unlimited liability
B difficulty raising capital
C profits must be shared
D owner controls all decisions

3. A partnership has no partnership agreement. Which rule applies?

A partners receive interest on capital
B partners receive salaries
C profits and losses are shared equally
D interest is charged on drawings

4. Which source of finance is available to a public limited company but not usually to a partnership?

A bank overdraft
B debentures
C trade payables
D owner’s capital

5. Which statement about ordinary shareholders is correct?

A They receive fixed interest each year.
B They are creditors of the company.
C They own part of the company.
D They are guaranteed dividends.

6. Which statement about debenture holders is correct?

A They are owners of the company.
B They receive dividends from profit.
C They receive fixed interest.
D They vote at annual general meetings.

7. A company issues debentures to finance expansion.

What is the effect?

A ownership is diluted
B liabilities increase
C ordinary share capital increases
D retained earnings decrease immediately

8. A company makes a rights issue fully taken up by existing shareholders.

What is the main advantage to existing shareholders?

A their percentage ownership can be maintained
B the company pays no dividends in future
C retained earnings increase automatically
D debenture interest decreases

9. A company makes a bonus issue.

Which statement is correct?

A cash is received from shareholders
B reserves are converted into share capital
C liabilities increase
D assets increase

10. Which action raises new cash for a company?

A bonus issue
B rights issue fully subscribed
C transfer to general reserve
D depreciation of non-current assets

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. A company wants to raise finance without reducing existing shareholders’ control.

Which source is most suitable?

A issue ordinary shares to new investors
B issue debentures
C bonus issue
D transfer retained earnings to general reserve

12. A company wants to reward shareholders without using cash.

Which action is most suitable?

A bonus issue
B debenture redemption
C rights issue
D payment of interim dividend

13. Which statement about limited liability is correct?

A shareholders cannot lose any money
B shareholders’ losses are limited to the amount invested
C directors are never responsible for business decisions
D creditors cannot claim from company assets

14. Which business type has separate legal identity?

A sole trader only
B partnership only
C limited company
D all unincorporated businesses

15. Which statement is a disadvantage of operating as a sole trader?

A profits are shared equally
B decisions require shareholder approval
C personal assets may be used to pay business debts
D financial statements must be published

16. A sole trader converts the business into a limited company.

Which benefit is most likely?

A unlimited liability increases
B personal assets gain protection
C ownership automatically remains one person only
D bank loans are cancelled

17. Which statement about a partnership is correct?

A partners may be liable for actions of other partners
B partnerships must issue ordinary shares
C partnerships always have limited liability
D partners are paid dividends

18. Which statement about a private limited company is correct?

A shares are freely offered to the public
B shares are usually restricted in transfer
C it has no separate legal identity
D shareholders have unlimited liability

19. Which statement about a public limited company is correct?

A it cannot issue shares
B it can offer shares to the public
C it is always owned by one person
D it cannot borrow through debentures

20. Which source of finance is most suitable for short-term cash-flow problems?

A bank overdraft
B ordinary share issue
C bonus issue
D sale of debentures repayable in 20 years

21. Which source of finance is most suitable for buying expensive machinery used for many years?

A long-term loan
B trade payables
C bank overdraft
D accrued expenses

22. Which source of finance is internal?

A retained earnings
B bank loan
C debentures
D ordinary share issue

23. Which source of finance is external?

A retained earnings
B depreciation provision
C issue of ordinary shares
D profit for the year kept in business

24. A company has insufficient retained earnings but needs long-term finance.

Which option is most suitable?

A bank loan
B cash discount received
C delaying depreciation
D reducing inventory valuation incorrectly

25. Which statement about retained earnings is correct?

A retained earnings are cash kept in the bank
B retained earnings are accumulated undistributed profits
C retained earnings are a liability to shareholders
D retained earnings are always equal to annual profit

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. A company has ordinary share capital of $200 000 and retained earnings of $80 000. It makes a bonus issue of $50 000 from retained earnings.

What is the total equity after the bonus issue?

A $230 000
B $250 000
C $280 000
D $330 000

27. A company has 100 000 ordinary shares. It issues 25 000 new shares to existing shareholders as a rights issue. All shares are taken up.

What is the effect?

