Theory question 105
Purchase and Sale of Goods(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 the seller.
Show the model answer
(a) Any four: bank loans; overdraft; trade credit from suppliers; hire purchase; loans from friends and relatives; cooperative/thrift societies; microfinance banks; credit cards.
(b)(i) Acceptance credit: an arrangement in which a bank (accepting house) accepts bills of exchange drawn on it by a customer, so the bills can be discounted for cash; it lets a business get short-term finance using the bank's good name.
(ii) Luncheon voucher: a voucher bought by an employer (often at a discount) and given to staff, which they use instead of cash to pay for meals at participating restaurants.
(iii) Bill of exchange: an unconditional order in writing, addressed by one person (drawer) to another (drawee), signed by the drawer, requiring the drawee to pay a certain sum on demand or at a fixed future date to a named person or bearer.
(c) Advantages (any two): increased sales/turnover; extra profit from interest charged; seller keeps ownership until the last instalment, so goods can be repossessed if payments stop.
Disadvantages (any three): capital is tied up; risk of bad debts and default; repossessed goods may be damaged or lose value; cost of collecting instalments and keeping records; legal costs of recovering goods.
For the bill of exchange, include 'unconditional order in writing'.