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Grade XIBusiness Studies(Exam Booster Booklet)
BUSINESS STUDIES: IMPORTANT QUESTIONS
CHAPTER 1: BUSINESS, TRADE AND COMMERCE
1. “Profit is not the sole objective of a business.”In the light of the statement above, discuss
the various objectives of business.
2. Define auxiliaries to trade. Briefly explain any five business activities that can be
considered auxiliaries to trade.
3. What are the various factors that need to be kept in the mind before starting a business?
4. Discuss the development of indigenous banking system in Indian subcontinent.
CHAPTER 2: FORMS OF BUSINESS ORGANISATION
1. Briefly explain the various features of a partnership?
2. Explain the merits and demerits of sole proprietorship firm.
3. Explain the factors that determine the choice of form of organisation.
4. What is 'Memorandum of Association'? Briefly explain its clauses.
5. What is the effect of conclusiveness of the 'Certificates of Incorporation' and
'Commencement of Business'?
CHAPTER 3: PRIVATE, PUBLIC AND GLOBAL ENTERPRISES
1. What are the benefits of entering into a joint venture?
2. What is Multinational company? Explain its features.
3. What is a Departmental Organization ? Explain its importance.
4. Briefly explain the major factors highlighting the role of public sector in the growth and
development of India.
CHAPTER 4: BUSINESS SERVICES
1. Explain in detail any five functions performed by commercial banks.
2. Banks provide a variety of accounts to the public in which they can deposit their money as
per their preferences. List and explain any three types of such accounts.
CHAPTER 5: EMERGING MODES OF BUSINESS
1. Evaluate the need for outsourcing and discuss its limitations.
2. What are the advantages and disadvantages of e-business?
3. Why should business transactions be secured?
CHAPTER 6: SOCIAL RESPONSIBILITIES OF BUSINESS AND BUSINESS ETHICS
1. Build up argument for and against social responsibilities.
2. What is business ethics? What are the elements of business ethics?
CHAPTER 7: SOURCES OF BUSINESS FINANCE
1. What advantages does issue of debentures provide over the issue of equity shares?
2. ‘Retained earnings are a better source of finance than any other source’. Do you agree with
the statement? State reasons to support your answer.
3. Explain any three merits and demerits of preference shares as a source of long-term
finance.
4. Explain any six factors that might affect an organisation’s choice of source of finance.
CHAPTER 8: SMALL BUSINESS AND ENTREPRENEURSHIP
1. Explain the role of small business in rural India.
2. What is a start up? What are the ways to fund a startup?
3. What are the characteristics of entrepreneurship?
CHAPTER 9: INTERNAL TRADE
1. List down the important features of a multiple chain store?
2. Discuss the features of a departmental store. How are they different from multiple shops or
chain stores.
3. Explain Goods and Services Tax and its features.
CHAPTER 10: INTERNATIONAL BUSINESS
1. Briefly explain the major advantages of international trade.
2. Explain the procedure of export trade.
3. Explain the procedure of import trade.
SOLUTIONS TO THE IMPORTANT QUESTIONS
CHAPTER 1: BUSINESS, TRADE AND COMMERCE
1. Though, it has been well-known that business is carried-out mainly and solely to earn
profit, however, now-a-days, with the growing diversities, business has expanded its
definition in terms of its objectives. It is no more limited to earning profits but much more
beyond this. The following are the multiple objectives that a business aims at achieving
simultaneously.
a. Innovation: It means developing newer techniques by incorporating new thoughts, so as
to meet newer needs. It is a continuous and a never-ending process. With the help of new
techniques, a business can reduce its cost of production and can provide newer and superior
products that too at a comparatively low price (than its competitors). Thus, innovation is of
immense need if a business wants to attract new consumers, in order to grow. In today’s
era, it has been realized that innovation is the only way that helps a business to leap and
remain ahead of its competitors.
b. Maximum profit: Since ages, profit has been the basic motive with which every business
is carried out. It is obvious and quite rational for anyone who invests a certain amount of
money in business with the motive of getting a higher amount in return. The profit earning
capacity of a business decides its future growth prospects. Higher the amount profits,
higher is the amount ploughed back in the business, consequently, higher is the growth
prospects and vice-versa.
c. Market share: Usually, every businessman faces competition. Moreover, each one wants
to stay ahead of his counterparts. The only way to do this is to capture the maximum
market share (i.e. catering to the needs of large number of consumers). A business in chase
of this objective must aim at providing superior quality of products to the consumers at
comparatively low price.
d. Workers’ performances and their attitude: Productivity and profitability of a business is
dependent on its workers’ performances and their attitude. A motivated and satisfied
worker performs his best and contributes the maximum to the achievement of the business
goals. Thus, every business must aim at creating a healthy environment that encourages its
workers to contribute in a positive manner.
e. Social responsibility: Besides all the above business objectives, it has been realized that
a business does have certain responsibilities towards the society. These are termed as social
responsibilities. Business being an integral part of a society must contribute to solve social
problems such as poverty, employment, consumer satisfaction, pollution, etc. The
fulfillment of these social objectives helps a business to earn positive reputation
(technically known as goodwill).
2. Auxiliaries to trade include trade-related activities that facilitate the exchange and
transportation of goods and services. Among the major auxiliaries to trade are transport,
advertisement, packaging, warehousing, banking and communication.
The following is a brief explanation of the various auxiliaries to trade.
i. Banking and finance: Finance is the most important input to carry on any business.