A cash increases and share capital increases
B cash decreases and share capital increases
C liabilities increase and cash increases
D reserves increase and cash decreases

28. A company has 200 000 ordinary shares. It makes a 1-for-4 bonus issue.

How many shares are in issue after the bonus issue?

A 50 000
B 150 000
C 200 000
D 250 000

29. A company has 300 000 ordinary shares. It makes a 1-for-5 rights issue at $2 per share. The issue is fully subscribed.

How much cash is raised?

A $60 000
B $120 000
C $300 000
D $600 000

30. A company has 400 000 ordinary shares. It makes a 1-for-2 rights issue. Only 75% of the rights shares are taken up at $1.50 per share.

How much cash is raised?

A $150 000
B $225 000
C $300 000
D $450 000

31. Which item is a source of finance from day-to-day trading?

A trade payables
B bonus issue
C depreciation
D revaluation reserve

32. Which statement about trade payables as a source of finance is correct?

A it is long-term finance from shareholders
B it is short-term finance from suppliers
C it increases share capital
D it reduces liabilities immediately

33. Which source of finance usually requires interest to be paid whether or not profit is earned?

A ordinary shares
B retained earnings
C debentures
D bonus issue

34. Which source of finance usually gives voting rights?

A ordinary shares
B debentures
C bank loan
D trade payables

35. Which statement about preference shares is usually correct?

A they usually receive a fixed dividend before ordinary shareholders
B they always carry full voting rights
C they are always current liabilities
D they receive interest as an expense

36. Which statement about ordinary dividends is correct?

A they are an expense in the income statement
B they are an appropriation of profit
C they reduce gross profit
D they increase share capital

37. Which statement about debenture interest is correct?

A it is an appropriation of profit
B it is an expense in the income statement
C it is paid only if dividends are paid
D it increases retained earnings

38. A business wants to avoid fixed interest payments.

Which source of finance should it avoid?

A ordinary share issue
B retained earnings
C debentures
D rights issue of ordinary shares

39. Which source of finance causes dilution of ownership if offered to new investors?

A debenture issue
B ordinary share issue
C bank loan
D overdraft

40. Which source of finance does not raise new funds but changes the structure of equity?

A rights issue
B bonus issue
C bank loan
D sale of inventory

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A sole trader takes goods for personal use.

Which statement is correct?

A drawings increase
B purchases increase
C capital introduced increases
D sales revenue increases

42. A sole trader introduces personal cash into the business.

Which statement is correct?

A capital increases
B drawings increase
C liabilities increase
D expenses increase

43. A partner lends money to the partnership.

How is this normally treated?

A as partner’s capital
B as a liability of the partnership
C as drawings
D as goodwill

44. Interest on a partner’s loan is usually treated as:

A an appropriation of profit
B an expense of the partnership
C drawings by the partner
D a reserve transfer

45. Interest on partners’ capital is usually treated as:

A an expense before profit is calculated
B an appropriation of profit
C a liability to the bank
D a reduction in capital introduced

46. Which statement about a general reserve is correct?

A it is created by retaining profit
B it is a current liability
C it is cash set aside in a bank account
D it is created by issuing debentures only

47. Which item would appear in equity of a limited company?

A bank overdraft
B trade payables
C retained earnings
D debenture interest payable

48. Which item would appear as a non-current liability?

A ordinary share capital
B retained earnings
C debentures repayable after 10 years
D inventory

49. A company needs finance but does not want to increase liabilities.

Which source is most suitable?

A issue ordinary shares
B issue debentures
C take a bank loan
D delay paying suppliers

50. Which statement best compares shareholders and debenture holders?

A shareholders are creditors; debenture holders are owners
B shareholders receive interest; debenture holders receive dividends
C shareholders own the company; debenture holders lend money to the company
D both receive guaranteed dividends

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. B — A sole trader has unlimited liability

• A sole trader and the business are not legally separate.

• If business assets are not enough to pay debts, the owner’s personal assets may be used.

• A is wrong because sole traders do not have to publish financial statements.

• C is wrong because separate legal identity belongs to companies.

• D is wrong because profit belongs to the owner, unless staff are paid wages/bonuses.

2. C — profits must be shared

• A sole trader keeps all profits.

• In a partnership, profits are shared between partners.

• A is not unique because sole traders also have unlimited liability.

