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Here we are providing Class 12 Business Studies Important Extra Questions and Answers Chapter 9 Financial Management. Business Studies Class 12 Important Questions are the best resource for students which helps in class 12 board exams.

Class 12 Business Studies Chapter 9 Important Extra Questions Financial Management

Financial Management Important Extra Questions Short Answer Type

Question 1.
What are the various factors affecting Financial Planning?
Answer:
A financial plan should be prepared very carefully because it has a long-term impact on the working of an enterprise. A financial plan is affected by a number of factors. All these factors should be’ taken into consideration while preparing a financial plan.

1. Nature of Business: The nature of business plays a decisive role in formulating a financial plan. A manufacturing business requires more amount of long-term funds than a trading business. In addition to it, the factors such as stability and regularity of income, future prospects of growth, seasonal fluctuations, assets structure, etc. affect the financial requirements as well as sources of finance.

2. Degree of Risk: The risk involved in the business also plays an important role while planning the sources of finance. A firm whose sales and earnings are subject to wide fluctuations runs the risk of not being able to meet the required payments in respect of interest and repayment of loans. Clearly, such firms should use more amount of their own funds and rely less on debt. On the other hand, the enterprises with stable sales and earnings can employ more amount of debts and hence can take the advantage of trading on equity.

3. Standing of the concern: Credit standing of concern among investors affects financial planning to a great extent. The credit standing of concern is determined by a number of factors such as the age of the firm, its past performance, size, market area, the reputation of management, etc.

4. Plans for future Growth: The plans for growth and expansion of the firm in near future are considered while formulating a financial plan. The financial plan should be developed in such a way as to facilitate required funds without much difficultly.

5. Alternative Sources of Finance: Since finance can be procured from a number of sources, the pros and cons of all the sources should be properly considered while choosing the proper sources of finance. The sources should be able to provide adequate funds to meet the requirements of the business.

6. Attitude of Management: The attitude of management towards risk and control of the business affects financial planning to a great extent. If the management is of risk-taking nature, it would employ more amount of borrowed funds. On the contrary, if it is of conservative nature it will employ more amount of equity capital. From the control point of view, if the management desires to keep full control of the enterprise, it will not issue fresh equity shares so that the new shareholders may not control the enterprises.

7. Government Policies and Control: The financial plan of a company is affected by the rules and regulations framed by the Government stock exchanges and financial institutions from time to time. The terms of issue of shares and debentures, interest rates, dividend payments, etc. are governed by the rules framed by the government periodically. Permission of the Securities and Stock Exchange Board of India (SEBI) is also required for the issue of shares and debentures.

8. Changes in Technology, Consumer Tastes, and Competitive Factors: Rapid innovations are taking place in every field nowadays. A financial plan is adequately affected by changes in technology, consumer preferences, degree of competition, and general economic conditions.

Question 2.
Explain in brief the various steps in financial planning.
Answer:
Following steps should be taken for preparing a financial plan:
1. Determination of Financial Objectives: For the purpose of preparing an effective financial plan first of all the financial objectives of a firm should be clearly determined. The financial objectives should be divided into short-term objectives as well as long-term objectives. The short-term objectives may include maintaining the liquidity of funds, maintaining the market standing of the firm and proper maintenance of sales, etc.

On the other hand, the long-term objectives may include the achievement of maximum efficiency of factors of production at minimum cost and the maximization of shareholder’s wealth. The objectives should be clearly defined so that they can be used as guidelines for determining the 1 policies and procedures.

2. Formulation of Financial Policies: The second step in financial planning is the formulation of financial policies. Financial policies act as guidelines for the f procurement, allocation, and effective utilization of funds of the organization. Financial policies are framed by the top management with the advice of the financial manager. The policies may be regarding capitalization, capital structure, trading on equity, fixed assets management, working capital management, dividend distribution, etc.

3. Formulation of Procedures: The policies laid down must be clarified in the form of detailed procedures. Each subordinate must know what he is required to do. Procedures are essential to ensure the consistency of actions. In financial procedures, financial executives decide about the control system, establish the standards of performance and compare the actual performance with the standards to ascertain the deviations and their causes. Thereafter, necessary steps are taken to control the deviations.

4. Provision of Flexibility: The objectives, policies, and procedures laid down as above constitute the financial plan of a business. Financial planning is a continuous process and hence there should be proper flexibility in the financial objectives, policies, and procedures so that these may be revised or thoroughly overhauled according to the changing circumstances.

Question 3.
Explain the major characteristics or Principles of a sound financial plan.
Answer:
An ideal financial plan must be based on the principles or qualities mentioned below:
1. Simplicity: Financial plan should be so simple that it may be easily understood by everyone. It should have a simple capital structure capable of being managed easily. The type of securities issued should be kept at a minimum because various types of securities will create unnecessary suspicion in the minds of investors.

2. Foresight: The financial plan should be prepared to keep in view the future needs of the business. It should take into consideration the future demand of the company’s products, the future scale of operations, technological innovations, and various other changes. A financial plan should be able to meet the future requirements of fixed as well as working capital.

3. Optimum use of Funds: An ideal financial plan should always aim at the best possible and intensive use of all available resources of finance. The business should neither be starved of funds nor it should have a surplus or idle funds. Unnecessary idle funds are as bad as inadequate funds. A proper balance should also be kept between the short-term and long-term funds of the business.

4. Flexibility: A financial plan should be sufficiently flexible. It should be possible for a company to change its financial plan with minimum cost and delay if warranted by changed circumstances. The company should be able to substitute one form of financing for another to economize the use of funds. The financial plan should allow a scope for adjustments as and when a new situation arises like recession, boom, etc. A rigid financial plan can easily become a burden rather than a 1 technique of financial management.

5. Liquidity: Liquidity is the ability of the enterprise to pay off its day-to-day expenses and other short-term liabilities on time. The financial plan should provide sufficient liquidity of funds as it will ensure the creditworthiness and goodwill of the enterprise. Adequate liquidity in the \ financial plan increases its flexibility also.

6. Economical: Financial plan must be prepared in such a way that the cost of capital is minimum. The average cost of capital will be minimum when a fair 1 balance is maintained between debt funds and owned capital. Also, the financial plan should involve minimum expenses on the issue of capital such as underwriting Commission, brokerage, etc.

7. Contingencies: A financial plan should keep-in view the requirement of funds for contingencies. Contingencies mean the requirement of funds for unseen: events.

8. Adequate system of Control: A financial plan should establish and maintain a proper system of financial control.

9. Suitable to the Organisation structure: A financial plan should be in accordance with the size and organizational structure of the firm.

Question 4.
Define the nature and types of working capital.
Answer:
Along with the fixed capital, almost every business requires working capital though the extent of working capital requirement differs in different businesses. Working capital is needed for running the day-to-day business activities. When a business is started, working capital is needed for purchasing raw materials. The raw’ material is then converted into finished goods by incurring some additional costs on it.

Now goods are sold. Sales do not convert into cash instantly because there is invariably some credit sales. Thus, there exists a time, lag between sales of goods and receipt of cash. During this period, expenses are to be incurred for continuing the* business operations.

For this purpose working capital is needed, Therefore, sufficient working capital is needed which shall be involved from the purchase of raw materials to the realization of cash.

The time period which is required to convert raw materials into finished goods and then into cash is known as the operation cycle or cash cycle. The need for working capital can also be explained with the help of the operating cycle.

The operating cycle of a manufacturing concern involves five phases:

1. Conversion of cash into raw material
2. Conversion of raw material into work-in-progress
3. Conversion of work-in-progress into finished goods
4. Conversion of finished goods into debtors by credit sales
5. Conversion of debtors into cash by realizing cash from them.

Thus the operating cycle starts from cash, finishes at cash, and then again restarts from cash. The need for working capital depends upon the period of the operation cycle. Greater the period, more will be the need for working capital. The period of operation cycle in a manufacturing concern is greater than a period of operating cycle in a trading concern because in trading units cash is directly converted into finished goods.

Diagram: Operating Cycle (Nature of Working Capital)

Because of the time involved in an operating cycle, there is a need, for working capital in the form of current assets. Firms have to keep I adequate stock of raw materials to avoid the risk of non-availability of raw materials. Similarly, the concern must have adequate stock of finished goods to meet the demand in the market on a continuous basis and to avoid being out of stock. Concern also has to sell finished goods on credit due to competition which necessitates the money tied up in debtors. Y and bills receivables. In addition to all these, concerns have to necessarily keep cash to pay the manufacturing expenses, etc., and to meet the contingencies.

Permanent and Temporary Working Capital Working Capital in a business is needed because of the operating cycle.

But the need for working capital does not .come to an end after the cycle is completed. Since the operating cycle is a continuous process, there remains a need for a continuous supply of working capital. However, the amount of working capital required is not constant. throughout the year, but keeps fluctuating.

On the basis of this concept, working capital is classified into two types:
(a) Permanent Working Capital: The need for working capital or current assets fluctuates from time to time. However, to carry on day-to-day operations of the business without any obstacles, a certain minimum level of raw- materials, work-in-progress, finished goods and cash must be maintained on a continuous basis. The amount needed to maintain current assets on this minimum level is called permanent or regular working capital. The amount involved as permanent working capital has to be met from long-term sources of finance, e.g., capital, debentures, long-terms loans, etc.