Thus, the absence of a banking and finance system can obstruct the free movement of
goods. An efficient banking facility ensures the easy and ready availability of cheap credit
to businessmen, thus acting as an auxiliary to trade.
ii. Advertising: The importance of advertisement in today’s world is well known. It is
through advertisements that businesspersons can reach out to a large number of potential
buyers through television, the radio, the Internet, newspapers and other media by making
them more aware of products. Advertising helps businesspersons to increase their sales and
plays the role of an auxiliary to trade.
iii. Warehousing: Warehousing performs various functions such as holding and preserving
goods until they are ready for final consumption or in case they need to be stored for a
period. Warehouses help businesses to store goods and facilitate the availability of these
goods when required.
iv. Insurance: Every business activity involves various types of risks because of factors
beyond control. Insurance acts as a protection against these risks. On payment of a
premium, business enterprises can recover their losses from insurance companies.
v. Transport: Transport enables a producer to sell goods in different regions and to get raw
materials and other inputs from distant places. Thus, transport facilitates the selling and
buying of goods.
3. The following are some of the important factors that must be considered before starting a
business:
i. Selecting the line of business- This is the foremost decision that involves choosing the
kind of product to be produced, analysing its existing and future market demand, profit
considerations and the level of technical know-how possessed by the entrepreneur.
ii. Scale of the business- Once the line of business is selected, the entrepreneur needs to
decide whether he wants to operate his business on a large or small scale. The choice of
scale of business is made on the degree of risk embedded in:
a. the line of business;
b. the ease of obtaining capital and
c. the projected demand for the product
A larger scale of business is preferred if the risk involved is low and the entrepreneur is
confident about the high demand for his product. Similarly, greater the ease of obtaining
capital, greater is the ease of operating on a large scale and vice versa.
iii. Location- The choice of business location is dependent on numerous factors such as
easy and cheap availability of raw materials and labour, well-connected transportation
facilities, power and other infrastructural facilities. In general, entrepreneurs prefer those
locations where such infrastructural facilities are easily available.
iv. Finance- Finance is required for every aspect of business. Right from the purchase of
raw materials and machinery to further investment or for meeting the day-to-day business
expenses, finance plays a crucial role in business. Therefore, while starting a business, the
feasibility of various fund-raising alternatives (as against the requirement) must be
carefully analysed.
v. Efficient manpower- A competent and trained workforce is the basic necessity for
carrying out various business activities. Therefore, an entrepreneur must appropriately
identify the requirement of human resources in the business at the worker level as well as at
the managerial level.
vi. Physical requirements- These requirements include machinery, equipments, tools and
technology that add to the efficiency of a business. An entrepreneur must carefully consider
and decide the requirements of such facilities on the basis of the nature and scale of his
business.
4. The following points highlight the developments of indigenous banking system in Indian
Subcontinent:
a. Metals as Money: Initially, the metals were used as money due to the high durability
and divisibility. In fact, the use of metallic money boosted the number of transactions and
accelerated the economic activities.
b. Use of Hundi and Chitti: Hundi and Chitti were financial instruments which were used
for carrying out trade and credit transactions during the Medieval period in India. A Hundi
is primarily an unconditional contract or order which warrantees a monetary payment
which can be transferred by valid negotiation.
c. Development of banks: With the use of currency and letter of credit, the Indian banking
system started lending money and financing the domestic and foreign trade in India. Along
with this, the development of banking system also encouraged people to deposit precious
metals with the lending authorities such as bankers, Seths, etc. and gradually, money
became an instrument of exchange.
d. Agriculture and livelihood opportunities: In the Indian subcontinent, agriculture and
the domestication of animals were important sources of livelihood. Along with this, people
also relied on other sources of earning a livelihood such as weaving cotton, dyeing fabrics,
making clay pots, utensils, and handicrafts, sculpting, cottage industries, masonry,
manufacturing, transports etc. This helped people in generating surpluses which could be
further saved for investment purposes.
e. Role of Intermediaries: The intermediaries and other institutions such as Jagat Seths,
developed and exercised great control and influence during the days of Mughals and East
India Company. They played an important role in the promotion of trade, commerce and
banking in India.
f. Credit transactions: With the development of credit facilities and availability of loans
and advances, the commercial activities and operations enhanced and the Indian
subcontinent started enjoying the benefits from a favourable balance of trade.
g. Evolvement of indigenous banking: The indigenous banking system not only benefitted
the manufacturers or traders by facilitating trade but they also helped those merchants with
additional funds who were looking for expansion and development. Later on, with the
evolvement of commercial and industrial banks, the banking system also started providing
both short term and long term loans to finance the agricultural projects in India.
CHAPTER 2: FORMS OF BUSINESS ORGANISATION
1. The following are the main features of a Partnership:
i. Easy formation- A partnership form of an organisation requires an agreement (oral or
written) between members to share profits and losses. Moreover, it requires a minimum of
two members for starting up this business. In addition to this, registration of a partnership
firm is also not compulsory.
ii. Unlimited Liability- All the partners in a partnership for of an organisation have
unlimited liability. In other words, in case the business assets are insufficient to retire all
the business debts, then personal property of the partners may be utilised for this purpose.
iii. Risk bearing- The risk associated with the fluctuations in the firms profits is borne by
the partners jointly. Thus, reducing the burden on individual partners. Therefore, in a
partnership form of an organisation all the partners share the risk of losses according to
their profit sharing ratio.
iv. Sharing of decision making and control- In a partnership form of an organisation, the
decision making and control is shared by the partners. In other words, all the decisions in
this business are taken by the partners jointly.
v. Continuity- Death, lunacy, insolvency or insanity of any of the partners brings an end to
the partnership. However, the existing partners may decide to continue business with a new
partnership agreement.
2. Merits of Sole Proprietorship A sole proprietor enjoys the following benefits.
(a) Ease in formation and closure of business: There are hardly any legal formalities to be
fulfilled for setting up a sole proprietorship firm. However, if a proprietor is dealing in
drugs and liquor products, then a licence has to be acquired. The procedure for closing
down a sole proprietorship firm is also hassle-free and easy.
(b) Quick decision making: A sole proprietor enjoys complete control over the business.
This makes decision making quick and easy.
