Question : Questions: Different Sources of Finance
Statement 1: Retained earnings are an internal source of finance.
Statement 2: Companies use retained earnings only for expansion and growth.
Option 1: Statement 1 is true, and statement 2 is false.
Option 2: Statement 1 is false, and statement 2 is true.
Option 3: Both statements 1 and 2 are true.
Option 4: Both statements 1 and 2 are false.
Correct Answer:
Statement 1 is false, and statement 2 is true.
Solution : The correct answer is (b) Statement 1 is false, and statement 2 is true.
Statement 1 is false. Retained earnings are indeed an internal source of finance for a company. Retained earnings represent the portion of net profit that a company chooses to keep and reinvest in the business rather than distribute it as dividends to shareholders.
Statement 2 is true. Companies do not use retained earnings only for expansion and growth. While retained earnings can be used to fund growth initiatives, they can also be utilized for various other purposes, including debt reduction, working capital needs, acquisitions, dividends, share buybacks, and other business requirements.
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