Question 5
(a) List four sources of credit available to a sole trader.
(b) Explain the following credit instruments:
(i) acceptance credit;
(ii) luncheon voucher;
(iii) bill of exchange.
(c) State two advantages and three disadvantages of hire purchase to seller.
Observation
Most candidates who attempted this question performed poorly. They could not list the sources of credit available to a sole trader. They could not explain acceptance credit as they did for luncheon voucher and bill of exchange. They could not state the advantages of hire purchase to sellers.
The expected responses are.
(a) Sources of credit available to a sole trader
- Overdraft
- Loans
- Leasing of equipment
- Hire purchase
- Credit card
- Revolving credit
- Trade credit
(b) Explanation of the following credit instruments:
- Acceptance credit: This is a method of borrowing where the company draws a cheque for its banks to accept so that the company will discount the cheque on the money market.
- Luncheon voucher: These are vouchers purchased at a discount by companies to be given to staff to cover lunch allowance as motivation.
- Bill of exchange: It is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to pay a sum certain in money to the order of the specified person or bearer at a fixed or determinable future time.
(c) Advantages of hire purchase to the seller:
- The seller retains ownership of goods until full payment is made.
- Profit will increase as a result of increase in sales.
- It increases the rate of turnover.
- Goods could be reprocessed if payment fails.
- There would be increase in cash flow for the seller if the hire purchase is externally financed.
Disadvantages of hire purchase to the seller
- It leads to tying down huge capital.
- It may lead to litigation.
- The buyer may abscond with the goods.
- If customers fail to pay their debts, it turns to be bad debts.
- Goods repossessed may be difficult to be resold.
- There could be high cost of recovering of the debt.
- Continuous disagreement during recovery of debt could create a bad image for the company.