(b) Temporary or Variable Working Capital: Any amount over and above the permanent level of working capital is called temporary, fluctuating, or variable working capital. Due to seasonal changes, the level of business activities higher than normal during some months of the year, and therefore, additional working capital will be required along with the permanent working capital. It is so because during peak season, demand rises and more stock is to be maintained to meet the demand.

Similarly, the amount of debtors increases due to excessive sales. Additional working capital thus needed is known as temporary working capital because once the season is over, the additional demand will be no more.’The need for temporary working capital should be met from short-term sources of finance, e.g. short-terms loans, etc. So that it can be refunded when it is not required.

Both types of working capital are necessary to run the business smoothly. The distinction between permanent and temporary working capital is illustrated in the following diagram:

Diagram: Showing Permanent and Temporary Working Capital.

The above diagram shows that permanent working capital remains the same throughout the year, while temporary working capital is fluctuating in accordance with seasonal demand.

However, in case of an expanding concern, the need for permanent working capital may not be constant and it would be increasing.

Therefore, the permanent working capital line also may not be horizontal and it will go on rising as illustrated in the following diagram:

Diagram: Showing Permanent and Temporary Working Capital in a Growing Concern

Question 5.
Define the term ‘Cost of Capital’. Also, explain the Significance of the cost of capital.
Answer:
The cost of capital of a firm is the minimum rate of return expected by its investors. The capital used by a firm may be in the form of equity shares, preference shares, debts, and retained earnings. The cost of capital is the weighted average cost of these sources of finance used by the firm. The concept of cost of capital occupies a very important role in financial management because investment decisions are based on it. If a firm is not able to achieve its cost of capital the market value of its shares will fall.

Definition:
Cost of capital for a firm may be defined as the cost of obtaining the funds, i.e., the average rate of return that the investors in a firm expect, for investing funds in the firm.

It is also referred to as cut-off rate,-target rate, hurdle rate, the minimum required rate of return, etc.

Some of the important definitions of cost of capital are stated below:

• “The cost of capital is the minimum required rate of earnings or the cut-off rate of capital expenditures.” – Ezra Salomon
• “The cost of capital is the minimum rate of return which a firm requires as a condition for undertaking as an investment.” – Milton H. Spencer
• “Cost of Capital represents a cut-off rate for the allocation of capital to investments of projects. It is the rate of return on a project that will leave unchanged the market price of its securities.” – James C. Van. Horne
• “The Cost of Capital is the rate of return a company must earn on an investment to maintain the value of the company.” – M. J. Fordon
• “A firm’s so-called cost of capital – commonly expressed as an annual percentage figure – is simply that rate of return which its assets must produce in order to justify raising the funds to acquire them.” – W. G. Lawpllen

Thus, on the basis of the above definitions, we can say that cost of capital is the minimum rate of return that a firm, must and, is expected to earn on its investments so as to maintain the market value of its shares.

Significance of the Cost of Capital: The concept of cost of capital is very important in making all the financial decisions of the firm. No financial decision is possible without the use of the cost of capital. Some important uses of cost of ’ capital are:
1. Helpful in Designing the Capital Structure: The concept of cost of capital plays a vital role in designing the capital structure of a company. The capital structure of a company consists of different sources of capital such as equity capital, retained earnings. Preference capital and debt capital. These sources differ from each other in terms of their respective costs. As such a company will have k to design such a capital structure that minimizes the cost of capital. Hence, the calculation of the cost of capital of different sources of capital is very essential to design an optimum capital structure.

2. Helpful in taking Capital Budgeting Decisions Capital budgeting is the process of decision making regarding the investment of funds in long-term projects of the company. The concept of cost of capital is very useful in making capital budgeting decisions $ because the cost of capital is the minimum required rate of return on an investment project. Also, a Finn must not invest in those projects which generate a return less than the cost of capital incurred for its financing.

Net Present Value (NPV) and Internal Rate of Return (IRR) are two important methods used in capital budgeting. Both of these methods are dependent upon the use of the cost of capital. In the NPV method, a project is accepted if its NPV is positive. The project’s NPV is calculated by discounting its cash flows at the cost of capital rate. Under the IRR method, the cost of capital is used as a minimum required rate of return. Hence, the cost of capital serves as a decision criterion for taking capital budgeting decisions.

3. Helpful in Evaluation of Financial Efficiency of Top Management: The concept of cost of capital can be used to evaluate the financial efficiency of top management. Such an evaluation will involve a comparison of the projected overall cost of capital with the actual cost of capital incurred by the management. Lower the actual cost of capital better is the financial performance of the management of the firm.

4. Helpful in Comparative Analysis of Various Sources of Finance: Cost of capital to be raised from various sources goes on changing from time to time. Calculation of cost of capital is helpful in the analysis of the usefulness of various sources of finance. A particular source of finance may be encouraged or discouraged on the basis of its changed cost.

5. Helpful in taking other Financial Decisions: The cost of a capital concept is also useful in making other financial decisions such as dividend policy, rights issue, working capital decisions, and capitalization of profits.

Question 6.
Explain the various factors affecting working capital requirements.
Answer:
Factors affecting working capital requirements:
1. Nature of Business: The basic nature of business influences the amount of working capital required. A trading organization usually needs a lower amount of working capital compared to a manufacturing organization. This is sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to, be converted into furnished goods before any sales become possible. Other factors remaining the same, trading business requires less working capital. Similarly, service industries that usually don’t have to maintain inventory require less working capital.

2. Scale of operations: For an organization that operates on a higher scale of operations, the quantum of inventory, debtors that are required is generally high. Such organizations, therefore require a large amount of working capital as compared to the organizations which operate on a lower scale.

3. Business Cycle: Different phases of business cycles affect the requirement of working capita! by a firm. In case of a boom, the sales, as well as production, are likely to be higher, and therefore higher amount of working capital is required. As against this, the requirement for working capital will be lower during the period of depression as the sales as well as production will below.

4. Seasonal factor: Most businesses have some seasonality in their operations. In peak season, because of a higher level of activity, a higher amount of working capital is required. As against this, the level of activity, as well as the requirement for working capital, will be lower during the lean season.

5. Production Cycle: The production cycle is the time span between the receipt of raw materials and their conversion into finished goods. Some businesses have a longer production cycle while some have a shorter one. Duration and the length of the production cycle affect the number of funds required for raw materials and expenses. Consequently working capital requirement is higher in firms with longer processing cycles and lower in firms with shorter processing cycles.

6. Credit Allowed: Different firms allow different credit terms to their customers. These depend upon the level of competition that a firm faces as well as the creditworthiness of its clientele.

A liberal credit policy results in a higher amount of debtors, increasing the requirement of working capital.

7. Credit Availed: Just as a firm allows credit to its customers it also may get credit from its suppliers. To the extent, it avails the credit on its purchases, the working capital requirement is reduced.

8. Operating Efficiency: Firms manage their operations with varying degrees of efficiency. For example, a firm managing its raw materials efficiently may be able to manage with a smaller balance. This is reflected in a higher inventory turnover ratio. Similarly, a better debtors turnover ratio may be achieved reducing the amount tied up in receivable. Better sales effort may reduce the average time for which finished goods inventory is held. Such efficiencies may reduce the level of raw materials, finished goods, and debtors resulting in the lower requirement of working capital.

9. Availability of raw material: If the raw materials and other required materials are available freely and continuously, lower stock levels may suffice. If however, raw materials do not have a record of uninterrupted availability, higher stock levels may be required. In addition, the time lag between the placement of the order and actual receipt of the materials (also called lead time) is also relevant. The higher the lead time, the higher the quantity of material to be stored and the higher is the amount of working capital requirement.

10. Growth Prospects: If the growth potential of concern is perceived to be higher, it will require a higher amount of working capital so that it is able to meet higher production and sales target whenever required.

11. Level of Competition: A higher level of competitiveness may necessitate higher stocks of finished goods to meet urgent orders from customers. This increases the working capital requirement. Competition may also force the firm to extend liberal credit terms.

12. Inflation: With rising prices, higher amounts are required even to maintain a constant volume of production and sales. The working capital requirement of a business thus becomes higher with a higher rate of inflation. It must, however, be noted that an inflation rate of 5%, does not mean that every component of working capital will change by the same percentage. The actual requirement shall depend upon the rates of price change of different components (e.g. raw materials,’ labor cost, finished goods.) as well as their proportion in the total requirement.

Financial Management Important Extra Questions Long Answer Type

Question 1.
Explain the various determinants of the financial needs of a business?
Answer:
Determination of Financial Needs of a Business
or
Assessing Funds Requirements
Answer:
Estimating or determining the financial requirements of the business is one of the main objectives of financial planning. Before raising funds, it is essential that the requirement of funds be correctly estimated. In the absence of correct estimates, the firm may suffer either from inadequate or surplus funds. If the funds are short of its requirements, the firm will not be able to meet its day-to-day expenses and pay the short-term and long-term liabilities on time.

On the other hand, if the funds are in excess of the requirements of the business, they will remain idle and will reduce the profitability of the business. Hence, the estimates should be made in a way that all financial requirements are properly satisfied.

Funds requirements of a business can broadly be classified into two main categories. They are:

1. Fixed Capital Requirements, and
2. Working Capital Requirements.

Assessment of Fixed Capital Requirements: Fixed capital is the capital that is meant for fulfilling the permanent or long-term needs of the business. In the words of Shubin, “Fixed capital is the funds required for the acquisition of those assets that are to be used over and over for a long period.”

