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Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 11th Lesson Multi National Corporations (MNCs) Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 11th Lesson Multi National Corporations (MNCs)

Essay Answer Questions

Question 1.
Define MNC and explain its features.
Answer:
The word ‘Multinational’ consists of two words Multi and National. Multi means ‘many’ and national means “country or nation”. Therefore Multinational company means a company that operates in several countries.

Multinational companies are also known as Transnational corporations International corporations or Global corporations. They conduct business in two or more countries. These corporations possess huge capital resources, the latest technology along with worldwide goodwill.

Definition :
According to International Labour Organisations (ILO) report –
“An enterprise whose managerial headquarters are located in one country, while it carries out operations in a number of other countries as well.”

According to Neil. H. Jocoby “A multinational corporation owns and manages business in two or more countries.”

David E. Liliental, considering a wider parameter, defines the MNCs as “Corporations which have their home in one country but operate and live under the laws and customs of other countries as well.” For brevity, MNC refers to the business enterprise operating in more than one nation.

The essential feature of a MNC is that headquarters are located in home country and they carry operations in a number of other countries i.e. host countries.

Characteristics of MNCs:
a) Giant size :
The sales and assets of MNCs are quite large. Hence they earn supernormal profits.

b) Global operations :
MNCs carry production and marketing operations in different countries of the world. They possess all the infrastructural facilities.

c) Centralized control :
MNC has its headquarters in the home country. It exercises control over all branches and subsidiaries.

d) Dominant position and status :
MNCs carry on operations in bulk and cover many people. Hence they control the market and enjoy a dominant position and status in all operated countries.

e) Sophisticated technology :
Generally MNCs had advance technology so as to produce quality goods and services to the consumers.

f) Professional management:
MNCs employ professional trained managers to integrate and manage world wide operations to maximize profits.

g) International research and development :
MNCs internationalize their research and development operations in order to caputre the market of the host countries.

h) Easy entry :
MNCs can enter into any country easily with their huge capital, technology, and managerial skills.

i) Higher revenues :
MNCs generate huge revenues with their large size sales and benefits of large scale economies

Question 2.
Define MNC and explain the advantages of MNCs.
Answer:
The word Multinational consists of two words Multi and National. Mutli means many and national means “nations or countries”. Therefore Multinational company means a company that operates in several countries.

Multinational companies are also known as Transnational Corporations or International Corporations-or Global Corporations. They conduct business in two or more countries. These corporations possess huge capital resources, latest technology along with worldwide goodwill.

According to Neil. H. Jocoby “A multinational corporation owns and manages business in two or more countries.”

David E. Liliental, considering a wider parameter, defines the MNCs as.”Corporations which have their home in one country but operate and live under the laws and customs of other countries as well.” For brevity, MNC refers to the business enterprise operating in more than one nation.

The essential feature of a MNC is that headquarters are located in home country and they carry operations in a number of other countries i.e. host countries.

Advantages to Host Countries:
1) Provide Capital :
The MNCs provide required capital for the development of industries in under developing countries. The direct foreign investment is quite useful to the developing countries.

2) Transfer of Technology:
MNCs serve as vehicles for transfer of advanced technology to the developing countries.

3) Generate Employment :
MNCs create employment in various cadres and pay attractive salaries in the host countries.

4) Foreign Exchange :
MNCs enable the host countries to increase their exports and reduce the imports. It improves the position of balance of payments.

5) Managerial Revolution :
MNCs help to professionalise management in host countries. They employ modern management techniques and trained manager.

6) Break Monopoly :
MNCs encourage healthy competition and break domestic monopolies.

7) Growth of Domestic Business Firms:
MNCs encourage domestic suppliers, ancillary units, bankers, and other institutions to expand their activites.

8) Innovation :
MNCs bring out innovation in their production and distribution activities which are required to provide goods and services to needs of the consumers of the host country.

9) Better Standard of Living :
MNCs help to improve standard of living in host countries by providing superior products and services at a reasonable rate.

10) Improves Public Relations among Nations :
They encourage international brotherhood through international business.

Advantages to Home Countries :
1) Availability of resources:
MNCs procure the land, labour, materials at cheap rates and can supply goods and services at reasonable rates.

2) Develop exports :
MNCs encourage the export of several products. This will imporve their foreign exchange earnings.

3) Generate income :
They can earn huge income from dividends, licenising fees, royalty and profits from their operations. This will improve the home country’s income.

4) Provides employment:
MNCs provide employment to the people of home country, as managers, technicians and other staff members.

5) Make use expertise :
The MNCs make use the latest technical knowledge and expertise of managers of different countries to run their business.

Question 3.
Define MNC and explain the limitations of MNCs.
Answer:
The word Multinational consists of two words Multi and National. Mutli means many and national means “nations or countries”. Therefore Multinational company means a company that operates in several countries.

Multinational companies are also known as Transnational Corporations or International Corporations or Globed Corporations. They conduct business in two or more countries. These corporations possess huge capital resources, latest technology along with worldwide goodwill.

According to Neil. H. Jocoby “A multinational corporation owns and manages business in two or more countries.”

David E. Liliental, considering a wider parameter, defines the MNCs as “Corporations which have their home in one country but operate and live under the laws and customs of other countries as well.” For brevity, MNC refers to the business enterprise operating in more than one nation.

The essential feature of a MNC is that headquarters are located in home country and they carry operations in a number of other countries i.e. host countries.

Disadvantages of MNCs:
1) Monopolize the markets :
MNC may join hands with big business units in host country to monopolize the markets. This ultimately leads to concentration of economic power.

2) Disregard host countries’ priorities :
MNCs invest only in porfitable business and ignore priorties set by the host countries. This results in regional backwardness in the host country.

3) Imbalance in the foreign exchange remittances :
MNCs and their subsidiaries collect huge amounts in the form of dividend. This creates an imbalance in the foreign exchange remittances.

4) Transfer of outdated technology :
The MNCs transfer the outdated technology, which is unsuitable and absolute by charging higher rates.

5) Impose restrictions :
MNCs try to impose restrictions with host countries related to non transfer of technical knowlege, determination of price, etc. to discourage the exports.

6) Threat to sovereignty :
MNCs may interfere in the political affairs of the country and try to create internal disturbances.

7) Spread of foreign culture :
MNCs cause damage to the cultural values of the host countries. They spread the foreign culture and change the attitudes, desires and fashions of the people.

8) Depletion of natural resources:
MNCs cause rapid depletion of some of the natural resources in host countries.

9) Retard growth of employment :
MNCs try to provide employment to their own nations. This bias attitude of the MNCs may lead to unemployment in the host country.

10) Business strategies and practices :
MNCs dump harmful products, give deceptive advertisements attract the consumers to purchase outdated and unwanted goods.

Question 4.
What is globalisation and explain the necessity of Globalisation?
Answer:
Globalisation refers to the increasing integration of markets (exchange) and production, to include the mobility of resources (capital, labour, ‘organisation and knowledge’).

The world is moving away from self-contained national economies toward an interdependent, integrated global economic system. Globalisation refers to the shift toward a more integrated and interdependent world economy.

Globalization has two facets :

1. The globalization of markets
2. The globalization of production

1) Globalization of Markets:

• The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace
• Falling trade barriers make it easier to sell internationally
• The tastes and preferences of consumers are converging on some global norm
• Firms help create the global market by offering the same basic products worldwide

2) Globalization of Production :

• The globalization of production refers to the sourcing of goods and services from locations around the globe to take advantages of national differences in the cost and quality of factors of production like land, labour and capital
• Companies compete more effectively by lowering their overall cost structure or improving the quality or functionality of their product offering

There are two macro factors that underlie the trend toward greater globalization :
1) Low Trade Barriers:
The decline in barriers to the free flow of goods, services and capital. Advanced countries made a commitment to lower barriers to trade and investment.

2) Technological change:
Technological change has made the globalization of markets a reality. Important advances have occurred in microprocessors, telecommunications, Internet and World Wide Web, transportation technology, etc.

Short Answer Questions

Question 1.
Explain the meaning of MNC.
Answer:
The word Multinational consists of two words Multi and National. Mutli means many and national means “nations or countries”. Therefore Multinational company means a company that operates in several countries.

Multinational companies are also known as Transnational Corporations or International Corporations or Global Corporations. They conduct business in two or more countries. These corporations possess huge capital resources, latest technology along with worldwide goodwill.

According to Neil. H. Jocoby “A multinational corporation owns and manages business in two or more countries.”

David E. Liliental, considering a wider parameter, defines the MNCs as “Corporations which have their home in one country but operate and live under the laws and customs of other countries as well.” For brevity, MNC refers to the business enterprise operating in more than one nation.

The essential feature of a MNC is that headquarters are located in home country and they carry operations in a number of other countries i.e. host countries.

Question 2.
List out the features of MNCs. [Mar. 2018 – A.P. & T.S.]
Answer:
a) Giant size :
The sales and assets of MNCs are quite large. Hence they earn supernormal profits.

b) Global operations :
MNCs carfy production and marketing operations in different countries of the world. They possess ail the infrastructural facilities.

c) Centralized control :
MNC has its headquarters in the home country. It exercises control over all branches and subsidiaries.

d) Dominant position and status:
MNCs carry on operations in bulk and cover many people. Hence they control the market and enjoy a .dominant position and status in all operated countries.

e) Sophisticated Technology :
Generally MNCs had advance technology so as to produce quality goods and services to the consumers.

f) Professional Management :
MNCs employs professional trained managers to integrate and manage world wide operations to maximize profits.

g) International research and development:
MNCs internationalize their research and development operations in order to caputre the market of the’host countries.

h) Easy entry :
MNCs can enter into any country easily with their huge capital, technology and managerial skills.

i) Higher revenues :
MNCs generate huge revenues with their large size sales and benefits of large scale economies.

Question 3.
State any four merits of MNCs to host country. [Mar. 2019 – A.P. Mar. 17 – T.S.]
Answer:
MNCs help the host country in the following ways.

1. The investment level, employment level and income level of the host country increases due to the operation of MNCs.
2. The industries of host country get latest technology from foreign countries through MNCs.
3. The host country’s business also gets management expertise from MNCs.
4. The domestic traders and market intermediaries of the host country gets increased business from the operation of MNCs.
5. MNCs break protectionalism, curb local monopolies, create competition among domestic companies and thus enhance their competitiveness.
6. Domestic industries can make use of R & D outcomes of MNCs.
7. The host country can reduce imports and increase exports due to goods produced by MNCs in the host country. This helps to improve balance of payment.
8. Level of industrial and economic development increases due to the growth of MNCs in the host country.

Question 4.
Explain any four merits of MNCs to home country. [Mar. 15 – T.S.]
Answer:
MNCs home country has the following advantages.

1. MNCs create opportunities for marketing the products produced in the home country throughout the world.
2. They create employment opportunities to the people of home country both at home and abroad.
3. It gives a boost to the industrial activities of home country.
4. MNCs help to maintain favourable balance of payment of the home country in the long run.
5. Home country can also get the benefit of foreign culture brought by MNCs.

Question 5.
Explain any four disadvantages to the host country. [Mar. 17, 15 – A.P.]
Answer:

1. MNCs may transfer technology which has become outdated in the home country.
2. As MNCs do not operate within the national autonomy, they may pose a threat to the economic and political sovereignty of host countries.
3. MNCs may kill the domestic industry by monopolising the host country’s market.
4. In order to make profit, MNCs may use natural resources of the home country indiscriminately and cause depletion of the resources.

Question 6.
State any four disadvantages to home country.
Answer:

1. MNCs may join hands with big business units in host country to monopolize the markets. This ultimately leads to concentration of economic power.
2. The MNCs transfer the outdated technology, which is unsuitable and absolute by charging higher rates.
3. MNCs may interfere in the political affairs of the country and try to create internal disturbances.
4. MNCs try to provide employment to their own nations. This bias attitude of the MNCs may lead to unemployment in the host country.

Very Short Answer Questions

Question 1.
Define Globalisation.
Answer:
The world is moving away from self contained national economies toward an interdependent integrated global economic system. Globalization refers to the shift toward a more integrated and interdependent world economy.

Globalisation has two facets :

1. The globalization of markets
2. The globalization of production

Question 2.
Define FDI.
Answer:
Foreign Direct Investment (FDI) is the control of production which takes place in one country (host country) by a firm based in another country (home). FDI is the defining feature of the MNC. Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country.

Question 3.
Define MNC. [May, 17 – A.P.]
Answer:
The word ‘Multinational’ consists of two words Multi and National. Multi means ‘many’ and national means “country or nation”. Therefore Multinational company means a company that operates in several countries.

Multinational companies are also known as Transnational corporations or International corporations or Global corporations. They conduct business in two or more countries. These corporations possess huge capital resources, latest technology along with world wide goodwill.

Examples of MNCs are :
Pepsi, Hyundai, Nike, Reebok, LG, Samsung and many more.

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 10th Lesson Micro, Small and Medium Enterprises (MSMEs) Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 10th Lesson Micro, Small and Medium Enterprises (MSMEs)

Essay Answer Questions

Question 1.
Define MSMEs and explain their significance. [Mar. 2019 – T.S.]
Answer:
The term (enterprise) has been defined under section 2(e) so as to mean ‘any industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 or engaged in providing or rendering of any service or services’.

In accordance with the provision of Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two classes. They are

1. Manufacturing enterprises
2. Service enterprises.

1) Manufacturing enterprises :
Manufacturing enterprises are those business enterprises which are engaged in the manufacturing or production of goods or commodities. More specifically, these enterprises involve in converting the raw material into finished products by using plant and machinery for creating value addition to the final products.

• A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh.
• A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore.
• A medium enterprise is an enterprise where in the investment in plant and machinery is more than Rs. 5 crore but does not exceed Rs. 10 crore.

2) Service enterprises :
The enterprises involve in providing or rendering services are defined as below.

1. A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh.
2. A small enterprise is an enterprise where the investment in equipment is more than Rs. 10 lakh but does not exceed Rs. 2 crore.
3. A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

Significance of MSMEs:
MSMEs contribute nearly 8% of the country’s GDP, 45% of the manufacturing output and 40% of the exports. They provide the largest share of employment after agriculture. They are the nurseries for entrepreneurship and innovation. The Ministry of MSME has undertaken number of programmes to help and assist entrepreneurs and small businesses. Entrepreneurs who are planning to set up business, may contact National Institute for Entrepreneurship and Small Business Development (National Institute for Micro, Small and Medium Enterprises).

The significance of MSMEs can be understood from the following :
a) 90% of MSMEs in India are unregistered (out of which nearly 80% are sole proprietor firms)
b) 40% of exports in India are through MSME channel
c) 40% of employment opportunity in India is provided by MSME sector
d) MSMEs provide opportunities to the budding entrepreneurs by providing various channels of investment opportunity according to their class of investment.
e) MSMEs provide a good market for foreign companies to start venture capital businesses in India.

Question 2.
Discuss the privileges enjoyed by MSMEs.
Answer:
MSMED Act 2006 provides the following privileges to Micro, Small and Medium Enterprises.

1) Buyer’s Liability to Make Timely Payment for Goods and Service :
Section 15 envisages to ensure timely receipt of payment for their goods and services by micro and small enterprises. It casts an obligation upon the buyer of any goods or services, to make payment to the supplier, by the specified date as follows :
a) When there is an agreement in writing :
On or before the date agreed upon between them in writing. Further, in no case the period so agreed shall exceed 45 days from the day of acceptance.

b) When there is no agreement:
Before the appointed day, which means the day following immediately after the expiry of 15 days from the day of acceptance or day of deemed acceptance.

The terms ‘buyer’, ‘supplier’, day of acceptance’ have been defined in the Act, as under:

• Buyer’ means a person buying any goods or receiving any services from a supplier for consideration.
• Supplier’ means a micro or small enterprise.
• ‘Day of acceptance’ means the day of actual delivery of goods or rendering of services.

2) Interest for Delayed Payment by Buyer :
Where a buyer fails to make payment as required above, he shall be liable to pay interest on the outstanding amount. The interest shall be payable for the period of delay from the date immediately following the agreed date. The interest shall be payable at a rate three times the bank rate and compounded at monthly rests.

3) Reference of Disputes :
Any dispute relating to amount payable for any goods or services, and any interest thereon, may be referred by any party, to the Micro and Small Enterprises Facilitation Council, which shall conduct conciliation in the matter.

Short Answer Questions

Question 1.
Define Manufacturing enterprises as per MSMEs Act, 2006.
Answer:
Manufacturing enterprises are those business enterprises which are engaged in the manufacturing or production of goods or commodities. More specifically, these enterprises involve in converting the raw material into finished products by using plant and machinery for creating value addition to the final products. From the point of view of MSMEs, the manufacturing enterprises are defined in terms of investment made in plant and machinery.

• A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh.
• A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore.
• A medium enterprise is an enterprise where in the investment in plant and machinery is more than Rs. 5 crore but does not exceed Rs. 10 crore.

Question 2.
Define Service enterprises as per MSMEs Act, 2006.
Answer:
These enterprises involve in providing or rendering services. Service sector may be defined in terms of investment made in equipment.

• A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh.
• A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore.
• A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

Question 3.
Briefly explain the registration process of MSMEs. [May 17 – A.P.]
Answer:
The following are the registration requirements under the MSMED Act, 2006. As per the Act any person intending to establish-

• a micro or small enterprise, may, at his discretion.
• a medium enterprise engaged in providing or rendering of services may, at his discretion.
• a medium enterprise engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, shall file the memorandum of micro, small or, as the case may be, of medium enterprise with authority specified by the State Government or the Central Government.

Very Short Answer Questions

Question 1.
Define Micro Enterprises. [May 17-T.S.]
Answer:
In case of manufacturing enterprises a micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh. In case of service enterprises a micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh.

Question 2.
Define Small Enterprieses. [Mar. 15- A.P.]
Answer:
In case of manufacturing enterprises small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore. In case of service enterprises, a small enterprise is an enterprise where the investment in equipment is more than Rs. 10 lakh but does not exceed Rs. 2 crore.

Question 3.
Define Medium Enterprises. [Mar. 17 – A.P.]
Answer:
In case of manufacturing enterprises a medium enterprise is an enterprise where in the investment in plant and machinery is more than Rs. 5 crore but does not exceed Rs. 10 crore. In case of medium enterprises a medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

Question 4.
Define Manufacturing Enterprise. [(Mar. 2019 – A.P.) (Mar. 17 – T.S)]
Answer:
Manufacturing Enterprise :

1. Micro – Investment in plant and machinery does not exceed Rs. 25 lakh
2. Small – Investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore
3. Medium – Investment in plant and machinery is more than Rs. 5 crore but does not exceed Rs. 10 crore

Question 5.
Define Service Enterprise. [(Mar. 2019, 15 – T.S.) (Mar. 2018 – A.P. – T.S.)]
Answer:
Micro – Investment in equipment does not exceed Rs. 10 lakh
Small – Investment in equipment is more than Rs. 10 lakh but does not exceed Rs.2 crore
Medium – Investment in equipment is more than Rs. 2 crore but does not exceed Rs.5 crore

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 9th Lesson Sources of Business Finance-II Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 9th Lesson Sources of Business Finance-II

Essay Answer Questions

Question 1.
1. Explain various sources of business finance available to Indian businessmen.
Answer:
A businessman can raise funds from various sources. On the basis of the period, sources of finance can be categorized into three. They are

1. Long-term sources
2. Medium-term sources
3. Short-term sources

1) Long-term sources of finance :
It includes i) Equity shares and preference shares ii) Debentures iii) Retained earnings.

i) Equity Shares :
Equity shares are the most important source of raising long-term capital by a company. Equity shares, also known as ordinary shares and also known as ownership capital or owner’s funds. Equity shareholders do not get a fixed divident but are paid on the basis of earnings by the company. They enjoy the rewards as well as bear the risk of ownership. Their liability, however, is limited to the extent of capital contributed by them in the company.