(c) Direct incentive: A sole proprietor is the sole bearer of all types of risks associated with
the business and, at the same time, is the single recipient of all the profits and gains earned
in the business. Thus, this direct link between efforts and rewards motivates the sole
proprietor to operate the business efficiency and effectively.
Limitations of Sole Proprietorship:
The following are a few limitations of a sole proprietor firm.
(a) Limited capital: The financial resources that are available to a sole proprietor are
limited merely to this person’s personal savings and borrowings that can be raised from
relatives and friends. Thus, the amount of capital available to a sole proprietor is limited,
which often prevents him or her from expanding the business.
(b) Limited managerial abilities: A sole proprietor manages all the core functions such as
purchasing, selling and planning. As a result, the benefits of specialisation are not available
to a sole proprietor. Also, because of limited resources, a sole proprietor may not be able to
employ specialised employees to handle specific business operations.
(c) Uncertain life: In the eyes of the law, a sole proprietor and his or her business are
regarded as the same entity. In the event of death, insanity, bankruptcy or physical ailment
of a sole proprietor, the life of the business is adversely affected.
3. The following are the factors that determine the choice of a business organisation.
(a) Nature of business activity: Any individual first needs to decide upon the nature or
kind of business activity that he or she desires to undertake. In case the business type
requires direct personal contact with customers, then the sole proprietorship form of
business proves beneficial. On the other hand, if direct personal contact is not required,
then a partnership or a company form of business is more suitable.
(b) Degree of control: The choice of a business form also depends on the degree of control
that a businessperson wants to exercise over its management. If a businessperson aims to
have direct control over all the business operations, then sole proprietorship may be
considered appropriate. However, if he or she does not mind sharing the decision-making
powers with others, then a partnership or company form of business would be more
suitable.
(c) Degree and specialisation of managerial abilities: If the business operations are large
and require specialised and skilled professionals for managing them, then a company form
of business may be selected. However, if the business operations are not very complex and
the scale of operations is also not very large, then sole proprietorship proves to be a better
alternative.
(d) Extent of liability: If the liability of the owner or the partners is unlimited then, sole
proprietorship and partnership. If the liability of the members is limited to the amount of
the shares held, then company.
(e) Cost and ease of formation: A sole proprietorship or partnership firm requires a
limited sum of money and is easy to form. A company or cooperative society involves the
completion of a large number of legal formalities,incurring a high cost.
(f) Continuity: A family business, cooperative society and a company are not affected by
situations such as the death or insanity of the owners. A sole proprietorship and a
partnership are affected by the death of the owners.
4. A memorandum of association (MoA) is the most essential document in the formation of a
company as it highlights the company’s main objectives and goals. The MoA regulates the
activities of the incorporated company in such a manner that the company can legally
undertake only those activities that are mentioned in the MoA. This document must be
signed by at least seven members in the case of a public company and by two persons in
the case of a private company. The following are the main clauses of the MoA.
(a) The name clause: This includes the name of the company which has already been
approved by the registrar of companies. It is the name by which the company will be
known.
(b) Registered-office clause: This clause mentions the name of the state where the
registered office of the company is situated. It is not mandatory to submit the exact address
of the registered office at this stage. However, the address needs to be submitted within 30
days of incorporation of the company.
(c) Objects clause: This is the most important clause in the MoA as it defines the main
objective of the company for which it was formed. The company cannot undertake
activities that are not stated in the objects clause. The objects clause is divided into the
following two sub-clauses.
(i) The main objects: This sub-clause lists the main objects for which the company is
formed. Any clause that is essential for the achievement of the main objectives is
considered valid even if it is not contained in the sub-clause.
(ii) Other objects: Objects that are not included in the main-objects clause can be
included in this sub-clause. If a company wants to initiate a business activity that is
mentioned in this clause, it is required to pass either an ordinary resolution or a special
resolution to get the consent of the central government.
(d) Liability clause: This clause states the liability of each shareholder according to the
amount unpaid by them for the shares they own.
(e) Capital clause: This clause defines the authorised capital of the company which it can
raise through the issue of shares. It also states the division of the number of shares.
(f) Association clause: This clause contains the statement by the signatories to the MoA
giving their approval to be a part of the company. They also give their consent to buy the
qualification shares of the company.
5. When we say that the ‘certificates of incorporation and commencement of business’ is
conclusive, we mean that once the certificate is issued, the existence of the company is
considered valid despite any flaw in its registration process or formation. The following are
the effects of the conclusiveness of the certificates of incorporation and commencement of
business.
Effect of Conclusiveness of Certificate of Incorporation (a) A company legally comes into existence or becomes a separate legal entity on the date
stated in its certificate of incorporation. For instance, if the certificate is issued on
September 30 and the date mentioned on the certificate is September 27, then the company
is said to exist since September 27 only.
(b) The certificate of incorporation acts as compelling confirmation of the regularity of the
incorporation of the company even if there is any flaw in its registration process.
(c) A company can immediately commence its business once its certificate of incorporation
is issued. Thus, the certificate of incorporation is conclusive evidence of the existence of a
company. As a result, the birth of the company cannot be questioned if it has the certificate
of incorporation.
Effect of Certificate of Commencement of Business (a) The certificate of commencement of business is issued by the registrar of companies
when all the documents submitted by the company are found satisfactory.
(b) The commencement of business certificate acts as definite proof for the company that it
has the legal right to do business.
(c) The formation of a public company is completed once it is granted the certificate of
commencement of business. Thus, the business activities of the company cannot be
questioned as it is legally allowed to start its business after getting the certificate.
CHAPTER 3: PRIVATE, PUBLIC AND GLOBAL ENTERPRISES
1. A joint venture is a business agreement in which two or more organisations come together
for mutual benefits and gains. Business organisations in a joint venture share not only the
physical, financial and human resources available but also the risks and profits of the
business. The following are some of the benefits for a company entering into a joint
venture.