Fixed capital is required for acquiring fixed assets. Fixed assets may include the following:

1. Tangible assets such as land, buildings, plant and machinery, furniture, etc.
2. Intangible assets such as goodwill, patents, copyrights, etc.

A certain amount of fixed capital is also required for meeting certain expenditures not leading to the creation of an asset like research expenses, promotional expenditure incurred for the establishment of business, share issue expenses, underwriting commission, etc. The requirement of funds for these expenditures is long-term and hence the funds required in respect thereof are also included under fixed capital.

Every business needs a fair amount of fixed capital to be invested in fixed assets so as to create production or business facilities. For a new business, the fixed capital is needed in the beginning because fixed assets are needed at the time of promoting or establishing the business. For an existing business fixed capital is required for the development and expansion of the business. Hence, it is essential to have an adequate amount of fixed capital in the business.
The assessment of fixed capital requirements for a new business can be made by preparing a list of fixed assets needed by the business.

The list is prepared by the promoters by studying similar units and by taking advice from technical experts. The estimation of cost of land can be made from property dealers, estimation regarding the cost of building can be made with the help of building contractors and the cost of machinery can be ascertained from the suppliers of the machinery. Similarly, the amount to be paid for goodwill, patents, trade-marks, etc. can also be estimated.

Factors Affecting the Estimation of Fixed Capital/Fixed Assets Requirements: Factors that affect the estimation of Fixed Capital or Fixed assets requirements can be studied under two heads
(a) Internal Factors and
(b) External Factors.

(a) Internal Factors:
1. Nature of Business: Certain types of businesses require heavy investment in fixed assets, while others do not. Usually, the manufacturing concerns require more fixed assets than trading concerns. Similarly, public utility undertakings like railway, electricity, water supply, etc. require huge funds to be invested in fixed assets.

2. Size of Business: Larger the size of a concern, the greater will be the requirement of fixed capital. Also, in larger concerns, most of the activities are performed with the help of automatic machines. As such, they require a huge investment in fixed assets.

3. Types of Products: A concern that manufactures simple consumer products such as soap, oil, etc. will need a lesser amount of fixed capital in comparison to a concern that manufactures complicated products such as motorcycles, cars, etc.

4. Activities Undertaken by the Enterprise: A concern that is engaged in the manufacturing of all parts of a product by itself will require a greater amount of fixed capital as compared to a concern that gets most of the parts manufactured from outside and merely assembles them. Similarly, if a concern itself manufactures and markets its products, it will require more amount of fixed capital as compared to a concern that is engaged only in the manufacturing or only in marketing activities.

5. Mode of Acquisition of Fixed Assets: If some of the fixed assets are available on the lease or on hire, a lesser amount of fixed capital will be required. On the contrary, if all the fixed assets are to be purchased on immediate cash payment, a larger amount of fixed capital will be needed.

6. Acquisition of Old Assets: In certain industries, old plant and machinery may be available at sufficiently reduced prices and which can be used ‘satisfactorily. It would reduce the requirement of fixed capital to a great capital to a great extent. But the old plant and machinery should be used in the industries where the technological changes are moderate or slow.

7. Availability of Fixed Assets of Concessional Rate: In some areas, the Government provides land and other equipment at concessional rates to promote balanced industrial growth. In such a case, the requirement of fixed capital is reduced.

(b) External Factors:
1. General Economic Outlook: If the economy is recovering from depression and the level of business activity is expected to rise, the requirement for fixed assets will also rise and hence the need for fixed capital will also rise.

2. Technological Changes: If rapid technological innovations are taking place in an industry, the need for fixed capital will be larger because the old and out-dated machinery will have to be replaced by new ones.

3. Degree of Competition: The degree of Competition also affects the Fixed Capital-requirements. If there is a lot of competition in some industries, the need for fixed capital will be more because if some firms go on adopting the new technology, the others have to follow them.

4. Shift in Consumer Preferences: If the consumer preferences go on changing in some industries, the need for fixed capital will be more because the firm will have to produce new varieties accordingly, which require more investment in fixed assets.

Assessment of Working Capital Requirements: After the assessment of fixed Capital, funds required for working capital are assessed. The term ‘Working Capital’ is used in two ways.

In one sense it denotes the ‘total current assets’ whereas in another sense it is regarded as the excess of current assets over current liabilities. Current assets include cash, receivables (i.e., debtors and bills receivables), stock, etc. The amount required to be invested in current assets differs from one business to another. The amount depends on various factors such as nature and size of the business, duration of the production cycle, rapidity of turnover, credit policy, the quantity of stock, seasonal fluctuations, rate of growth, etc.

Working capital may be fixed or fluctuating. Fixed working capital refers to the minimum amount which would always be invested in raw materials, work-in-progress, finished goods, receivables, and cash balance. This amount is absolutely essential throughout the year on a continuous basis to maintain a desirable level of business activity. The amount required for fixed working capital mainly depends on the duration of the production cycle.

The cycle starts from the purchase of raw material; then the raw material is converted into finished goods by incurring labor and other costs. On sale, these finished goods are converted into debtors and lastly, the firm will again have cash when the debtors pay. The length of the production cycle (i.e., the length of time between the purchase of raw material and receiving cash from debtors) will determine the quantum or requirements of fixed working capital. The longer the cycle, the higher will be the requirements of fixed working capital.

The requirement of working capital over and above the fixed working capital is known as fluctuating working capital. It keeps on fluctuating from time to time according to the change in the level of business activities. For instance, during peak season, due to intensive sales, more funds are blocked in stocks and debtors and thus more amount will be required for fluctuating working capital.

The total amount of working capital can be estimated by estimating the needs of working capital for the following:

1. For maintaining adequate stock
2. For receivables.
3. For paying day-to-day expenses
4. For contingencies

1. For maintaining adequate stock: Every industrial undertaking is required to maintain a minimum stock of raw materials, work in progress, and finished goods. The requirement of the stock is determined by various factors like volume of production, the length of the production cycle, and the period for which the finished goods have to remain in a warehouse before they are sold.

2. For receivables: Finished goods may be sold for cash or on credit. Credit sales take the form of receivables (i.e., debtors and bills receivables). The amount is tied up in receivables until cash is realized from them. The amount tied up in receivables depends upon a number of factors such as quantum of credit sales, credit period allowed, the efficiency of the debt collection system, etc. For example, if a firm changes its credit period from 30 days to 60 days, the amount tied up in debtors will go up, and consequently, the need for working capital will also increase by a similar amount.

3. For paying day-to-day expenses: A firm has to carry some minimum cash balance to make payment for wages, salaries, and other expenses throughout the year. A proper cash balance is also maintained to avail of the cash discounts facilities offered by proper cash balance is also maintained to avail of the cash discounts facilities offered by the suppliers.

4. For contingencies: A minimum cash balance is also maintained for meeting unseen contingencies so that the business successfully sails through the period of crisis.

Thus, the overall financial needs of a business can be determined, by assessing the needs for fixed capital and working capital separately and then by adding the two.

Question 2.
Define the term ‘Over-Capitalisation’ and ‘Under Capitalisation’ and their causes?
Answer:
Over Capitalisation: Quiet often, the term ‘Over-Capitalisation’ is misunderstood to mean the excess of capital. But in actual practice, over-capitalized concerns have been found short of funds.

In fact, over-capitalization refers to that state of affairs where a company earns less than what should have earned at a fair rate of return on the capital invested in it. In other words, if a company is continuously unable to earn a fair rate of return on its capital, it is termed an over-capitalized company.

In the words of Bonneville Dewey, ” When a business is unable to earn a fair rate of return on its outstanding securities, it is over¬capitalised.”

According to Gerstenberg, “A corporation is over-capitalized when its earnings are not large enough to yield a fair return on the number of stocks and bonds that have been issued or when the amount of securities outstanding exceeds the current value of assets.”

The same view has been expressed by Harold Gilbert in these words, “When a company has consistently been unable to earn the prevailing rate of return o.n its outstanding securities (considering the earning of similar companies in the same industry and the degree of risk involved) it is said to be over-capitalized.”

It is clear from the above definitions that the situation of over¬capitalisation arises due to a fall in the earning capacity of the business. On account of this, the earnings will not be sufficient to give a reasonable return on capital employed in it. For example, a company is earning a profit of Rs. 8,00,000 on a total capital investment of Rs. 80,0, 000. In case the normal, rate of return prevailing in the market is 10%, this company will be said to be fairly capitalized. However, if it earns only Rs. 2,20,000 while the normal rate is 10%, the company will be said to be over-capitalized because it will be able to give a return of only 6% on the total capital employed.

In order to ascertain whether a company is earning a fair return or not, the rate of return earned by the company should be compared with similar firms in that industry. If the company’s rate of return is t .substantially less than the average rate earned by other firms, will indicate that the company is unable to earn a fair return on the capital 1 employed in it. It may also be noteworthy that a company will be said to be over-capitalized only when it is continuously unable to earn fair income over a long period of time. If its earning is reduced temporarily, owing to the occurrence of abnormal events like strikes, lockouts, etc. the company will not be called over-capitalized.

Causes of Over-Capitalisation:
Following are some of the important causes of over-capitalization:-
1. Over-Issue of Capital: If a company raises more capital than it can profitably use, there will be a large number of idle funds will the company. Because of idle funds, the earning capacity of the company will be reduced. This leads – to the situation of over-capitalization because the company will have to pay dividends on idle capital too. Hence, the rate of dividend will fall which in turn leads to a fall in the market price of its shares.

