Term-End Examination: June’ 2012
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
PART-A
1. Distinguish between any two of the following: 5+5=10
(a) Sole trader and partnership.
Sole Trading Concern ;
1. Membership : It is owned and controlled by only one person.
2. Agreement : The question of agreement does not arise.
3. Decision : The owners have full control over his business. So he is able to take decision promptly.
4. Secrecy : There is a complete secrecy in the business.
5. Risk : The whole risk is borne by the proprietor. |
Partnership Firm :
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(b) Capital market and money market.
Capital Market
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Money Market
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1. It provides finance/money capital for long-term investment.
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1. It provides finance/money for short-term investment.
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2. The finance provided by the capital market may be used both for fixed and working capital.
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2. The finance provided by money market is utilized, usually for working capital.
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3. Mobilisation of resources and effective utilization of resources through lending are its main functions.
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3. Lending and borrowing are its principal functions to facilitate adjustment of liquidity position.
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4. It acts as a middleman between the investor and the entrepreneur.
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4. It acts as a link between the depositor and the borrower.
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5. Underwriting is one of its primary activities.
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5. Underwriting is a secondary function.
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(c) Direct channels and indirect channels of distribution.
Ans: In indirect distribution an intermediary is involved between the manufacturer and the buyer. That intermediary is responsible solely for the distribution of goods on the behalf of the company. On the other hand in the direct distribution the manufacturing firms hire a sales staff and there is a direct trade-off between buyer and the seller. In this case no intermediary is involved.
Secondly, indirect selling is simple and cheap while direct distribution channels require more budget. Thirdly, the seller does not have a control over the distribution of its products in the market. These intermediaries have nothing to do with the image of the manufacturing company. This is not the case in direct channels because in that case company has more control on the distribution of its products. In this way company can maintain its image in the market by providing convenience and accessibility to buyers.
(d) Current account and savings bank account.
Ans: Refer Below
2. Write short notes on any two of the following: 5+5=10
(a) Containerisation
Ans: Containerisation is a system of standardised transport that uses a common size of steel container to transport goods. These containers can easily be transferred between different modes of transport – container ships to lorries and trains. This makes transport and trade of goods cheaper and more efficient.
The container was invented in 1956 by Malcolm Maclean an American truck businessman. International standards for container sizes were established between 1968 and 1970. The widespread adoption of containers enabled an improvement in trade and contributed to the process of globalisation. About 90% of non-bulk goods are carried in container. 27% of containers originate from China, the world’s largest exporter of manufactured goods.
(b) Public utility undertaking
Ans: Public utility undertakings are a special type of business undertakings which are engaged in the supply of essential public services in limited market area on a monopolistic basis. Public utility concerns supply electricity, gas, water, communication and transport services or products which are absolutely indispensable for the community. The public utilities are generally granted legal monopoly power in public interest.
As the well-being of the community is closely linked up with their efficient working, public utilities are not allowed to operate freely like other private enterprises. The State regulates the working of such concerns to ensure that the essential products or services are available to consumers at reasonable pieces and in proper quantity and quality.
(c) Fire insurance
Ans: Insurance that is used to cover damage to a property caused by fire is called fire insurance. Fire insurance is a specialized form of insurance beyond property insurance, and is designed to cover the cost of replacement, reconstruction or repair beyond what is covered by the property insurance policy. Policies cover damage to the building itself, and may also cover damage to nearby structures, personal property and expenses associated with not being able to live in or use the property if it is damaged. Homeowners and property owners may consider fire insurance in addition to a property insurance policy if the property contains valuable items.
(d) Chain stores
Ans: Chain Stores or Multiple Shops: Chain stores or multiple shops are networks of retail shops that are owned and operated by manufacturers or intermediaries. Under this type of arrangement, a number of shops with similar appearance are established in localities, spread over different parts of the country. These different types of shops normally deal in standardised and branded consumer products, which have rapid sales turnover. These shops are run by the same organisation and have identical merchandising strategies, with identical products and displays. The chain operation is most effective in handling high-volume merchandise, whose sales are relatively constant throughout the year. In India, Bata Shoe stores are typical examples of such shops. Similar type of retail outlets are coming up in other products also.