(a) Increased resources and capacity: In a joint venture, the resources and operational
capacities of the individual business are pooled. A joint venture is able to expand and grow
better than an individual business enterprise.
(b) Access to new markets and distribution networks: Entering into a joint venture with an
enterprise located in another region widens the market base for each of the individual
enterprises.
(c) Access to technology: Through a joint venture, a company can acquire new and modern
technology more easily with less investment and less time and effort compared with the
technology that individual enterprises may be able to acquire working independently.
(d) Innovation: A joint venture, especially with a foreign partner, gives a company access
to new ideas and technology which help in the innovation of new products. These new
products enable businesses to sustain in today’s complex and competitive market.
(e) Low cost of production: The costs of raw material and labour, etc., are very low in
India compared to other countries. Thus, international corporations that enter into joint
ventures with Indian companies reap huge benefits.
2. Multinational corporations (MNCs) are enterprises with operations in more than one
country. They are huge industrial organisations characterised by their large size, wide range
of products and use of advanced technologies and sophisticated marketing strategies.
The following are the major features of Multinational Companies.
i. Huge capital resources: MNCs have huge resources as they are capable of generating
capital from all over the world. As they have goodwill, they can also borrow from
international banks and from a large number of investors who are willing to invest in
them for huge returns.
ii. Foreign collaborations: MNCs generally enter the market with the help of local private
companies. This is mainly because of the restrictions imposed on them by the
government and also to take advantage of the brand image of the Indian company.
iii. Advanced technology: These companies invest huge amounts in research and
development of technology. Thus, new technology helps them to increase their
efficiency and attain a superior position in the market.
iv. Product innovation: Multinational corporations have refined research and development
centres for the innovation of new products. This helps them to sustain in the market and
retain their large consumer base.
v. Centralised control: MNCs have a centralised control in the sense that the management
and control of MNCs lie in the hands of the parent company, i.e., the headquarters.
3. Departmental organizations works directly under the ministries of the government with no
separate legal existence. They have a high degree of accountability towards the public. The
following are the merits of a departmental undertaking.
The following points highlight the importance of these organizations
i. They are set up under an Act of Parliament and hence are easy to form.
ii. As these enterprises work directly under the ministries of the government, they have a
high degree of public accountability.
iii. The revenue earned by these enterprises directly goes to the government treasury and
therefore is a source of income for the government .
iv. Strict accounting and auditing controls ensure optimum utilisation of resources .
v. These enterprises have maximum degree of control by the Parliament , as they are set
under an Act of Parliament.
4. Public sector indeed is considered to be a powerful engine of growth and development in
India. This is because of the following factors that highlight the role of public sector in
India.
i. Infrastructural development- For the development of any country, infrastructural
development is a requisite factor. In this regard, the public sector made huge capital
investments in the development of infrastructural facilities such as fuel, energy, and
transport facilities. This contributed to the growth and development of India.
ii. Regional balance- During the pre-independence period, industrial development was
confined only to a few selected sectors. However, after 1951, public sector enterprises were
set up for the development of the backward sectors of the economy. This was done in order
to maintain a regional balance in all the states thereby contributing to the overall equality in
the nation.
iii. Self sufficiency- To become a self sufficient economy, India required heavy machinery
and foreign exchange. And obtaining both these factors posed a big problem for the private
sector companies. Thus, the public sector enterprises were made to get involved in heavy
engineering with the help of government resources and capital.
iv. Import substitution and exports- To attain self sufficiency, the government aimed at
restricting imports and at the same time maximising exports. In this regard, for restricting
the imports of heavy machinery and engineering, many PSUs were established to produce
these goods domestically. Simultaneously, with the aim of expanding exports, PSUs such
as MMTC and STC were established.
CHAPTER 4: BUSINESS SERVICES
1. The following are five functions that are performed by commercial banks:
i. Collection of deposits- Banks accept various types of deposits from the public such as
saving account deposit, current account deposit, fixed account deposits and pay interest on
them as they are indebted to pay the depositor the amount deposited by him/her in the bank.
This function forms the basis of the loan operations of the banks.
ii. Lending of funds- Banks grant loans and advances on the basis of total deposits
available. These advances can be in the form of overdrafts, discounting trade bills, cash or
consumer credits, etc. The interest charged on these loans act as a major source of profits
for the banks.
iii. Cheque facility- Cheques drawn on other banks are also collected by banks and in this
way they act as a clearing house. These cheques are mainly of two types- bearer cheques
(encashable immediately at bank counters) and crossed cheques (deposited only in the
payees account).
iv. Remittance of funds- Banks help in transferring the funds of the customers from one
place to another. These transfers can be done in the form of bank drafts, pay orders,
nominal commission charges and much more.
v. Allied services- In addition to other functions, banks also provide services such as locker
facility, underwriting services, bill payments, etc. They perform functions such as buying
and selling of shares and debentures on behalf of the customers.
2. The following are the three types of accounts in which the public can deposit their
money:
i. Savings deposit account: This account carries a nominal interest rate and is generally
opened by investors who are willing to save a small amount of money in the bank.
ii. Current deposit account: The money deposited in this account can be withdrawn at
any point of time. However, this account does not carry any interest rate. Rather, the bank
charges some service charges for maintaining this account.
iii. Fixed deposit account: This account carries a higher interest rate than any other
savings account; it is used to save money for a longer period of time. The longer the
period of deposit, the higher the interest rate paid on it. The money deposited in this
account is payable only after a fixed period. However, if the depositor wishes to
withdraw the money before maturity, he/she can do so by paying a penalty fee to the
bank.
CHAPTER 5: EMERGING MODES OF BUSINESS
1. Outsourcing refers to the process of contracting out less important (i.e., non-core) business
activities to other agencies, while retaining the more important areas.
Advantages of Outsourcing The following are the advantages of outsourcing.
(a) Focus on core activities: Outsourcing allows a business enterprise to focus on the
activities that are more important to it. This helps it to come up with more sophisticated and
superior products, which builds goodwill for it in the market.