2. Promotion of the Company with Inflated Assets: A company will fall prey to over-capitalization if it is promoted with assets purchased at excessive prices, the reason is that such prices of the assets do not fear any relation to their earning capacity. Such a situation arises particularly when a partnership firm or private company is converted into a public company and in that process, their assets may be transferred to the public company at price higher than their real values. Sometimes, the promoters also transfer their property to the new company at inflated prices.

3. Promotion or Expansion of the Company during Boom Period: If a company is formed or expanded during the boom period, it; may becomes a victim of over-capitalization. The reason is that the price paid for assets will be quite high. When the boom disappears the real value of such assets will decline to a great extent whereas they will be shown in the books at their original values. Such a company is over-capitalized because its earning will fall due to depression but the assets and capital will be shown in the books in previous figures.

4. High Promotion Expenses: A certain degree of over-capitalization may be caused due to the. fact that the promoters have incurred heavy expenses on the promotion. of the company, a huge amount may have been spent on issue and underwriting of shares and the promoters may have taken a fabulous. remuneration for the services rendered by them. A major part of the earnings of the company will be utilized to write off these expenses and consequently, the company will not be able to pay fair dividends on its shares.

5. Over-estimation of Earnings at the Time of promotion: In case of a new concern,-the amount of capitalization is determined on the basis of estimates of future earnings. However, if it is found that the actual earning is less than the estimated earning, it will lead to a situation of over-capitalization. For example, if a company’s annual earnings were estimated at Rs, 50,000 and its current rate of return (or N capitalization rate) is 10% its, capitalization will be fixed at Rs. 5,00,000. Subsequently, it was found that the company actually earned (Rs. 40,000. On this basis, the company’s capitalization should have been: fixed at Rs. 4,00,000. Thus, the company will be over-capitalized by 4 Rs. 1,00,000.

6. Under-estimation of Rate of Return at the Time of Promotion: A concern may have correctly estimated the number of its earnings, but it may have under-estimated its rate of return (i.e., capitalization, rate). For example, a company’s annual earnings were estimated at ‘ Rs. 50,000 and the rate of return were fixed at 10%. By applying this rate the company’s capitalization was worked out at Rs. 5,00,000. Subsequently, it was found that the actual rate of return was 12.5%, and hence the amount of capitalization should have been fixed at Rs. i.e., Rs. 50,000 × 100. 12.5 Obviously, there is over-capitalization to the extent of Rs.1,00,000.

7. Shortage of Capital: Sometimes, the shortage of capital may also lead to over-capitalization. It may happen when the promoters underestimate the requirements of capital and raise less capital in relation to the needs of the business. In such a case the company will be forced to borrow a large sum of money at an unreasonably high rate of interest. A major part of the earnings will be absorbed by the amount of interest, leaving little for the shareholders. This will bring down the value of shares leading to over-capitalization.

8. Inadequate Depreciation: If a company does not make sufficient provisions for depreciation and replacement of assets, it will find after some time that the earning capacity of the assets is diminished leading to a fall in its earnings. This is yet another case of over-capitalization.

Under-capitalization: The term ‘under-capitalization’ does not mean a shortage or inadequacy of capital. The term is just reverse to over-capitalization. In the words of Greenberg:

“A corporation may be under-capitalized when the rate of profits, it is making on total Capital, is exceptionally high in relation to the return enjoyed by similarly situated companies in the same industry, or when it has too little capital with which to conduct its business.”

In simple words, under-capitalization is a state of affairs when the capital or resources of the company are being utilized more efficiently. As a result, the company succeeds in continuously earning an abnormally high rate of return on the capital employed in it. Such a company declares a high rate of dividend in comparison to the prevailing rate and the market value of its shares exceeds their book value. Thus under-capitalization refers to the sound financial position and good management of the company.

Causes of Under-Capitalisation:
The following are the important causes of under-capitalization:
1. Under-Estimation of Capital Requirements: At the time of promotion, the promoters may under-estimate the capital requirements of the company. This results in a situation of under-capitalization at later stages when more capital is required.

2. Under-Estimation of Earnings: Sometimes at the time of promotion, the future earnings of the company are under-estimated and the company is capitalized accordingly. If afterward it is found that the actual earnings are far in excess of the estimates, the company may find itself in a situation of under-capitalization.

3. Over-Estimation of Rate of Return at the Time of Promotion: Sometimes a concern estimates its income correctly but it over-estimates its rate of return (i.e„ capitalization rate). For example if a company’s earnings were estimated at Rs. 60,000 and the rate of earnings were fixed at 15%. By applying this rate the capitalization was fixed at‘Rs. 4,00,000 (i.e., Rs. 60,000 × \(\frac{100}{15}\)). Subsequently, it was ascertained that the actual rate was 10% and hence the amount of capitalization should have been Rs, 6,00,000 (i.e., Rs. 60,000 × \(\frac{100}{10}\)). Thus, the company is under-capitalized by Rs. 2,00,000.

4. Promotion of Company During Deflation: Companies that are floated under recessionary conditions often experience under-capitalization after the recession is over. This is because of two reasons. Firstly, during recession assets are purchased at a price that is must lower in comparison to their earning capacity. Secondly, companies established during a recession are capitalized at a low figure anticipating low earnings but when the recession is over earnings increase and the company becomes under-capitalized.

5. Conservative Dividend Policy: Certain companies follow a policy of declaring low dividends and plowing back a major part of their earnings. They build up large funds for replacement, renovation, and expansion. The result of such a policy is reflected in high earnings which is a situation of under-capitalization.

6. High Level of Efficiency: In a company where the management is very efficient, the company may operate on a high efficiency even with a meager amount of capital. Over a period, earning the position of the company will improve and it will become under-capitalized.

Here we are providing Class 12 Business Studies Important Extra Questions and Answers Chapter 8 Controlling. Business Studies Class 12 Important Questions are the best resource for students which helps in class 12 board exams.

Class 12 Business Studies Chapter 8 Important Extra Questions Controlling

Controlling Important Extra Questions Short Answer Type

Question 1.
Mention the important features of the control function of management.
Answer:
Characteristics of Control: The Control function of management has the following features:
1. Controlling is a continuous Process: It involves continuous measurement and review of actual performance and results in corrective action based on this review. It may lead to changes in planning, staffing, organizing, etc.

2. Controlling is looking Back: Control leads to the appraisal of past activities. Thus, it is looking back. The shortcomings in the performance of various individuals and departments are revealed by the control process. This is known as feedback information. It will help in knowing the reasons for poor performance. Corrective action can be initiated on the basis of feedback information.

3. Control is forward-looking: Control is said to be forward-looking. It is related to the future as the past cannot be controlled. It is usually preventive as the preserve of the control system leads to minimizing wastages, losses, and deviations from standards. It should be noted that control does not curtail the rights of individuals. It simply keeps a check on the Performance of individuals.

4. Control is Action-Oriented: Control implies taking corrective measures, whenever required. Action is the essence of control. The purpose of control is achieved only when corrective action is taken on the basis of feedback information. If the control does not lead to any action, then a manager can’t ensure actual performance as per standards. A good system of control facilities timely action so that there is minimum wastage of resources, time, and energy.

5. Control is a Pervasive function: It is a basic function of every manger irrespective of his level of authority. It is a follow-up action to the other function of management. Every manager is responsible for controlling the activities of those working under him and taking necessary action whenever necessary.

Question 2.
Explain the term Management by Exception.
Answer:
Management by exception: Effective control can be achieved if critical or key points are identified and close attention is directed to adjustment at these points. This is known as ‘control by exception’. According to this principle, only significant deviations from the standards require management’s attention as they constitute exceptions. An attempt to go through all deviations tends to increase the workload of the Manager and decrease attention on important problems.

For instance, if postal expenses mqt&ase by twenty percent, the deviation is too insignificant to require managerial attention. On the other hand, if labor costs rise by twenty percent, they should receive immediate managerial attention.

The Principle of Management by exception implies that minor deviations from the standards may be ignored or given less attention. This would conserve managerial time, effort, and energy which could be utilized on important matters. But whenever deviations from standards are higher than the accepted level, management must take corrective measures to deal with the situation.

Question 3.
Explain in brief the term Responsibility Accounting.
Answer:
Responsibility Accounting is a system of control where responsibility is assigned for the control of costs. The persons are made responsible for the control of costs. Proper authority is given to the persons so that they are able to keep up their performance. In case the performance is not according to the predetermined standards then the persons who are assigned this duty will be personally responsible for it.

In responsibility accounting, the emphasis is on men rather than on systems e.g. if Mr. A, the manager of a department, prepares the cost budget of his department then he will be made responsible for keeping the budget under control. A will be supplied with full information of cost incurred by this department. In case the cost incurred is more than the budgeted costs, then A will try to find out reasons and take necessary corrective measures. A will be personally responsible for the performance of his department.

Question 4.
Explain in brief the term Zero base budgeting.
Answer:
Zero Based Budgeting Whenever a budget is prepared, past records and experience are taken into consideration. The new budget is prepared on the basis of budgets of the previous period. This method is known as ‘Based Budgeting’. On the contrary, the concept of zero-base budgeting considers the future not a mere projection of the past. As the environment is changing fast, the need to forecast systematically future events arise. For the growth and survival of any business organization, these changes need to be adopted.

