Term-End Examination: December, 2011
ELECTIVE COURSE: COMMERCE ECO-1: BUSINESS ORGANISATION
Time: 2 hours Maximum Marks: 50 (Weightage 70%)
Note: Attempt both Part-A and Part-B.
PART - A
1. Distinguish between any two of the following: 5+5=10
(a)Business and commerce
Ans: Commerce and business are words with similar meaning, but they also differ from one another in the following manner:
1. While business can be an entity, commerce refers to trade and trade-related activities.
2. Commerce focuses on buying and selling part of a business whereas there is much more to a business than just buying and selling.
3. A business holds many activities such as planning, advertising, selling, buying, marketing, accounting and supervising manufacturing, etc. Commerce, which mainly focuses on buying and selling, is a part of each and every one of these activities that make a business. As a result, commerce comes under business.
4. When it comes to business, there are several types of businesses based on the structure. They are sole trader, partnership, trust, and company. One cannot say that such variations exist when it comes to commerce.
(b)Equity shares and preference share
Ans: Difference between Preference Share and Equity Share are given below:
Basis of Difference
a) Right of Dividend
Preference shares are paid dividend before the Equity shares.
Equity shares are paid dividend out of the balance of profit available after the dividend paid to preference shareholders.
b) Rate of Dividend
Rate of dividend is fixed.
Rate of dividend is decided by the Board of Directors, year to year depending on profits.
Preference Shares may be converted into Equity shares, if the terms of issue provide so.
Equity shares are not convertible.
d) Participation in Management
Preference shareholders do not have the right to participate in the management of the company.
Equity shareholders have the right to participate in the management of the company.
e) Redemption of Share Capital
Preference shares may be redeemed.
A company may buy-back its equity shares.
(c)Indoor advertising and outdoor advertising.
In case of indoor advertising, messages are conveyed through various media to the indoor target audience. The media or vehicles used for indoor advertising are newspapers, magazines, radio, television, film and video. Here, the message reaches the indoor audience where they are supposed to be in relaxed and receptive mood. Indoor advertising comes under indirect advertising as these are not meant for any specific individual.
On the other hand, outdoor advertising caters to those people who are out of doors. In this case, the advertising message is placed in a strategic location to attract the attention of audiences on the move.
(d)Bonded warehouse and public warehouse.
Ans: Difference between Bonded warehouse and public warehouse
Bonded warehouses are warehouses in which dutiable goods may be stored without paying the duties on them. For importers, there are a number of advantages to using this type of storage, which makes them a popular option in many ports all over the world. Different governments have different laws about how such warehouses can be administered and who can use or operate one. Also known as a customs warehouse, a bonded warehouse acts sort of like a no man's land where goods can be deposited without an importer or an agent needing to pay duties on them.
A public warehouse is a business that provides short or long-term storage to companies on a month-to-month basis. Public warehouse fees can be a combination of storage fees and inbound and outbound transaction fees. A public warehouse can charge for each square foot that is used by a company.
2. Write short notes on any two of the following: 5+5
(a)Clearing and forwarding agents
Ans: Clearing and forwarding agent” means any person who is engaged in providing any service, either directly or indirectly, concerned with the clearing and forwarding operations in any manner to any other person and includes a consignment agent.
A clearing and forwarding agent normally undertakes the following activities:
(a) Receiving the goods from the factories or premises of the principal or his agents;
(b) Warehousing these goods;
(c) Receiving dispatch orders from the principal;
(d) maintaining records of the receipt and dispatch of goods and the stock available at the warehouse
(b)Pricing Policy of Public utilities
Ans: Public utilities are those business undertakings which provide necessary services to the society. The undertakings dealing with the supply of electricity, gas, power, water and transport etc. are all covered under public utility services. All these things are needed in the day-to-day life of the people.
The purpose of making public utilities as monopoly concerns is to serve the consumers in a better way and to provide services at cheap rates. Certain special privileges are also given to these concerns with a view to improve their working. The prices are also affected by the nature of demand and laws of returns. These concerns operate under decreasing cost conditions. So, they should charge reasonable prices. The pricing policy of these undertakings is generally guided by the government. Some margin of profit is allowed to maintain efficiency and expansion of these services.