Preferences shares :
The capital raised by issue of preference shares is called preference share capital’. In other words, as compared to the equity shareholders, the preference shareholders have a preferentail claim over dividend and repayment of capital. Preference shareholders generally do not enjoy any voting rights. A company can issue different types of preference shares by raising capital.

ii) Debentures:
Debentures are an important instrument for raising long-term debt capital. A company can raise funds through issue of debentures. It bears a fixed rate of interest. The debenture issued by a company is an aknowledgement that the company has borrowed a certain amount of money, which it promises to repay on a future date. ‘Debenture holders’ are, therefore, termed as ‘creditors of the company’.

iii) Retained Earnings :
A company generally does not distribute all its earnings amongst the shareholders as dividends. A portion of the net earnings may be retained in the business for use in the future. This is known as ‘retained earnings’. It is a source of internal financing or self financing or ‘ploughing back of profits’.

2) Medium-term sources of finance :
It includes i) Public deposits ii) Loans, from banks iii) Lease financing

i) Public deposits:
The deposits that are raised by organisations directly from the public are known as ‘Public deposits’. Any person who is interested in depositing money in an organisation can do so by filling up a prescribed form. The organisation in return issues a deposit receipt as acknowledgement of the debt. Public deposits can take care of medium-term financial requirements of a business.

ii) Commercial Banks:
Commercial banks occupy a vital position as they provide funds for different purposes as well as for different time periods. Banks extend loans to firms of all sizes and in may ways, like, cash credits, overdrafts, term loans, purchase/discounting of bills, and issue of letter of credit.

iii) Lease Financing :
A lease is a contractual agreement whereby one party i.e. the owner of an asset grants the other party the right to use the asset in return for a periodic payment. In other words it is a renting of an asset for some specified period. The owner of the assets is called the “lessor” while the party that uses the assets is known as the ’lessee’. Lease finance is an important means for modernisation and diversification in the firm. Such financing is resorted to acquiring assets like computers and electronic equipment.

3) Short-term sources of finace :
It includes i) Bank credit ii) Trade credit iii) Installment credit iv) Advances v) C.P (Commercial Paper)

i) Bank credit :
Commercial banks extend the short-term financial assistance to business firms by means of bank credit. Bank credit may be provided in the following forms i) loans ii) cash credit iii) overdraft.

ii) Trade credit:
Trade credit is the credit extended by one trader to another for the purchase of goods and services. Trade credit facilitates the purchase of supplies without immediate payment. Trade credit is commonly used by business organisations as a source of short-term financing.

iii) Installment credit:
This is another method by which the assets are purchases and possession of goods is taken immediately but the payment is made in installment over a pre-determined period of time. Generally, interest is charged on the unpaid price.

iv) Advances:
Some business organisations get advances from their customers and agents against orders and this source is short term source of finance for them.

v) Commercial Paper (CP) :
Commercial paper is an unsecured promissory note issued by a firm to raise funds for short period, varying from 90 days to 364 days. It is issued by one firm to other business firms, insurance, companies, pension funds and banks. The amount raised by CP is generally very large. As the debt is totally unsecured, the firms having good credit rating can issue the CP.

Question 2.
Discuss the main sources of finance available to companies for meeting long-term as well as short-term financial requirements.
Answer:
A businessman can raise funds from various sources. On the basis of period, sources of finance can be categorized into three. They are Q

1. Longterm sources
2. Mediumterm sources
3. Short-term sources

Long-term sources of finance :
It includes i) Equity shares and preference shares ii) Debentures iii) Retained earnings.

i) Equity Shares :
Equity shares are the most important source of raising long-term capital by a company. Equity shares, also known as ordinary shares and also known as ownership capital or owner’s funds. Equity shareholders do not get a fixed divident but are paid on the basis of earnings by the company. They enjoy the rewards as well as bear the risk of ownership. Their liability, however, is limited to the extent of capital contributed by them in the company.

Preferences shares :
The capital raised by issue of preference shares is called ‘preference share capital’. In other words, as compared to the equity shareholders, the preference shareholders have a preferentail claim over dividend and repayment of capital. Preference shareholders generally do not enjoy any voting rights. A company can issue different types of preference shares by raising capital.

ii) Debentures:
Debentures are an important instrument for raising long-term debt capital. A company can raise funds through issue of debentures. It bears a fixed rate of interest. The debenture issued by a company is an aknowledgement that the company has borrowed a certain amount of money, which it promises to repay on a future date. ‘Debenture holders’ are, therefore, termed as ‘creditors of the company’.

iii) Retained Earnings :
A company generally does not distribute all its earnings amongst the shareholders as dividends. A portion of the net earnings may be retained in the business for use in the future. This is known as ‘retained earnings’. It is a source of internal financing or self financing or ‘ploughing back of profits’.

Short-term sources of finance :
It includes i) Bank credit ii) Trade credit iii) Installment credit iv) Advances v) C.P
(Commercial Paper)

i) Bank credit:
Commercial banks extend the short-term financial assistance to business firms by means of bank credit. Bank credit may be provided in the following forms i) loans ii) cash credit iii) overdraft.

ii) Trade credit:
Trade credit is the credit extended by one trader to another for the purchase of goods and services. Trade credit facilitates the purchase of supplies without immediate payment. Trade credit is commonly used by business organisations as a source of short-term financing.

iii) Installment credit:
This is another method by which the assets are purchases and possession of goods is taken immediately but the payment is made in installment over a pre-determined period of time. Generally, interest is charged on the unpaid price.

iv) Advances:
Some business organisations get advances from their customers and agents against orders and this source is short term source of finance for them.

v) Commercial Paper (CP) :
Commercial paper is an unsecured promissory note issued by a firm to raise funds for short period, varying from 90 days to 364 days. It is issued by one firm to other business firms, insurance, companies, pension funds, and banks. The amount raised by CP is generally very large. As the debt is totally unsecured, the firms having good credit rating can issue the CP.

Question 3.
Write a comparative evolution of the various methods that are opend to meet the financial requirements of a business firm.
Answer:
A businessman can raise funds from various sources. On the basis of period, sources of finance can be categorized into three. They are

1. Long-term sources
2. Medium-term sources
3. Short-term sources

i) Long-term sources of finance :
It includes i) Equity shares and preference shares ii) Debentures iii) Retained earnings.

i) Equity Shares:
Equity shares are the most important source of raising long-term capital by a company. Equity shares, also known as ordinary shares and also known as ownership capital or owner’s funds. Equity shareholders do not get a fixed divident but are paid on the basis of earnings by the company. They enjoy the rewards as well as bear the risk of ownership. Their liability, however, is limited to the extent of capital contributed by them in the company.

Preferences shares :
The capital raised by issue of preference shares is called ‘preference share capital’. In other words, as compared to the equity shareholders, the preference shareholders have a preferentail claim over dividend and repayment of capital. Preference shareholders generally do not enjoy any voting rights. A company can issue different types of preference shares by raising capital.

ii) Debentures:
Debentures are an important instrument for raising long-term debt capital. A company can raise funds through issue of debentures. It bears a fixed rate of interest. The debenture issued by a company is an aknowledgement that the company has borrowed a certain amount of money, which it promises to repay on a future date. ‘Debenture holders’ are, therefore, termed as ‘creditors of the company’.

iii) Retained Earnings :
A company generally does not distribute all its earnings amongst the shareholders as dividends. A portion of the net earnings may be retained in the business for use in the future. This is known as ’retained earnings’. It is a source of internal financing or self financing or ‘ploughing back of profits’.

2) Medium-term sources of finance :
It includes i) Public deposits ii) Loans from banks iii) Lease financing

i) Public deposits :
The deposits that are raised by organisations directly from the public are known as ‘public deposits’. Any person who is interested in depositing money in an organisation can do so by filling up a prescribed form. The organisation in return issues a deposit receipt as acknowledgement of the debt. Public deposits can take care of medium-term financial requirements of a business.

ii) Commercial Banks :
Commercial banks occupy a vital position as they provide funds for different purposes as well as for different time periods. Banks extend loans to firms of all sizes and in may ways, like, cash credits, overdrafts, term loans, purchase/discounting of bills, and issue of letter of credit.

iii) Lease Financing :
A lease is a contractual agreement whereby one party i.e. the owner of an asset grants the other party the right to use the asset in return for a periodic payment. In other words it is a renting of an asset for some specified period. The owner of the assets is called the “lessor” while the party that uses the assets is known as the ‘lessee’. Lease finance is an important means for modernisation and diversification in the firm. Such financing is resorted to acquiring assets like computers and electronic equipment.

3) Short-term sources of finance :
It includes i) Bank credit ii) Trade credit iii) Installment credit iv) Advances v) C.P (Commercial Paper)

i) Bank credit:
Commercial banks extend the short-term financial assistance to business firms by means of bank credit. Bank credit may be provided in the following forms i) loans ii) cash credit iii) overdraft.

ii) Trade credit:
Trade credit is the credit extended by one trader to another for the purchase of goods and services. Trade credit facilitates the purchase of supplies without immediate payment. Trade credit is commonly used by business organisations as a source of short-term financing.

iii) Installment credit:
This is another method by which the assets are purchases and possession of goods is taken immediately but the payment is made in installment over a pre-determined period of time. Generally, interest is charged on the unpaid price.

iv) Advances:
Some business organisations get advances from their customers and agents against orders and this source is short term source of finance for them.

v) Commercial Paper (CP) :
Commercial paper is an unsecured promissory note issued by a firm to raise funds for short period, varying from 90 days to 364 days. It is issued by one firm to other business firms, insurance, companies, pension funds and banks. The amount raised by CP is generally very large. As the debt is totally unsecured, the firms having good credit rating can issue the CP.

Question 4.
What do you mean by Specialized Financial Institutions? Why are these needed?
Answer:
Specialised financial institutions are the institutions which have been set up to serve the increasing financial needs of commerce and trade in the area of venture capital, credit rating and leasing, etc.

1) IFCI Venture Capital Funds Ltd. (IVCF):
Formerly known as Risk Capital and Technology Finance Corporation Ltd. (RCTC), is a subsidiary of IFCI Ltd. It was promoted with the objective of broadening entrepreneurial base in the country by facilitating funding to ventures involving innovative product or process or. technology.

2) ICICI Venture Funds Ltd :
Formerly known as Technology Development and Information Company of India Limited (TDICI), was founded in 1988 as a joint venture with the UTI. Subsequently, it became a fully owned subsidiary of ICICI. It is a technology venture finance company, set up to sanction project finance for new technology ventures. The industrial units assisted by it are in the fields of computer, chemicals, drugs, diagnostics, engineering, etc.

3) Tourism Finance Corporation of India Ltd (TFCI) :
TFCI is a specialised financial institution set up by the Government of India for promotion and growth of tourist industry in the country. Apart from conventional tourism projects, it provides financial assistance for non-conventional tourism projects like amusement parks, ropeways, car rental services, ferries, etc.

Question 5.
Critically examine the advantages and disadvantages of raising funds by issuing shares of different types.
Answer:
Joint stock companies’ capital is divided into number of equal parts known as shares. A company can issue different types of shares to get funds from the investors to suit their requirement. Under the Companies Act 1956 a company can issue only two types of shares.

1. Preference shares
2. Equity shares.

1) Preference shares :
As compared to the equity shareholders, the preference shareholders have a preferential claim over divided and repayment of capital. Preference shares resemble debentures as they bear fixed rate of return. Preference shares have some characteristics of both equity shares and debentures. Preference shareholders generally do not enjoy any voting rights.

Merits or Advantages:

• Preference shares provide reasonably steady income in the form of fixed rate of return and safety of investment.
• Preference shares are useful for those investors who want to get fixed rate of return with comparatively low risk.
• It is a superior security over equity shares.
• Payment of fixed rate of dividend to preference shares may enable a company to declare higher rates of dividend for the equity shareholders in good times.
• Preference capital does not create any sort of charge against the assets of a company.

Limitations:

• Preference shares are not suitable for those investors who are willing to take risk and are interested in higher returns.
• Preference capital dilutes the claims of equity shareholders over assets of the company.
• The rate of dividend on preference shares in generally higher than the rate of interest on debentures.

2) Equity shares :
Equity shares are the most important source of raising long-term capital by a company. Equity shares, also known as ordinary shares represent the ownership of a company and thus the capital raised by issue of such shares is known as ownership capital or owner’s funds. Equity shareholders do not get a fixed dividend but are paid on the basis of earnings by the company. Their liabilities, however, is limited to the extent of capital contributed by them in the company. They have a right to participate in the management of a company.

Merits:

• Equity shares do not create any obligation to pay a fixed rate of dividend.
• Equity shares can be issued without creating any charge over the assets of the company.
• It s a permanent source of capital and the company need not repay it except under liquidation.
• Equity shareholders are the real owners of the company who have the voting rights.

Limitations:

• Investors who want steady income may not prefer equity shares as equity shares get fluctuating returns.
• The cost of equity shares is generally more as compared to the cost of raising funds through other sources:
• Issue of additional equity shares dilutes the voting power, and earnings of existing equity shareholders.
• More legal formalities and procedural delays are involved while raising funds through issue of equity shares.

Short Answer Questions

Question 1.
What are the sources of Short-term finance?
Answer:
The short-term loans and credits are raised by a firm for meetings its working capital requirements. There are generally for short-period not exceeding accounting period, i.e. one year. The main sources of short-term funds are as follows.
1) Bank credit :
Commercial banks extend the short-term financial assistance to business firms by means of bank credit. Bank credit may be provided in the form of loans and cash credit, overdraft, etc.

2) Trade credit:
Trade credit is the credit extended by one trader to another for the purchase of goods and services. Trade credit facilitates the purchase of supplies without immediate payment. Trade credit is commonly used by business organisations as a source of short-term financing.

3) Installment credit:
This is another method by which the assets are purchases and possession of goods is taken immediately but the payment is made in installment over a pre-determined period of time.

4) Advances :
Some business organisations get advances from their customers and agents against orders and this source is short term source of finance.

5) Commercial paper :
Commercial paper emerged as a source of short term finance in our country in the early nineties. Commercial paper is an unsecured promissory note issued by a firm to raise funds for a short period, varying from 90 days to 364 days. It is issued by one firm to other business firms, insurance companies, pension funds and banks.

Question 2.
What are the sources of Long-term finance?
Answer:
The sources of long-term finance are i) Issue of shares ii) Issue of debentures iii) Retained earnings.

i) Issue of shares:
The capital obtained by issue of shares is known as ‘share capital’. The capital of a company is divided into small units called ‘shares’. Each share has its nominal value. There are two types of shares normally issued by a company. These are ‘equity shares’ and ‘preference shares’. The money raised by issue of equity shares is called ‘equity share capital’ while the money raised by issue of preference share is called ‘preference share capital’. It is important method of raising long-term finance.

ii) Issue of debentures:
Debentures are an important instrument for raising long-term debt capital. A company can raise funds through issue of debentures. It bears a fixed rate of interest. The debenture issued by a company is an acknowledgment that the company has borrowed a certain amount of money, which it promises to repay on a future date. ‘Debenture holders’ are, therefore, termed as ‘creditors of the company’.

iii) Retained Earnings :
A company generally does not distribute all its earnings amongst the shareholders as dividends. A portion of the net earnings may be retained in the business for use in the future. This is known as ‘retained earnings’. It is a source of internal financing or self financing or ‘ploughing back of profits’.

Question 3.
What are the sources of Medium-term finance?
Answer:
The sources of Medium-term finance are

1. Public deposits
2. Loans from Banks
3. Lease Financing

i) Public deposits :
Industries receive deposits from the public. These deposits are called public deposits. The period of public deposits used to be short (i.e for three years). So public deposits have been a very important source for working capital requirements.

ii) Loans from Banks :
Commercial banks occupy a vital position as they provide funds for different purposes and for different periods. They extend loan facility in the form of cash credit, overdraft, term loans and purchasing discounting bill of exchange. The borrower is required to provide some security or to create a charge on the assets of the firm before a loan is sanctioned.

iii) Lease Financing :
A lease is a contractual obligation whereby the lessor or owner grants the lessee the right to use the asset in return for a periodic payment known as lease rent. At the end of the lease period the asset goes back to the lessor. Lease financing is an Important means for modernisation and diversification in the firm. Such R&smcing is resorted to in acquiring assets like computers and electronic equipment.

Question 4.
Discuss the need for specialized financial institutions.
Answer:
Specialised financial institutions are the institutions which have been set up to serve the increasing financial needs of commerce and trade in the area of venture capital, credit rating and leasing, etc.
1) IFCI Venture Capital Funds Ltd. (TVCF) :
Formerly known as Risk Capital and Technology Finance Corporation Ltd. (RCTC), is a subsidiary of IFCI Ltd. It was promoted with the objective of broadening entrepreneurial base in the country by facilitating funding to ventures involving innovative product or process or technology.

2) ICICI Venture Funds Ltd :
Formerly known as Technology Development and Information Company of India Limited (TDICI), was founded in 1988 as a joint venture with the UTI. Subsequently, it became a fully owned subsidiary of ICICI. It is a technology venture finance company, set up to sanction project finance for new technology ventures. The industrial units assisted by it are in the fields of computer, chemicals, drugs, diagnostics, engineering, etc.

3) Tourism Finance Corporation of India Ltd (TFCI) :
TFCI is a specialised financial institution set up by the Government of India for promotion and growth of tourist industry in the country. Apart from conventional tourism projects, it provides financial assistance for non-conventional tourism projects like amusement parks, ropeways, car rental services, ferries, etc.

Question 5.
Explain the advantages and disadvantages of equity source of Finance. [Mar. 2019. 17 – A.P.]
Answer:
Advantages of equity source of Fiance :

1. Equity shares do not create any obligation to pay a fixed rate of dividend.
2. Equity shares can be issued without creating any charge over the assets of the company.
3. It is a permanent source of capital and the company need not repay it except under liquidation.
4. Equity shareholders are the real owners of the company who have the voting rights.
5. In case of profits, equity shareholders are the real gainers by way of increased dividends and appreciation in the value of shares.

Limitations:

• Investors who want steady income may not prefer equity shares as equity shares get fluctuating returns.
• The cost of equity shares is generally more as compared to the cost of raising funds through other sources.
• Issue of additional equity shares dilutes the voting power, and earnings of existing equity shareholders.
• More legal formalities and procedural delays are involved while raising funds through issue of equity shares.

Question 6.
Differentiate between the Equity shares and Preference shares. [Mar. 2019; May 17 -T.S.]
Answer:

Question 7.
Differentiate betwene a Share and a Debenture. [Mar. 2019, 18, 17 – A.P. & T.S.; May 17; Mar. ’15 – A.P.; May 17 – T.S.]
Answer:

Very Short Answer Questions

Question 1.
Business finance
Answer:
The rquirements of funds by business firm to accomplish its various activities is called business finance. Finance is considered as the life blood of any organisation. The success of an industry depends on the availability of adequate finance. Finance is also labeled as capital of a company.

Question 2.
Bank loan
Answer:
A loan is a direct advance made in lumpsum against some security. A specified amount is sanctioned by the bankers to the customer. The loan amount is paid in cash or credited to customers a/c. The customer has to pay interest on the amount from the date of sanctioning the loan.

Question 3.
Debentures
Answer:
Debentures are an important instrument for raising long term debt capital. A company can raise funds through issue of debentures. It bears a fixed rate of interest. The debentures issued by a company is an acknowledgement that the company has borrowed a certain amount of money which it promises to repay on a future date. ‘Debenture holders’ are therefore, termed as ‘creditors of the company’.

Question 4.
Trade credit
Answer:
Trade credit is the credit extended by one trader to another for the purchase of goods and services. Trade credit facilitates the purchase of supplies without immediate payment. Such credit appears in the records of the buyer of goods as ‘sundry creditors’ or ‘accounts payable’.

Question 5.
Equity share [Mar. 2018, 15 -A.P.]
Answer:
According to Companies Act, 1956, shares which are not preference shares are equity shares. Equity shares are earlier known as ordinary shares. These are so called because they do not have any special right in payment of dividend and repayment of capital earlier all equity shareholders had equal voting rights. But the recent amendment in the Companies Act 2000, permits companies to issue equity shares with differential voting rights. Equity capital need not be refunded during the life time of the company. Equity shares facilitate the company to get the benefits of leverage.

Question 6.
Preference share [Mar. 2018 – T.S.; Mar. 17 – A.P. & T.S.]
Answer:
As per Section 85 of the Indian Companies Act 1956, preference shares are those shares which carry special rights in respect of dividends and also repayment of capital at the time of winding up. The rate of dividend on these shares are fixed.

Preference shareholders arerpaid dividends when the company makes profits.

If nothing is mentioned in the Articles of Association, preference means preference as to both the payment of dividend and repayment of capital.