Zero-base budgeting is the latest technique and it is meant for a particular period of time. It doesn’t prepare an altogether new budget. Normally, the previous year’s performance is taken as a base for the current year’s budget in budgeting techniques. But in zero-base budgeting, every year is taken as a new year, and the previous year is not taken as a base.

Zero is taken as a base and all budget proposals are considered in the light of present conditions. In zero-based budgeting, the amount to be spent on various activities will depend upon justification given by the manager.

Hence, zero-based budgeting provides flexibility and freedom in allocating the resources and the chances of repletion of weaknesses of the previous year are reduced.

Question 5.
Explain the Modern technique of control by the management information system (MIS) a computer-based technique.
Answer:
Management information system: A management information system (MIS) is a computer-based information system that provides information and support for effective managerial decision-making. A decision-maker requires up to date, accurate and timely information. MIS provides the required information to the managers by systematically Processing massive data generated in an organization. Thus, MIS is an important communication tool for managers.

MIS also serves as an important control technique. It provides data and information to the managers at the right time so that appropriate corrective action may be taken in case of deviations from standards.

MIS offers the following advantages to Managers:

1. It facilitates the collection, management, and dissemination of information at different levels of Management and across different departments of the Organisation.
2. It supports planning, decision making, and controlling at all levels.
3. It improves the quality of information with which a manager works.
4. It ensures cost-effectiveness in managing information.
5. It reduces information overload on the managers as only relevant information is provided to them.

Question 6.
Distinguish between Planning and Control.
Answer:
A comparison of Planning and Control:

Question 7.
What are the advantages of Management audit?
Answer:
The main advantages of Management audit are as follows.

1. It helps to locate present and potential deficiencies in the performance of management functions.
2. It helps to Improve the Control system to an Organisation by continuously monitoring the performance of Management.
3. It Improves Coordination in the functioning of various departments so that they work together effectively towards the achievement of organizational objectives.
4. It ensures updating of existing managerial .policies and strategies in the light of environmental changes.

Conducting a management audit may sometimes pose a problem as there are no standard techniques of management audit. Also, management audit is not compulsory under any law. Enlightened managers, however, understand its usefulness in improving the overall performance of the organization.

Controlling Important Extra Questions Long Answer Type

Question 1.
Explain the essential features of a sound control system. (Imp. Q)
Answer:
Essential features of a sound control system:
A good control system has the following essential features:
1. Clear out objectives: Before Planning a control system, it is essential to know clearly the objectives it will tend to achieve. The standards of performance should be based on these objectives. Thus, the control system should be directed towards the detection of early deviations from the standards to permit effective corrective action. If the standards are arbitrary or subjective in nature, they will not be able to measure deviations properly. Thus, the purpose of control will be lost.

2. Suitability: Control techniques should be appropriately designed to suit the nature of the activities being controlled. This means that different types of activities need different types of control techniques. The control technique should be tailored to reflect the performance of all types of operations, say, production or sales.

It is also essential that the overall control system should be appropriate for the organization. A control system that is good for a small organization may be inadequate for a big organization.

3. Simplicity: A good system of control should be simple and easy to understand. The employees must know what is expected of them and how their performance will be evaluated. If the employees don’t understand the standards of performance properly, the actual performance might turn out to be very poor.

4. Economy: The system of control must be worth its costs. It must justify the expenses involved. A control system is justifiable if the savings anticipated from it exceed the costs of its working. Small enterprises cannot afford elaborate control systems which are very costly. As far as possible, unnecessary paperwork and reports should be avoided.

5. Flexibility: A good control system must keep pace with the continuously changing environment. It must be responsive to changing conditions. It should be adaptable to new developments such as the introduction of new methods, materials, and changes in the requirements of the customers. If there is a change in any plan, the control system should be capable of absorbing such change.

6. Forward-looking: The system of control should be forward-looking in the sense that it should detect and report deviations promptly. Timeless is the essence of control. Ideally, deviations should be anticipated and preventive action should be taken. More realistically information on deviations should be monitored and feedback to the system immediately so that corrections are effected with minimum cost and inconvenience.

7. Suggesting Corrective Action: Merely pointing out deviations is not sufficient in a good control system. It must lead to taking corrective action to achieve the desired objectives. It may result in taking suitable action against the employees, giving them training, ensuring effective supervision, improving communication, revising standards, etc.

8. Concentration on exceptions: This is also known as ‘Control significant deviations from standards require management’s attention as they constitute exceptions. An attempt.to go through all deviation tends to increase unnecessary efforts and to decrease attention on important problems.

9. Strategic Point Control: Small deviations in certain cases may have greater significance than larger ones in other cases, for example, deviation of ten percent in budgeted labor cost may be more troublesome to a manager than a deviation of twenty-five percent in budgeted postal charges. The Principle of strategic point control states that effective control can be achieved if critical, key, or strategic points can be identified and close attention directed to adjustment at those points. In fact, strategic point control is an extension of control by exception.

Question 2.
Explain the relationship of the controlling the function of management with other functions of management.
Answer:
Relationship of control with other Function of Management: We know that control is the last function of management because its need arises only after performing the functioning of planning, organizing, and directing. But being the last function does not lower down its importance as compared to other functions. Control is very must linked to other functions of management. In fact, the success of all other functions depends upon effective control,

The relation of Control with other managerial functions is explained below:
1. Relationship of Control with Planning: There is a close relationship between the Control and Planning functions of Management. Planning is the basis of Control, The control process involves determining the standards, comparison of the deviations, and taking corrective action to remove such deviations. In this process, planning provides such standards against which the progress of the actual performance is compared.

Thus where there is no plan there can be no basis for control. HG Hick has rightly said that “Planning is clearly a prerequisite for controlling. It is utterly foolish to think that controlling could be accomplished without planning there is no predetermined understanding of the desired performance.

On the other hand, plans will also prove mere imaginations in the absence of control. Because in such a case there will be no one to check whether or not everything is being done according to plans. Also in the absence of control, there will be no corrective action to direct the actual progress towards the accomplishment of plans.

Thus planning is meaningless without control, and control is aimless without planning.

2. Relationship of control with the organization: Control can be meaningful only when the person responsible for deviations is identified and is held responsible. This is possible only because of the organization because it is only in an organization that the authority and responsibility of each one are defined. In the absence of organization, neither the person responsible for committing the mistakes will be identified nor any action can be taken against him. Hence, the same mistakes will be repeated time and again. As such, effective organization is essential for effective control.

Similarly, Organisation is also dependent upon control because organizing is to assign work to individuals and give them authority and fix responsibility in case of mistakes. Since fixing of responsibility’ is possible only through Control, therefore effective control is essential for effective organization.

3. Relationship of control with Direction: Direction removes the difficulties in the way of various functions even before they are reviewed in order to control their progress. Direction makes the employee more capable and enthusiastic towards their work and provides them with adequate guidance training and supervision. Thus direction and control are interlinked with each other.

4. Relationship of control with other functions of Management: Control has deep relations with other functions of management as well. Communication helps in comparison of actual results with the standards by providing timely information of actual results with the standards by providing timely information of actual progress. Decision-making helps in determining the way to remove the deviations and the type of corrective actions to be undertaken.

Motivation helps in encouraging people to work towards the achievement of organizational objectives. Under control performance of each person is evaluated and efficient persons are motivated by providing them financial and non-financial incentives whereas inefficient employees are provided training to remove their deficiencies. Thus, it is clear that all the functions of management are inter-linked.

The relationship of various managerial functions is depicted through the following diagram:

From the above diagram, it is clear that the relationship between control and other managerial function is so deep that it is impossible to think of them separately. Every function affects the control and gets affected by it.

Here we are providing Class 12 Business Studies Important Extra Questions and Answers Chapter 7 Directing. Business Studies Class 12 Important Questions are the best resource for students which helps in class 12 board exams.

Class 12 Business Studies Chapter 7 Important Extra Questions Directing

Directing Important Extra Questions Short Answer Type

Question 1.
Explain the term Directing.
Answer:
Directing – Meaning: In the ordinary sense, directing means giving instructions and guiding people in doing work. In our daily life, we come across many situations-like a father directing his daughter to do work in organizing a function, a teacher directing his student to complete an assignment, a film director directing the artists about how they should act in the film, etc. In all these situations we can observe that directing is done to achieve some predetermined objective.

In the context of the management of an organization, directing refers to the process of instructing, guiding, selling, motivating, and leading people in the organization to achieve its objectives.

You can observe here that directing is not a mere issue of communication but encompasses many elements like supervision, motivation, and leadership. It is one of the key managerial functions performed by every manager. Directing is a managerial process that takes place throughout the life of an organization.

The main characteristics of directing are discussed below:

1. Directing initiates action: Directing is a key managerial function. A manager has to perform this function along with planning, organizing, staffing, and controlling while discharging his duties in the organization. While other functions prepare a setting for action, directing initiates action in the organization.
2. Directing takes place at every level of Management: Every manager, from the top executive to supervisor performs the function of directing. The directing takes place wherever superior-subordinate relations exist.
3. Directing is a Continuous process: Directing is a continuous activity. It takes place throughout the life of the organization irrespective of people occupying managerial positions. We can observe that in organizations like Infosys, Tata, and BHEL, HLL – the manager may change but the directing process continues because without direction the organizational activities cannot continue further.
4. Directing flows from top to bottom: Directing is first initiated at the top level and flows to the bottom through the organizational hierarchy. It means that every manager can direct his immediate subordinate and take instructions from his immediate boss.

