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Difficulty: MediumSole Proprietorship: Features, Capital Sources, Merits, and Demerits

A sole trader operating a textile enterprise requires short-term financing to replenish stock from suppliers prior to a festive season. Which of the following represents an external source of capital appropriate for this immediate operational need?

  1. Trade credit extended by suppliersAnswer
  2. B
    Ploughed-back profits from previous trading periods
  3. C
    Capital raised through the issuance of debentures
  4. D
    Equity contributed by a sleeping partner

Answer

Trade credit extended by suppliers
Trade credit extended by suppliers represents an external short-term source of capital where goods are delivered immediately and payment is settled at a designated later date, directly matching the sole trader's short-term stock replenishment need.

Step-by-Step Solution

1
Analyze the financial requirement
The sole trader requires short-term external funding specifically for inventory purchase.
Categorizing sources of capital by ownership source (internal vs external) and duration (short-term vs long-term) helps identify valid financing options.
2
Evaluate potential capital sources available to a sole proprietor
Trade credit provides short-term inventory supply on deferred payment terms from external creditors.
Sole traders cannot issue corporate securities or introduce partners without altering their business legal entity.

Key Concept

Capital Sources of Sole Proprietorship
Estimated Time:1m 0s
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Topics

Sole Proprietorship: Features, Capital Sources, Merits, and Demerits

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