Define the term bankruptcy.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2023). The mark or mark type is shown in brackets.

1. [2] (a) A legal procedure when a business is unable to repay outstanding debts/loans
2. [1] (a) A business runs out of cash/is insolvent / no financial capital to operate /assets used to pay creditors
3. [1] (b) Retained earnings are the part of business profits not distributed to shareholders as dividends but instead reserved for re-investment back into the business.
4. [1] (b) Inexpensive way of raising finance
5. [1] (b) Not repaid
6. [1] (b) No interest
7. [1] (b) Internal source of finance
8. [1] (b) Flexible way of raising finance
9. [1] (b) Deal with unpredictable situations
10. [1] (b) Not using the owner's capital
11. [1] (b) No loss of control
12. [1] (b) Available/sufficient finance
13. [1] (b) Instant increase in liquidity
14. [1] (b) Retained earnings may be inexpensive – compared to other sources of finance (though not free) there is an opportunity cost for shareholders
15. [1] (b) Retained earnings provide flexibility – business has complete control as to how they are used
16. [1] (b) They do not dilute the ownership of the business – unlike share issues or venture capital (in shares or loans)
17. [1] (b) Readily available – when other sources of finance may not be available – banks and investors may be unwilling
18. [1] (b) Increases liquidity – provides liquid assets – funds for emergencies – gives stability to a business
19. [1] (b) Can be used to stimulate growth