(c)Doctrine of subrogation
Ans: This principle applies to the contract of indemnity only i.e. marine and fire. It lays down a principle which is quite equitable. According to this doctrine, where a loss occurs and the insurer pays as for a total loss, he is entitled to all the rights and remedies which the insured has against a third party in respect of loss so paid for. It prevents the insured being indemnified from two sources in respect of the same loss. Suppose ‘A’ has damaged ‘B’ is motor car negligently. If he pays ‘B’ is loss in full. B cannot collect the same from the insurance company. On the other hand if B applied to his insurance company for indemnity under his policy, he will not be permitted to collect the damages from A. In the latter case the insurance company will be entitled to collect that amount.
Ans: The mercantile agents perform important marketing services and facilitate the process of distribution of goods. The following are the various types of functional middlemen:
(i) Brokers: They do not possess the goods themselves, and their main function is to bring buyer and seller together. They charge brokerage or commission from the buyer as well as the seller.
(ii) Commission Agents: These agents are also known as consignees. They sell goods on behalf of the actual owners.
(ii) Common Carriers: These include railways, road transport, airways and shippers who are engaged in carrying goods from the place of their production to the place of consumption.
(iii) Auctioneers: They are appointed when goods are to be sold by auction.
(iv) Insurance Companies, Banks, etc.: These agencies render valuable services in the form of facilitating functions in the process of purchase and sale of goods. Most of the business transactions are carried through banks.
PART - B
Attempt any three of the following questions:
3. Explain the factors that determine the choice of the form of business organisation. 10
Ans: Criteria for the Choice of Organization
Before undertaking a description of the various forms of organisation and their respective merits and weaknesses it will be desirable to refer to the features which make for an ideal form of business organisation. These characteristics will be found applicable to the various forms of organisation in varying degrees. In choosing a particular form of organisation an entrepreneur will try to find out how far his requirements will be met by a particular form of organisation. The following factors will be taken into account.
(i) Ease of formation: An ideal form of organisation is one which can be brought into existence with the least difficulty, i.e., in the form of least expenses in formation and minimum legal formalities.
(ii) Ease of financing: Another important feature of a good form of organisation is the facility of raising the required amount of capital.
(iii) Limited liability: From the point of view of risk, the entrepreneurs will naturally prefer limited liability. In case of insolvency or winding up owner or owners must be in a position to lose only to the extent of their investment in the business.
(iv) Direct relationship between ownership and control of management: As a rule, the control should lie where the ownership lies. It will ensure that the management takes active interest in running the business efficiently and effectively. If the control is not with the owners, the management may not show required interest in maximising profits through increase in efficiency
(v) Flexibility of operations: The organisation should lend itself to change and adjustment without much difficulty as and when the need arises. A good form of organisation offers the maximum flexibility and adaptability.
4. What is capital structure? Discuss various factors to be kept in mind while deciding capital structure of the company. 2+8=10
Ans: Capital Structure: A finance manager for procurement of funds is required to select such a finance mix or capital structure that maximises shareholders wealth. For designing optimum capital structure he is required to select such a mix of sources of finance, so that the overall cost of capital is minimum. Capital structure refers to the mix of sources from where long term funds required by a business may be raised i.e. what should be the proportion of equity share capital, preference share capital, internal sources, debentures and other sources of funds in total amount of capital which an undertaking may raise for establishing its business.
The following are some of the factors affecting choice of capital structure by a firm.
1) Position of cash flow: The cash flow position should be such that it must be able to fulfill its cash obligations and in addition is also left with some buffer. The capital structure of the company should be decided taking this factor into consideration.
2) Cost of capital: Cost is an important consideration in capital structure decisions and it is obvious that a business should be at least capable of earning enough revenue to meet its cost of capital and also finance its growth. Thus, along with risk, the finance manager has to consider the cost of capital factor for determination of the capital structure.
3) Control: Along with cost and risk factors, the control aspect is also an important factor for capital structure planning. When a company issues equity shares, it automatically dilutes the controlling interest of present owners. In the same manner, preference shareholders can have voting rights and thereby affect the composition of Board of directors, if dividends are not paid on such shares for 2 consecutive years. Financial institutions normally stipulate that they shall have one or more directors on the board. Thus, when management agrees to raise loans from financial institutions, by implication it agrees to forego a part of its control over the company.