• B can apply to both sole traders and partnerships.

• D is an advantage of a sole trader, not a partnership disadvantage.

3. C — profits and losses are shared equally

• If there is no partnership agreement, the Partnership Act rules apply.

• Profits and losses are shared equally.

• No interest on capital.

• No partner salaries.

• No interest on drawings.

4. B — debentures

• A public limited company can raise finance by issuing debentures.

• A partnership cannot issue debentures in the same way as a company.

• Overdrafts, trade payables and capital can be used by partnerships too.

5. C — They own part of the company

• Ordinary shareholders are owners.

• They may receive dividends, but dividends are not guaranteed.

• They do not receive fixed interest.

• Creditors are lenders/suppliers, not owners.

6. C — They receive fixed interest

• Debenture holders are lenders to the company.

• They receive interest whether or not the company makes profit.

• They do not own the company.

• They do not receive dividends.

7. B — liabilities increase

• Debentures are long-term loans.

• When issued, the company receives cash and creates a liability.

• Ownership is not diluted because debenture holders are lenders, not shareholders.

8. A — their percentage ownership can be maintained

• A rights issue offers new shares to existing shareholders.

• If fully taken up, existing shareholders can keep their same proportion of ownership.

• This protects control and avoids dilution.

9. B — reserves are converted into share capital

• Bonus issue = free shares issued to existing shareholders.

• No cash is received.

• Total equity does not increase.

• Reserves decrease and share capital increases.

10. B — rights issue fully subscribed

• A rights issue raises cash because shareholders pay for new shares.

• Bonus issue raises no cash.

• Transfer to reserve only moves profit within equity.

• Depreciation is not a source of new cash.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. B — issue debentures

• Debentures raise finance without giving ownership to new shareholders.

• Existing shareholders’ control is not diluted.

• The downside is fixed interest and increased liabilities.

12. A — bonus issue

• Bonus issue rewards shareholders with additional shares.

• No cash is paid to shareholders.

• It uses reserves and converts them into share capital.

13. B — shareholders’ losses are limited to the amount invested

• Limited liability means shareholders are not personally responsible for company debts.

• They can lose the amount invested in shares.

• Creditors can still claim from company assets.

14. C — limited company

• A limited company is a separate legal entity.

• It exists separately from its owners.

• Sole traders and ordinary partnerships are unincorporated and do not have separate legal identity.

15. C — personal assets may be used to pay business debts

• Sole traders have unlimited liability.

• Personal assets may be at risk if the business cannot pay debts.

• They do not have to publish accounts like public companies.

16. B — personal assets gain protection

• A limited company gives limited liability to shareholders.

• The company is legally separate.

• Personal assets are usually protected from company debts.

17. A — partners may be liable for actions of other partners

• In an ordinary partnership, partners may be jointly liable for debts/actions of the partnership.

• Partners do not receive dividends.

• Partnerships do not issue ordinary shares.

18. B — shares are usually restricted in transfer

• Private limited company shares are not freely offered to the public.

• Share transfer is usually restricted by the company’s rules.

• It still has separate legal identity and limited liability.

19. B — it can offer shares to the public

• A public limited company can sell shares to the public.

• It can also raise finance through debentures.

• It is not owned by one person only.

20. A — bank overdraft

• An overdraft is suitable for short-term cash-flow problems.

• Share issues and debentures are long-term finance.

• A bonus issue raises no cash.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. A — long-term loan

• Machinery is a non-current asset used for many years.

• It should be financed using long-term finance.

• Overdrafts and trade payables are short-term.

22. A — retained earnings

• Retained earnings are internal finance.

• They come from profits kept inside the business.

• Bank loans, debentures and share issues are external finance.

23. C — issue of ordinary shares

• Issuing shares raises finance from outside the business.

• It is external finance.

• Retained profit is internal finance.

24. A — bank loan

• A bank loan provides long-term external finance.

• Reducing inventory incorrectly or delaying depreciation is not a valid source of finance.

• Cash discount received is not enough for major long-term finance.

25. B — retained earnings are accumulated undistributed profits

• Retained earnings are profits kept in the business over time.

• They are not necessarily cash in the bank.

• They are part of equity, not liabilities.

