CA Intermediate · Financial Management and Strategic Management · Types of Financing
A company that obtains machinery by an arrangement in which the supplier retains ownership and the company pays the price in fixed instalments over a stated period, with ownership passing on payment of the last instalment, is using which source of finance?
This is hire purchase. The supplier keeps ownership while the company uses the machinery and pays fixed instalments, and title passes to the company only when the last instalment is paid. An operating lease never transfers ownership, so it does not fit.
- AHire purchaseCorrect
- BOperating lease
- CFactoring without recourse
- DDebenture issue
Explanation
In hire purchase the hirer gets possession and use of the asset immediately, pays instalments, and becomes owner only after the final instalment. In an operating lease ownership never passes to the lessee, so that option is wrong. Factoring and debentures do not involve acquiring a specific asset in this manner.
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