Day: May 22, 2023

Lucy, owner of the jewellery business Lucy’s Jewels, always buys her materials from the same local Staffordshire suppliers.

Which one of the following would be the most suitable source of finance for her weekly purchases of these materials?

Select ONE answer:

1. Trade credit
2. Debentures
3. Share issue
4. Commercial bank loan

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

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

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. Correct – Definition of Trade credit e.g. given by suppliers allowing a business to purchase stock and material with payment at a later date. Trade credit is the most suitable because it allows Maris Sal to obtain small amounts of raw materials to manufacture products for sale. Because payments can be made to suppliers once the stock is sold
2. Not correct – because debentures offer longer term finance usually to develop larger capital projects, which is not what Maris Sal requires to purchase materials to make jewellery.
3. Not correct – Maris Sal would not issue share capital to purchase materials to produce their jewellery because share ca[ital. is used to raise large sums of money, not to purchase stock.
4. Not correct – because if Maris Sal took out a medium term method of finance like a commercial bank loan they would be required to make immediate repayments and pay interest and may have to refinance to re-stock when everything was sold.

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