PART-B
Attempt any three of the following questions:
3. What is a joint stock company? Explain as to how it overcomes the limitations of partnership form of organisation. 2+8=10
Ans: A Company is an association of many persons who contribute money or money’s worth to a common stock and employs it for a common purpose. The common stock so contributed is denoted in terms of money and is called capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.
According to Section 3 (1) of Indian Companies Act 1956 " Company means a company formed and registered under this Act."
According to Professor Haney “A Company is an artificial person, created by law having a separate entity with a perpetual succession and a common seal."
Advantages of Joint stock company over partnership firms:
1) Independent corporate existence- the outstanding feature of a company is its independent corporate existence. By registration under the Companies Act, a company becomes vested with corporate personality, which is independent of, and distinct from its members which is not in the case of partnership.
2) Limited liability: Limitation of liability is another major advantage of incorporation. The companies, being a separate entity, leading its own business life, the members are not liable for its debts. The liability of members is limited by shares whereas in case of partnership liabilities of partners are unlimited.
3) Perpetual succession- An incorporated company never dies. Members may come and go, but the company will go on forever. But, death of any partner can cause dissolution of partnership.
4) Transferable shares- when joint stock companies were established the great object was that the shares should be capable of being easily transferred. But, in case of partnership no partner can transfer his share to other person without the consent of other partners.
6) Separate property- The property of an incorporated company is vested in the corporate body. The company is capable of holding and enjoying property in its own name. No members, not even all the members, can claim ownership of any asset of company’s assets. But in case of partnership, partners are joint owner of firm’s property.
7) Capacity for suits- A company can sue and be sued in its own name. But in case of unregistered firm, it is not possible.
8) Professional management- A company is capable of attracting professional managers. It is due to the fact that being attached to the management of the company gives them the status of business or executive class.
4. "Stock exchange is a barometer of the economic and business conditions in a country." Discuss. 10
Ans: Stock exchange is a specific place, where trading of the securities, is arranged in an organized method. In simple words, it is a place where shares, debentures and bonds (securities) are purchased and sold. The term securities include equity shares, preference shares, debentures, government bonds, etc. including mutual funds.
According to the Securities Contracts (Regulation) Act 1956, the term 'stock exchange' is defined as ''An association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling of business in buying, selling and dealing in securities."
Presence and vibrant functioning of a stock exchange is necessary for a developing economy. It reflects healthy financial and investment conducive atmosphere in the economy. The Indian securities market is considered as one of the most promising emerging markets. It is one of the top eight markets of the world. The stock exchange plays a vital role in the process of raising resources for the development of corporate sector. In the absence of the stock exchange it would be impossible for private enterprises, industries and entrepreneurs to survive and grow.
As the barometer measures the atmospheric pressure, the stock exchange measures the growth of the economy. it performs the following vital functions:
a) Provides liquidity and marketability of securities: The stock exchange provides a market where the securities can be converted into cash and vice versa. The marketability of the existing securities takes place easily.
b) Pricing of securities; Stock exchange is a mechanism where the prices of the securities are determined by the forces of demand and supply of the securities. It is useful information for buyers, sellers, loan institutions etc.
c) Safety of transactions: The membership, operation of the stock exchange is regulated by SEBI through its protective and Regulatory functions. The listing of the securities is compulsory which protects the interests of the investors.
d) Contributes to Economic Growth: The stock exchange leads to capital formation and allocation of resources through the process of investment and disinvestment of the securities. As buying and selling of securities take place funds are available to the eligible companies and savings are channelised.
e) Provides scope for speculation: Speculation is a legal activity if it is performed within the regulations determined by SEBI. Healthy speculation is encouraged to ensure liquidity and price continuity in the stock market.