Question 2.
Explain in brief the importance of supervision.
Answer:
Supervision: The term supervision can be understood in two ways. Firstly, it can be understood as an element of directing and secondly as a function performed by supervisors in the organizational hierarchy.

As an element of directing every manager in the organization supervises their subordinates. In this sense, supervision can be understood as the process of guiding the efforts of employees and other resources to accomplish the desired objectives. It means overseeing what is being done by subordinates and giving instructions to ensure optimum utilization of resources and achievement of work targets.

Secondly, supervision can be understood as functions to be performed by a supervisor, a managerial position in the organization hierarchy at the operative level i.e., immediately above the worker. The functions and performance of a supervisor are vital to any organization because he is directly related to workers whereas other managers have no direct touch with bottom-level workers.

Importance of Supervision:
The importance of supervision can be understood from multiple roles performed by a supervisor. These are explained below.
1. Supervisor maintains day to day contact and maintains friendly relations with workers. A good supervisor acts as a guide, friend, and philosopher to the workers.

2. Supervisor acts as link-between workers and management. He conveys management ideas to the workers on one hand and workers’ problems to the management on the other. This role played by the supervisor helps to avoid misunderstandings and conflict between management and workers/employees.

3. Supervisor plays a key role in maintaining group unity among workers placed under his control. He sorts out internal differences and maintains harmony among workers.

4. Supervisor ensures the performance of work according to the targets set. He takes responsibility for task achievement and motivates his workers effectively.

5. Supervisor provides good on-the-job training to the workers and employees. A skilled and knowledgeable supervisor can build an efficient team of workers.

6. Supervisory leadership plays a key role in influencing the workers in the organization. A supervisor with good leadership qualities can build up high morale among workers.

7. A good supervisor analyses the work performed and gives feedback to the workers. He suggests ways and means of developing work skills.

Question 3.
Explain in brief the elements of the communication process.
Answer:
Elements Of Communication P: Communication has been defined as a process. This process involves the elements like source, encoding, media/channel, receiver, decoding, noise, and feedback. The process is represented in the figure below.

Communication Process

The elements involved in the communication process are explained below –

1. Sender: Sender means a person who conveys his thoughts or ideas to the ‘ receiver. The sender represents a source of communication.
2. Message: It is the content of ideas, feelings, suggestions, order, etc. intended to be communicated.
3. Encoding: It is the process of converting the message into communication symbols such as words, pictures, gestures, etc.
4. Media: It is The path through which an encoded message is transmitted to the receiver. The channel may be in written form, face to face, phone call, internet, etc.
5. Decoding: It is the process of converting encoded symbols of the sender.
6. Receiver: The person who receives communication from the sender.
7. Feedback: It includes all those actions of the receiver indicating that he has received and understood the message of the sender.
8. Noise: Noise means some obstruction or hindrance to communication.

The hindrance may be caused to sender, message, or receiver. Some examples of noise are:
(a) Ambiguous symbols that lead to faulty encoding.
(b) A poor telephone connection.
(c) An inattentive receiver.
(d) Faulty decoding (attaching wrong meanings to message)
(e) Prejudices obstructing the poor understanding of the message.
(f) Gestures and postures that may distort the message.

Question 4.
Explain in brief the functions of a supervisor.
Answer:
Functions of a supervisor:
The function performed by a supervisor are briefly discussed below –
1. Preparation of Work Schedules: Scheduling involves laying down the time for starting and completing various activities. The supervisor determines the schedules of work for every individual in his unit or section. This is done to ensure a steady flow of work.

2. Improving Communication: The supervisor maintains direct contact with the subordinates which leads to effective communication. He also provides leadership to the workers of his department. He fixes production targets for them and provides them the necessary guidance for doing the work assigned to them.

3. Optimum Utilisation of Resources: The supervisor issues orders and instructions to the workers for achieving coordination in section. He tells them what to do and how to do it so that they may utilize machines, materials, money, and methods effectively.

4. Providing Motivation: The supervisor motivates his subordinates by providing financial and non-financial incentives. He inspires them for higher quality and productivity.

5. Control of Performance: The supervisor controls the performance of the workers by comparing their performance with the standards. He takes necessary action to ensure that goods are produced according to the predetermined standards. He also provides feedback to the subordinates about their performance and gives them counseling for improvement.

6. Reporting: The supervisor keeps records of output and other related aspects of each employee. On the basis of records, he sends performance reports and other necessary information to his superior.

7. Link Between Management and Workers: The supervisor is an important link between the management and the workers. He explains management policies to the workers and also passes on the management’s instructions. He has close contact with the workers and tries to understand their problems. He brings worker’s problems to the notice of the top management.

8. Human Relations: A supervisor tends to achieve good human relations in his unit. He can mix up with the workers and share their joys and sorrows. He also settles conflicts between workers or groups of workers.

9. Grievance Handling: A supervisor is in direct touch with the workers, so he can handle their grievances effectively. When a grievance is reported, he listens to the worker’s viewpoint and tries to remove the cause of grievance. But if he can’t redress the grievance he should report it to the upper-level management.

Question 5.
Differentiate between formal and informal communication.
Answer:
Comparison of Formal and Informal Communication:

Question 6.
What is the importance of leadership? Explain.
Answer:
Importance of Leadership:
Leadership is considered the most important element of the directing function of management. It supports all other managerial functions by assisting in the formulation and execution of plans. Good leadership provides the following benefits.

1. Clarification of Goals: A leader interprets and explains the objectives of the group to his followers. As a result, the members of the group know the targets to be achieved and the contribution, each of them is to make towards common objectives. They are not likely to go astray and will continue in the right direction.

2. Motivation: A good leader creates- an urge for higher performance among people. He creates self-confidence and enthusiasm among his subordinates. He converts lukewarm desire into a burning passion for success. A sound leader can create an environment conducive to hard work. He directs the potential talent of employees towards the achievement of goals.

3. Moral Building: A leader builds up dedication and loyalty among a group of people. He develops mutual cooperation and self-discipline among people. The persons become ready to sacrifice even their lives for the good of the common goal. Under a good leader, people work willingly and enthusiastically. The leader encourages subordinates to take initiative and provides psychological support to them. He serves as a friend, philosopher, and guide for his group.

4. Teamwork: An organization can be successful only when all its members work together as a team rather than going in different directions. It is the leader who creates team spirit and coordination among different members of the group. He resolves internal conflicts and differences, of opinion. He serves as an arbitrator and mediator among the members. A leader harmonizes the personal goals and aspirations of subordinates with the goals of the organization as a whole.

5. Creates dynamic environment: In the dynamic environment of today, frequent changes are required in the structure and working of an organization. But change creates uncertainly and inconvenience. Therefore, people tend to resist change. A good leader persuades people to accept and carry out the desired changes. A leader is an important agent of organizational change and development. He provides psychological support to his followers.

6. Representation: A leader serves as the representative of his followers. He protects their interest and serves as their guardian. He acts as their spokesman and bargains with the outside forces for the welfare of the groups. A true leader upholds the interests of his followers and attempts to fulfill their hopes and aspirations. He is always ready to solve the problems of his followers. A leader manager represents his organization in business meetings, trade conferences, government committees, and so on.

Competent leadership is required at all levels of management. All managers must provide leadership so as to create an urge in the employees to cooperate and improve their performance towards the achievement of organizational objectives.

Directing Important Extra Questions Short Answer Type

Question 1.
Explain the nature and importance of communication in today’s changing business world.
Answer:
Nature Of Communication:
The foregoing definitions reveal the following characteristics of communication –
1. Pervasive Function: Communication is required at all levels of management and in all departments of the organization. It is an indispensable part of the management process. It is an activity of each and every manager. Therefore, communication is regarded as a pervasive function.

2. Continuous Process: Communication is an ongoing process that has to be in regular touch with their subordinates and superiors to maintain and improves performance.

3. Two-Way Process: Communication is a two-way process. It includes sending a message and the response to that message. It is not complete until the reaction or response to the message is available. The reaction or response is known feedback.

4. Circular Process: Communication becomes a circular process with feedback. The flow of communication is a circular one.

5. Two or more Parties: It requires at least two persons to complete the process of the communication-a sender with the message and a receiver who must understand the message and respond to it.

6. Understanding: The receiver may or may not agree with the point of view of the sender of the message. However, for communication to be complete, the receiver must understand the message in the same sense as intended by the sender.

Importance Of Communication:
Communication is an indispensable part of the process of management. Non an organization can survive and grow without an effective system of communication. Since the job of a manager is to get things done through others, he has to spend a major portion of his time on communication. The first executive function is to develop and maintain a system of communication. Most of the problems of management arise due to a lack of understanding. Therefore, communication’s the number one problem of management today:

Sound communication offers the following benefits:
1. Basis of Planning and Decision Making Communication is essential for decision-making and planning: The quality of managerial depends on the quality of communication (amount and quality of information available to the organization) Communication provides the necessary information with the help of which managers can diagnose problems, evaluate alternative courses of action and choose the right alternative.

Realistic Planning and sound decision making is not possible without accurate information through communication, for example, the entire sales plan of an enterprise may fail if the information about the latest market condition is not available to management. At the same time, the decisions and plans of management need to be communicated to the subordinates. Effective communication is also helpful for the proper implementation of plans and policies of the management.

