Question

Fixed capital is required for

• A. Payment of routine expenses
• B. Purchase of land
• C. Purchasing stock
• D. Payment to creditors

Hint:

Remember: {Fixed Capital} is for {Fixed Assets} (long-term, used for production). {Working Capital} is for {Current Assets} and {Current Liabilities} (short-term, part of operations).

Answer 1

The Correct Option is B

Step 1: Understanding the Question:
The question asks for the purpose for which fixed capital is required.
Step 2: Key Concept:
There are two main types of capital in a business:

Fixed Capital: The capital invested in acquiring long-term assets (fixed assets) that are used for more than one year and are not meant for resale. Examples include land, buildings, plant, and machinery.

Working Capital: The capital used to finance day-to-day operations. It is used for short-term assets like inventory (stock), accounts receivable, and for paying routine expenses and short-term liabilities.

Step 3: Detailed Explanation:
Let's analyze the options based on this distinction:

(A) Payment of routine expenses: These are day-to-day operational costs (like salaries, rent) and are met using working capital.

(B) Purchase of land: Land is a fixed asset, a long-term investment. Its purchase requires fixed capital.

(C) Purchasing stock (inventory): Stock is a current asset. It is part of the operating cycle and is financed by working capital.

(D) Payment to creditors: Creditors are current liabilities. Paying them is part of managing working capital.

Step 4: Final Answer:
Fixed capital is specifically used for acquiring fixed assets like land. Therefore, (B) is the correct answer.