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Page 1: Business Studies (Exam Booster Booklet) Grade XI€¦ · Business Studies (Exam Booster Booklet) BUSINESS STUDIES: IMPORTANT QUESTIONS CHAPTER 1: BUSINESS, TRADE AND COMMERCE 1. “Profit

#GrowWithGreen

Grade XIBusiness Studies(Exam Booster Booklet)

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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?

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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.

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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.

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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

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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:

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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.

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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

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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

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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.

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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.

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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

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(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.

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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.

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(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.

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(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.

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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.

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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:

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(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.

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(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

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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

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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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