Match business finance to its purpose
Select a funding source by matching its time horizon and repayment pattern to the business need, then justify the trade-off.
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These lessons cover Topic 1.1 only. The 2029 syllabus has a separate document and is not mapped here. Practice is self-checked, not an official Cambridge grade; full timed-paper practice and human subject-teacher review remain outstanding.
Before you begin
- No prior accounting course is assumed. For each business form, compare who owns it, who controls decisions, who supplies finance and who bears risk.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A company needs new cash but wants to keep the same number of shares. Which action does not itself provide new cash?
What you will learn
- Match common finance sources to short- and long-term needs
- Compare equity, retained profit and debentures for a company
- Make a supported recommendation using business context
Match the source to the cash need
Short-term working-capital needs may be met by supplier trade credit or an agreed overdraft. Longer-term assets may be funded by an appropriately timed loan, an instalment arrangement, leasing, retained profit or company finance.
A source that appears available may still be unsuitable. Compare when cash is needed, when it can be repaid, total cost, security, ownership, control, flexibility and the consequences if sales are lower than expected.
Company finance affects ownership and obligations
A limited company can raise finance by issuing ordinary shares or debentures, or retain profits generated by its operations. A share issue brings capital from investors but can dilute existing ownership and voting proportions. Shareholders may expect returns, but a dividend is not the same as contractual loan interest.
A debenture is long-term loan capital: interest is payable under its terms and the amount is repayable according to the agreement. It does not normally create shareholder voting rights, but it adds a fixed finance commitment. Retained profit avoids a new lender or share issue but is limited by past results and competes with dividends and other uses.
A bonus issue transfers amounts within equity and does not itself bring new cash into the company. Do not recommend it as a way to fund a new machine.
Pause and explain
What is a key difference between issuing shares and issuing a debenture?
Worked example
A growing company needs $100,000 for a production line expected to generate cash over six years. It has profitable retained earnings but wants to avoid diluting shareholders. Recommend a funding direction and one check.
Show the worked solution
- The asset will support operations for several years, so avoid relying only on short-term finance.
- Using retained earnings avoids new voting shares and interest, but reduces cash available for other needs.
- A long-term loan or debenture may preserve ownership but creates interest and repayment commitments.
- Compare forecast cash flows and the opportunity cost of retained profit before deciding.
Answer Retained earnings could avoid dilution and borrowing cost, if the company can spare the cash without weakening working capital. A longer-term loan or debenture is an alternative that preserves voting proportions but adds interest and repayment obligations. Compare affordability and the returns expected from the line.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A company issues 20,000 ordinary shares at $2 each. How much cash is raised before issue costs, and what ownership effect should be considered?
Give me a hint
Multiply the number of shares by the issue price.
Compare my reasoning
- Cash raised = 20,000 × $2.
- The gross amount is $40,000 before any issue costs.
- New shares can reduce existing shareholders' percentage ownership if they do not acquire shares proportionately.
The company raises $40,000 before issue costs. Existing owners should consider dilution of their percentage ownership and voting rights.
Look for these in your work
- Calculation correct
- Issue costs qualified
- Dilution considered
A company must choose between $60,000 of retained profit and a $60,000 debenture for a five-year project. Compare one financial benefit and one cost of each.
Give me a hint
A source can have no interest payment and still have an opportunity cost.
Compare my reasoning
- Retained profit avoids a new contractual interest and repayment schedule.
- Using retained profit reduces cash available for working capital or other investments.
- A debenture preserves existing share ownership proportions.
- It adds interest and repayment obligations that continue if project cash flows disappoint.
Retained profit avoids debenture interest but has an opportunity cost and can reduce liquidity. A debenture preserves voting proportions but adds contractual finance costs and repayment risk. Compare forecast cash flow and alternative uses before choosing.
Look for these in your work
- Both sources compared
- Opportunity cost included
- Repayment risk included
An owner proposes a bonus issue to finance a new warehouse. Explain the problem with this proposal and identify a more relevant funding source.
Give me a hint
Ask whether a bonus issue brings new money into the company.
Compare my reasoning
- A bonus issue transfers amounts within equity and issues shares to existing shareholders.
- It does not create new cash for the warehouse.
- A share issue for cash, retained earnings, a loan or debenture could provide funds, each with different costs and control effects.
A bonus issue does not bring in new cash, so it cannot by itself pay for the warehouse. The company should consider a cash share issue, retained profit or borrowing, then compare dilution, liquidity, interest and repayment terms.
Look for these in your work
- No cash inflow identified
- Alternative sources named
- Trade-offs explained
Common mistakes
- Recommending finance without matching its duration to the need
- Treating share capital and loan capital as if they have the same control and repayment effects
- Calling a bonus issue new cash finance
What can you explain now?
Which company finance source normally gives new investors ownership rights?
Compare with the explanation
An issue of ordinary shares
Shareholders obtain ownership through shares; lenders do not become owners just by lending.
After trying it yourself, choose your next review. This is your self-assessment.
Your review choice appears on Today. Sign in to sync it across devices.
Make it stick
Give one ownership effect of a share issue and one repayment effect of a debenture.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.