Preference shareholders have no voting rights. Hence they have no voice in the management. Investors who prefer a constant rate of return and less risk purchase preference shares.

Question 7.
Retained earnings [Mar. 15; May, 17 – T.S.]
Answer:
Retained earnings is also known as “Ploughing back of profits”. Retained earnings refers to the reinvestment of undistributed profits. It is a very good source of business finance. A part of profit is transferred to the reserves every year. After a few years, it becomes a large amount which is then employed for modernisaton and expansion of business.

As per Indian Companies Act, 1956, Companies are required to transfer a part of their profits to reserve.

Question 8.
Deferred shares
Answer:
The rights of the deferred shareholders with regard to payment of dividend and repayment of capital are deferred (postponed). Deferred shareholders rank last so far as payment of dividend and return of capital is concerned. These shares are generally small in denomination. These shareholders try to manage the company with economy and efficiency.

These shares are issued to the promoters of the company. So these shares are also called promoters shares or management shares. When the company prospers, the deferred shareholders get dividend.

According to Companies Act 1956, no public company or which is subsidiary of a public company cannot issue deferred shares.

Question 9.
State Financial Corporation
Answer:
The State Financial Corporation was established by the Government of India in 1951 with a view to provide financial assitance to small and medium scale industries which are beyond the scope of Industrial Finance Corporation of India. Its share capital is subscribed by respective state governments, RBI, LIC and commercial banks.

Question 10.
Commercial Banks
Answer:
Commercial banks occupy a vital position as they provide funds f or different purposes as well as for different time periods. Banks extend loans to firms of all size and in many ways, like, cash credits, overdrafts, term loans, purchase/discounting of bills and issue of letter of credit.

Question 11.
Financial Institutions
Answer:
Banks provide funds for different purposes. Another important source of rasing finance is from the finanical institutions like Industrial Finance Corporation of India, Industrial Development Bank of India, Industrial Credit and Investment Corporation of India. Such institutions provide long term and mediun terms on easy installments to big industrial and business houses.

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 8th Lesson Sources of Business Finance-I Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 8th Lesson Sources of Business Finance-I

Essay Answer Questions

Question 1.
What is business finance? Explain its need and significance in the business organizations. [Mar. 2018, 17, 15 – A.P. & T.S.; May 17 – A.P. & T.S.]
Answer:
Finance is considered as the life blood of any organisation. The requirements of funds by business firm to accomplish its various activities is called business finance. According to B.O. Wheeler “Finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of a business enterprise.”

Need and significance in the business finance:
1) For fixed capital requirement of business :
In order to start business, finance is required to purchase fixed assets like land and buildings, plant and machinery, furniture and fixture, etc.

2) For working capital requirement of business :
Working capital is utilised for holding current assets such as purchase of material, payment of wages, transporta¬tion charges, etc.

3) For expansion and growth of business :
Finance is required to increase produc¬tion, to install more machines to set up a R & D centre etc.

4) For diversification :
Business finance is needed to start new activity in business. Entering into new business and new lines of activities is known as diversification.

5) For Survival :
Business finance is required to carry out the various business operations in continuity. Without the required finance, organisations cannot survive for long.

6) For liabilities :
To meet liabilities of business, be it long-term or short, a business requires sufficient finance, e.g. for payment of loan installments, creditors, etc.

7) For payment of expenses :
Business finance is needed for paying salaries, wages, taxes, advertisements and other expenses like rents, etc.

Question 2.
What are the various factors that determine the selection of sources of finance? [Mar. 2019 – T.S. Mar. 17 – A.P.]
Answer:
Financial needs of business are of different types-long term, short term, fixed and fluctuating. Therefore, business firms resort to different types of sources for raising funds.

i) Cost :
The fact of cost is of two types i) cost of procurement of funds ii) cost of utilising funds. These cost factors deciding about the source of funds will be utilised by an organisation.

ii) Financial strength and stability of operations:
In the choice of source of funds for business should be in a sound financial position so as to be able to repay the principal amount and interest on the borrowed amount.

iii) Form of organisation and legal status :
The form of unit organisation and status influences the choice of a source for raising money.
Ex : A partnership firm cannot raise money by issue of equity shares.

iv) Factor of time period :
Business units should plan according to the time period for which the funds are required. Ex : Short term need purposes depend upon by the business unit through trade creditors for long term finance sources such as issue of shares and debentures.

v) Risk profile factor:
Business should evaluate each of the source of finance in terms of the risk involved Ex: Issued equity shares, these are to be repaid only at the time of winding up and dividends are not paid if the profits are not available. There is little risk involved. On the other hand a loan is to be repaid as per schedule and the interest is to be paid whether the firm earns profit or not.

vi) Control:
A particular source of fund may affect the control and power of the owners on the management of a firm. As equity shareholders enjoy voting rights, financial institutions may take control of the assets or impose conditions as part of the loan agreement.

vii) Effect on credit worthiness :
Depending on certain sources of finance may affect the credit worthiness in the market. Ex: Issue of secured debentures may affect the interests of the creditors and they may not be willing to extend further loans to the company.

viii) Flexibility and ease :
Another aspect affecting the choice of a source of finance is the flexibility and ease of obtaining funds. Restrictive provisions, detailed investigation and documentation in case of borrowings from banks and financial institutions for example may be the reason that business organisations may not prefer it, if other options are readily available.

ix) Tax benefits :
Various sources may also be weighed in terms of their tax benefits. Tax is not deducted on dividend of preference shares. Interest paid on loans and debentures is tax deductible. In order to take advantages of tax benefits firms may issue debentures to take loans.

Short Answer Questions

Question 1.
What are the various types of capital required for business enterprises?
Answer:
Nature of Business Fiances :
Whether it be manufacturing or trading concern business finance is required which is called initial capital. The amount of capital required depends upon the nature and size of business. It consists of owner’s contribution and borrowing from different sources.

On the basis of the purpose of financial requirements of a business, business finance may be classified into two types.

1) Fixed capital:
The capital which is used to acquire fixed assets such as land and buildings, plant and machinery, etc. is called the “Fixed Capital”. These assets remain with the business for a long period. Capital required by the business concern to meet its long term needs is known as fixed capital. It is permanently kept in the business. It cannot be easily realised.

2) Working capital:
The capital required by a business organisation to run its day- to¬day operations such as payment of wages, salaries, electricity bills, purchase of raw-material, etc. is called working capital. The capital used in current assets is called working capital.

Current assets are those which can be converted into cash within a period of one year. Therefore it is also called circulating or revolving capital.

The working capital of the business concern depends on the nature of the business, size of business, production policy, etc.

Question 2.
Explain the classification of sources of finance.
Answer:
A brief explanation of classifications and the sources of finance is given below.

1) On the basis of period:
On the basis of period, sources of funds can be categorized into 1) Long term 2) Medium-term finance 3) Short-term finance. The long-term sources fulfil the financial requirements of an enterprise for a period exceeding five years. Such financing is generally required for the acquisition of fixed assets. Where the funds are required for a period more than one year but less than five years, medium-term sources of finance are used. Short term funds are those which are required for short duration i.e. a period not exceeding one year.
Ex : Trade credit, Bank Overdrafts, etc.

2) On the basis of ownership :
On the basis of ownership, the sources can be classified into owner’s funds and borrowed funds. Owner’s funds are those which are provided by the owners which include issue of equity shares and retained earnings. Borrowed funds refer to the funds raised through loans or borrowings. The sources include loans from commercial banks, loans from financial institutions, issue of debentures, public deposits, and trade credit.

3) On the basis of generation :
Sources of finances can be generated from internal or from external sources. Internal sources of funds are those that are generated from within the business. Ex : Retained earnings, depreciation of funds, etc. External sources of funds include those sources that lie outside an organisation. E.g: Shares, debentures, public deposits, etc.

Very Short Answer Questions

Question 1.
Business finance:
Answer:
The term finance means money for funds. Financing means making money available when it is needed. It refers to money required for business purposes. Finance is the life blood of every organisation. The prosperity of a business unit mainly depends upon the availability of finance.

Question 2.
Fixed Capital [Mar. 2019 – A.P. m Mar. 2018, 17 – T.S. ; May 17 – A.P.]
Answer:
The capital which is used to acquire fixed assets such as land and buildings, plant and machinery, etc. is called “Fixed Capital”. These assets remain with the business for a long period. These items are not purchased for sale. In other words, capital required by the business concern to meet its long term needs is known as ‘Fixed capital’. It is permanently kept in the business. It cannot be easily realised.

Question 3.
Working Capital: [Mar. 2019; May 17 – T.S.]
Answer:
The capital required by a business organisation to run its day- to-day operation such as payment of wages, salaries, electricity bills, purchase of raw-material, etc. is called “Working Capital”. The capital used in current assets is also called “Working capital”.

Current assets are those which can be converted into cash within a period of one year. Therefore it is also called circulating or revolving capital.

The working capital of the business concern depends on the naturee of the business, size of the business, production policy, etc.

Question 4.
Long – term finance :
Answer:
The capital required for long period are termed as long term finance. This is usually required for period between 7 years to 20 years. This type of capital is used to acquire fixed assets such as land and buildings, plant and machinery, for working capital and also for expansion and modernization of the business. Long term finance can be raised through issue of shares, issues of debentures, loan from banks and other financial institutions, retained earnings, etc.

Depending upon the need any one of the above sources can be conveniently used to procure long term capital or finance.

Question 5.
Short – term finance :
Answer:
Funds raised for a period not exceeding one year is called short-term capital or short-term finance. This type of finance is used to meet day-to-day operating expenses of business such as purchase of raw materials, wages, salaries, etc. The amount of funds required depends upon nature of business, time gap between order and delivery of stocks, operating cycle and the volume of business.

It can be raised through Trade credit, Bank Credit, Advances from Customers, Bank Loans, Retained earnings and Bills of Exchange.

Question 6.
Internal sources of finance :
Answer:
Internal sources of funds are those which are generated from within the business. E.g.: Ploughing back of profits, retained earnings, collection of receivables disposing of surplus inventories, and depreciation of funds, etc.

Question 7.
External sources of finance :
Answer:
External sources of funds include those sources that lie outside an organisation, such as shares, debentures, public deposits, borrowing from commercial banks and financial institutions, suppliers, lenders, and investors.

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 7th Lesson Formation of a Company Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 7th Lesson Formation of a Company

Essay Answer Questions

Question 1.
Discuss the procedure to form a company.
Answer:
A Joint Stock Company requires a number of legal formalities to be complied with before it is brought into existence. Formation means the establishment of a company by fulfilling all formalities. The important steps to be taken by the company for formation are shown in the following chart.

1) Promotion :
Promotion is the first stage in the formation of a company. It involves identification of business opportunity or idea, detailed investigation, assembling the requirements, and financing proposition. Promotion is the process of organization and planning the finance of business enterprise under the corporate firm.

2) Incorporation or Registration :
A company being an artificial person comes into existence only after its registration with the Registrar of Companies. It is the legal process through which an enterprise obtains recognition as a separate legal entity. Private or public limited companies must file all the necessary documents with the Registrar to obtain the Incorporation Certificate. With this certificate the company gets a separate legal entity. For this purpose a number of steps have to be taken for registration.

3) Capital subscription :
After incorporation of a company the next step will be to raise the capital. A public company cannot commence business unless the minimum subscription as stated in the prospectus is subscribed. If a company does not receive 90 percent of the issue amount from the public as subscription within 120 days, it has to refund the amount to the applicant as per the guidelines of Securities Exchange Board of India (SEBI) guidelines within 10 days.

4) Commencement of business:
A public company has to file the following certificates, to get the certificate of commencement.

• A declaration that a prospectus or statement in lieu of prospectus has been filed
• A declaration that directors have taken up their qualification shares and paid them.
• A declaration that minimum subscription amount has been allotted and collected.
• A statutory declaration by the Secretary of the company or a Director that all the formalities relating to commencement of business are duly complied with.

A scrutiny is made by the Registrar with all the documents and issues a “Certificate of commencement of business”. The process of company formation comes to an end with the issue of this certificate.

Question 2.
Describe various steps involved in promoting a company.
Answer:
Promotion is the first stage in the formation of a company. It involves identification of a business opprotunity or idea, analysis of its prospects, gathering the relevant information and taking steps to implement it. Promotion is considered as putting an idea into practice.

Definition:
“Promotion is the process of organizing and planning the finance of a business enterprise under the corporate form.” – L.H. Haney

“Promotion starts with the conception of the idea from which the business is to evolve and continue down to the point at which the business is fully ready to begin operation as a going concern.” – Guthmann and Dougal

To be successful the idea of business must be exposed and investigation chart given the stages of promotion.

1) Discovery of an idea :
The success of business depends on the selection of a business line. The promoter has to form an idea about the type of business and its prospects. The promoter should analyse the strengths and weaknesses of the proposed idea, and develop the idea with the help of technical experts.

2) Detailed investigation :
At this stage various factors relating to the proposed unit are to be studied from the pratical point of view. To find out the strong and weak points of the idea a detailed investigation is conducted. The promoter shall estimate demand for the product, and then thinks of arranging finance and also considers the availability of workers, plant and machinery, raw materials, and cost of production. For this purpose technical experts, financial consultants, etc. are consulted.

3) Assembling requirements :
After making sure that proposed business is feasible and profitable the promoters make arrangements to assemble the requirements like directors appointment, selecting the place for unit, contacting the suppliers of raw materials purchasing of plant and machinery, etc.

4) Financing proposition :
The promoter decides about the capital structure of the company. In this process, he determines how much share capital will be issued, type of shares and debentures to be issued, and the nature of loans to be borrowed from financial institutions or banks for a long period.

Question 3.
Explain the process involved in Incorporation of a company.
Answer:
A company being an artificial person comes into an existence through incorporation. A Joint Stock Company whether private or public limited must be registered with the Registrar of Companies. It is called incorporation. For that purpose the joint stock companies must file all the necessary documents with the Registrar to obtain the Incorporation Certificate. With this certificate the company gets a status of legal entity.

A number of steps have to be taken up before getting a company registered.

1) Application for approval of name :
For approval, an application is to be submitted to the Registrar of Companies of the state and obtain the approval name. A company may adopt any name which is not prohibited under the Emblems and Names Act, 1950. The Registrar is expected to approve the name within 14 days of the receipt of application.

2) Preparation of Memorandum of Association (MoA) :
MoA is the constitution of company which describes its objects, scope and the relationship with outside world. This main document must be carefully drafted, stamped and signed by seven members in case of a public company and two members in case of a private company. As per the new amendment of the Act, 1950 one member is enough to sign on MoA in case of private company.

3) Preparation of Articles of Association (AoA) :
This is the second document which contains rules and regulations relating to the internal management and also the capital structure of the business. A public limited company may not require to file its own Articles of Association. However, it may adopt model clauses prescribed in Table A, Schedule I of the Act. A private company is required to submit its articles and duly signed by the signatories.

4) Preparation of other documents :
At the time of incorporation of a company the following documents are to be prepared and submitted to the Registrar of Companies.

• Consent of the first directors
• Promoters should execute a power of attorney in favour of one of the promoters or an advocate who is to carry out the formalities required for registration.
• When the location of the registered office is finalized, prior to incorporation, the notice of it is to be filed. If not, within 30 days of its registration it is to be submitted.
• When a company by its Articles appoints any person to act as Director, Manager, Secretary their particulars have to be filed within 30 days along with MoA and AoA of the company.

5) Statutory declaration :
A declaration that all the requirement under, the Companies Act, 1950 have been complied with in Form no. 1 is to be filed with the Registrar.

6) Payment of registration fee :
If the prescribed fees has to be paid towards registration of company.

7) Incorporation certificate :
The Registrar is satisfied with all requirements under the Companies Act, 1950, issues a certificate called “Certificate of Incorporation. With the receipt of this certificate, the company gets its recognition as a corporate body.

Question 4.
What is Memorandum of Association? Explain its clauses.
Answer:
The Memorandum of Association is the most important main document of the company. It is constitution and charter of the company. It provides the foundation on which the company structure is built. It defines the scope of the company’s activities as well as its relation with the outside of the company. The contents of the MoA cannot be altered at the option of directors or even the shareholder. It is to be altered only with Government’s and court approval in many cases. The purpose of the memorandum is to enable the shareholders, creditors, and those who deal with the company to know what is the permitted range of activities of the enterprise.

The memorandum has to be divided into paragraphs consecutively numbered and has to be printed. It should be signed by seven members in case of public company and by two members in case of private company.

Memorandum of association contains the following clauses :

1) Name clause :
The name of the company should be specified in this clause. A company can choose any name it likes, however it should fulfil the following conditions.

• The proposed name should not be identical or similar to the name of existing company.
• The proposed name should not convey any connection or link with a government department or local authority.
• The name of the public company should end with the word ‘Limited’, while that of private company should contain the word ’Private limited1.
• The proposed name should not be objectionable under the provisions of Emblems and Names Act, 1950.

The name of the company must appear on the outside of every office, or place of business, in one of the local languages and on all cheques, bills, letters, notices and other official publications, etc. of the company.

2) Situation Clause :
Every company will have a registered office. This clause should specify the place and the state in which registered office is located. It is necessary to determine the legal jurisdiction and to make correspondence. If the registered office is not confirmed on the date of incorporation, it should communicate the address to the registrar within 30 days of its incorporation. The purpose of stating the registered office is that all communications, notices, circular, etc. are sent to the registered office.

3) Objects Clause:
It is the most important clause in the memorandum of association. It defines powers of the company and the scope of its activites. A company is not authorised to do any business outside the purview of the objects clause. The objects of the company must be legal and very clearly defined. It contains main objects and other objects. Great care should be taken in drafting this clause.

4) Liability Clause :
It contains the nature of liability of its members. It means that the liability of a member is limited to the nominal value of shares held by him. The sharholders are not liable for the debts of the company. A company registered with unlimited liability is not required to give this clause in memorandum.

5) Capital Clause :
It contains the capital structure of the company. The amount of capital required by the company is stated in this clause. This is called Authorised capital or Registered capital. The capital is divided into small units called ‘Shares’. The company must mention the number and kinds of shares issued and the value of each share. Company is not authorised to issue shares over and above authorised capital.

6) Subscription or Association Clause :
This clause contains the names of signatories to the memorandum. The memorandum must be signed by at least seven persons in case of public limited company and by at least two persons in case of a private limited company. Each subscriber must take at least one share in the company. The subscribers declare that they agree to incorporate the company and agree to take the shares stated against their names. The signatures of the subscribers are attested by at least one witness each.

Question 5.
What is Articles of Association and also explain its contents.
Answer:
The Articles of Association of a company are its bye-laws or rules and regulations that govern the internal management of the company and the conduct of the business. It determines the relationship between the company and its members as well as among the members themselves. Articles of Association determine the powers of the directors and officers of the company. It must be printed, divided into paragraphs, numbered consecutively and signed by each subscriber of the memorandum and filed with the Registrar.

The contents of Articles of Association:

The Articles of Association is the document which contains the rules and regulations to be followed for the purpose of internal management of the company. It generally contains the following.

1. Rules and regulations.
2. Rules of preliminary contracts.
3. Provisions regarding use of common seal.
4. Procedure of issuing share capital, number and value of shares, issue of shares, , calls on shares, lien on members’ shares, etc.
5. Procedure for transfer and forfeiture’ of shares.
6. Procedure for issue of debentures and stocks.
7. Procedure for alteration of capital
8. Provisions regarding conducting the general meetings, special meetings, voting, proxies, etc. resolutions.
9. Rules regarding appointment of Directors and their remuneration.
10. Provisions relating dividends and reserves.
11. Preparation of Accounts and Audit, and method of appropriation of profits.
12. Winding-up procedure
13. Maintenance of Bank Accounts.

These bye-laws are very useful in inter management of the company.

Question 6.
What is prospectus? Explain the contents of prospectus.
Answer:
A private company can start its business immediately after receiving the Certificate of Incorporation. Whereas a public company has to raise the necessary capital from the public. In that connection the company have to invite the public to subscribe for shares in their company. This invitation to the public is known as “Prospectus”.

Definition :
As per Section 2(36) of the Companies Act, 1956, a prospectus is defined as “Any document described for issued as propectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for purchase of any shares in, or debentures of a body corporate”.

Any advertisement offering shares or debentures of the company for sale to the public is called’Prospectus’.