26. C — $280 000

• Before bonus issue:

  • share capital = $200 000

  • retained earnings = $80 000

  • total equity = $280 000

• Bonus issue:

  • share capital increases by $50 000

  • retained earnings decreases by $50 000

• Total equity remains $280 000.

27. A — cash increases and share capital increases

• A rights issue is paid for by shareholders.

• Cash increases.

• Share capital increases.

• It raises new finance.

28. D — 250 000

• Existing shares = 200 000

• Bonus issue = 1 for 4

• New shares = 200 000 / 4 = 50 000

• Total shares = 200 000 + 50 000 = 250 000

29. B — $120 000

• Existing shares = 300 000

• Rights issue = 1 for 5

• New shares = 300 000 / 5 = 60 000

• Issue price = $2

• Cash raised = 60 000 × $2 = $120 000

30. B — $225 000

• Existing shares = 400 000

• Rights issue = 1 for 2

• Rights shares available = 400 000 / 2 = 200 000

• 75% taken up = 150 000 shares

• Issue price = $1.50

• Cash raised = 150 000 × 1.50 = $225 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. A — trade payables

• Trade payables are short-term finance from suppliers.

• The business receives goods now and pays later.

• This is created through normal day-to-day trading.

32. B — it is short-term finance from suppliers

• Trade payables arise when goods are bought on credit.

• It helps cash flow temporarily.

• It does not increase share capital.

33. C — debentures

• Debentures require fixed interest.

• Interest must be paid even if profit is low.

• Ordinary dividends are only paid if declared.

34. A — ordinary shares

• Ordinary shareholders usually have voting rights.

• Debenture holders are lenders, not owners.

• Trade payables and bank loans do not give voting rights.

35. A — they usually receive a fixed dividend before ordinary shareholders

• Preference shareholders usually receive a fixed dividend.

• They are paid before ordinary shareholders.

• The dividend is still an appropriation of profit, not interest expense.

36. B — they are an appropriation of profit

• Ordinary dividends are paid out of profit.

• They are not expenses in the income statement.

• They reduce retained earnings.

37. B — it is an expense in the income statement

• Debenture interest is finance cost.

• It is charged as an expense.

• It must be paid before calculating profit available for shareholders.

38. C — debentures

• Debentures involve fixed interest payments.

• If a business wants to avoid fixed interest, it should avoid debenture finance.

• Ordinary shares involve dividends, not compulsory interest.

39. B — ordinary share issue

• Issuing ordinary shares to new investors can dilute existing ownership.

• Debentures and bank loans increase liabilities but do not dilute ownership.

40. B — bonus issue

• A bonus issue raises no new cash.

• It converts reserves into share capital.

• It changes the structure of equity but not total equity.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A — drawings increase

• Goods taken for personal use are drawings.

• They reduce owner’s capital.

• They are not sales revenue because the owner did not sell them to a customer.

42. A — capital increases

• Cash introduced by the owner increases business assets.

• It also increases owner’s capital.

• It is not income or profit.

43. B — as a liability of the partnership

• A partner’s loan is separate from partner’s capital.

• The partnership owes the money to the partner.

• Therefore, it is treated as a liability.

44. B — an expense of the partnership

• Interest on a partner’s loan is treated as a finance cost.

• It is deducted before profit is appropriated.

• It is not part of profit-sharing.

45. B — an appropriation of profit

• Interest on capital is not an expense.

• It is an appropriation of profit between partners.

• It is recorded in the appropriation account.

46. A — it is created by retaining profit

• A general reserve is created from profit kept in the business.

• It is part of equity.

• It is not a separate bank account. That trap is ancient but still deadly.

47. C — retained earnings

• Retained earnings are part of equity.

• They represent accumulated profits not distributed as dividends.

• Overdrafts, trade payables and interest payable are liabilities.

48. C — debentures repayable after 10 years

• Debentures repayable after more than one year are non-current liabilities.

• Share capital and retained earnings are equity.

• Inventory is a current asset.

49. A — issue ordinary shares

• Ordinary share issue raises finance without increasing liabilities.

• Debentures, bank loans and delayed supplier payments all increase liabilities.

50. C — shareholders own the company; debenture holders lend money to the company

• Shareholders are owners.

• Debenture holders are lenders/creditors.

• Shareholders may receive dividends.

• Debenture holders receive interest.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.