Question

The source of fixed capital is not

• A. Issue of debentures
• B. Issue of shares
• C. Creditors
• D. Loan from Industrial Finance Corporation of India

Hint:

Fixed capital is always raised from long-term sources like shares, debentures, and institutional loans — not from short-term liabilities like creditors.

Answer 1

The Correct Option is C

Step 1: Understanding fixed capital.
Fixed capital refers to the funds invested in long-term assets such as land, buildings, plant, machinery, and equipment.
These assets are not intended for sale; rather, they are used continuously in the production process to generate income.
Step 2: Common sources of fixed capital.
Fixed capital is usually raised from long-term financial sources such as:
- Issue of shares: Capital obtained from shareholders represents long-term equity funding.
- Issue of debentures: Funds borrowed through debentures are repayable over a long period, suitable for fixed asset investments.
- Loans from financial institutions: Organizations like the Industrial Finance Corporation of India (IFCI) provide long-term loans for setting up industries and purchasing machinery.
Step 3: Why creditors are not a source.
Creditors are individuals or entities to whom the business owes short-term obligations — generally payable within a year.
Since creditors represent short-term liabilities, they cannot be considered a source of fixed capital, which is meant for long-term investment.
Step 4: Analysis of options.
- (1) Issue of debentures: Long-term source — correct for fixed capital.
- (2) Issue of shares: Long-term equity — correct.
- (3) Creditors: Incorrect for fixed capital — a short-term liability.
- (4) Loan from IFCI: Long-term institutional source — correct.
Step 5: Conclusion.
Hence, the source of fixed capital is not creditors.