Contents of Prospectus:
Every prospectus should disclose the matter as specified in Part -1 of Schedule-II to the Compnies Act. Some of the contents which every prospectus must include are

1. Name and full address of the company.
2. The particulars of the signatories to the memorandum of association and the number of shares taken up by them.
3. Name, addresses, and occupations of members of the Board of Directors.
4. The minimum subscription amount fixed by the promoters.
5. The details of property acquired if any.
6. The time of opening of the subscription list.
7. The capital structure of the company, and particulars of issue.
8. The amount payable on application, allotment, and calls.
9. Basis for the issue price
10. The particulars of preferential treatment given to any person for subscribing shares or debentures.
11. The addresses of the underwriters if any.
12. Particulars about reserves and surpluses.
13. The amount of preliminary expenses.
14. The name and address of Auditor.
15. Particulars regarding voting rights at the meetings of the company.
16. Management perception of risk factors.
17. ‘Disclosure of investors’ grievances and redressal system.

Short Answer Questions

Question 1.
What are different types of promoters?
Answer:
The following are different types of promoters.
1) Professional promoters :
The professional promoters are specialized promoters. Specialized promotion is their whole time occupation.

2) Accidental promoters :
They are not specialists in company formation. They promote own firms as entrepreneurs.

3) Financial promoters :
These are the promoters who float new enterprises during favourable conditions in the securities market.

4) Technical promoters :
This type of promoters promote new enterprises on the basis of their specialised knowledge and training in technical fields.

5) Institutional promoters :
These are promoters who provide technical, managerial and financial assistance for the promotion of a company.

Question 2.
Discuss the differences between Memorandum of Association and Articles of Association.
Answer:
Differences between Memorandum of Association and Articles of Association :

Question 3.
Explain the functions of promoters. [May 17 – T.S.]
Answer:
Promoter is the person who assembles the men, money and the materials into a going concern. Promoters are those who take various steps in setting up a business organisation. Promoter is mainly concerned with the promotion of a business venture. Discovery, investigation, assembling and financing, etc. are performed by the promoter.

Functions:

• A promoter conceives an idea for the setting up of a business.
• Promoter makes preliminary investigation and ensures the future prospects of business.
• Promoter brings together various individuals who agree to associate with him and share the business responsiblities.
• He prepares various documents and gets the company incorporated.
• Promoter raises the required finances and gets the company going.

Very Short Answer Questions

Question 1.
Define Promotion.
Answer:
Promotion means undertaking such a step, which would persuade a large number of people to come together for achieving a common goal through the company form of organisation. According to L.H. Haney, “Promotion may be defined as the process of organising and planning the finance of a business enterprise under the corporate form”.

Question 2.
Define MOA.
Answer:
According to Lord Cairns, “Memorandum of Association of a company is charter and defines the limitation of the powers of a company. It contains the fundamental conditions upon which alone the company is allowed to be incorporated”. The Memorandum of Association is the constitution of the company. It is the charter of the company. It provides the foundation on which the company structure is built. It defines the scope of the company’s activities as well as its relation with the outside world.

Question 3.
Minimum Subscription :
Answer:
The minimum amount of capital to be collected by a public limited company before its allotment of shares is known as “minimum subscription”. A public limited company cannot start business unless a minimum subscription as stated in the prospectus has been subscribed. It is fixed by taking into account the following requirements.

• Amount required for the purchase of property.
• Amount required for working capital.
• Amount required for payment of preliminary expenses.
• Amount required for any other expenditure for the formation of company.

Question 4.
Statement in lieu of prospectus :
Answer:
If the public company does not raise its capital by the public issue of shares, then it need not publish a prospectus. In such a company capital may be collected privately and shares may be allotted by the mutal agreement of a few people. Such public company having a share capital, and not issuing prospectus must prepare a statement in lieu of the prospectus and file it with the Registrar of Companies.

Question 5.
Criminal liability for misstatements in Prospectus:
Answer:
In case of Mis-statements or Misrepresentation in Prospectus, it gives rise to impose civil or criminal liability to pay compensation to the persons, who subscribed the shares relying on such false information in the prospectus and also criminal libaility to pay a fine up to Rs. 5000/- or imprisonment up to 2 years or both.

Question 6.
Certificate of commencement of business:
Answer:
A public limited company cannot commence its business unless it received a certificate of business commencement. This certificate is not compulsory for private limited company. It means private company can commence its business without the certificate of business commencement. The Registrar of Companies issues this certificate only when all the legal documents are submitted. Further, the registrar issues this certificate only on the confirmation of collection minimum subscription.

Question 7.
Prsopectus.
Answer:
A prospectus is a document which invites the public to promote funds to the company by way of subscribing to its shares and debentures. The history, nature, and profitability of the company is depicted in the prospectus.

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 6th Lesson Joint Stock Company – Formation Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 6th Lesson Joint Stock Company – Formation

Essay Answer Questions

Question 1.
What is a joint stock company? What are its features of it?
Answer:
Business units may be classified into two types. They are :
1) Non-corporate business units
2) Corporate business units.
The basic demerits of non-corporate business units (i.e., sole proprietorship concerns, partnership firm, joint Hindu undivided family concerns) are limited sources, unlimited liability. To overcome these demerits new business units i.e. corporate business units came into existence.

Joint Stock Company is one of the kind of corporate business units. A joint stock company is a voluntary association of persons formed for undertaking some big business activity. It is established by law and can be dissolved by law. The company has a separate legal entity, so that even if its members die, the company remains in existence. The money so contributed constitutes capital of the company. The capital of the company is divided into small units called shares. Since members invest their money by purchasing the shares of the company they are known as shareholders and the capital of the company is known as share capital.

Company – Definition :
“A company is an artificial person created by law, having a separate legal entity with a perpetual succession and a common seal.” – Section 566 of the Companies Act, 1956

“A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership.

Features:
1) An artificial person created by law :
A company is an aritficial person created by law and existing only in contemplation of law. It is intangible and invisible legal person having no body and soul. .

2) Seperate legal entity :
A company has an independent existence a part from its members. Its assets and liabilities belong to the company and not to its members. It can own property, have a bank account, take a loan, sue (file a case in court) and be sued in its own name.

3) Formation :
A company comes into existence through the operation of law. So, registration must be under the Companies Act.

4) Common seal as a substitute for signature:
A company cannot sign the documents as it is not a natural person. So, each company has a common seal which is like its signature. When any authorised person puts the seal on any paper or document, it is a legal evidence of an act done by the company.

5) Perpetual existence :
A company is an artificial person created by a process of law. Hence, it enjoys perpetual succession (permanent existences) i.e. it never dies. It is said that “members may come and members may go but the company goes on forever”. A company is not affected by death of a member or a new member coming in place of an old member. A company is wound up by law only. It has to act through its directors and employees.

6) Limited liability of members:
The liability of every shareholder is limited to issue price of the shares allotted to him. If the shares are fully paid up-, he is not subject to any further liability.

7) Transferability of shares:
The members of the company (public company) are free to transfer or dispose the shares held by them to any person as and when they like. They do not need the consent of other shareholders to transfer their shares. But in case of private company some restrictions are imposed for transfering shares.

8) Membership :
To form a joint stock company, a minimum of two members are required in case of private limited company and seven members in case to public limited company. The maximum limit is fifty in case of private limited company. There is no maximum limit on the number of members in case of a public limited company.

9) Democratic management:
Since the number share holders are very large and may be distributed at different geographical locations, it becomes difficult for them to carry on operational management of the company on day-to-day board. This gives rise to the need of separation of the management and ownership.

10) Statutory regulations are to be followed :
A company has to comply with and abide by a number of statutory requirements. A company is governed by the Companies Act and it has to invariably follow the various provisions of the Act. For ‘ instance, such companies should submit a number of returns to the government and also its accounts have to be audited by a Chartered Accountant.

Question 2.
Explain the advantages and disadvantages of a joint stock company.
Answer:
A joint stock company is an artificial person created by law with a fixed capital, divisible into transferable shares, with perpetual succession and common seal. The company has a separate legal entity. It must be compulsorily registered. The capital of a company is divided into small units called shares. Any one who holds or buys share in a company is called shareholder.

Joint Stock Company – Advantages:
1) Limited liability :
The liability of shareholders is limited. The risk of loss is limited to the issue price of theshares.

2) Large financial resources :
Company form of organisation enables to mobilise huge financial resources because of principles of limited liabilities and diffusion of ownership. It collects funds in the form of shares of small denominations so that people with small means can also buy them. Benefits of limited liability and transferability of shares attract investors.

3) Continuity of existence :
A company has perpetual or continuous existence. Members may go or new members may come in, but the company goes on for ever.

4) Benefits of large scale operation :
A joint stock company can undertake business on large scale. As a result it can derive all the advantages of large scale production.

5) Liquidity :
The transferability of shares act as an added incentive to investors. The shares of a public company can be traded easily in the stock exchange. The public can buy shares when they have money. The prospective investors can invest and convert shares into cash whenever they need money.

6) Professional management :
Companies, because of their complex nature of activities and large volume of business, require professional managers at every level of their operation. This leads to efficiency in management of their business affairs.

7) Research and development :
A company generally invests a lot of money on research and development for improved processes of production, designing and innovating new products, improving quality of product, new ways of training its staff, etc.

8) Tax benefits :
Although the companies are required to pay tax at a high rate, in effect, their tax burden is low as they enjoy many tax exemptions under Income Tax Act.

Joint Stock Company – Disadvantages :
1) Too many legal formalities:
Formation of a company is a time – consuming process and also expensive. Many legal formalities have to be observed and several legal documents have to be prepared and filed. Delay in formation may deprive the business the momemtum of an early start.

2) Lack of motivation :
The directors and other officers of a company have little personal involvement in the efficient management of a company. Separation between ownership and control and absence of a direct link between effort and reward may lead to lack of personal interest and incentive. It is difficult to keep peronal touch with all the customers and employees. As a result, efficiency of business operations may be low.

3) Delay in decisions :
Redtapism and bureaucratic hurdles do not permit quick decisions and prompt action in company form of organisation. There is little scope for personal initiative and a sense of responsibility. Paid employees like to play safe and tend to shift responsibility. There is lack of flexibility of operations in a company.

4) Economic oligarchy :
The management of company is supposed to be carried on according to the collective will of its members. But in practice, there is rule by a few (Oligarchy). Often directors try to mislead the members and manipulate voting power to maintain and continue their control.

5) Corrupt management:
In a company, there is often danger of fraud and misuse of property by dishonest management. Fake companies may be formed to deprive the investors of their hard-earned money. Unscrupulous people may manipulate annual accounts to show artificial profits or losses for their personal gain.

6) Excessive government control :
A company has to submit many statements and returns to the government. Excessive government control leads to waste of time for the company.

7) Unhealthy speculation :
A few individuals may corner the shares to gain control over the company.

8) Conflict of interests :
Company is the only form of business wherein a permanent conflict of interests may exist. In a company conflicts may continue between shareholders and board of directors or between shareholders and creditors or between management and workers.

9) Lack of secrecy :
Under the Companies Act, a company is required to disclose and publish a variety of information on its working. Widespread publicity of affairs makes it almost impossible for the company to retain its business secrets. The accounts of a public company are open for inspection to public.

Question 3.
Distinguish between a private company and a public company. [Mar. 2019 – A.P. & T.S. – Mar. 2018 – T.S.]
Answer:
On the basis of number of members or public interest companies may be classified into

1. Public company
2. Private company

1) Public company :
According to Companies Act, Public company means a company which (a) is not a private company; (b) has a minimum paid-up capital of ₹ 5 lakhs or such higher paid-up capital and (c) is a private company which is a subsidiary of a company which is not a private company.

2) Private company:
According to Companies Act, Private company means a company which has a minimum paid up capital of one lakh rupees or such higher paid up capital as may be prescribed and by its articles. Restricts the right of members to transfer its shares. Limits the number of its members to 50. Prohibits any invitation to the public to subscribe to any shares in, or debentures of the company. Prohibits any invitation or acceptance of deposits from persons other than its members, directors, and relatives.

Differences between Private company and Public company

Short Answer Questions

Question 1.
List out and briefly explain different types of companies.
Answer:

1) Chartered Companies:
The companies which are established by the Royal charter or special sanction of the Royal Head of the State are called chartered companies. Such companies are granted special privileges and powers to achieve the defined objectives.
E.g.: East India Company.

2) Statutory Company :
These companies are formed by the enactment of special Act by Parliament or State Assembly. The Reserve Bank of India, the State Bank of India, Life Insurance Corporation of India, etc. are the examples of Statutory Companies.

3) Registered Company:
All those companies that are registered under the Companies Act 2013 are called Registered Companies.

4) Government Company :
Government company means any company in which not less than 51% of the paid up capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a government company.

5) Private Company :
A private company is a very suitable form for carrying on the business of family and small concerns. It is registered under the Companies Act 2013.

6) Public Company :
According to the section 2 (71) of the Companies Act of 2013 a company is a said to be public company (a) It is not a private company (b) It has a minimum paid up capital of ₹ 5,00,000 and above (c) It is a private company which is subsidiary of any public company.

7) Companies limited by shares :
In these compaines the liability of the members is limited to the extent of the value of shares held by them.

8) Companies limited by guarantee :
In these companies the members’ liability is not only up to the face value of the shares but also extended to the amount guaranteed by them.

9) Unlimited Companies:
In these companies the liability of the members is unlimited. The members are fully liable for all the debts of the company.

10) Holding Company :
Where one company controls the management of another company, the controlling company is called ‘Holding Company’.
E.g.: If.company A holds more than 5,1% of paid1 up share capital of company B, the company A is called holding company.

11) Subsidiary Company :
Where one company controls the management of another company such- company so controlled fs called subsidiary company.
E.g. : If company A holds more than 51% of paid up share capital of company B, the company B is called subsidiaiy company.

12) Indian Company:
A company registered in Indian having place of business in India called Indian company. It may be a private company or a public company.

13) Foreign Company :
A foreign company is one that is incorporated outside India but has business operations in India.

14) National Company:
Such companies confine their operations within the boundaries of the country in which they are registered.

15) Multi-national Company :
Such companies which extend the areas of their operations beyond the country in which they are registered.

Question 2.
What are the features of a public company?
Answer:
A joint stock company is an artifical person created by law with a fixed capital, divisible into transferable shares, with perpetual succession and common seal. The company has a seperate legal entry. It must be compulsorily registered. The capital of the company is divided into small units called shares. Any one who holds or buys share in a company is called shareholder. Thus a company is defined as an association of persons, having a separate legal existence, perpetual sucession and a common seal.

On the basis of public interest company may be classified into two types.

1. Private Limited Company
2. Public Limited Company.

Public Limited Company – Features :
It is suitable form of company for carrying on the business at large scale involving huge amount of capital. According to section 2(71), Public company is one which has the following features.

• The minimum paid up capital is ₹ 5,00,000.
• The minimum number of members is seven.
• The maximum number of members is unlimited. Such a company must use the word “Ltd” as part of its name.

A public company must write public limited or simply limited after its name. Steel Authority of India Limited, Bajaj Auto Limited, Reliance Industries Limited, and Hindustan Lever Limited are the examples of public companies.

Question 3.
What are the features of a private company?
Answer:
Sole proprietorship, Joint Hindu family and partnership form of business organisations could not meet the needs of modern industry and commerce because of their limitations like limited resources, unlimited liability, etc. The need for another form of organisation free of the above limitations was felt thus joint stock type of company came into existence as it can raise large resources with risk of unlimited liability, deploy huge capital, use modern technology, introduce specializations and run with professionalism.

On the basis of public interest company may be classified into two types

1. Private limited company
2. Public limited company.

Private Limited Company – Features :
According to section 2(68) of the Companies Act 2013 private company means company which has a minimum paid up capital of one lakh rupees or such higher paid – up-capital as may be prescribed and by its articles.

1. Restricts the rights of members to transfer its shares.
2. Limits, the number of its member to 50.
3. Prohibit any invitation to the public to subscribe to any shares in, or debentures of the company.
4. Prohibits any invitation or acceptance of deposits from persons other than its members, directors, and relatives.

Very Short Answer Questions

Question 1.
Define company.
Answer:
The word ‘Company’ implies a group of people who voluntarily agree to form a company and derived from the Latin word ‘com’ i.e., with or together and ’panis’ i.e., bread. It refers to an association of persons discussing matters and taking food together. However, in law company is termed as a company which is formed and registered under the Companies Act 2013.

“A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership.” -L.H. Haney

Question 2.
What is a Government company? [Mar. 2019 – A.P. & T.S.Q Mar. 2018 – A.P.]
Answer:
Government company means any company in which not less than 51% of the paid up capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a government company.

Question 3.
What do you mean by a statuatory company?
Answer:
There are companies formed by the enactment of special Act by Parliament or State Assembly. The Reserve Bank of India, the State Bank of India, Life Insurance Corporation of India, etc. are the examples of Statutory Companies.

Question 4.
Chartered Company
Answer:
The companies which are established by the Royal charter or special sanction of the Royal Head of the State are called chartered companies. Such companies are granted special privileges and powers to achieve the defined objectives.
iE.g.: East India Company.

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 5th Lesson Partnership Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 5th Lesson Partnership

Essay Answer Questions

Question 1.
Define Partnership. Discuss its merits and limitations. [Mar. 2019; May 17 – T.S. M Mar. 15 – A.P. & T.S.]
Answer:
Partnership is an association of two or more persons who pool their financial and managerial resources and agree to carry on a business with profit motive. The persons who are enter into partnership individually called ‘Partners’ and collectively known as ‘Firm’.

Partnership – Definition :
Partnership is “the relation between two or more persons who have agreed to share the profits of a business carried on by all or any one of them acting for all” – Section 4 of the Indian Partnership Act, 1932.

Merits:
1) Easy to form :
A partnership can be formed easily without many legal formalities. Since it is not compulsory to get the firm registered, a simple agreement, either in oral, writing or implied is sufficient to create a partnership firm.

2) Availability of larger resources :
A partnership firm consists of more than one person, it may be to pool more resources as compared to sole proprietorship.

3) Better decisions :
In partnership firm each partner has a right to take part in the management of the business. All important decisions are taken in consultation with and with the consent of all partners. Thus, collective wisdom prevails and there is less scope for reckless and hasty decisions.

4) Flexibility:
The partnership firm is a flexible organisation. Changes in the business can be adopted easily. At any time the partners can change the size or nature of business or area of its operation after taking the necessary consent of all the partners.

5) Sharing of risks:
The losses of the firm are shared by all the partners equally or as per the agreed ratio.

6) Protection of interest:
In partnership form of business organisation, the rights of each partner and his/her interests are fully protected. If a partner is dissatisfied with any decision, he can ask for dissolution of the firm or can withdraw from the partnership.

7) Secrecy :
Business secrets of the firm are known to the partners only. It is not required to disclose any information to the outsiders. It is also not mandatory to publish the annual accounts of the Partnership firm.

Limitations:
1) Unlimited liability :
The partners liability is unlimited. This is the most important drawback of partnership. The partners are personally liable for the debts and obligations of the firm. In other words, their personal property can also be utilised for payment of firm’s liabilities.

2) Limited capital:
Since the total number of partners cannot exceed 20, the capacity to raise funds remains limited as compared to a joint stock company where there is no limit on the number of share holders.

3) Non-transferability of share :
In partnership firm, the partners cannot transfer his share of interest to other without consent of remaining partners.

4) Possibility of conflicts:
Differences and disputes among the partners are common. These conflicts harm to the firm. Difference of opinion may give rise to quarrels and lead to dissolution of the firm.

Question 2.
Is registration of Partnership compulsory under the Partnership Act, 1932? Explain the procedure required for registration of a firm.
Answer:
Partnership is an association of two or more persons who pool their financial and managerial resources and agree to carry on a business, and share its profits or losses. The persons who form a partnership are individually known as ‘Partners’ and collectively a firm or partnership firm.

The Indian Partnership Act, 1932 does not make it compulsory for a firm to be registered; but there are certain disabilities which attach to an unregistered firm. These disabilities make its virtually compulsory for a firm to be registered. Registration can take place at any time.