2. Smooth and Efficient Operation: An effective communication system serves as a lubricant, fostering the smooth and efficient functioning of the enterprise. The achievement of goals of the enterprise is of paramount importance and communication is one of the important tools available to the manager to attain them. It is through communication that a manager issues orders and instructions and changes and regulates the behavior of subordinates in the desired direction. Effective communication promotes managerial efficiency and facilitates leadership.

3. Facilitates Coordination: In every organization, the work to be done is divided among several interrelated departments and sections. The activities and efforts of different individuals and groups must be coordinated. Communication is the most effective means of creating cooperation and coordination. The exchange of ideas and information helps in bringing about the unity of action in the pursuit of a common purpose.

Communication binds people together. Group meetings used in coordination involve the exchange of ideas and knowledge and the transfer of information and understanding. Communication is at the root of all group activity. It is through coordination that managers come closer to employees. Interaction and discussion between the two sides improve the superior-subordinate relationships.

4. Employee Motivation and Moral: Communication helps management to keep the employees fully informed about the plans, job changes, etc. The motivation and morale of employees tend to be high when they clearly understand what they are supposed to do. Sharing of information with employees and discussion with them on matters of common interest provide satisfaction to employees.

Communication is the means by which employees can bring their suggestions, difficulties, and grievances to the notice of the management. Upward communication ensures greater job satisfaction and stimulates worker’s enthusiasm and loyalty towards the enterprise. Effective communication satisfies the personal and social of employees.

5. Sound Industrial Relations: Effective communication helps to create mutual understanding and trust between the employer and the employees. It enables the management to come into close contact with workers. It serves as a bridge between management and labor and creates a spirit in the organization. Thus, an effective communication system is a prerequisite for good labor-management relations.

6. Industrial Democracy: Communication is essential for worker’s participation in management. It is helpful in the delegation and decentralization of authority. Effective communication is the basic training and development of managerial personnel. The process of leadership itself depends upon effective communication.

Public Relations: In the modern business world, every business enterprise must create and maintain a good corporate image in society. Communication is an indispensable means of developing a favorable public opinion. It is through communication that management can keep cordial relations with the government, trade unions, customers, and the community.

In modem business the role of communications has increased due to the following reasons:
(a) Increasing size of organizations.
(b) Growing complexities in decision making.
(c) Rapid changes in technology.
(d) Need for better industrial relations.
(e) Growth of trade union movements.
(f) Need to improve public relations,
(g) Increasing Competition.

Question 2.
Explain the nature and importance of Motivation.
Answer:
Importance Of Motivation:
The success of an organization to a great extent depends upon the motivation of its employees. By motivating employees, managers can obtain their best performance towards the achievement of organizational and individual goals. Motivation is the core of management due to the following reasons.

1. Higher Efficiency: The level of performance of employees in an organization depends on their abilities and willingness to work hard. Motivation bridges the gap between the ability to work and willingness to work. It induces employees to contribute their maximum efforts to achieve a higher level of performance. Therefore, motivation helps in increasing production and reducing the cost of operations.

2. Optimum utilization of Resources: Every organization has physical, financial, and human resources. Effective utilization of physical and financial resources requires competent and motivated people. Motivation creates the willingness to work among employees. It enables managers to achieve the best possible utilization of all resources.

3. Achievement of Organisational Goals: The objectives of an organization cannot be realized unless the people working in it are motivated to work hard contribute their best towards the fulfillment of the assigned tasks. Management can secure the willing cooperation of subordinates towards the accomplishment of organizational goals by satisfying their needs through appropriate rewards. Motivated employees fully cooperate with management in achieving the desired results.

4. Stability in the Workforce: Motivation creates confidence in employees. It helps to improve their loyalty and commitment towards the organization. As a result, the rates of labor absenteeism and labor turnover are reduced. This leads to the maintenance of a stable workforce. The knowledge skills and experience of employees continue to be available to the organization.

5. Cordial Relations: Motivation brings satisfaction among employees through monetary and non-monetary rewards. Therefore, it leads to a friendly and supportive relationship between the employer and employees. Industrial disputes are reduced and the morale of employees is increased.

6. Facilitates change: Effective motivation helps management in overcoming resistance to change motivated employees and to support all changes that are in the interest of the organization. This is because they identify their own progress with the prosperity of the enterprise.

7. Corporate linage: When the employees of an organization are motivated and satisfied, the organization makes rapid progress and its reputation improves. Thus, motivation helps in building a better image of the enterprise. As a result, the enterprise is able to attract qualified and competent people.

Here we are providing Class 12 Business Studies Important Extra Questions and Answers Chapter 6 Staffing. Business Studies Class 12 Important Questions are the best resource for students which helps in class 12 board exams.

Class 12 Business Studies Chapter 6 Important Extra Questions Staffing

Staffing Important Extra Questions Short Answer Type

Question 1.
State whether the following statements are true or false.
(i) “Personal Manager is both a line manager as well as a staff manager.”
Answer:
True.

(ii) Staffing and employing refer to the same activity.
Answer:
True.

(iii) Personnel problems exist only in a large organisation.
Answer:
False.

(iv) Recruitment and selection are one and the same thing.
Answer:
False.

(v) Training and development are synonymous.
Answer:
False.

Question 2.
What is meant by staffing? How staffing is a line as well as staff function?
Answer:
In simple words, staffing is the processing of obtaining and maintaining capable and competent people to fill all positions from top management to the operative level. This includes securing, recruiting, selecting, training, appraising and maintaining the individuals in organizations. Let us pull the views of management scholars on the definition of staffing.

• Staffing is the function by which managers build an organization through the recruitment, selection, development of individuals as capable employees.
• Staffing is the executive function which involves the recruitment, selection, compensating, training, promotion and retirement of subordinate managers.
• Staffing is concerned with the placement, growth development of all those members of the organization whose function is to get things done through the efforts of another individual.
• Staffing is the whole personnel function of bringing in and training the staff and maintaining favourable conditions of work.

Almost all the scholars unanimously agree that –
1. Staffing is a function involving the recruitment, selection and training and development of people.

2. Staffing is broad enough to cover both rank and file employees and managers. Staffing provides the managers with tremendous opportunity to surround themselves with subordinates of their own choosing. More often than not, staffing is equated to hiring the employees in work organization. Actually, staffing is more than hiring, for managers cannot build excellent, effective and efficient organization solely by hiring. The concept -of staffing is so broad to include several activities frequently assigned to the personnel departments such as transfers, discharge, retirements, training, development and orientation.

Truly, staffing concept widens and magnifies the decision zone of managers but at the same time, staffing entails a balanced sharing of the staffing function with the personnel department.

Question 3.
Define personnel Management. How is it different from Human Resource Management?
Answer:
Personnel management is a set of activities and personnel management focusses on the effective use of human resource in an organization. Hence it is also Labelled as Human Resource Management or Human Engineering. The other names for the term Personnel Management are PMIR, PHRM. The Lexicon of personnel management was traditionally dominated by Plippo, Julius, Pigors and Myres, Strauss and Sales. The new scholars in the field include Andrew Dubrin, Dennis Middlemist, Lloyd Byars, Leslie W. Rue, Deris Torrington, Michael Hitt and Charles Carrer etc. Let us briefly see their views on human resource management.

PHRM is that organizational function, which provides specialized concepts, methods, techniques and professional judgement, geared toward effective and efficient utilization of human resources.

Human Resource Management encompasses those activities designed to provide for coordination the human resources of an organisation.

Personnel management is a series of activities enabling working man and his employing organization to reach an agreement about the nature and objectives of the employment, the relationship between them and then to fulfil those agreements.

Personnel management is that function of all enterprises which provides for effective utilization of human resources to achieve both the objectives of the enterprise and the satisfaction and development of employees.

Personnel management is the integration and coordination of human resources in order to move effectively toward the desired objectives.

These definitions need little explanation. What we study in Personnel/HRM:
The organisation is definitely in the people business. Human resource management is that function performed in the organization to facilitate the most effective use of people to achieve organizational goals. Human resource management, in this process, is concerned with –

1. Manpower planning.
2. Employee recruitment, selection, training and placement.
3. Performance evaluation (appraisal), counselling, career development, and training.
4. Employee’s development.
5. Employee’s welfare, safety and health.
6. Maintenance of harmonious Labour relations.
7. Compensation and fringe benefits.
8. Job analysis and employment opportunities programmes.

The Objectives of Personnel/HRM:
As things stand now, the management scholars, pedagogues, and researchers – all unanimously agree that human resource management may be conceived as the process of developing, applying and evaluating policies, procedures methods and programmes relating to the individual members and groups in the organization. The conception applied whether the specific employee is a file clerk, a maintenance mechanic, a research and development scientist a marketing executive, a finance view-president or a production superintendent.

Essentially as noted in the previous paragraphs, personnel/human resources management is basically concerned with the management of human resources in sharp contrast to the management of material and other financial resources.

Another sophisticated way of defining human, resource management is in terms of goals/objectives. The goals of HRM, frankly speaking, are the same as the goals of management of an organization in general. Actually, HRM starts with objectives – what the organization is aiming to do about the people it employs.