5. Why are the channels of distribution different for different products? 10
Ans: The prime of object of production is its consumption. The movement of product from producer to consumer is an important function of marketing. It is the obligation of the producer to make goods available at right place, at right time right price and in right quantity. The process of making goods available to the consumer needs effective channel of distribution. Therefore, the path taken by the goods in its movement is termed as channel of distribution. The goods may be sent to the consumer directly or indirectly through middlemen. The channel of distribution may be classified as:
- Direct channel of distribution
- Indirect channel of distribution
The producer can select any channel depending on nature of product. Same channel of distribution cannot be used for all products because all products are not similar. The following factors concerning the product, affect the selection of the channel of distribution:
(1) Price of the Product. The products of a lower price have a long chain of distributors. As against it, the products having higher price have a smaller chain. Very often, the producer himself has to sell the products to the consumers directly.
(2) Perishability. The products which are of a perishable nature need lesser number of the intermediaries or agents for their sale. Under this very rule, most of the eatables (food items), and the bakery items are distributed only by the retail sellers.
(3) Size and Weight. The size and weight of the products too affect the selection of the middlemen. Generally, heavy industrial goods are distributed by the producers themselves to the industrial consumers.
(4) Technical Nature. Some products are of the nature that prior to their selling, the consumer is required to be given proper instructions with regard to its consumption. In such a case less of the middlemen arc) required to be used.
(5) Goods Made to Order. The products that are manufactured as per the orders of the customers could be sold directly and the standardized items could be sold off only by the middlemen.
(6) After-Sales Service. The products regarding which the after-sales service is to be provided could be sold off either personally or through the authorized agents.
6. "Banks provide various types of advances to its customers according to their needs and repayment capacity." Explain. 10
Ans: Advances by commercial banks are made in different forms such as demand loan, term loan, cash credit, overdraft etc. These forms of advances are explained below:
1. Demand Loan: In a demand loan account, the entire amount is paid to the debtor at one time, either in cash or by transfer to his savings bank or current account. No subsequent debit is ordinarily allowed except by way of interest, incidental charges, insurance premiums, expenses incurred for the protection of the security etc. Repayment is provided for by instalment.
2. Term Loan: When a loan is granted for a fixed period exceeding three years and is repayable according to the schedule of repayment, it is known as a term loan. The period of term loan may extend up to 10 years and in some cases up to 20 years. A term loan is generally granted for fixed capital requirements.
3. Overdraft: An overdraft is a fluctuating account wherein the balance sometimes may be in credit and at other times in debit. Overdraft facilities are allowed in current accounts only. Opening of an overdraft account requires that a current account will have to be formally opened, and the usual account opening form completed.
4. Cash Credit: A cash credit is essentially a drawing account against credit granted by the bank and is operated in the same way as a current account in which an overdraft limit has been sanctioned. The principal advantages of a cash credit account to a borrower are that, unlike the party borrowing on a fixed loan basis, he may operate the account within the stipulated limit as and when required.
5. Bills Purchased: Bills, clean or documentary, are sometimes purchased from approved customers in whose favour regular limits are sanctioned. In the case of documentary bills, the drafts are accompanied by documents of title to goods such as railway receipts or bills of lading (BOL). Before granting a limit, the creditworthiness of the drawer is to be ascertained.
6. Bills Discounted: Bills, maturing within 90 days or so after date or sight, are discounted by banks for approved parties. In case a bill, say for Rs. 10,000/- due 90 days hence, is discounted today at 20% per annum, the borrower is paid Rs. 9,500/-, its present worth. However the full amount is collected from the drawee on maturity.
7. In the present day context, do you think it is necessary for the government to directly participate in business? State your views. 10
Ans: Reasons for Direct Participation of Government in Business and Industry
Government today is engaged in various types of business undertakings. There are several types of services which are provided by government organisations such as electricity, water, postal, telecommunications, transport services, etc. Besides these organisations, there are many manufacturing industries owned and engaged by government. They produce steel, locomotives, machine tools, watches, railway coaches, telephone equipment, and so on. Government undertakings are also involved in the supply of consumer goods like milk (through government milk schemes), bread (Modem Bakeries), cloth (National Textile Corporation), etc. The reasons for the direct participation of government in business and industry may be divided into three categories:
- Basic reasons,
- Ideological reasons, and
- Specific reasons.
- Basic Reasons: The Government of India was rightly convinced that political independence without economic independence would not have much meaning. It was, therefore, decided to industrialize the country in a big way as early as possible. It was decided to establish steel plants, fertilizer factories and other units necessary for industrial and agricultural growth.