4) Trading on equity: A company may raise funds by issue of shares or by borrowings, carrying a fixed rate of interest that is payable irrespective of the fact whether or not there is a profit. Preference shareholders are also entitled to a fixed rate of dividend, but dividend payment is subject to the company's profitability. In case of ROI the total capital employed i.e. shareholders' funds plus long term borrowings, is more than the rate of interest on borrowed funds or rate of dividend on preference shares, the company is said to trade on equity. It is the finance manager's main objective to see that the return and overall wealth of the company both are maximised, and it is to be kept in view while deciding on the sources of finance. Thus, the effect of each proposed method of new finance on EPS is to be carefully analysed. This, thus, helps in deciding whether funds should be raised by internal equity or by borrowings.
5) Corporate taxation: Under the Income tax laws, dividend on shares is not deductible while interest paid on borrowed capital is allowed as deduction. Cost of raising finance through borrowings is deductible in the year in which it is incurred. If it is incurred during the pre-commencement period, it is to be capitalised. Cost of share issue is allowed as deduction. Owing to such provisions, corporate taxation plays an important role in determination of the choice between different sources of financing.
6) Government Policies: Government policies are a major factor in determining capital structure. For instance, a change in the lending policies of financial institutions would mean a complete change in the financial pattern followed by companies. Also, rules and regulations framed by SEBI considerably affect the capital issue policy of various companies. Monetary and fiscal policies of government also affect the capital structure decisions.
7) Legal requirements: The finance manager has to keep in view the legal requirements at the time of deciding as regards the capital structure of the company.
5."There is no need for the presence of wholesalers in the distribution channel and they should be eliminated." Discuss. 10
Ans: Wholesalers: Wholesale trader is one wholesales to other middlemen, institutions and individuals a fairly large quantities. According to American Management Association, wholesalers sells to retailers or other merchants and/or individual, institutional and casual users but they do not sell in significant amounts to ultimate consumers. Wholesale trade is to do with marketing and selling merchandise to retailers, wholesalers or to individuals commercial and professional or other institutional contrast to household consumers, to individuals for personal use.
1. Wholesalers are just middlemen between manufactures and retailers and hence they just add to cost of marketing. The profit margin of the wholesaler increases the cost of the product and it adversely affects the ultimate consumer. Thus by eliminating him, the consumer will be benefited since he would be required to pay a less price for his purchases.
2. Wholesalers are obstacles between producers and consumers and hinder the path of trade relations between them.
3. In some cases; wholesaler is the sole distributor of goods in an area, and the retailers and consumers have to depend on him for their supplies. Since the wholesaler enjoys a monopolistic position, he takes undue advantage of the situation and charges exorbitant prices from his customers. Thus, if such a wholesaler is eliminated, the retailers and consumers would be favorably affected.
4. Sometimes wholesalers sell goods at unreasonable prices by making maladjustments between the factors of demand and supply, with a view to earn more profit. They also create situations of scarcity by hoarding goods and then indulging in black-marketing. Therefore, if a wholesaler is eliminated, then such trade malpractices can be checked.
5. Wholesalers do not allow the development of personal relations between the producers and customers / consumers.
6. Some wholesales give partial treatment to some retailers. Thus, if such wholesalers are eliminated, all the retailers will be treated similarly by the manufacturers.
7. Most of the wholesalers are transfer agents and most of their services are superfluous in nature. If they are eliminated, goods can be directly supplied from the manufactures to the consumer.
8. Wholesalers maintain their existence at the cost of consumers and they are nothing but parasites thriving at the expense of the consumers who pay more of the purchases, just to feed these middlemen. Hence they should be eliminated from the business scene.
9. Large and established retailers can afford to buy their suppliers in bulk from the producers directly rather than approaching the wholesalers. Thus there is no need to have these middlemen.
10. The wholesalers do not actually bear the trade risks. When production is affected by strikes, labor troubles, power cuts, etc, it is the consumer who suffers. Thus these middlemen can safely be eliminated from the business activities.
6."All business risks are not insurable." In the light of this statement, explain insurable risks and non-insurable risks. 10
Ans: The various life risks cannot be treated individually, so they are put under a few broad categories based on the degree of each risk. There are two main classes of risk: (i) Non-insurable Risks; and (ii) Insurable Risks.
Non-insurable Risks If the insurance can be purchased at higher premium, there should not be any uninsurable risk. Theoretically, after investigating all the factors affecting a risk, the life insurance company should be able to give each due consideration and determining the premium charge for the insurance.