The procedure for registration of a firm is as follows:

1. The firm will have to apply to the Registrar of Firms of the state concerned in the prescribed form.
2. The firm will have to apply to the Registrar of firms of the state concerned in the prescribed form. For this, a form containing the following particulars, accompanied by a fee of ₹3/- has to be sent to the Registrar of Firms.
   a) The name of the firm
   b) Location of the firm
   c) Names of other places where the firm carries on business
   d) The name in full and addresses of the partners
   e) The date on which various partners joined the firm.
   f) The duration of the firm
3. The duly filled in form must be signed by all the partners. The filled in form along with prescribed registration fee must be deposited in the office of the Registrar of Firms.
4. The Registrar will scrutinise the application, and if he is satisfied that all formalities relating to registration have been duly complied with, he will put the name of the firm in his register and issue the Certificate of Registration.

Question 3.
Discuss different types of Partners. [Mar. 2019; May 17 – A.P. Mar. 17 – T.S.]
Answer:
A Partnership firm can have different types of partners with different roles and liabilities. Some of them may take part in the management while other may contribute capital.

1) Active Partners or Working Partners:
The partners who actively participate in the day-to-day operations of the business are known as active partners or working partners.

2) Sleeping Partners :
The partners, who simply provide capital and do not participate in the management activities of the firm are called sleeping partners.

3) Nominal Partners :
Nominal partners allow the firm to use their name as partner. They neither invest any capital nor participate in the day-to-day operations. They are not entitled to share the profits of the firm. However they are liable to third parties for all the acts of the firm.

4) Partners in Profits :
A person who shares the profits of the business without being liable for the losses is known as partner in profits. This is applicable only to the minors who are admitted to the benefits of the firm and their liability is limited to their capital contribution.

5) Limited Partners :
The partners whose liability is limitied in a firm are called limited partners. They are also known as special partners.

6) General Partners :
The partners having unlimited liability are called general – partners. According to Indian Partnership Act, 1932 the liability of the partner is unlimited. So they are general partners (excpet minor partner).

7) Partner by Estoppel:
A person, who behaves in the public is such a way as to give an impression that he/she is a partner of the firm, is called partner by Estoppel. Such partners are not entitled to share the profits of the firm, but are, fully liable if somebody suffers because of his/her false representation.

8) Partner by Holding out:
Sometimes, the firm may use the name of a person in its activities, creating a sense in the public that he is also a partner. If that person accepts the same, he becomes automatically responsible to the third parties. Such person is known as “Partner by Holding out”.

4. What is Partnership Deed? And also explain its contents. [Mar. 2018 – T.S.]
Answer:
Partnership is an association of two or more persons who pool their financial and managerial resources and agree to carry on a business, and share its profits or losses. Partnership was established among partners through an agreement. Such agreement may be in the form of oral or written. If partnership agreement is in registration it is known as Partnership Deed.

Partnership Deed is a document containing the terms and conditions of a partnership. It is an agreement in writing signed by the partners duly stamped and registered. The Partnership deed defines certain rights, duties and obligations of partners and governs relations among them in the conduct of business affairs of the firm.

The Partnership deed must not contain any term which is contrary to the provisions of the Partnership Act. Each partner should have a copy of the deed.

The following points are generally included in the deed.

Partnership Deed – Contents

1. Name of the firm
2. Nature of the business
3. Names and addresses of partners
4. Location of business
5. Duration of partnership, if decided
6. Amount of capital to be contributed by each partner
7. Profit and loss sharing ratio
8. Duties, powers and obligations of partners
9. Salaries and withdrawals of the partners
10. Preparation of accounts and their auditing
11. Procedure for dissolution of the firm
12. Procedure for settlement of disputes

Short Answer Questions

Question 1.
Define Partnership and state its important features. [Mar. 17 – A.P.]
Answer:
Partnership is an agreement between two or more persons to carry on business with profit motive, carried on by all or any one of them acting for all.

Partnership – Definition :
“Partnership is the relation existing between persons competent to make contract, who agree to carry on a lawful business in common with a view to private gain.” – L.H. Haney

“The relation between persons who have agreed to share the profits of a business carried on by all of them acting for all.” – Indian Partnership Act, 1932, Section 4

Partnership Firm – Features:
The following are the important features of partnership organisation.

1. Formation
2. Unlimited liability
3. Existence of lawful business
4. Principal agent relationship
5. Voluntary registration

1) Formation :
The partnership form of business organisation is governed by the provision of Indian Partnership Act, 1932. It comes into existence through a legal agreement where in the terms and conditions governing the relationship among partners. Partnership formation is very easy.

2) Unlimited Liability :
The liability of partner is unlimited, joint and several. Personal assets may be used for repaying debts in cases the business assets are insufficient. All the partners are responsible for the debts and they contribute in proportion to their share in business and as such are Habile to that extent.

3) Existence of lawful business:
The business to be carried on by a partnership must always be lawful. Any agreement to indugle in sumuggling, black marketing, etc. cannot be called partnership business in the eyes of law.

4) Principal agent relationship :
Each partner is an agent of the firm. He can act on behalf of the firm. He is responsible for his own acts and also the acts on behalf of the other partners. There must be an agency relationship between the partners.

5) Voluntary registration :
The registration of a partnership firm is not compulsory. But an unregistered firm suffers from some limitations which make it virtually compulsory to be registered.

Question 2.
Discuss the registration procedure of partnership.
Answer:
The Indian Partnership Act, 1932 does not make it compulsory for a firm to be registered; but there are certain disabilities which attach to an unregistered firm. These disabilities make it virtually compulsory for a firm to be registered. Registration can take place at any time. The procedure for registration of a firm is as follows:

1. The firm will have to apply to the Rigistrar of Firms of the state concerned in the prescribed form.
2. The firm will have to apply to the Registrar of Firms of the state concerned in the prescribed form. For this, a form containing the following particulars, accompanied by a fee of Rs. 3/- has to be sent to the Registrar of Firms.
   a) The name of the firm
   b) Location of the firm
   c) Names of other places where the firm carries on business
   d) The name in full and addresses of the partners
   e) The date on which various partners joined the firm
   f) The duration of the firm
3. The duly filled in form must be signed by all the partners. The filled in form along with prescribed registration fee must be deposited in the office of the Registrar of Firms.
4. The Registrar will scrutinise the application, and if he is satisfied that all formalities relating to registration have been duly complied with, he will put the name of the firm in his register and issue the Certificate of Registration.

Question 3.
Briefly explain the rights of partners.
Answer:
The rights and duties of the partners of a firm are usually governed by the partnership agreement among the partners. In case the Partnership Deed does not specify them, then the partners will have rights and duties as laid down in the Indian Partnership Act, 1932.

Rights of Partners :

1. Every partner has a right to take part in the management of the business.
2. Right to be consulted and expressed his opinion on any matter related to the firm.
3. Partner has a right to inspect the books of accounts or to copy them.
4. Right to have an equal share in the profits or losses of the firm, unless and otherwise agreed by the partners.
5. Right to receive interest on loan and advances made by partner to the firm.
6. Right to the partnership property unless and otherwise mentioned in the partnership deed.
7. Every partner has power or authority, in an emergency, to do any such acts, for the purpose of protecting the firm from losses.
8. Right to prevent the introduction of a new partner without consent of other partners.
9. Right to act an agent of the partnership firm in the ordinary course of business.
10. Right to be indemnified for the expenses incurred and losses sustained by partner to the firm.

Question 4.
Briefly explain the duties of partners.
Answer:
Generally, the Partnership Deed contains rights and duties of the partners. If deed is not prepared, the provisions of the Partnership Act will apply. Also when deed is in silent on any point, the relevant provisions of the act will apply.

Duties of Partners

1. Every partner has to attend diligently to his duties in the conduct of the business.
2. Should act in a just and faithful manner towards other partner and partners.
3. Should bound to share the losses of the firm equally unless and otherwise agreed upon by all partners.
4. No partner shall carry on any business competing with the firm. If he does so, he has to render to the firm any profits arising out of such business.
5. Must maintain true and correct accounts relating to the firm’s business.
6. No partner should make secret profits by way of commission or otherwise from the firm’s business.
7. Every partner is bound to keep and render true and proper accounts of the firm to his copartners.
8. No partner is allowed to assign or transfer his rights and interest in the firm to an ‘ outsider without the consent of other partners.

Question 5.
Explain the ways of dissolution of a Partnership Firm.
Answer:
The partnership is established through an agreement among partners. The partnership firm is established through partnership. A distinction should be made between the “Dissolution of partnership” and “Dissolution of firm”.

Dissolution of Partnership:
Dissolution of partnership implies the termination of the original partnership agreement or change in contractual relationship among partners. A partnership is dissolved by the insolvency, retirement, incapacity, death, expulsion, etc. of a partner or on the expiry/ completion of the term of partnership.

A partnership can be dissolved without dissolving the firm.
In dissolution of partnership, the business of the firm does not come to an end. The remaining partners continue the business by entering into a new agreement. On the Other hand, dissolution of firm implies dissolution between all the partners. Thus, business of the partnership firm comes to an end. The remaining partners continue the business by entering into a new agreement.

Dissolution of Firm:
Dissolution of firm implies dissolution between all the partners. The business of the partnership firm comes to an end. Its assets are realised and the creditors are paid off. Thus, dissolution of firm always involves dissolution of partnership but the dissolution of partnership does not necessarily mean dissolution of the firm.

Dissolution of the firm takes place under certain circumstances.
1) Dissolution by agreement:
A partnership firm may be dissolved with the mutual consent of all the partners or in accordance with the terms of the agreement.

2) Dissolution by notice :
In case partnership-at-will, a firm may be dissolved, if any partner gives a notice in writing to other partners indicating his intention to dissolve the firm.

3) Contingent dissolution :
A firm may be dissolved on the expiry of the firm, completion of the venture, death of a partner, adjudication of a partner as insolvent.

4) Compulsory dissolution:
A firm stands automatically dissolved if all partners or all but one partner are declared insolvent, or business becomes unlawful.

5) Dissolution through Court:
Court may order the dissolution of a firm, when any partner becomes members unsound, permanently incapable of performing his duties, guilty of misconduct, wilfully and persistently commits breach of the partnership agreement, unauthorised transfers the whole of his interest or share in the firm to a third person.

Very Short Answer Questions

Question 1.
Partnership Firm
Answer:
Partnership is an association of two or more persons who pool their financial and managerial resources and agree to carry on a business, and share its profits or losses. Partnership was established among partners through an agreement. Such agreement may be in the form of oral or written. If partnership agreement is in registration, it is known as partnership deed.

Question 2.
Partnership Deed [May 17 -A.P.]
Answer:
Partnership Deed is a document containing the terms and conditions of a partnership. It is an agreement in writing signed by the partners duly stamped and registered. The partnership deed defines certain rights, duties and obligations of partners and gov- erj^s relations among them in the conduct of business affairs of the firm.

Question 3.
Active Partner [Mar. 2018, -A.P. & T.S.]
Answer:
The partners who actively participate in the day-to-day operations of the business are knovyn as active partners or working partners.

Question 4.
Sleeping Partner
Answer:
The partners, who simply provide capital and do not participate in the management activities of the firm are called sleeping partners.

Question 5.
Partner by Estoppel
Answer:
A person who behaves in the public in such a way as to give an impression that he/she is a partner of the firm is called partner by estoppel. Such partners are not entitled to share the profits of the firm, but are fully liable if somebody suffers because of his/her false representation.

Question 6.
Prartner by Holding out
Answer:
Sometimes, the firm may use the name of a person in its activities, creating a sense in the public that he is also a partner. If that person accepts the same, he becomes automatically responsible to the third parties. Such person is known as “Partner by Holding Out”.

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 4th Lesson Joint Hindu Family Business & Co-op Society Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 4th Lesson Joint Hindu Family Business & Co-op Society

Essay Answer Questions

Question 1.
What is Joint Hindu Family Business and discuss its main features? [May 17 – T.S.]
Answer:
A joint Hindu Family Business is a form of business, which is owned and managed by the members of a Joint Hindu Family. It is also known as a Hindu undivided family business. It is a unique Indian business institution, governed by the provisions of Hindu law. It is managed by the head of the family, known as Karta. The other members are called ‘Co-parceners’. All of them have equal ownership right over the properties of the business.

The membership of the JHF is acquired by virtue of birth in the same family. There is no restriction for minors to become members of the business. The Joint Hindu Family Business is governed by two Hindu laws. They are

1. Dayabhaga
2. Mitakshara

Features :
The important features of the Joint Hindu Family Business are as under.

1) Formation :
In JHF business there must be at least two members in the family, having some ancestral property. It is not created by an agreement but by operation of law.

2) Legal Status :
The Joint Hindu Family business is a jointly owned business. It is governed by the Hindu Succession Act, 1956.

3) Membership:
Outsiders are not allowed as members in the JHF. Only the members of undivided family acquire coparcenership rights by birth.

4) Profit Sharing :
Profits are distributed among coparceners in the JHF equally.

5) Management :
JHF is managed by the eldest male member of the family called Karta.

6) Liability:
The liability of Karta alone is unlimited while liability of other coparceners is limited to their share or interest in the coparcenary.

7) Continuity :
Death of any coparceners does not affect the continuity of business. Even on the death of the Karta, it continues to exist as the eldest of the coparceners takes position of Karta. However, JHF business can be dissolved either through mutual agreement or by partition suit in the court.

Question 2.
Define the Cooperative Society. Explain its features.
Answer:
The term ’cooperation’ is derived from the Latin word ’co-operari’. The word ‘Co’ means ’with’ and ’operari’ means ’to work’. Thus, the term cooperation means working together. So, those who want to work together with some common economic objective can form a society, which is termed as Cooperative Society.

Cooperative Society – Definition : “A society which has its objectives for the promotion of economic interests of its members in accordance with cooperative principles.” – The Indian Cooperative Societies Act 1912, Section – (4).

Features:
1) Voluntary association :
In cooperative society the membership is voluntary. Anybody having a common interest is free to join a cooperative society.

2) Number of members :
A minimum of 10 members are required to form a cooperative society. In case of multi-state cooperative societies, the minimum number of members should be 50 from each state in case the members are individuals. However, after the formation of the society, the member may specify the maximum number of members.

3) Separate legal entity :
A cooperative society is based on the service motive of its members. Its main objective is to provide service to the members and not to maximize profit.

4) Limited liability :
The liability of the members of the cooperative society is restricted to the extent of shares subscribed by them.

5) Capital :
The capital of the cooperative society is contributed by its members. Since the members’ contribution is very limited, it often depends on the loan from government, and apex cooperative institutions or on the grants and assistance from state and central government.

6) Service motive :
The primary objective of all cooperative societies is to provide services to its members.

7) Equal voting rights:
In a cooperative society, the principle of one man one vote is adopted.

8) Democractic management:
The management of a cooperative society is based on democratic lines. The members of the society elect directors to conduct and control the business.

9) Distribution of surplus :
After giving a limited dividend to the members of the society, the surplus is distributed in the form of bonus, keeping aside a certain percentage as reserve and for general welfare of the society.

10) Registration of the society :
In India, cooperative societies are reistered under the Cooperative Society Act 1912 or under the State Cooperative Societies Act. The Multi-state Cooperative Societies are registered under the Multi-state Cooperative Societies Act 2002. Once registered, the society becomes a separate legal entity and attains certain characteristics.

Question 3.
A cooperative form of organisation is a method of ‘Self Help’ – Discuss.
Answer:
The term ‘cooperation’ is derived from the Latin word ‘co-operari’. The word ‘Co’ means ‘with’ and ‘operari’ means ‘to work’. Thus, the term cooperation means working together. So, those who want to work together with some common economic objective can form a society, which is termed as ‘Cooperative Society’.

Cooperative Society is a voluntary association of persons who work together to promote their economic interests. It works on the principle of slef-help and mutual help. The primary objective is to provide support to the members. The motto of a cooperative society is “Each for all and all for each”. People come forward as a group, pool their individual resources, utilise them in the best possible manner and derive some common benefits out of it.

The primary objective of all cooperative societies is to provide services to its members. The membership is open to all those haying a common economic interest. Any person can become a member irrespective of his/her caste, creed, religion, colour, sex, etc. Cooperative societies are started not for profit but for service. The members are provided with goods at cheaper rates. Financial help is also given to members at concessional rates. A feeling of cooperation is created among members. So, a cooperative form of organisation is a method of “self help through mutual help”.

Question 4.
State the advantages and disadvantages of Hindu undivided family business organisation.
Answer:
Joint Hindu Family Business in the form of business which is owned and managed by the members of a Joint Hindu Family. It is also known as Hindu undivided family business.

JHF – Advantages:
1) Continuity :
It is not dissolved by the death or insanity of a coparcener.

2) Centralized and efficient management:
The management of Joint Hindu Family firm is vested in the hands of Karta only. This results in the unity of command and disciplined management.

3) No limit to membership:
It can have any number of members unlike other organisations. The members of the family become members only by birth. So there is no limit to membership.

4) Better credit:
This form of business firm is having better credit worthiness than the sole trader.

5) Limited liability :
The liability of the members is limited. But the liability of Kartha is unlimited.

JHF – Disadvantages:
1) Lack of direct relationship :
Karta alone looks after the business of the firm. But benefits are shared by all the coparceners. Thus incentive to Karta for efficient and painstaking management may be lacking.

2) Limited managerial ability :
For expansion and growth of the business in Joint Hindu Undivided Family, the managment and control of the business becomes difficult, as the Kartha alone has to manage.

3) Limited resources :
The resources of a Joint Hindu Family are limited as compared with the patnership and joint stock company.

Question 5.
Discuss the merits and demerits of cooperative form of organization.
Answer:
Cooperative Societies – Merits:
1) Simple Formation :
It is easy and simple to form a cooperative society. There is no need to comply with a number of legal formalities as in the case of a joint stock company. Cooperative society can be formed with minimum 10 members. The procedure for registration is very simple.

2) Democractic management:
Every member has only one vote irrespective of the number of shares held by him. Meeting are well attended and voting by proxy is not allowed. As such the management of the society is democratic.

3) Voluntary service :
The members serve the society voluntarily. Hence the management expenses are minimized. “Self help#through mutual help” is the main principle.

4) Low operating cost :
The administrative expenses of a cooperative society are usually low. Many members provide administrative services honorarily.

5) Limited liability :
The liability of the members, is limited to the extent of the value of their shares.

6) Perpetual existence :
A cooperative enterprise is not effected by the retirement, death, or insanity by any .member. It has continuous existence.

7) State patronage :
The government is helping cooperative organisation to their r success. A number of concessions and tax relief are given by the government for encouraging society form of organization.

8) Aim of mutual prosperity :
Cooperatives function on the principle of “Each for all . and all for each” with the aim of mutual prosperity.

Cooperative Societies – Demerits :
1) Limited financial resources :
Restriction on divided and the principle of “one member, one vote” discourage rich people from joining the society. Due to shortage of funds, there is limited scope for expansion and growth.

2) Lack of unity among members:
Many cooperatives fail because of constant group rivalry and quarrels among members.

3) Non-transferability of shares :
A member cannot transfer his shares freely but he can be allowed to withdraw his capital.

4) Political interference :
Government nominates members to the managing commit¬tees. Every government tries to send their own party members to these societies.

Short Answer Questions

Question 1.
Briefly explain the different types of cooperative societies.
Answer:
The main object of cooperative society is rendering services to its members. The members associate together on the basis of equity. They contribute capital to the business on democratic lines. Every person has one vote irrespective of the capital contributed by him. They undertake reasonable risk.

Types of Cooperative societies :
According to services rendered, cooperatives may be classified into the following categories.

1. Consumers’ cooperative societies
2. Producers’ cooperative societies
3. Marketing cooperative societies
4. Housing cooperative societies
5. Farming cooperative societies
6. Credit cooperative societies

1) Consumers’ cooperative societies :
A consumers cooperative society is set up to ensure a steady supply of essential goods of standard quality at fair prices.

2) Producers’ cooperative societies :
These societies are formed to protect the interest of small producers and artisans by making available items of their need for production, like raw materials, tools and equipments, etc.

3) Marketing cooperative societies :
Small producers form together as marketing cooperative societies to solve the marketing problems of their products.

4) Housing cooperative societies :
The housing cooperative societies are formed to provide residential accommodation to their members either on ownership basis or at fair rents. Housing cooperative buys land and constructs flats which are allotted to members.

5) Farming cooperative societies:
These societies are formed by the small farmers to get the benefit of large scale farming.

