Which source of finance comes from profits kept in the business rather than paid to shareholders?

• A. Retained profits
• B. Personal savings
• C. Loans
• D. Overdraft

Answer: (A)

This question tests understanding of using profits that stay in the business as a source of finance. When a company earns profits and chooses not to pay them out to shareholders, those profits are kept in the business and become internal funds called retained profits (or retained earnings). These funds can be reinvested for growth, equipment, marketing, or to improve cash flow, all without taking on debt or issuing new equity. The idea is that the business funds its own activities from its own earnings.

Other options are external sources: personal savings come from the owner, not from profits kept in the business; a loan is borrowed money that must be repaid with interest; an overdraft is short-term borrowing from a bank.