A business needs finance both for its working capital requirements and for its fixed capital expenditure. Which of the following pairs is correctly matched?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Salaries to employees – Working capital requirement
Option (1) Purchase of machinery – Working capital requirement — Incorrect. Purchase of machinery is fixed capital expenditure. Machinery is bought once and used for many years.
Option (2) Payment for raw materials – Fixed capital expenditure — Incorrect. Payment for raw materials is a working capital requirement. Raw materials are bought again and again for daily production.
Option (3) Salaries to employees – Working capital requirement — Correct. Working capital is the money needed to run the business from day to day. Salaries are paid every month, so they are a working capital requirement.
Option (4) Expanding the production capacity – Working capital requirement — Incorrect. Expanding the production capacity is fixed capital expenditure, like buying machinery or a building. It adds long-lasting assets to the business.
NCERT (Pre-rationalised Edition): “INTRODUCTION You all know that a business needs finance from the time an entrepreneur makes the decision to start it. It needs finance both for working capital requirements such as payments for raw materials and salaries to its employees, and fixed capital expenditure such as the purchase of machinery or building or to expand its production capacity. … Business can raise these funds from various sources and in different ways through financial markets. …” |