6) Credit cooperative societies :
There societies are started by persons who are in need of credit. They accept deposits from the members and grant them loans at reasonable rate of interest.

Very Short Answer Questions

Question 1.
Karta
Answer:
The business of a Joint Hindu Family is managed by the senior most male member of the family Who is known as Karta. The Karta has only the legal right to enter into contracts on behalf of the family business. Other members cannot question the decisions taken by the Karta.

Question 2.
Coparcener
Answer:
In a Joint Hindu Family business, the members of a Hindu Joint Family own the business jointly. Only the male members of the family up to three successive genera¬tions become members by virtue of their birth. They are called “Coparceners”.

Question 3.
Dayabhaga
Answer:
This school of Hindu law prevails only in West Bengal, Assam states. According to this law, if the deceased male coparcener has not left behind a male issue his widow (or in her absence daughter) will become a coparcener.

Question 4.
Mitakshara
Answer:
This school of HUF prevails in entire India except in West Bengal and Assam. Family members of male line and their wives, unmarried daughters are its members. By birth in the family, he gets the right on existing property. By birth a member gets a share in common propety, it continues till his death. In this way shares in the property get fluctuated in accordance with number of coparceners.

Question 5.
What do you mean by Cooperative Society?
Answer:
Cooperative society is a voluntary association of persons who work together to promote their economic interest. It works on the principle of self-help and mutual help. The primary objective is to provide support to the members. The motto of a cooperative society is “Each for all and all for each”.

Question 6.
Consumers’ cooperative societies
Answer:
Consumers’ cooperative societies are set up to ensure a steady supply of essential goods of standard quality at reasonable rates.
Eg : Vijay Krishna super markets.

Question 7.
Producers’cooperative societies
Answer:
These societies are formed to protect the interest of small producers and artisans by making available items of their need for production, like raw material, tools and equipments, etc.

Question 8.
Credit cooperative societies
Answer:
These societies are started by persons who are in need of credit. They accept deposits from the members and grant them loans at reasonable rate of interest.

Question 9.
Housing cooperative societies
Answer:
The housing cooperative societies are formed to provide residential accommodation to their members either on ownership basis or at fair rents. Housing cooperative buys land and constructs flats which are allotted to members.

Question 10.
Farming cooperative societies
Answer:
These societies are formed by the small farmers to get the benefit of large scale farming.

Question 11.
Marketing cooperative societies
Answer:
Small produces form together as marketing cooperative societies to solve the marketing problems of their products.

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 3rd Lesson Forms of Business Organization Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 3rd Lesson Forms of Business Organization

Essay Answer Questions

Question 1.
Define Sole Proprietorship and discuss its merits and demerits. [Mar. 17 ; May 17- A.P.]
Answer:
A business unit is commenced with a single person i.e. owned by a single person it is called “Sole proprietorship concern”. The person who does the business is called sole trader. The individual may run the business on his own or may obtain the assistance of employees.

Sole proprietorship concern is also known as individual entrepreneurship, it is easiest to form and is also the simplest in organisation. In the sole trading concerns the sole trader contributes capital and runs the business. There are no legal formalities to be followed except those required for a particular type of business.

A sole proprietor contributes and organises the resources in a systematic way and controls the activities with objective of earning profit.

Sole proprietorship – Definitions:
“A type of business unit where one person is solely responsible for providing the capital and bearing the risk of the enterprise, and for the management of the business.” – J.L. Hanson

“Sole proprietorship is a form of business where the individual proprietor is the supreme judge of all matters pertaining to his business.” – Kimball and Kimball

Merits:
The following are the merits of sole proprietorship concern.

1. Easy to form
2. Quick decision and prompt action
3. Direct contact with customers
4. Flexibility in operation
5. Maintence of business secrets
6. Motivation
7. Self employment

1) Easy to form :
It is very and simple to form a sole proprietorship form of business organisation. Less legal formalities are required to be observed. Naturally, the business can be wound up any time if the proprietor so decides.

2) Quick decision and prompt action :
Since he is the sole organizer, he can take quick decisions. He can act promptly according to the changes in the market. Because, nobody interferes in the affairs of the sole proprietory organisation.

3) Direct contact with customers :
He is the owner and manager of the concern. He will be in a position to study the tastes and needs of customers personally since he establishes good contacts with them.

4) Flexibility in operation :
It is very easy to initiate and implement charges as per the requirements of the business. The expansion or curtailment of Forms of Business Organization does not require many formalities as in the case of other forms of business organisation.

5) Maintenance of business secrets :
The business secrets are known only to the proprietor. He is not required to disclose any information to others unless and until he himself so decides. He is also not bound to publish his business accounts.

6) Motivation:
In this organisation the entire profit of the business goes to the owner. This motivates the proprietor to work hard and run the business effectively and efficiently.

7) Self-employment:
Small scale units can be easily started. Nationalised banks are also helping in this direction.

Demerits:
The following are the demerits.

1. Limited resources
2. Lack of continuity
3. Unlimited liability
4. Limited managerial skills

1) Limited resources :
The resources of a sole proprietor are always limited. Being the single owner, it is not always possible to arrange sufficient funds from his own sources. So, the proprietor has a limited capacity to raise funds for his business.

2) Lack of continuity :
The continuity of the business is linked with the life of the proprietor. Illness, death or insolvency of the proprietor can lead to closure of the business. Thus, the continuity of business is uncertain.

3) Unlimited liability :
As per law, the proprietor and business are one and same. So personal proprietors of the owner can also be used to meet the business obligations and debts.

4) Limited managerial skills :
As there is only one man the managerial ability is limited. The sole trader has limited financial sources, administration, sale and marketing skills. However, all skills required to take decisions may not be present in a single person alone.

Question 2.
“One man management is best in the world provided one man is big enough to take care of everything.” Discuss.
Answer:
Business organisation is an organised entity having group of people working together to achieve or common goal. In order to achieve the desired goal, try to organisations mobilise capital or finance, employ labour or man power and other resources like land and building, plant and machinery, furniture and fitting, etc. Finally, all these resources are put together in a useful manner to achieve the end results.

Sole proprietorship concern is one of the business organisations. When a business organisation is owned by a single person, it is called sole trade in concern. It is also known as “one man’s business”. The person who does the business is called the sole trader or sole proprietor. The sole trader carries on business by himself and for himself. He is the proprietor, manager and controller of business. He enjoys all profits and bears all losses.

According to James Stephenson, a sole trader is a person who carries on business exclusively by and for himself. The leading feature of this kind of concern is that the individual assumes full responsibility for all risks connected with conduct of business. He is not only the owner of the capital of the undertaking, but is usually the organizer and manager and takes all the profits or responsibility for losses.

Sole proprietorship has several advantages but proves to be inadequate as the business expands. One man control is ideal if the man is competent enough to manage everything. But in reality, one man cannot look after every aspect of business. Therefore, sole proprietorship is suitable for small scale business.

In spite of all the limitations, a sole trading concern is a popular form of organisation in all parts of the world. Thus, we can say that it has its own place in the field of business even today. Its future is bright. In the words of William R. Basset, “One man control is the best in the world, if that one man is big enough to manage everything. But a business must be small, indeed to permit one man actually to know and to supervise everything. The danger is always present that he thinks he knows, when really he does not know. If the one man is away or ill, the business stops and when he dies, business vanishes or has to be rebuilt”. Thus, one man control is strictly limited to small business only.

Short Answer Questions

Question 1.
What is sole proprietorship?
Answer:
A sole proprietor contributes and organises the resources in a systematic way and controls the activities with the objective of earning profit.

The sole proprietorship is that form of business ownership which is owned and controlled by a single individual. He receives all the profits and bears risks of his property in the success of failure of the ent.erprises^It is the first stage in the evolution of the forms of organisation and is thus, the oldest among them,

Sole proprietorship also known as individual entrepreneurship, it is the easiest to form and is also the simplest in organisation. All that is required is that the individual concerned should decide to carry on some particular business and find the necessary capital. For this purpose, he may depend mostly on his own savings, or else, he may borrow part or whole from his friends or relatives. There are no legal formalities to be followed except those required for a particular type of business.

Question 2.
Explain the features of sole proprietor.
Answer:
“Sole proprietorship is a form of business where the individual proprietor is the supreme judge of all matters pertaining to his business.” – Kimball and %imball

The important features of sole proprietorship :

1. The business is owned by only one person.
2. The business is controlled by a single individual.
3. The risk is borne by a single person only i.e. sole trader.
4. The liability of the sole trader is unlimited.
5. The business concern has no separate legal entity, i.e. as per law the sole trader and firm both are same.
6. To commencement of business, legal formalities are very less. So it is easiest form.
7. Decisions are made by sole trader only.

Thus, a sole proprietor or trader is a person who sets up his business with his own resources. He is the owner, entreprenuer, financier, manager, controller of Lie business and sole responsible for the results of its operations.

Question 3.
Explain the limitations of sole trader.
Answer:
The following are the limitations of sole trading concern.

1. Limited resources
2. Lack of continuity
3. Unlimited liability
4. No suitable for large scale operations
5. Limited managerial skills

1) Limited resources :
The resources of a sole proprietor are always limited. Being the single owner, it is not always possible to arrange sufficient funds from his own sources. So, the proprietor has a limited capacity to raise funds for his business.

2) Lack of continuity :
The continuity of the business is linked with the life of the proprietor. Illness, death or insolvency of the proprietor can lead to closure of the business. Thus, the continuity of business is uncertain.

3) Unlimited liability :
As per law, the proprietor and business are one and same. So personal proprietors of the owner can also be used to meet the business obligations and debts.

4) Not suitable for large scale operations :
Since the resources and the managerial ability is limited, sole proprietorship form of business organisation is not suitable for large scale business.

5) Limited managerial skills :
As there is only one man the managerial ability is limited. The sole trader has limited financial sources, administration, sale, and marketing skills. However, all skills required to take decisions may not be present in a single person alone.

Very Short Answer Questions

Question 1.
No separate entity
Answer:
The sole proprietorship unit does not have an entity separate from the owner. The businessman and its enterprise are one and the same, and the businessman is responsible for everything that happens in his business firm.

Question 2.
Unlimited liability
Answer:
The liability of the sole proprietor is unlimited. In case of loss, if his business assets are not enough to make the payment of business liabilities, his personal property can also be utilised to pay off the liabilities of the business.

Question 3.
Forms of business organisation
Answer:
Arrangement of ownership and management of business organisations is termed as “Form of business organisation”. Business organisations may be owned and managed by a single individual (sole proprietorship) or a group of individuals (partnership) or in the form of a company (joint stock company).

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 2nd Lesson Business Activities Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 2nd Lesson Business Activities

Essay Answer Questions

Question 1.
What is meant by Industry? Explain various types of industries with suitable. [Mar. 2019, 18 – T.S. Mar. 16 – A.P.]
Answer:
Industry – Meaning :
Industry is concerned with the production of goods and services. Industry is involved to convert raw materials into finished goods. It creates form utility to goods.

Classification of Industries :
Industries can be classified into various types. They are

1. Primary industry
2. Genetic industry
3. Extractive industry
4. Manufacturing industry
5. Construction industry
6. Service industry

1) Primary Industry :
Primary industry is concerned with the production of goods with the help of nature. E.g : Agriculture, Farming, Fishing, Horticulture, etc.

2) Genetic industry :
This industry is concerned with the breeding of plants or animals, which are used in reproduction. E.g. : Poultry forms,’ Cattle breeding farms, Fish hatcheries, etc.

3) Extractive Industry :
This is concerned with extraction or drawing out goods from the soil, air or water. Generally products of extractive industries come in raw material, they are used for manufacturing and construction industries for produc¬ing finished products. E.g. : Mining, Fishing, Coal, Mineral, Iron ore, Oil industry, Timber, Rubber from forests, etc.

4) Manufacturing Industry :
This industry is engaged in the conversion of raw materials into semi-finished or finished goods. E.g.: Cotton Textiles, Sugar, Cement, etc.

Manufacturing industries are also sub-divided into four types. They are given below:

i) Analytical Industry :
In an analytical industry the basic raw material is broken into several useful materials. E.g.: Oil refinery. Crude oil is refined and several petroleum products are obtained.

ii) Synthetic Industry:
In this type of manufacturing industry two or more materials are mixed to form a new product. E.g. : Cosmetics, Soaps, Fertilizers, Paint industry etc.

iii) Processing Industry :
In this industry material is processed through various stages.
E.g.: The textile industry. Cotton passes through the spinning, weaving, dyeing, bleaching and printing processes.

iv) Assembling Industry :
In this type of industry, manufactured components or parts are combined together mechanically or chemically to produce a new product.
E.g.: Manufacturing of TV sets, and automobiles industries.

5) Construction Industry :
This industry is concerned with the construction and erection.
E.g.: Construction of Buildings, Roads, Dams, Bridges, and Canals.

6) Service industry:
These type of industries are engaged in the provision of essential services to the community. Service sector plays an important role in the development of the nation. E.g.: Hotels, Tourism, Entertainment industry, etc.

Question 2.
What is Commerce? Describe the various branches of Commerce.
Answer:
Commerce – Meaning:
Commerce is the part of business. It deals with the buying and selling of goods. Commerce is concerned only with the exchange of goods. It includes all those activities which are related to the transfer of goods from production place to the consumption place. Commerce includes trade and aids to trades. Trade means buying and selling of goods. Aids to trade include transport, banking, insurance, warehousing, etc.
(Commerce = Trade + Aids to Trade )

Commerce – Definition:
“Commerce is an organized system for the exchange of goods between the members of the industrial world.” – James Stephenson

Branches of Commerce :
Commerce is divided into two branches. They are :

1. Trade
2. Aids to trade

1) Trade:
Trade is branch of commerce. It means purchase and sale of goods with profit motive. It involves exchange of goods and services between buyers and sellers. Trade may be classified into two types, i) Home trade ii) Foreign trade

i) Home trade :
This is also known as inland trade or internal trade. Purchase and sale of goods with profit motive within the boundaries of the country is called internal trade.

Home trade is also divided into two types. They are :

1. Wholesale trade
2. Retail trade

1) Wholesale trade :
It implies buying and selling of goods in large quantities. Traders who engage themselves in wholesale trade are called “Wholesalers”. Wholesale serves as a connecting link between the producers and retailers.

2) Retail trade :
It involves buying and selling in small quantities. Traders engaged in retail trade are called “Retailers”. They serve as a connecting link between the wholesalers and consumers. Retail trade is the final stage of distribution.

ii) Foreign trade:
It refers to buying and selling of goods and services between two or more countries, it is called foreign trade. In other words, the trade beyond the boundaries of the country is known as foreign trade.

Foreign trade is also known as “External trade” and “International trade”. Foreign trade may be classified into three types. They are
i) Export trade
ii) Import trade
iii) Entrepot trade

i) Export trade:
When domestic goods are sold to the other country it is called export trade. Selling and sending goods by Indian firms to other firms located outside India.

ii) Import trade :
In this type of trade, wherein goods are purchased from foreign countries. Purchasing goods by an Indian trader from a trader of the USA, the. UK, Japan, etc., is an example for import trade.

iii) Entrepot trade :
When the goods imported from one country are exported to an other country, it is known as entreport or re-export trade. E.g.: Oil import from Iraq by an Indian firm and export the same to Nepal, is called entrepot trade.

2) Aids to Trade :
Commercet is the sum total of those processes, which are engaged in the removal of hindrance of persons, place and time in the exchange of commodities, it is called Aids to trade.
Aids to trade is also called “Auxiliaries to trade.” Aids to trade include Transport, Communication, Warehousing, Banking, Insurance, Advertising.

i) Transport :
It means for the movement of commodities from one place to another place. The development of road, rail, air and water transport allows to move commodities all over the world. They create place utility to goods. Transport is broadly classified into three types – Land transport, Water transport, Air transport.

ii) Insurance :
Insurance reduces the problem of risks. Business is subject to risks and uncertainties. These are inevitable in the field of business. Risks may be due to fire, theft, accident or any other natural calamity. Insurance plays a vital role in removing risks. Insurance tries to reduce risks by spreading them out over a larger number of people.

iii) Warehousing :
There is a time gap between production and consumption. In other words, goods which are produced at one time, are not consumed at the same time. Hence it becomes necessary to make arrangements for storage or warehousing. Warehousing creates time utility and removes the hindrances of time.

iv) Banking :
Banking solves the problem of finance. Businessmen receive money and also pay money in large amounts. It is risky to carry large amount to cash from one place to another. Here comes banking as a solution. Banking and financial institutions solve the problem of payment and facilitate exchange between buyer and seller. Banks provide many services like accepting deposits, advance loans, agency services, overdraft facilities, etc.

v) Advertising :
Advertising means giving publicity regarding goods or services which are offered to the public for sale. It is intended to retain the existing market. Advertising creates mass market for the product. Advertisements can be made through different media.” E.g. : Newspaper, Magazines, Television, Radio, Outdoor publicity, etc.

Question 3.
Define trade explain the various types of aids to trade.
Answer:
Trade :
Trade is branch of commerce. It means purchase and sale of goods with profit motive. It involves exchange of goods and services between buyers and sellers.
Trade may be classified into two types.

1. Home trade
2. Foreign trade

1) Home trade :
This is also known as inland trade or internal trade. Purchase and sale of goods with profit motive within the boundaries of the country is called internal trade. Home trade is also divided into two types. They are :
i) Wholesale trade
ii) Retail trade

i) Wholesale trade :
It implies buying and selling of goods in large quantities. Traders who engage themselves in wholesale trade are called “Wholesalers”. Wholesale serves as a connecting link between the producers and retailers.

ii) Retail trade :
It involves buying and selling in small quantities. Traders engaged in retail trade are called “Retailers”. They serve as a connecting link between the wholesalers and consumers. Retail trade is the final stage of distribution.

2) Foreign trade :
It refers to buying and selling of goods and services between two or more countries, it is called foreign trade. In other words, the trade beyond the boundaries of the country is known as foreign trade.

Foreign trade is also known as “External trade” and “International trade”. Foreign trade may be classified into three types. They are
i) Export trade
ii) Import trade
iii) Entrepot trade

i) Export trade :
When domestic goods are sold to the other country it is called export trade. Selling and sending goods by indian firms to other firms located outside india.

ii) Import trade :
In this type trade, wherein goods are purchased from foreign countries. Purchasing goods by an Indian trader from a trader of the USA, the UK, Japan, etc. is an example for import trade.

iii) Entrepot trade :
When the goods imported from one countiy are exported to an other country, it is known as entrepot or re-export trade. E.g.: Oil import from Iraq by an Indian firm and export the same to Nepal, is called entrepot trade.

Aids to trade :
Commerce is the sum total of those process, which are engaged in the removal of hindrance of persons, place and time in the exchange of commodities, it is called Aids to trade.

Aids to trade is also called “Auxiliaries to trade.” Aids to trade include, Transport, Communication, Warehousing, Banking, Insurance, Advertising.

i) Transport:
It means for the movement of commodities from one place to another place. The development of road, rail, air and water transport allows to move commodities all over the world. They create place utility to goods. Transport is broadly classified into three types – Land transport, Water transport, Air transport.

ii) Insurance:
Insurance reduces the problem of risks. Business is subject to risks and uncertainties. These are inevitable in the field of business. Risks may be due to fire, theft, accident or any other natural calamity. Insurance plays a vital role in removing risks. Insurance tries to reduce risks by spreading them out over a larger number of people.

iii) Warehousing :
There is a time gap between production and consumption. In other words, goods, which are produced at one time, are not consumed at the same time. Hence it becomes necessary to make arrangements for storage or warehousing. Warehousing creates time utility and removes the hindrances of time.

iv) Banking :
Banking solves the problem of finance. Businessmen receive money and also pay money in large amounts. It is risky to carry large amount to cash from one place to another. Here comes banking as a solution. Banking and financial institutions solve the problem of payment and facilitate exchange between buyer and seller. Banks provide many services like accepting deposits, advance loans, agency services, overdraft facilities, etc.

v) Advertising :
Advertising means giving publicity regarding goods or services which are offered to the public for sale. It is intended to retain the existing market. Advertising creates mass market for the product. Advertisements can be made through different media.
E.g.: Newspaper, Magazines, Television, Radio, Outdoor publicity, etc.

