ACCA Financial Management (F9) Certification Practice Exam

What are common sources of short-term finance?

1. Equity financing and long-term loans

2. Trade credit and bank overdrafts

3. Bonds and equity shares

4. Sales of fixed assets

The correct answer is: Trade credit and bank overdrafts

Short-term finance refers to funding that is typically required for a period of one year or less. This type of financing is crucial for businesses to manage their working capital and meet immediate obligations. Trade credit is a common short-term financing method that allows businesses to purchase goods and services on account, deferring payment until a later date. This effectively gives companies extra time to generate revenue from those goods before they need to pay their suppliers. On the other hand, bank overdrafts provide immediate access to funds by allowing businesses to withdraw more money from their bank account than is currently available. This is also a short-term solution, making it easier for businesses to maintain liquidity in the face of cash flow fluctuations. The other options involve financing methods that are generally not categorized as short-term. Equity financing and long-term loans represent either ownership stakes or debt obligations typically structured for longer periods, making them unsuitable for short-term financing needs. Similarly, bonds and equity shares are both long-term financial instruments designed to raise capital over extended timeframes. Finally, the sale of fixed assets typically generates cash that is used for long-term financing needs and does not align with the immediate cash flow demands of short-term financing. Therefore, trade credit and bank overdrafts are widely recognized as effective