(b) Specialisation: The external agencies to which tasks are contracted out are highly
specialised in their areas of activity and have expertise in performing the assigned tasks.
This contributes to the overall efficiency and excellence of the company which is
outsourcing work.
(c) Cost savings: The larger the company, the higher are its constraints in minimising the
cost of its back-office operations. In view of this, outsourcing enables companies,
especially large-scale organisations, to perform these operations at reasonable costs
(compared with the costs that they would have incurred by performing the operations
themselves). Thus, outsourcing is regarded as cost efficient.
Limitations of Outsourcing The following are the limitations of outsourcing.
(a) Confidentiality: Outsourcing involves sharing vital information and technological
knowledge with the firms to which tasks are outsourced. As a result, there is always a risk
that these firms might share vital information with the business rivals of the companies
which have outsourced tasks to them. This lack of confidentiality can pose a serious threat
to companies which rely on outsourcing.
(b) Quality concerns: Once the contract is given and the rates are fixed, it may happen that
the firm to which tasks have been outsourced starts using cheap and inferior inputs in order
to reduce their own costs and increase their profits. This adversely affects the quality of
products and services of the companies outsourcing tasks.
(c) Resentment in home country: Global enterprises outsource their activities to firms
located in countries where labour costs are much less. However, if the home countries of
these enterprises are facing unemployment, then this may lead to resentment and
disturbances.
2. The advantages of e-business are:
i. Ease of Formation - The investment required to start up e-business is almost
negligible. This is because it does not require much capital or resources for the physical
establishment of the business. Thus, it becomes a comparatively easier mode of trading
than the traditional mode of business.
ii. Global Access - E-business provides a worldwide access to the business. Businessmen
are able to extend their sale of products to a large number of consumers. Similarly, the
consumers also get to choose from a variety of goods. Thus, it can be said that e-business
has shrunk the whole world where international boundaries do not matter anymore.
iii. Ease of Access - Unlike traditional modes of business, e-business provides easy
accessibility to the consumers, as they can access products from anywhere and order
them anytime.
iv. Consumer-Friendly - E-commerce saves the time and efforts of the consumers. It
provides a wide range of payment options to its customers such as debit cards, credit
cards, cash on delivery and EMIs. All these options are quite safe and secure.
The disadvantages of e-business are:
i. Lack of Personal Touch - Unlike traditional business methods, e-commerce lacks a
personal touch, as both the consumer and the seller are not physically present when the
deal is made. As a result, direct trading is preferred over e-commerce for products such
as clothes, shoes and jewellery. This is because in such cases, the consumers prefer the
physical presence of the seller along with the product.
ii. Lack of Security - Online trading and transactions are highly prone to internet risks
and online threats. The possible threats could be leakage of credit/debit card details to
the third parties, anonymity of the trading people, virus attacks and hacking and
phishing.
iii. Technical Drawbacks - Online trading requires basic computer knowledge and
internet familiarity. This often creates distress and disgrace for the people who do not
know how to operate computer. Furthermore, this often divides the society (termed as
‘digital divide’) into computer literates and computer illiterates. Besides, sometimes
due to technical problems or server downtime, websites stop functioning; this may add
to the frustration of the consumers and may even discourage them to revisit the website.
3. Business transactions should be secured because online transactions face a number of risks.
Following are the type of risks involved in e-business:
i. Data Storage Risk - Data stored in a system is prone to misuse by hackers and
fraudsters.
ii. Transaction Risk - The following are some of the transaction risks:
a) Default on order taking or giving: Either the seller denies that receipt of the order or
the customer denies the placement of the order.
b) Default on delivery - In this case, either wrong goods are delivered or the goods are
delivered at the wrong place. It can also happen that the goods are not delivered at
all.
c) Default on payment - In this case, the seller denies the receipt of any payment,
while the customer claims to have made the payment.
iii. Risk of Threat to Intellectual Property and Privacy - Information uploaded on the
internet is prone to the risk of getting leaked and copied, as business transactions are
highly prone to internet risks and online threats. Other examples include the leakage of
credit/debit card details to the third parties, virus attacks and hacking and phishing
activities. Thus, business transactions should be secured.
CHAPTER 6: SOCIAL RESPONSIBILITIES OF BUSINESS AND BUSINESS ETHICS
1. The case in favour of taking up social responsibilities (a) Existence and growth: Business enterprises exist to make profits by providing goods
and services to consumers. Thus, we can say that their long-term growth prospect depends
not only on their profits but also on how efficiently they serve society. Therefore, taking up
social responsibilities supports the existence and growth of a business enterprise.
(b) Avoidance of government intervention: Business enterprises should always work in
line with society’s values and ethics. This would help them fulfil their social
responsibilities, which in turn would make them less prone to government intervention.
(c) Better environment for doing business: Businesses make use of society’s resource of
human capital. Thus, by providing employment to people, they help solve the social
problem of unemployment and poverty, thereby creating a favorable environment for
business.
The case against taking up social responsibilities (a) Violation of profit maximisation objectives: It is argued that a business enterprise
exists to make a profit. Thus, if it engages itself in solving social problems, then it may not
have enough resources to meet its primary objective of profit maximisation.
(b) Burden on consumers: It is argued that when a business enterprise is engaged in
solving social problems such as environment pollution and unemployment, its expenditures
increase. This increased financial burden is ultimately passed on to the consumers in the
forms of higher prices of products.
(c) Lack of social skills: Businesspersons are basically trained to solve business-related
problems such as minimising cost, maximising profits and increasing sales. However, they
are not specialised in solving social problems. Thus, it is argued that social problems must
be solved only by specialised agencies, which have the required training and skills.
