Final answer:
Yes, it is true that a firm's annual profits that are retained in the business serve as a source of financial capital for expansion; retained earnings enable companies to reinvest in equipment, structures, and R&D without external borrowing or issuing stock.
Step-by-step explanation:
The statement that a firm's annual profit retained in the business is another source of funds for a firm's expansion is true. Firms earning profits have the option to reinvest a portion of those profits into the business, which could include spending on equipment, structures, and research and development.
This reinvestment of profits acts as a primary source of financial capital for many established companies, specifically because it allows them to fund their growth without having to rely on external sources of capital such as borrowing from banks or issuing bonds. While borrowing and selling stock are also viable options, retained earnings provide a steady and reliable source of financial capital to support the firm's long-term investment opportunities.
Firms may also borrow money from banks or through bonds, sell stock, or attract early-stage investors. These alternative sources of funds are important for companies that may not have enough current profits to invest in expansion or when facing low profits or losses.