Business Studies Multiple Choice Question – 14 January 2022

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Colin from Stafford is a heating engineer, has started his own business as a sole trader.

He needs to buy a new van.

Which one of the following would be the most suitable external source of finance to buy his van?

Select ONE answer:

  1.  Overdraft
  2. Commercial bank loan
  3. Retained profit
  4. Issue of share capital

Show the workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Business Studies KS4 & KS5 classes

The answer is 2

  1. Not correct- because an Overdraft, although an external source of finance, is used as a flexible short-term method of finance, usually used for cash-flow problems and not to purchase an asset.
  2. Correct – External source of finance e.g. is money that is provided from outside of the business / a commercial bank loan is when finance is borrowed from an external source such as bank and is repaid over a period of time with interest. A bank loan is a medium term source of finance and is therefore suitable for purchasing an asset such as a van. Interest and capital would be paid over a period of time and Colin would be able to plan for this.
  3. Not correct – because retained profits are an internal source of finance.
  4. Not correct – because Colin is a sole trader and therefore cannot issue share capital as this method of finance is only available for limited companies.

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