- Ideological Reasons: Apart from the economic and social consideration, the government had strong ideological commitment to the philosophy of public ownership of the means of production. It may be noted that the Industrial Policy Resolution of 1956 which is valid till now, has greatly and clearly emphasised the need for the government in business and this explains the importance of the government owned enterprises in Indian Economy.
- Some Specific Reasons: There are many other reasons for the government to participate in business. These are specific to a particular decision. Some of these are listed below.
Air Transport Business: Till 1953, there were many private air companies in the country. Most of these were financially unsound and had no money to invest in modem and costly aeroplanes, the air transport are of strategic importance to the country. The government, therefore, nationalised nine air companies and created Indian Airlines Corporation and Air India International Corporation in 1953.
Insurance Business: Today, the whole of insurance business is with the government. The life insurance business is operated through the Life Insurance Corporation of India and other types of insurance business through the General Insurance Corporation of India and its four subsidiary companies.
Commercial Banks: The government today is in the banking business in a big way. Over 90% of commercial banking is in the hands of the government. The government rightly wanted the banking system to serve the developmental needs of the economy in conformity with national policy and objectives.
Coal Industry: The coking coal mines were nationalised in 1971. It was done because coking coal which is essential for production of iron and steel has very limited reserves in the country. The private sector was mining this fast depleting and scarce natural resources in a very wasteful manner.
Oil Industry: In the 1970's the foreign oil companies Burmah Shell, Caltex and Esso were nationalised. Here the objective was that the government should have control over a critical and strategically important resource like oil. Today, the government has full control over the production and distribution of oil. And this has paid us rich dividends in terms of self-reliance and generation of resources.
By and large, the conclusion so far is that the government in India went into business due to economic and social compulsions. From the above discussion we can conclude the reasons for government participation in business as follows:
1) The government's role in business in India is greatly justified by economic and social reasons.
2) Had the government not initiated a large number of industrial activities, the Indian economy would never have got the sound base and self-reliance which it has today.
3) A large number of enterprises have been forced on the government when they became sick and they could not be allowed to be closed down due to social and economic reasons.
4) There is an element of ideology in the role which the government has in business today. Had the ideology not been there, the government would have disengaged itself from at least some of its business activities after completing its role as path finder or initiator.
5) The government continues to be in business in a big way because of ideological as well as economic and social considerations.
8. Explain the procedure, one has to follow when goods are imported. 10
Ans: Import Procedure: The procedure to import includes several formalities.
- The process starts with a search for export firms and making a trade enquiry about the product, its price and terms and conditions of exports. Having selected an export firm, the importer asks the exporter to send him/her a formal quotation — called proforma invoice.
- The importer then proceeds to obtain the import license, if required, from the office of the Directorate General Foreign Trade (DGFT) or Regional Import Export Licensing Authority.
- The importer also applies for the Import Export Code (IEC) number.
- Since payment for imports requires foreign currency, the importer has to also make an application to a bank authorised for sanction of the necessary foreign exchange.
- After obtaining an import license, the importer places an import order or indent with the exporter for supply of the specified products.
- If required as per the terms of contract, the importer arranges for the issuance of a letter of credit to the exporter from the bank.
- Having shipped the goods under shipment advice to the importer, the exporter sends a set of necessary documents containing bill of exchange, commercial invoice, bill of lading/ airway bill, packing list, certificate of origin, marine insurance policy, etc., to enable the importer claim title to the goods on their arrival at the port of destination.
- After the arrival of the goods in the importing country, the person in charge of the carrier (ship or airway) prepares import general manifest to inform the officer in charge at the dock or the airport that the goods have reached the ports of the importing country.
- The importer or his/her C&F agent pays the freight (if not already paid by exporter) to the shipping company and obtains delivery order from it which entitles the importer to take the delivery of the goods at the port.
- The importer then fills in a form ‘bill of entry’ for assessment of customs import duty. After payment of the import duty, the bill of entry has to be presented to the dock superintendent for physical examination of the goods. The examiner gives his report on the bill of entry. The importer or his agent presents the bill of entry to the port authority for issuance of the release order.