Gujarat BoardEnglish MediumSTD 12 CommerceOCMFINANCIAL MANAGEMENT5 Marks
Question
Explain the meaning of fixed capital and its characteristics.
✓
Answer
Introduction :
Fixed capital is required to establish business and to purchase fixed assists.
Fixed capital is required on large scale, so financial management raise fund and obtain it from public by issue of various securities.
Existence of fixed capital is continued for a long time so it is necessary to consider the issue of depreciation.
Meaning of fixed capital :
As per General meaning “the capital which is normally invested for the $5$ years or more than $5$ years means for long term in permanent assists of business is called fixed capital or long term capital.
Fixed capital includes land, building, plant, machinery, furniture etc.
Characteristic of fixed capital :
Long period :
Fixed capital is invested for $5$ years or more than $5$ years.
Different ratio in different types of business :
The ratio of fixed capital is high in chemical industry and industry of plant and machinery.
The ratio of fixed capital or low in trading units.
Components :
Fixed capital includes the components such as land, building, plant, machinery, furniture etc.
Less liquidity :
As fixed capital is employees in fixed assists its conversion into cash is not easy so there is less ratio of liquidity.
Risk :
Fixed capital is employee in fixed assists of business.
It remains in business for long time.
So there is risk of going out of use.
Risk increases due to changes in social, political and economic factors.
Depreciation :
Fixed capital is employees in fixed assists of business depreciation is calculated on fixed assists so its value reduces in books of account.
Sources :
The sources of fixed capital are promoters of business, owners of business, various types of securities, plugging back of profit, institution etc.
Conclusion :
The ratio of fixed capital depends on the size and nature of business.
Its most important characteristic is that it has no cash liquidity and depreciation is calculated on it.
Compare to working capital risk factor is higher in fixed capital.
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