Question 4.
Explain the inter-relationship between Trade, Commerce and Industry, and also state differences between them.
Answer:
Inter-relationship between Industry, Trade and Commerce :
Business:
Business deals with production or purchase and sale of goods and services undertaken with the object of earning profit and acquiring wealth, through the satisfaction of human wants. .

Industry :
Industry deals with production of goods and services.

Commerce :
Commerce deals with distribution or exchange of goods and services.

Trade :
Trade deals with the buying and selling of goods and services.

Short Answer Questions

Question 1.
Define industry.
Answer:
Industry – Meaning :
Industry is concerned with the production of goods and services. Industry is involved to convert raw materials into finished goods. It creates form utility to goods.

Industry is a business activity which is related to the extracting, producing, processing or manufacturing of goods.

The goods may be consumer goods or producer goods. Consumer goods are the goods, which are used finally by consumers, e.g., Food grains, textiles, cosmetics, VCR, etc. Producer’s goods are the goods used by manufacturers for producing some other goods. E.g. Machinery, tools, equipment, etc.

Question 2.
What do you understand by commerce?
Answer:
Commerce is the part of business. It deals with buying and selling of goods and services and includes all those activities which directly or indirectly facilitate that exchange.

Commerce includes trade and aids to trade i.e. deals with the distribution aspect of the business. Whatever is produced it must be consumed, to facilitate this consumption there must be a proper distribution channel. Here comes the need for commerce which is concerned with the smooth buying and selling of goods and services.

Commerce is a very wide term. It involves the process of bringing goods from the place of production to the place of consumption. In other words, it supplies goods to ultimate consumers. Thus commerce in the sum total of those processes, which are engaged in the removal of hindrances of persons as place, time in the exchange of commodities. Importance of commerce :

1. Commerce helps to increase our standard of living.
2. Commerce links producers and consumers.
3. Commerce generates employment opportunities.
4. Commerce increases national income and wealth.
5. Commerce encourages international trade.

COMMERCE = TRADE + AIDS TO TRADE”

Question 3.
What is trade?
Answer:
Trade :
Trade means purchase and sale of goods with profit motive. It involves exchange of goods and services between buyers and sellers. Trade is a branch of commerce. It connects buying and selling activities. An individual who does trade is called a trader. Trader transfers the goods from the producer to the consumer. He earns profit from this activity.

Trade may be classified into (a) home trade (b) foreign trade.

Question 4.
State the types of foreign trade.
Answer:
Foreign trade :
It refers to buying and selling of goods and services between two or more countries through international airports and sea ports. Foreign trade is also known as ‘External Trade’ or ‘International Trade’.

Foreign trade may be classified into three types. They are :

1. Import trade
2. Export trade
3. Entrepot trade

1) Import trade :
In this type of trade, wherein goods are purchased from foreign countries. Purchasing goods by an Indian firm from a trader of the USA, the UK, Japan, etc. is an example for import trade.

2) Export trade :
When domestic goods are sold to the other country it is called export trade. Selling and sending goods by Indian firms to other firms located outside India.

3) Entrepot trade :
When the goods imported from one country are exported to an other country, it is known as entrepot trade or re-export trade.
E.g.: Electronic goods are imported from Singapore and the same are exported to Bangladesh.

Question 5.
Explain the classification of industries.
Answer:
Classification of Industries : Industries can be classified into various types. They are

1. Primary industry
2. Genetic industry
3. Extractive industry
4. Manufacturing industry
5. Construction industry
6. Service industry

1) Primary industry :
It is concerned with the production of goods with the help of nature. E.g : Agriculture, Farming, Horticulture, etc.

2) Genetic industry :
This industry is concerned with the breeding of plants or animals, which are used in reproduction.
E.g. : Poultry forms, Cattle breeding farms, Fish hatcheries, etc.

3) Extractive industry :
This is concerned with extraction or drawing out goods from the soil, air or water. Generally products of extractive industries come in raw material, they are used for manufacturing and construction industries for producing finished products.
E.g. : Mining, Fishing, Coal, Mineral, Iron ore, Oil industry, Timber, Rubber from forests, etc.

4) Manufacturing Industry:
This industry is engaged in the conversion of raw materials into semi-finished or finished goods. E.g.: Cotton Textiles, Sugar, Cement, etc.

Manufacturing industries are also sub-divided into four types. They are given below :

i) Analytical Industry :
In an analytical industry the basic raw material is broken into several useful materials. E.g.: Oil refinery. Crude oil is refined and several petroleum products are obtained.

ii) Synthetic Industry:
In this type of manufacturing industry two or more materials are mixed to form a new product. E.g. : Cosmetics, Soaps, Fertilizers, Paint industry, etc.

iii) Processing Industry:
In this industry material is processed through various stages. E.g.: The textile industry. Cotton passes through the spinning, weaving, dyeing, bleaching, and printing processes.

iv) Assembling Industry:
In this type of industry, manufactured components or parts are combined together mechanically or chemically to produce a new product. E.g.: Manufacturing of TV sets, and automobiles industries.

5) Construction Industry:
This industry is concerned with the construction and erection. E.g.: Construction of Buildings, Roads, Dams, Bridges, and Canals.

6) Service industry:
These type of industries are engaged in the provision of essential services to the community. Service sector plays an important role in the development of the nation. E.g.: Hotels, Tourism, Entertainment industry, etc.

Question 6.
Define entrepot trade.
Answer:
Entrepot trade :
It means importing (buying) goods from one country for the purpose of exporting (selling) them to another country. This type of trade is also known as re-export trade.

Entrepot trade refers to a trade in one centre for the goods of other countries. Merchandise can be imported and exported without paying import duties in entrepot trade. Because of favorable trade conditions, profit is possible in entrepot trade.

Question 7.
What are the hindrances involved in commerce?
Answer:
Commerce is an organised system which facilitates free flow of goods and services. In busi¬ness, products and services are produced through industry. The produced goods and ser¬vices face various types of hindrances to reach the customers. Commerce removes all these hindrances and helps to distribute products and reach business desired goal.

Following are some important hindrances in commerce :

1. Hindrance of person
2. Hindrance of place
3. Hindrance of exchage
4. Hindrance of time and duration
5. Hindrance of knowledge

1) Hindrance of person :
Trade treaty is done by buyers and sellers. In exchange of money, the sellers sell the value of the goods and services to the buyers. Therefore through the handover of products personal hindrances can be removed.

2) Hindrance of place :
The goods are produced at one place but their consumption in different places. The hindrance of distance is removed by various means of transport such as rail, road, air, and sea. Transport helps in removing the hindrance of place. It creates place utility.

3) Hindrance of exchange :
The payment of goods and services is generally made possible through banks. Bank as a part of commerce, acts to remove the hindrance of exchange. Bank helps in removing the hindrance of exchange.

4) Hindrance of time and duration :
There is a time gap between production and consumption. The goods produced are not immediately required for consumption. Warehousing removes the hindrances of time and duration. It preserves the goods from the time of production to the time of consumption. It creates time utility.

5) Hindrance of risk :
Business involves risk. Risk is involved in transporting goods from one place to another place. There can be a risk due to fire, theft, accident, etc. The risk of loss will removed by insurance. Insurance helps in the removal of hindrance of risk.

6) Hindrance of knowledge :
Advertisement removes the hindrance of knowledge. It informs to the customers about the availability of various products. Communication helps in the efficient operation of commercial activities. The hindrances of knowledge will be removed by advertisements.

Very Short Answer Questions

Question 1.
Industry tf
Answer:
Basically industry is concerned with manufacturing of goods and services. Industry deals with extractive, genetic, manufacturing, construction, and service type industries.

Question 2.
Commerce.
Answer:
It deals with buying and selling of goods. Commerce is concerned only with the exchange of goods and services.

(Commerce = Trade + Aids to Trade)

Question 3.
Trade
Answer:
Trade is the central activity of commerce. Trade means purchase and sale of goods with profit motive. It involves exchange of goods and services between buyers and sellers.

Question 4.
Home trade
Answer:
Purchase and sale of goods with profit motive within the boundaries of the country is called home trade. It is also known as Inland trade or Internal trade.

Question 5.
Entrepot trade.
Answer:
It is one of types of the foreign trade. When goods are imported from one country and the same are exported to another country such trade is called entrepot trade.
E.g.: Electronic goods are imported from Taiwan and same are exported to Nepal.

Question 6.
Transportation
Answer:
There is a vast distance between centers of production and centers of consumption. This difficulty is removed by transport. Transportation creates place utility.

Question 7.
Warehousing
Answer:
It is very important function of commerce. It involves storage or accumulation of goods for the purpose of equalizing supplies over a period of time. So, it creates time utility.

Question 8.
Genetic industries
Answer:
These industries are concerned with the breeding of plants or animals, which are used in reproduction. Eg : Poultry farms, etc.

Question 9.
Extractive industries
Answer:
These are concerned with extraction or drawing out goods from the soil, air or water. Eg : Mining, Fishing, Coal, Minerals, Iron ore, Oil industries, etc.

Question 10.
Banking
Answer:
Banking is one of the aids to trade. It solves the problem of finance. Businessmen receive money and also pay money in large amounts. It is risky to carry money from one place to another place. Here comes banking as a solution.

Question 11.
Ana lytica l industry
Answer:
In an analytical industry the basic raw material is broken into several useful materials. E.g.: Oil refinery. Crude oil is refined and several petroleum products are obtained.

Question 12.
Synthetic Industry
Answer:
In this type of manufacturing industry two or more materials are mixed to form a new product. E.g.: Cosmetics, Soaps, Fertilizers, Paint industry, etc.

Question 13.
Processing industry
Answer:
In the industry material is processed through various stages. E.g.: The textile industry. Cotton passes through the spinning, weaving, dyeing, bleaching and printing processes.

Question 14.
Assembling industry
Answer:
In this type of industry, manufactured components or parts are combined together mechanically or chemically to produce a new product.
E.g.: Manufacting of TV sets and automobile industries.

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 1st Lesson Concept of Business Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 1st Lesson Concept of Business

Essay Answer Questions

Question 1.
Define Business. What are its characteristics? [A.P. Mar. 2019, 17]
Answer:
The term Business refers to “the state of being busy”. Every individual is engaged in some activities to fulfill his/her set of needs and wants. All these activities are intended to satisfy human needs. Business is one of the human economic activities.

Business – Definitions :
“A human activity directed towards producing or acquiring wealth through buying and selling of goods.” -L.H. Haney

“Business is an institution organized and operated to provide goods and services to society under the incentive of private gain.” -B.O. Wheeler

“Business is a sum of all activities involved in the production and distribution of goods and services for private profits.” – Keith and Carlo

Business – Characteristics :
Following are the essential characteristics of the business.

1. Creation of utilities
2. Deals with goods and services
3. Continuity in dealings
4. Sale, transfer or exchange
5. Profit motive
6. Risk and uncertainty
7. Economic activity
8. Art as well as science

1) Creation of utilities :
Business makes goods more useful to satisfy human wants. It adds to production, the utilities of person, time, place, form, knowledge, etc. Businessman is able to satisfy the customer’s demands effectively and economically with the help of business transactions.

2) Deals with goods and services :
Business deals with goods and services. The goods may be consumer goods such as cloths, soaps, milk, shoes, furniture, etc. They may be industrial goods such as machinery, equipment, etc. which are used for further production. Business also deals with services such as transport, warehousing, banking, insurance, etc.

3) Continuity in dealings :
Dealings in goods and services become business only if undertaken on a regular basis. A single isolated transaction of purchase and sale does not constitute business. Recurring or repeated transactions of purchase and sale constitutes business. E.g.: If a person sells his old scooter or a car, it is not business though the seller gets money in exchange. But if he opens a shop and sells scooters or cars regularly, it will become business. Therefore, regularity of dealings in an essential feature of business.

4) Sale, transfer or exchange :
In a business activity there should be two parties i.e. a buyer and a seller. There should be exchange, sale, transfer of goods or services between these two parties for money. For instance, cooking food for personal consumption does not constitute business. But cooking food and selling it to others for a price becomes business. E.g.: Students’ mess.

5) Profit motive:
The primary objective of business is to earn profits. Profits are essential for the survival as well as growth of business. Profits must, however, be earned through legal and fair means. Business should never exploit society to make money.

6) Risk and uncertainty :
Profit is the reward for assuming risk. Risk implies uncertainty of profit or the possibility of loss. Risk is a part and parcel of business. Business enterprises function in uncertain and uncontrollable environment. E.g.: Changes in customers’ tastes and fashions, demand, competition, government policies, etc. create risk. Flood, fire, earthquake, strike by employees, theft, etc. also cause loss. A businessman can reduce risks through correct forecasting and insurance. But all risks cannot be eliminated.

7) Economic activity:
Business is primarily an economic function. It involves production and distribution of goods and services for the satisfaction of human wants. However, business is a part of society and it reflects on aspiration, values and beliefs of people. Therefore, business may be described as a socio-economic function.

8) Art as well as science :
Business is an art because it requires personal skills and experience. It is also a science because it is based on certain principles and laws.
The above mentioned features are common to all business enterprises irrespec¬tive of their nature, size and form of ownership.

Question 2.
Explain the objectives of a business.
Answer:
Objectives of business mean the purposes for which business is established and carried on. Proper selection of objectives is essential for the success of a business. Therefore, every businessman must select and define his business objectives carefully and clearly.

Objectives of business are classified as given below.

1) Economic Objectives:
Business is basically an economic activity. Therefore, its primary objectives are economic in nature. The main economic objectives of business are as follows.

i) Earning profits :
Every business enterprise’s main object is profit. It is the hope of earning profits that inspires people to start business. Profit is essential for the survival of every business unit. Profit also serves as the barometer of stability, efficiency and progress of a business enterprise.

ii) Creating customers :
Profits arise from the businessman’s efforts to satisfy the needs and wants of customers. A businessman can earn profits only when there are enough customers to buy and pay for his goods and services. The customer is the foundation of business and keeps it in existence. Business exists to satisfy the wants, tastes and preferences of customers.

iii) Innovation :
Innovation refers to “creation of new things resulting from the study and experimentation, research and development”. In these days of competition a business can be successful only when it creates new designs, better machines, improved techniques, new varieties, etc. Modern science and technology have created a great scope for innovation in the business world.

2) Social Objectives:
Business does not exist in a vaccum. It is a part of society. It cannot survive and grow without the support of society. So, business must have some social objectives. They are given below.

i) Supplying desired goods at reasonable prices :
Business is expected to supply the goods and services required by the society. Goods and services should be of good quality and these should be supplied at reasonable prices. It is also the social obligation of business toaKoid malpractices tike smuggling, black makreting and misleading advertising.

ii) Fair Remuneration to employees:
Employees must be given fair compensation for their work. In addition to wages and salary a reasonable part of profits should be distribuited among employees by way of bonus. Such sharing of profits will help to increase the motivation and efficiency of employees.

It is the obligation of business to provide healthy and safe work environment for employees. Employees work day and night to ensure smooth functioning of business. It is, therefore, the duty of employers to provide hygienic working and living conditions for workers.

iii) Employment generation :
Business should provide opportunities for gainful employment to members of the society. In a country like India unemployment has become a serious problem and no government can offer jobs to all. Therefore, provision of adequate and full employment opportunities is a significant service to society.

iv) Social welfare :
Business should provide support to social, cultural and reli¬gious organisations. Business enterprises can build schools, colleges, libraries, dharamshalas, hospitals, sports bodies and research institutions. They can help non-government organisations (NGOs) like CRY (Child Relief and You), Help Age, and others which render services to weaker sections of society.

v) Payment of government dues :
A business should not shut its eyes to its obligations towards the government. Therefore, business owes it to the government to pay its tax dues honestly and in time. It must also dutifully abide by the laws of the land.

3) Human Objectives:
i) Labour welfare :
Business must recognise the dignity of labour and human factor should be given due recognition. Adequate provisions should be made for their health, safety and social security.

ii) Developing human resources :
Employees must be provided with the opportunities for developing new skills and attitudes. This can be done by training the employees and conducting workshops on skill development and attitude. Human resources are the most valuable asset of business and their development will help in the growth of business.

iii) Participative management :
Employees should be allowed to take part in decision making process of business. This will help in the development of employees. Workers’ participation in management will usher in industrial democracy.

iv) Labour – Management cooperation :
Business should strive for creating and maintaining cordial employer- employee relations so as to ensure peace and progress, in industry.

4) National Objectives:
i) Optimum utilisation of resources :
Business should use the nation’s resources in the best possible manner. Judicious allocation and optimum utilisation of scarce resources is essential for rapid and balanced economic growth of the country. Business should produce goods in accordance with national priorities and interests. It should minimise the wastage of scarce natural resources.

ii) National self-reliance :
It is the duty of business to help the government in increasing exports and in reducing dependence on imports. This will help a country to achieve economic independence. .

iii) Development of small scale industries :
Big business firms are expected to encourage growth of small scale industries which are necessary for generating employment. Small scale firms can be developed as ancillaries which provide inputs to large scale industries.

iv) Development of backward areas :
Business is expected to give preference to the industrialisation of backward regions of the country. Balanced regional development is necessary for peace and progress in the country. It will also help to raise standard of living in backward areas. Government offers special incen¬tives to the businessmen who set up factories in notified backward areas.

Question 3.
Discuss the social responsibility of business.
Answer:
Business organisations are obliged to consider social impact of their decisions. The obligation of any business to protect and serve public interest is known as social responsibility of business. Any responsibility business has, particularly towards members of the society with whom they interact or towards the society in general called is social responsibility.

The Concept of Social Responsibility:
Every business operates within a society. It uses the resources of the society and depends on the society for its functioning. This creates an obligation on the part of business to look after the welfare of society. Therefore, all the activities of the business should be such that they will not harm, rather they will protect and contribute to the interests of the society.

Social responsibility of business refers to all such duties and obligations of business directed towards the welfare of society. So, every business must contribute in some way or the other for their benefit. E.g. : Every business must ensure a satisfactory rate of return to investors, provide good salary, security and proper working condition to its employees, make available quality products at reasonable price to its consumers, maintain the environment properly, etc. Social responsibility implies that a business should not do anything harmful to the society in course of business activities of a businessman.

Social Responsibility Towards Different Interest Groups :
The business generally interacts with owners, investors, employees, suppliers, customers, competitors, gov-ernment and society. They are called interest groups. Such interest groups are given below.

Social responsibility towards different interest groups

• Responsibility towards owners
• Responsibility towards employees
• Responsibility towards suppliers
• Responsibility towards customers
• Responsibility towards government
• Responsibility towards society

1) Responsibility towards owners :
Owners are the persons who own the business. They contribute capital and bear the business risks. The primary responsibilities of business towards its owners are to :

1. Run the business efficiently.
2. Proper utilisation of capital and other resources.
3. Growth and appreciation of capital.
4. Regular and fair return on capital invested by way of dividends.

2) Responsibility towards employees :
Business needs employees or workers to work for it. These employees put their best effort for the benefit of the business. The responsibility of business towards its employees include:

1. Timely and regular payment of wages and salaries.
2. Proper working conditions and welfare amenities.
3. Opportunity for better career prospects.
4. Job security as well as social security like facilities of provident fund, group insurance, pension, retirement benefits, etc.

3) Responsibility towards suppliers :
Suppliers are businessmen who supply raw materials and other items required by manufacturers and traders. Certain suppliers, called distributors, supply finished products to the customers. The responsibilities of business towards these suppliers are :

1. Giving qualitative goods at reasonable prices.
2. Dealing on fair terms and conditions.
3. Availing reasonable credit period.
4. Timely payment of dues.

4) Responsibility towards customers :
No business can survive without customers. As a part of the responsibility of business towards them the business should provide the following facilities.

1. Products and services must be qualitative
2. Giving delivery of goods within stipulated time
3. Reasonable price
4. There must be proper after-sales services.
5. Complaints and grievances of the customers, if any, must be settled quickly.
6. Unfair means like underweighing the product, adulteration, etc. must be avoided.

5) Responsibility towards government:
Business activities are governed by the rules and regulations framed by the government. The various social responsibilities of the government are:

1. Setting up units as per guidelines of the government.
2. Payment of fees, duties and taxes regularly as well as honestly.
3. Conforming to pollution control norms set up by government.
4. Not to indulge in corruption through bribing and other unlawful activities.