Practically, however, there are a number of reasons why some persons are not insurable. The premium would be much high for these persons which will be against the insurance principle because higher premium will stimulate only to those who are at death bed. If they are allowed it would be a case of speculation because after payment of a few premiums he will be gaining. It would be unfair to other healthy policyholders.
The second reason is that unknown risk cannot be insured to avoid the existing policyholders. So, in order to protect existing policy-holders, the insurance company must accept those risks against which it can assess adequate and fair premiums to provide for claims.
The insurable risks are those which after the selection process can be carried out by an insurer although there can be different terms and conditions for different policyholders. There is a standard of risk, if the risk is not too great (i.e., uninsurable) it can be insured as sub-standard risks even if he does not meet the requirement of a standard risk.
The risk of death among sub-standard lives varies, but in all cases it is higher than that of standard lives. Insurable risks are divided into three broad classes standard, sub-standard and super-standard. Every insurer, however, does not use all these classifications. Generally distinction between standard and super-standard is not made.
The standard risk is related with the normal life where there is no much or no less risk. There is certain criteria on which the risks are judged as normal life.
Sub-standard risks are those risks which are higher though insurable than the standard risk. Thus, the sub-standard risks are above the standard risk and below the uninsurable risk.
The super-standard risk is present where there is lesser risk than the standard risk. This is also called a preferred risk. An insurer does not prefer to issue preferred risk policies because it increases the premium on other standard risk which may cause reduction in loss of business.
7. (a) Differentiate between a Government company and a public limited company. 5+5=10
Ans: Public Company means a company which:
(a) is not a private company;
(b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed;
(c) is a private company which is a subsidiary of a company which is not a private company.
Government Company is a public limited company wherein Central or any State Government holds not less than 51% of paid up shareholding, it is called as government company. The main difference is that in Govt Company the Board of Directors are nominated by Govt , whereas in Public Ltd the promoters raise funds from Market and are elected in Annual General Meeting and other special meetings.
(b) What are the problems of public enterprises?
Ans: Public enterprises in India suffer from several problems some of which are as follows:
Investment decisions in many public enterprises are not based upon proper evaluation of demand and supply, cost-benefit analysis and technical feasibility. Projects are launched without clear-cut objectives and serious thought.
Due to inefficient financial planning, lack of effective financial control and easy availability of money from the Government, several public enterprises suffer from over-capitalisation.
Public enterprises incur heavy expenditure on social infrastructure such as schools, hospitals, etc. Location in backward regions and the desire to make the undertaking a model employer lead to huge capital outlay on housing and other amenities for labour.
Manpower planning is not effective due to which several State enterprises like Bhilai Steel have excess manpower. Recruitment is not based on sound labour projections.
One serious problem of the public sector has been low utilisation of installed capacity. The average capacity utilisation in more than 50 per cent of the public enterprises has been less than 75 per cent. There is considerable idle capacity.
8. State the documents that must accompany an export shipment. Describe them briefly. 10
Ans: Documents related to export shipment
Mate’s receipt: This receipt is given by the commanding officer of the ship to the exporter after the cargo is loaded on the ship. The mate’s receipt indicates the name of the vessel, berth, date of shipment, description of packages, marks and numbers, condition of the cargo at the time of receipt on board the ship, etc. The shipping company does not issue the bill of lading unless it receives the mate’s receipt.
Shipping Bill: The shipping bill is the main document on the basis of which customs office grants permission for the export. The shipping bill contains particulars of the goods being exported, the name of the vessel, the port at which goods are to be discharged, country of final destination, exporter’s name and address, etc.
Bill of lading: Bill of lading is a document wherein a shipping company gives its official receipt of the goods put on board its vessel and at the same time gives an undertaking to carry them to the port of destination. It is also a document of title to the goods and as such is freely transferable by the endorsement and delivery.
Airway Bill: Like a bill of lading, an airway bill is a document wherein an airline company gives its official receipt of the goods on board its aircraft and at the same time gives an undertaking to carry them to the port of destination. It is also a document of title to the goods and as such is freely transferable by the endorsement and delivery.
Marine insurance policy: It is a certificate of insurance contract whereby the insurance company agrees in consideration of a payment called premium to indemnify the insured against loss incurred by the latter in respect of goods exposed to perils of the sea.
Cart ticket: A cart ticket is also known as a cart chit, vehicle or gate pass. It is prepared by the exporter and includes details of the export cargo in terms of the shipper’s name, number of packages, shipping bill number, port of destination and the number of the vehicle carrying the cargo.