2. Business ethics can be defined as the code of conduct that a business must follow for the
welfare of society. Following are the elements of business ethics:
i. Commitment by top management: Top-level officers in an organisation should
sincerely follow the ethical code of conduct and guide employees towards adopting
the code.
ii. Publication of a ‘code’: The management in an enterprise should clearly define the
ethical code of conduct that needs to be followed by all employees. The code should
include guidelines regarding standards of work, laws governing production and
standards for the health and safety of employees.
iii. Establishment of compliance mechanism: An enterprise should also devise a suitable
mechanism through which it can measure the actions of all employees, so as to ensure
that the ethical standards are duly met.
iv. Involvement of employees at all levels: Employees, at different levels in the
organisation, should actively participate in the successful implementation of ethical
standards set by the enterprise.
v. Measurement of results: Although it is difficult to measure results after
implementing ethical standards, the top management should take steps to monitor the
compliance and to curb any unethical behaviour on part of employees.
CHAPTER 7: SOURCES OF BUSINESS FINANCE
1. Debentures are financial instruments used by companies to raise long-term debt capital.
They imply that the company has borrowed a certain sum of money which it will repay
later to the debenture holders. They are considered as fixed income securities as they carry
a fixed rate of return and are repayable on a certain pre-specified date in the future.
The following are the advantages of issuing debentures over issuing equity shares.
(a) The issue of equity shares denotes the dilution of ownership of a firm. This is because
the equity share holders own specified shares of the company and have voting rights. In
contrast, debenture holders do not have any rights in the company. That is, they do not
enjoy voting rights or any kind of ownership in the firm. Rather, they are only entitled to a
fixed amount as payment. Thus, debentures do not result in any kind of dilution of
ownership of the firm. Thus, issuing debentures is more advantageous for a firm than
issuing equity shares.
(b) In order to issue shares, a company has to incur huge costs. Besides, it has to pay
dividends to its shareholders, which are not tax deductible. On the other hand, a company
receives tax deductions on the interest paid to its debenture holders. Hence, issuing
debentures is advantageous for a firm in terms of low costs.
(c) Debentures carry a fixed rate of return. This implies that irrespective of the profit
earned, the company has to pay only a fixed interest to its debenture holders. On the other
hand, a company that issues shares has to pay dividends to the shareholders, which varies
with the profit—i.e., the higher the profit, the higher will be the dividends. Thus,
companies prefer to issue debentures if they expect to earn higher profits in a year.
2. Yes, we agree that retained earnings are a better source of finance than any other source.
This is mainly because of the advantages that are associated with retained earnings as a
long-term source of finance.
The following are some such benefits of retained earnings enjoyed by the business:
i. Lesser costs involved- As these funds are raised internally, they do not involve any kind
of explicit costs in the form of interest, floatation or dividend. This minimises the overall
cost of the business and makes retained earnings a favourable source of finance.
ii. Increases price of equity shares- High amounts of retained earnings may lead to an
increase in the price of equity shares. This is because with higher retained earnings, the
growth prospects of the business increases. This, in turn, makes the business a favourable
venture to invest in.
iii. Reduced burden- Retained earnings are basically the surplus or profits of the business
that are retained in the business. This, in turn, helps the business in reducing the burden of
unexpected losses, as these earnings act as a cushion at the time of crises.
iv. Permanent source of capital- Since retained earnings are raised within the business and
remain invested in business for longer periods, they act as a permanent source of finance
for the business.
v. Greater degree of operational freedom- Funds in raised through retained earnings are
generated internally. This provides greater flexibility and operational freedom to the
owners as there are no restrictions on the use of these funds.
3. The following are the merits of preference shares as a source of long-term finance:
i. Secured returns: The rate of return on preference shares is fixed; thus, the risk of
uncertainty is less. Preference shares entitle their holders the preferential right to receive
the repayment of capital invested by them before their equity counterparts at the time of
winding up of the company.
ii. No dilution of control: Preferential shareholders do not have any voting rights in the
company. As a result, the control on the management of the company does not get diluted.
iii. Less risky: The returns on these shares are fixed. Thus, they are suitable for the
investors who want a fixed rate of return with comparatively low risk.
Following are the demerits of preference shares as a source of long-term finance:
i. Varying dividends: The dividend payment to preference shareholders is dependent on the
profits of the company. Thus, the dividend paid on preference shares keeps on varying with
the profits of the company.
ii. Non-tax-deductible asset: Unlike the return on debentures or the interest on loans, the
return on preference shares is not tax-deductible. Thus, it does not result in any tax savings.
iii. Not suitable for risk-taking investors: The return on preference shares is fixed. Thus, it
is not suitable for those investors who are willing to bear a high risk in exchange of a
higher return.
4. The following are the six factors that might affect an organisation’s choice of source of
finance.
i. Cost of raising funds- Raising finance through different sources involves different levels
of costs. These costs primarily include interest obligations, procurement cost and utilisation
cost. For instance, issuing equity shares or trade credit involves higher cost than issuing
debentures or factoring. Thus, the company should consider the costs involved and opt for
the cheapest source of finance.
ii. Payment obligations- A business needs to honour the payment obligations of capital as
well as the return on investment. For instance, in case of borrowed funds, the firm is legally
bound to make interest payments at regular intervals. However, in case of equity, the
capital is repaid only at the time of dissolution. Thus, a company should opt for sources
whose payment obligations are non-binding in nature.
iii. Dilution of control involved- Certain sources of funds involve dilution of ownership of
the business. For instance, issue of equity shares leads to the dilution of control of the
owners. However, this dilution does not take place in case of borrowed funds. Thus, the
company should also consider the extent to which the owners are ready to share their
control over the business.
iv. Credit worthiness of the issuer- High dependence on certain types of borrowings tends
to adversely affect the credit worthiness of a company or an issuer. For instance, if a
company highly depends on the secured debentures, then this may hamper the interests of
the unsecured creditors in the company. As a result, they may not extend further credit to
the company.
v. Associated tax benefits: The interest paid on instruments varies from source to source.
