question_answer

As a source of finance retained profit is better than other sources. Do you agree with this view? Give reasons for your answer.

Answer:

Ans.     Yes, we agree. Retained earnings are better than other sources of finance because:

(a) Retained earnings is a permanent source of funds which an organization can avail of.

(b) It enhances capacity of the business to absorb unexpected losses.

(c) It does not involve any explicit cost in the form of interest, dividend or flotation cost.

(d) It may increase the process of equity shares of a company.

(e) There is a greater degree of operational freedom and flexibility as the funds are generated internally.