6) Responsibility towards society :
A society consists of individuals, groups, organizations, families, etc. They all are the members of the society. Thus, it has certain responsibilities towards society, which may be as follows :

1. to help the weaker and backward sections of the society
2. to preserve and promote social and cultural values
3. to generate employment
4. to protect the environment
5. to conserve natural resources and wildlife
6. to promote sports and culture

Question 4.
Classify and describe each type of Economic activities.
Answer:
All the activities in which the people participate from morning till night are called human activities. Every individual is engaged in some activities to fulfil his/her set of needs and wants. All these activities are intended to satisfy human needs.

All the activities of human beings can be classified into two types. They are :

Non – economic Activities :
Those human activities do not involve money or money’s worth, such activities are termed as non-economic activities. Human beings engage themselves in non-economic activities due to love, affection, patriotism, charity, sympathy, and other such sentiments.
E.g. : A mother looks after her children, young man helps a blind man to cross the road, etc.

Economic Activities:
Human beings undertake certain economic activities for earning money or livelihood. Working as a teacher in a school, a doctor in a hospital, a worker in a factory, a farmer in a field, an emloyee in an office, a merchant selling goods, etc.

In other words, an human being involves in any activity together with money or money’s worth, such activities are termed as human economic activities. Such human economic activities are classified into three types. They are given below ;

1. Profession
2. Employment
3. Business

1) Profession:
An activity which involves the rendering of personalized services of a specialized nature based on professional knowledge, education and training is called a profes¬sion. Services rendered by doctors, lawyers, chartered accountants, engineers, etc. come under this category.

2) Employment:
An employment is a contract of service. A person who works under the contract for a salary is called an employee and the person who has given the job to the employee is called employer. An employee works under an agreement as per the rules of service and performs tasks assigned to him by the employer. The relationship between the employer and the employee is that of a ‘Master’ and ‘Servant’.

3) Business:
Business is one of the human economic activities. Business is an economic activity involving production, exchange, distribution and sale of goods and services with an objective of making profits.

Short Answer Questions

Quelition 1.
Business objectives.
Answer:
Objectives of business mean the purposes for which business is established and carried on. Proper selection of objectives is essential for the success of a business. Objectives serve as the guidelines for the future direction and management of business. Therefore, every businessman must select and define his business objectives carefully and clearly.

Objectives of business may be classified into four broad categories. They are :

1. Economic objectives
2. Social objectives
3. Human objectives
4. National objectives

Every businessman seeks to earn profits by satisfying the wants of people. It is the hope of earning profits which induce people to enter into business. No business can survive without making adequate profits. Thus profit is the fundamental economic objective of business.

If profit maximization is regarded as the sole objective of business, it is likely to result in unfair practices such as hoarding, black marketing, etc. The profit making and social service objectives are not contradictory to each other.

Business must discharge social responsibilities in addition to earning profits. It should aim at servicing the community.

Quelition 2.
Social objectives.
Answer:
Business does not exist in a vacuum. It is a part of society. It cannot survive and grow without the support of society. Business must therefore discharge social responsibilities in addition to earning profits.

Social objectives – Definition :
“The primary aim of business should be service and subsidiary aim should be earning of profit.” – Henry Ford

Some important social objectives are given below :

1. Business is expected to supply the goods and services required by the society. Goods and services should be of good quality and these should be supplied at reasonable prices.
2. Employees must be given fair compensation for their work. In addition to wages and salary a reasonable part of profits should be distributed among employees by way of bonus. Such sharing of profits will help to increase the motivation and efficiency of employees. So, fair remuneration to employees is an important social objective.
3. Business should provide job opportunities to the members of the society. In a country like India unemployment has become a serious problem and no government can offer jobs to all. So, employment generation is also one of the social objectives.
4. Business should provide support to social, cultural and religious organisations. Business enterprises can build schools, colleges, libraries, hospitals, etc.
5. Every business enterprise should pay tax dues to the government honestly and at the right time. These direct and indirect taxes provide revenue to the government for spending on public welfare. So, payment of government dues is also one of the important social objectives.

Quelition 3.
Role of profit in business.
Answer:
A business enterprise is established for earning some income. It is the hope of earning profits that inspires people to start business. Profit is essential for the survival of every business unit. Just as a person cannot live without food, a business firm cannot survive without profit. Profits enable a businessman to stay in business by maintaining intact the wealth producing capacity of its resources.

Profit is also necessary for the expansion and growth of business. Profits ensure continuous flow of capital for the modernisation and extension of business operations in future. Profit also serves as the barometer of stability, efficiency and progress of a business enterprise.

Quelition 4.
Brief explaination of economic activities.
Answer:
The term business refers to “the state of being busy”. Every business individual is engaged in some activities to fulfil his/her set of needs and wants. All these activities are intended to satisfy human needs. E.g.: A farmer engages himself in agricultural activities and an employee works in the office, a teacher teaches in the classroom, etc. for satisfying his needs, comforts and luxuries.

All the activities of human being can be divided into two types. They are :

1. Economic Activities
2. Non-economic Activities

Economic activities :
Those human activities that are involved in money, such activities are termed as economic activities. Human beings undertake certain economic activities for earning money or livelihood. Working as a teacher in a school, a doctor in a hospital, a worker in a factory, a merchant selling goods or an industrialist manufacturing goods, all these are economic activities. These economic activities are concerned with production, exchange and distribution of goods and services.

Very Short Answer Questions

Quelition 1.
Define Business. [Mar. 2018, 17 ; May 17 – A.P.]
Answer:
A business is an economic institution. It is concerned with production and distribution of goods and rendering of service in order to earn profits and acquire wealth. Business may be defined as “a human activity directed towards producing or acquiring wealth through buying and selling of goods”. – L.H. Haney

Profits are consideration of Business.

Quelition 2.
What is a Profession?
Answer:
Profession is one of the human economic activities. An activity which involves the rendering of personalised services of a specialized nature based on professional knowledge, education and training is called a profession. E.g. : Doctors, Lawyers, Chartered Accountants, Engineers, etc.

Remuneration is consideration of Profession.

Quelition 3.
What is Employment?
Answer:
Employment is also one of human economic activities. Any activity assigned to a person by the employer under an agreement or rules of services comes under the category of employment.

A person who undertakes such activity is called employee.

Salary is consideration of Employment.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 13th Lesson Final Accounts with Adjustments Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 13th Lesson Final Accounts with Adjustments

Essay Type Questions

Question 1.
Describe the various types of adjustments with examples.
Answer:
Types of Adjustments:
1. Adjustments relating to closing stock: Closing stock means, the stock of goods unsold at the end of the accounting year.
Adjustment entry:

(Being the closing stock transfer to the trading account)

Accounting treatment in final accounts:

1) Show on the credit side of trading A/c

2) Show on the assets side of balance sheet.

Note : If closing stock is given in Trial Balance, show it on the Assets side of Balance sheet.

2. Adjustments relating to expenses:
a) Outstanding expenses : Expenses relating to the current accounting year but not yet paid and are to be paid in the next year e.g: Salary for the month of December is due but not paid.

Adjustment entry:

(Being the expenses due)

Accounting treatment in final accounts:

1) Add either in trading A/c or in profit & loss A/c to the concerned expenditure item.
Trading A/c

2) Show it as a liability on the liabilities side of Balance sheet.

Note : If outstanding expenses are given in trial balance show as liability in Balance sheet.

b) Prepaid expenses : Expenses relating to the next accounting year but paid in the current accounting period are called prepaid expenses. (May. ’17 – A.P.)

Adjustment entry:

(Being expenses paid in advance)

Accounting treatment in final accounts: If prepaid expenses are given as an adjustment.

1. Deduct it from the concerned expenditure either in trading A/c or in Profit & Loss A/c for the first instance and
2. Record as asset on assets side of the balance sheet as second time.

1) Add either in trading A/c or in profite & loss A/c to the concerned expenditures item.

Trading A/c

Balance Sheet

Note: If prepaid expenditure is given only in Trial balance, show it as asset in Balance sheet.

3. Income:
a) Accrued Income: Income relating to current year which is not received during the current year but to be received in the next year is called Accured income or income receivable.
Adjustment entry:

(Being the income receivable)

Accounting treatment in final accounts: If accrued income is given as adjustment –

1. For the first instance add to the concerned income in profit and loss a/c on credit side and then.
2. Show it as an asset in balance sheet on assets side.

Profit & Loss A/c

Balance Sheet

Note : If accrued income is given in trial balance, show it on assets side of Balance sheet.

b) Income Received in Advance : The income relating to the next year but received in the current year is called income received in advances.
Adjustment entry:

(Being the income received in advance)

Accounting treatment in final accounts: When income received in advance is given adjustment

1. Deduct it from the concerned income in Profit & Loss a/c on credit side and
2. Record it as a liability on the liabilities side in the balance sheet.

Profit & Loss A/c

Balance Sheet

Note: If Income received in advance is given in the trial balance show it on liabilities side in the balance sheet.

4. Depreciation: Decline in the value of fixed assets is called “Depreciation”.
Adjustment entry:

(Being the depreciation provided on asset)

Accounting treatment in final accounts: When depreciation is given as an adjustment:

1. Debit it to profit & loss A/c.
2. Deduct it from the value of concerned asset in balance sheet on assets side.

Trial Balance

Adj : Provide depreciation on machinery 10%

Profit & Loss A/c

Note : If depreciation is given in trial balance, it should be shown on debit side in P & L A/c only.

5. Debtors : In final accounts bad debts, provision for bad debts may be given as adjustments relating to debtors.
A) Bad debts: To debts which are not collected or irrecoverable are known as bad debts.

Adjustment entry:

(Being bad debts written off)

Accounting treatment in final accounts:

a) When bad debts are given, only in the adjustments –

1. Debit to profit & loss A/c and
2. Deduct from debtors in the balance sheet on assets side.

Trial Balance

Adjustment: Bad debts : 500

Note : If the bad debts are given in trial balance only, it should be shown on debit side in Profit & Loss A/c.

b) When Bad debts are given in both Trial Balance and adjustments:

1. In Profit & Loss A/c, both the bad debts (Bad debts given in Trial balance and given in adjustment) are to be shown on debit side.
2. Bad debts given only in the adjustments are to be deducted from debtors in the balance sheet.

Trial Balance

Adjustments: 1) Bad debts : 400

B) Provision for bad and doubtful debts: Some debts of a particular year may or may not be recovered in the next year. These debts are known as doubtful debts. So traders create same amount on current year debtors and keep the same to meet the doubtful bad debts of the next year, which is called provision for bad and doubtful debts.

a) When provision for doubtful debts is given as adjustment:
Adjustment entry:

(Being provision created on debtors)

Accounting treatment in final accounts:

1. Show it on debit side in profit & Loss A/c and
2. Deduct it from debtors in Balance sheet,

e.g.:
Trial Balance

Adjustment: Create provision for bad and doubtful debts 5%.

Profit & Loss A/c

Balance Sheet

b) When provision for doubtful debts is given in Trial Balance and also in adjustments: Accounting treatment in final accounts:

1. Compare the old provision (given in trial balance) with new provision (given in the adjustments), if the new provision is more than the old provision, the difference amount (New provision – old provision) should be debited to the Profit & Loss A/c.
On the other hand, new provision is less than the old provision, the difference amount (old provision – new provision) should be recorded on the credit side of Profit & Loss A/c.

2. In balance sheet, deduct the amount of new provision of bad and doubtful debts from sundry debtors.

Trial Balance

Adjustments : Create 5% provision for doubtful debts.

Profit & Loss A/c

Balance Sheet

c) If the bad debts are given both in trial balance and in adjustments, and also provision for bad debts given in adjustments.
Accounting treatment in final accounts:

1. Don’t calculate the provision directly on sundry debtors.
2. Calculate the provision after deducting the further bad debts.

Trial Balance

Adjustments:

1. Further bad debts : Rs. 600
2. Provision for bad debts : 5%

Profit & Loss A/c

6. Interest on capital : It is the amount of interest payable on owner’s capital by the business organisation.

Adjustment entry:

(Being the interest payable on capital)

Accounting treatment in final A/cs:

1. Debit in profit & Loss A/c and
2. It should be added to the capital in balance sheet.

Trial Balance

Adjustment: Interest on capital: 12%

7. Interest on Drawings : Drawings mean the amount of cash or goods taken by the trader for personal use. The amount of interest payable by the owner to the business is called interest on drawings.
Adjustment entry:

(Being the interest on drawings)
Accounting treatment in final A/cs:

1. It is to be recorded on credit side of P & L a/c and
2. It should be deducted from capital in balance sheet.

Trial Balance

Adjustment: Interest on drawings : 5%

Note: When interest on drawings is given in trial balance, it should be shown on credit side in Profit & Loss A/c only.

Short Answer Questions

Question 1.
Write the following:
a) Interest on Capital:
Answer:
The amount of interest payable on owner’s capital by the business organisation is called interest on capital.
Adjustment entry:

(Being the interest payable on capital)
Accounting treatment in final accounts:
When interest on capital is given as an adjustment.
1. Debit in P & L A/c and
2. It should be added to the capital in balance sheet.
Note : When it is given in trial balance, debit it in P & L A/c only.

b) Interest on Drawings :
Answer:
Drawings mean the amount of cash or goods taken by the trader for personal use.
The amount of interest payable by the owner to the business is called Interest on drawings.
Adjustment entry:

(Being the interest on drawings)
Accounting treatment In final accounts:

When interest on drawings given as adjustment.

1. It is to be recorded on credit side of P & L A/c and
2. Deduct the amount from capital in Balance sheet.

Note: When interest on drawings is given in trial balance, it should be shown on credit side in Profit & Loss A/c.

Very Short Answer Questions

Question 1.
What is the meaning of adjustment ?
Answer:
To find out net profit and true financial position, all expenses relating to current year whether actually paid or not, all incomes received or yet to be received should be taken into account. Some of the incomes and expenses relating to next year, but received and paid in the current year should not be included in the accounts of current year. The amount to be adjusted to the concerned items is called adjustment. e.g: Outstanding salaries, prepaid insurance, etc.

Question 2.
Explain the importance of adjustment:
Answer:

1. Expenses or incomes relating to the accounting period can be known accurately.
2. Profit or loss can be ascertained accurately.
3. Real value of assets and liabilities can be ascertained easily.

Question 3.
Give the meaning of bad debts. (Mar. 2018 T.S.)
Answer:
The debts which are not collected or Irrecoverable are known as bad debts.
Adjuštment entry:

(Being bad debts written off)

Adjustments Summary

Problems

Question 1.
From the following trial balance, prepare final accounts of Praveen Traders as on 31.12.2013:

Adjustments:

1. Closing stock: 4500;
2. Outstanding wages : 390;
3. Outstanding salaries : 500
4. Prepaid Insurance: 400

Answer:

Question 2.
From the following particulars, prepare final accounts : (May ’17 – T.S.)

Adjustments:

1. Closing stock: 6000
2. Prepaid Insurance: 200
3. Outstanding salaries :600
4. Accrued interest : 500

Answer:

Question 3.
From the following particulars, prepare final accounts of Giri for the year ending 31.12.2013.

Adjustments:

1. Closing stock value: 3500
2. Outstanding wages : 860
3. Prepaid insurance: 100
4. Provide depreciation on furniture: 10% and on land & buildings : 10%
5. Interest received in advance : 500

Answer:

Question 4.
From the following Trialbalance o1 Mr.kapil, prepare Trading P & L A/c and Balance Sheet or the year ended (Mar. 2018 – A.P.)
Trial Balance

Adjustments:

1. Outstanding wages: 2000;
2. Outstanding salaries: 1000;
3. Prepaid insurance: 50;
4. Create 5% reserve for bad debts on debtors;
5. Depreciation on furniture: 150, Dep. on machinery: 500;
6. Closing stock: 11,000.

Answer:

Question 5.
From the following particulars, prepare final accounts for the year ended 31.3.2010.
Trial Balance

Adjustments:

1. Closing stock: 16,800;
2. Interest on capital :9%;
3. Write off : 2,000 as bad debt and provide 5% reserve for doubtful debts;
4. Outstanding wages: 1,000.

Answer:

Question 6.
Prepare final accounts of Praveen Traders for the year ending 31.03.2014.
Trial Balance

Adjustments:

1. Closing stock : 5,800;
2. Depreciation on motor van: 10%;
3. Reserve for bad & doubtful debts : 5%;
4. Outstanding rent Rs. 500;
5. Prepaid taxes: Rs. 200/-.

Answer:

Question 7.
Prepare final accounts from the following trial balance for the year ended 31.12.2013.
Trial Balance

Adjustments:

1. Closing stock: 2,100
2. Outstanding stationery bill : 600
3. Depreciation on machinery: 10%
4. Bad Debts : 500
5. Prepaid wages :500

Answer:

Question 8.
From the following Trial balance of Vinod Traders, prepare final accounts:
Trial Balance

Adjustments:

1. Closing stock: 9,500
2. Bad debts : 1,500
3. Provide reserve for bad debts : 5%
4. Outstanding wages : 300
5. Depreciation on machinery: 10%
6. Interest received in advance : 500.

Answer:

Question 9.
Prepare sole traders final accounts for the year ending 31.03.2014.
Trial Balance

Adjustments:

1. Closing stock value : 7,500;
2. Depreciation on machinery : 12%;
3. Commission received in advance : 1,200;
4. Interest receivable : 1,500;
5. Further bad debts : 400;
6. Prepaid insurance: 500.

Answer:

Question 10.
Prepare Final Accounts of Ramakrishna Traders as on 31.12.2013:

Adjustments:

1. Closing stock: 3,500
2. Outstanding rent: 500
3. Prepaid salaries & wages : 400
4. Interest received in advance: 300
5. Depreciation on machinery: 10%

Answer:

Question 11.
Prepare Ravi Traders’ Final Accounts for the fear ended 31.12.2013:
Trial Balance

Adjustments:

1. Closing Stock Value : 5,100
2. Reserve for Bad Debts : 5%
3. Depreciation on patents : 20%
4. Outstanding Rent :300
5. Commission Receivable : 200

Answer:

Question 12.
Prepare Final Accounts of Srinivasa Traders as on 31.12.2012.
Trial Balance

Adjustments:

1. Closing stock value: Rs. 5,000
2. Calculate Interest on Capital : 8%
3. Interest on Drawings: 10%
4. Provide Reserve for Debts : 5%
5. Depredation on premises: 10%

Answer:

Question 13.
From the following Trial Balance prepare Final Accounts.
Trial Balance

Adjustments:

1. Closing Stock Value : Rs. 16,800;
2. Outstanding Salaries : 400
3. Prepaid Rent & Taxes: 201
4. Provide Reserve on Sundry Debtors : 5%
5. Depreciation on Machinery: 10%
6. Interest on Capital: 5%

Answer:

Question 14.
From the following Trial Balance of Vishnu traders prepare Final Accounts for the year ended 31.3.2014.
Trial Balance

Adjustments

1. Closing Stock Value: Rs. 14,000;
2. Depreciation on Furniture: 250, on Machinery: 750
3. Outstanding Wages : Rs. 500;
4. Bad Debts : 600;
5. Interest on Drawings : 5%

Answer:

Question 15.
Prepare Final Accounts:
Trial Balance

Adjustments:

1. Closing Stock Value : Rs. 56,000
2. Outstanding Salaries : 6,000
3. Bad Debts : 2000, and Create Reserve for Bad debts : 3%
4. Depreciation on Machinery: 5%
5. Interest on Capital: 5%

Answer:

Question 16.
From the following Trial Balance and additional information of Latha, prepare Trading and Profit and Loss Account for the year ended 3l Dec. 2008 and Balance Sheet as on that date.
Trial Balance

Adjustments:

1. Closing Stock : Rs. 26,800
2. Depreciate 10% on Machinery and 20% on Patents
3. Outstanding Salaries : Rs. 1,500
4. Unexpired Insurance: Rs. 170
5. Provide 5% provision for bad debts on Debtors

Answer:

Question 17.
From the following Trial Balance of Mr. Paramesh, prepare the Trading, Profit and Loss account and Balance Sheet for the year ended 31.12.2012.
Trial Balance as on 31.12.2012

Adjustments:

1. Closing Stock : Rs. 34,500
2. Outstanding salaries : Rs. 5,500
3. Depreciate plant and machinery by 5%
4. Prepaid insurance: Rs. 1,500
5. 5% provision is to be made for bad debts on debtors

Answer:

Student Activity

Visit any organisation and note the adjustments made during the last year’s final accounts.