For example, the interest paid on borrowed funds is tax deductible, which in turn helps in
reducing the overall cost of the company. It is one of the important factors that should be
considered while choosing the source of finance.
vi. Ease of obtaining and repayment: The choice of source of finance also depends on the
ease with which money can be raised. Often, the length and time involved in raising funds
through certain sources are huge; this, in turn, prevents businessmen from choosing that
source of finance. For instance, issuing equity shares or borrowing money from banks
involves formalities and procedures that are lengthy and time consuming. Thus, a business
should choose those sources through which funds can be easily obtained.
CHAPTER 8: SMALL BUSINESS AND ENTREPRENEURSHIP
1. The following are some of the major roles played by small-scale businesses in rural India.
(a) They generate employment opportunities: Cottage and rural industries play a
significant role in providing employment opportunities, particularly to people in rural areas.
This proves to be a boon especially for the economically weaker sections of the rural
society.
(b) They mitigate disguised unemployment and alleviate poverty: Small-scale businesses
use labour-intensive production techniques, and are, therefore, able to provide employment
to the excess/surplus rural labour. Thus, small-scale businesses remove disguised
unemployment from the agriculture sector and at the same time provide livelihood to the
rural people. Hence, they contribute to alleviating rural poverty.
(c) They enable equitable income distribution: The capital requirements of small-scale
businesses are low, mainly because of their use of labour-intensive production techniques,
and this encourages entrepreneurs to start units on a small scale. Small-scale businesses are,
therefore, set up all over the country, many of them providing employment opportunities to
people in rural areas. This triggers the redistribution of wealth and income, and enables the
equitable distribution of income in rural areas.
(d) They help accelerate growth: Small-scale businesses have been considered as a major
propeller for the acceleration of economic growth and as an employment generator,
particularly in the rural and backward areas of India.
(e) They facilitate rural development and reduce migration from rural to urban areas: It
is well known that a large number of people migrate from rural to urban areas in search of
better employment opportunities and improved living standards. Small-scale businesses
help reduce this migration by providing employment opportunities to rural people in their
own regions. By doing so, small units also help mitigate the excessive pressure on urban
infrastructure.
2. A startup, as per the Ministry of Commerce of India, refers to an entity, registered or
incorporated in India which is not older than 5 years and whose annual turnover does not
exceed 25crore rupees in any preceding year. Also, a startup should work towards
innovation, development and commercialization of goods, services, processes, IPR or
patent. The ways in which a startup can be funded are as follows:
(a) Boot Strapping: Commonly known as self-financing, boot strapping involves using
your own resources and personal savings to fund the business activities. It is especially
considered when the initial funding requirement is small and handy.
(b) Crowdfunding: Herein, a group of people come together and pool in their resources to
achieve a common goal. This method helps startups to meet their funding requirements.
(c) Angel Investment: Angel investors are the ones which have a surplus funds to invest in
startups. Also, along with the money, they also offer guidance and support to the new
investors.
(d) Venture Capital: These are professionally managed funds which are invested in
companies having huge growth potential. These capitalists not only provide funding but
also assist the startups with mentorship, expertise and guidance to sustain the business.
.
3. The following are the key characteristics of entrepreneurship:
(a) Systematic Activity: Entrepreneurship does not happen by chance, rather it is a step-by-
step activity that requires skills and competency that can be acquired or learnt by education,
vocational training or observation.
(b) Lawful and Purposeful Activity: The objective of entrepreneurship is to conduct a
lawful business and not engage in any kind of illegitimate business. To put in different
words, the purpose of entrepreneurship is to create value for personal profit as well as gain
for the society.
(c) Innovation: Entrepreneurship involves creation of value and producing goods &
services for the society. It also involves introduction of new products, new markets, new
inputs & technology that does not harm ecology.
(d) Organisation of Product: Entrepreneurship leads to the creation of form, time & place
utility by combining the various factors of production. It requires a person to have the
knowledge of availability & location of resources as well as how to utilise them.
(e) Risk Taking: Entrepreneurship involves high risk as one is quitting their job and there
are no assured payoffs.
CHAPTER 9: INTERNAL TRADE
1. The following points highlight the main features of a chain store.
i. Location- These chain stores are generally spread across localities such that it is
convenient for the customers to approach the store.
ii. Centralised procurement of goods- The procurement of goods in a chain store is
centralised at its main head office. This helps in saving the costs as the manufacturing is
done in bulk and then despatched to the chain stores as per the requirements.
iii. Direct supervision- The management and supervision of each of the chain stores lies in
the hands of the Branch Manager of that store who takes care of the daily operations.
iv. Fixed prices- The prices of the goods offered by the chain stores is fixed and no
bargaining is allowed. Also, the sale is done on cash basis which is reported on a daily
basis.
v. Inspectors- In each of the chain stores, an inspector is appointed by the main head office
to keep a check on the quality of the goods and services being provided on a daily basis.
vi. Control- The management of all the chain store is done by the head office which is
responsible for policy making and implementation.
2. Department stores are basically large, fixed establishments that deal in a wide variety of
products. The following points highlight the features of a department store:
(a) Central locations: Department stores are generally located in central areas so as to
attract a large number of customers.
(b) Defined hierarchy: The management in department stores follows the same hierarchy
that is generally followed in any joint stock company. That is, the top management consists
of a board of directors, with the managing director, the general manager and the department
managers under it in that order.
(c) Absence of middlemen: Department stores purchase goods directly from manufacturers
and sell them to customers. Thus, they eliminate the role of middlemen.
(d) Centralised purchase with decentralised sales: In a department store, the purchases
from manufacturers are handled by a single division that follows a centralised purchase
policy. On the other hand, the sales are handled by the respective sections of the
department store, which follow a decentralised policy for sales.
Differences between department stores and multiple shops
Basis of difference Department stores Multiple shops
Variety of products They offer a wide variety of products to
customers.
They deal in a single line of product
and specialise in it.
Customer services They offer a wide variety of customer
services.
They offer limited customer services.
Location They are located in central parts of cities
so as to attract a large number of
customers.
They have multiple locations—that
is, they are spread across cities or
towns.
Pricing policy They do not follow a fixed pricing policy
as the prices of products vary across
departments.
They follow a fixed pricing policy
across all the shops that are part of a
particular chain.
Cost of failure They have a very high cost of failure
because of the huge initial and operating
expenses.
They have a limited cost of failure
because the initial investment is not
very large and the losses of one shop
can be covered by the profits of
others.
3. According to Article 366(12A) of Constitution of India, “Goods and services tax means
any tax on supply of goods, or services or both except taxes on the supply of the alcoholic
liquor for human consumption”
1. Single Tax Structure- GST has integrateddifferent taxes being imposed by the Centre
and State governments thereby leading to a single tax system.
2. Destination-based tax- GST is a destination based tax which means tax is levied at
theplace of final consumption. It is levied on the value addition done by the manufacturer
and seller.
3. Comprehensive tax structure- Under GST, tax is levied on both the goods and
servicesaccording to applicable rates.
4. An asset or a liability- GST paid on purchase of goods and services(Input GST) is
treated as an asset while GST collectedon sale of goods(Output GST) is treated as a
liability of the business. Input GST is set off against Output GST and excess is shown as
an asset. Output GST after setting off Input GST is shown as a liability of the business
towards the government.
5. Abolition of different tax structures- Service Tax, Union Excise Duty, Central Sales
Tax (collected by states), Custom Duty etc. being imposed by central government and
Value Added Tax, Entry Tax, Octroi, Luxury Tax etc. being imposed by state
governments have been abolished with the introduction of GST.
6. Equal share for both Centre and States- GST on goods and services is levied either
by Central government or State governments but it is shared by them equally.
CHAPTER 10: INTERNATIONAL BUSINESS
1. The following are the some of the advantages of international Trade.
i. Medium of earning foreign exchange- By facilitating exchange of goods in the
international market, international trade acts as a medium of acquiring sufficient amount of
foreign exchange reserves for the nations. This in turn enables them to import those goods
that may not be available domestically, for example, technology, capital goods and
petroleum products.
ii. Increase in employment opportunities- International trade stimulates the production
operation in the country. It encourages the firms to hire more people in order to meet the
production targets. Thus, it helps in increasing employment opportunities in the country,
particularly in export-oriented industries.
iii. Faster economic growth- International business provides a huge platform to the
countries and local producers to cater the needs of an international consumer base.
Therefore, it helps in promoting their growth prospects to a large extent.
iv. Improved living standards- International business facilitates the consumption of goods
and services that are produced in other countries. This in turn helps them to enjoy a higher
and improved standard of living along with growth and development.
v. Price stabilisation- International trade helps in maintaining the price stability within the
country. For instance, if the price of a good increases due to its short supply, then the price
increase can be controlled by importing the same good from another country.
2. Step 1: Receiving the enquiry from the importer asking for such information as price of
goods, quality and conditions for exporting
Step 2: Receiving the indent (i.e., order for goods) from the importer
Step 3: Assessing the credit worthiness of the importer through a letter of credit from the
importer’s bank, guaranteeing to honour a draft of a specified amount drawn on it by the
exporter
Step 4: Obtaining an export licence by registering with the authority concerned
(Directorate General of Foreign Trade) and securing an Importer Exporter Code
Step 5: Obtaining pre-shipment finance from a bank in order to purchase raw materials so
as to undertake production and packaging
Step 6: Starting the production of goods
Step 7: Contacting the Export Inspection Agency (EIA) or another designated agency for
the pre-shipment inspection
Step 8: Securing excise clearance by submitting an invoice to the Regional Excise
Commissioner, who, if satisfied, would issue excise clearance to the exporter
Step 9: Obtaining the certificate of origin that allows the importer to claim tariff
concessions and other exemptions, if any
Step 10: Reserving shipping space in a vessel
Step 11: Packaging and labelling of the goods with all the necessary information such as
the importer’s name, port of destination, and gross and net weight of the goods
Step 12: Getting the goods insured against the perils of the sea or related risks
Step 13: Obtaining customs clearance from the customs house before loading the goods on
the ship
Step 14: Obtaining the mate’s receipt, which provides such details as the name of the vessel
and date of shipment. This serves as evidence that the cargo has been loaded on ship.
Step 15: Receiving the bill of lading, which serves as a token of acceptance that the goods
have been put on board the vessel
Step 16: Preparation of the invoice, which contains such information as the quantity of
goods sent and the amount to be paid by the importer
Step 17: Securing payment by submitting a set of documents to the banker, which is to be
handed over to the importer on acceptance of a bill of exchange
Step 18: Receiving the certificate of payment specifying that the payment has been
received in accordance with the exchange control regulations
3. Step 1: Making the trade enquiry with the exporter regarding the price of the goods
required and the terms and conditions on which the exporter is willing to supply the goods
Step 2: Obtaining an import licence
Step 3: Obtaining foreign exchange to make payment to the exporter
Step 4: Placing an order with the exporter specifying the price, quantity and quality of the
goods required
Step 5: Obtaining a letter of credit from the bank and sending it to the exporter
Step 6: Arranging for finance to make payment to the exporter on the arrival of the goods
Step 7: Receiving shipment advice from the exporter (serves as proof of dispatch of the
goods)
Step 8: Retirement of import documents that are to be handed over to the
exporter’s banker in exchange for the export documents
Step 9: Obtaining (on the arrival of the goods) an import general manifest from the person
in charge of the carrier (ship or airliner) in which the goods are being imported. It is on the
basis of this document that unloading of the cargo will take place.
Step 10: Obtaining customs clearance and release of goods on presenting the delivery
order, a port duty dues receipt and a bill of entry.
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