The overall aim of the personnel/human resource management is to make an effective contribution to the achievement of overall organizational objectives and to the fulfilment of corporate social responsibility. But unfortunately, there are no universal objectives just as there are no universal (absolute) principles governing personnel policies and practices. Personnel objectives and the means for achieving them depend on their context. At the most, they are only certain basic heading and guidelines which provide a conceptual and analytical framework within which organization does what it needs to do in the \yay which best suits itself.

In every organisation, although the human resource managers tend to carry out a unique set of activities having to do with the utilization of human resources, this work is performed with the Primary objective of accomplishing the exact same objective as is the work of other managers – finance, marketing, production and research etc.

Human resource management is basically aimed at –

1. Helping the organization to reach its goals.
2. Employing the skilful, intelligent workforce in an organization.
3. Providing the organization with well-trained and well-motivated employees.
4. Increasing to the fullest the employee’s job satisfaction and self-actualization.
5. Developing and maintaining the quality of work life.
6. Helping the members to maintain ethical policies and., behaviour.
7. Managing change to the mutual advantage of individuals groups the enterprise and the general public.

Personnel management thus aims at the attainment of maximum individual development maintaining desirable working relationships (between employee and organization) handling human problems in the organization and acquiring, developing, utilizing and maintaining an effective workforce. In more sophisticated terms, the personnel objectives are concerned with the organization, manpower, relationship and responsibility.

Question 4.
Name the components of staffing.
Answer:
The modern concept of staffing comprises of three important components.

1. Recruitment: Recruitment is a positive step which aims as attracting a number of candidates to apply for the given job. The higher the number of people who apply for a job, the higher will be the possibility of getting a suitable employee one of them.
2. Selection: Selection, on the other hand, is a negative process. It aims at selecting the most reliable person out of the candidates who have applied for the job.
3. Training: Training is concerned with up-gradation the knowledge and skills of the employees so that their abolition to perform can be enhanced.

Components of Staffing

Question 5.
Explain Employment Interview and its importance.
Answer:
Employment Interview: According to Julius Michael “An interview is a face to face, oral, observational and personal appraisal method.” Usually, it is used as a means of getting information from the candidate. It also involves giving information that will help the applicant make up his mind about the company.

Interviewing the candidates is an important aspect of the selection procedure. The final selection is partly based on the performance of the candidate in different tests and partly on his performance in his final interview. In the interview, the candidate has to appear before the interview or group interviewers. The candidate’s overall personality is judged in the interview. The interview may last for 10 to 20 minutes or even more. Various questions are asked from the candidates and so on. interviewing technique is used in all companies and in the case of all categories of Staff to be recruited.

Importance of Interview: For the selection of the right type of people, employment interview is very important. The advantages of employment interview are as follows:

1. There is face-to-face contact between the employer and the candidate, the employer can assess the personality traits of the candidate.
2. The candidate can seek more information about the employer and the job. This creates better the employer and the job. This creates a better understanding of the mind of the candidate.
3. The communication skill of the candidate can be judged in the interview. His way of thinking can also be known.
4. the interview is very important where the candidate has not to go through employment tests. The information contained in the application form can be checked during the interview.
5. Many companies do not follow the elaborate selection procedure as it is costly and time-consuming. They can relay on an interview if it is properly planned and administered.

Question 6.
Explain in brief the types of training.
Answer:
Depending upon the purpose of training of the following kinds of training programmes are used in industry:-

1. Induction or Orientation Training
2. Apprenticeship Training
3. Internship Training

Now we shall discuss these kinds of training:
1. Induction or Orientation Training: Induction is concerned with introducing or orienting a new employee to the organisation and its procedures, rules and regulation.

When a new employee reports for work, he must be helped to get acquainted with the work environment and fellow employees. It is better to give him a friendly welcome when he joins the organisation, get him introduced to the organisation and help him to get a general idea about the rules and regulations working conditions etc. of the organisation.

The benefits of induction or orientation and socialisation of new employees are as follows

1. It builds up the new employee’s confidence in the organisation and in himself so that he may become an efficient employee.
2. It gives the new entrant the information he needs such as the location of locker rooms, cafeteria and other facilities, time to break off, leave rules etc.
3. It promotes a feeling of belonging and loyalty to the organisation among newcomers.
4. It ensures that new employee does not form false impressions regarding the place of work because the first impression is the last impression.

2. Apprenticeship Training: Apprenticeship training involves imparting knowledge and skills, in a particular craft or trade such as printing tool making etc. The government of various countries have passed laws which make it obligatory on certain employers to provide apprenticeship training to young people. Apprenticeship training is desirable in industries which require a constant flow of new employees expected to become all-round craftsmen. It is very much prevalent in printing trade building and construction and vocations like mechanics, electricians, welders etc. it is similar to on-the-job training.

Under apprenticeship training, the trainee is placed under the supervision of an experienced person who imparts him the necessary skills and regulates his performance. The advantages of apprenticeship training to the trainees are that they receive a stipend while learning and acquire valuable skills which command a high wage in the labour market. In India, there are so many ‘earn when you learn’ schemes, both in the private as well as public sector undertakings. This is also advantageous to employers. Some employers look upon apprentices as a source of cheap labour.

3. Internship Training: Under this method, an educational institute enters into an arrangement with industrial enterprises for providing practical knowledge to its students. Internship training is usually meant for such vocations where advanced theoretical knowledge is to be backed up by practical on the job experience. For instance, engineering students are sent to big industrial enterprises for gaining practical work experience and medical students are sent to big hospitals to get practical knowledge.

The period of such training varies from six months to two years. The trainees do not belong to the business enterprises but they come from the vocational or professional institutions. It is quite usual that enterprises giving them training absorb them by offering suitable jobs.

Question 7.
Explain in brief the importance of training.
Answer:
Training is beneficial to both, employers and employees. A well-trained employee is an asset to the enterprise because his efficiency and productivity are high. Training enables the employees to obtain job security, high earnings and promotion. In fact, management has no choice. Whether or not to train employees. The only choice left is whether training will be imported through a formal and systematic programme or not. In the absence of formal training employees learn by ‘trial and error’. They pick the wrong ways of doing things and the time involved in learning is very long. Formal training helps to minimise time, cost and wastage involved in training. The main advantages of training are as follows

1. Higher Productivity: Training helps to improve the job knowledge, skills and job performance of employees. Well trained employees are more efficient and as a result the quantity and quality of performance increases.

2. Reduced Supervision: Well-trained employees are self-reliant. Trained employees tend to be more professional and disciplined. They take more interest in their jobs. They do not require continuous and intensive supervision. Therefore the supervisors can save their time and energy.

3. Better Safety: Human error or negligence is the major cause of accidents in industries. Employees who lack knowledge and skills regarding their job often commit mistakes. Training makes employees proficient and reduces accidents. Training makes employees safety conscious and enables them to make better use of safety devices.

4. Economy: Trained employees make better and economical use of the materials and machinery. Proper handling of facilities reduces wastage, spoilage and breakage. The loss to damage is minimised and the cost of production is reduced.

5. Higher Morale: Effective training improves job attitudes and self-confidence of employees. They feel that management cares for them. Trained employees can work better and thereby earn rewards. As a result, their motivation and morale are boosted. Higher morale helps to reduce absenteeism and labour turnover. Relations between management and labour can be improved.

6. Promotion and Career Growth: Training enables employees to acquire knowledge and skills for more responsible jobs. It prepares employees for higher positions in the organisation. They can earn promotions more quickly. Thus training facilitates career growth of an employee.

7. Stability and Growth: Through training, an organisation can develop its future executives and thereby ensure its stability. It becomes flexible as well-trained employees can handle a great variety of jobs. Training makes employees more dynamic and adaptive to changes. With the help of well-trained staff, an organisation can smoothly expand and diversity. It can face adverse conditions more effectively.

Question 8.
Explain the term Job Analysis, Job Description and Job Specification.
Answer:
Job Analysis: Job analysis is the process of determining the tasks which comprise the job methods and equipment used in the job and the skill and knowledge required for the successful performance of the job. It involves a systematic and detailed study of a job so as to determine its contents and requirements.

Job analysis serves the following purposes:

1. Job analysis provides a scientific basis for proper recruitment and selection of personnel.
2. It helps in placing the right person on the right job.
3. Job analysis facilitates the training and development of employees by identifying the abilities required for a job.
4. It helps in the proper evaluation of a job.
5. Job analysis helps in improving the design and methods of jobs. The information generated by job analysis is used to prepare two statements
   (a) job description and
   (b) job specification.

Job Description: Job description is a written, organised and factual statement of the nature and contents of a job.

It consists of the following information:
(a) Title or name of the job
(b) Location, code no. of the job
(c) Department concerned
(d) Duties involved in the job
(e) Working conditions
(f) Equipment used
(g) Relationship with other jobs.

Job Specification: Job specification is a formal and written statement of the minimum human qualities required for the successful performance of a job. It specifies the knowledge, skills, experience and aptitude which the job holder should possess. Job specification helps in selecting and training the right person for a job.

Question 9.
Explain in brief the merits and demerits of internal sources recruitments.
Answer:
Internal Sources: Such sources of labour supply exist within the organisation. There are two internal sources of recruitment, namely, transfer and Promotion. These are discussed below.

1. Transfer: It involves shifting of an employee from one job to another, one department to another or from one shift to another, Transfer is a good source of filling vacancies with employees from over-staffed departments or shifts. It may also be used as a tool for training.

At the time of transfer, it is ensured that the employee to be transferred to the new job is capable of performing it. In fact, the transfer does not involve any drastic change in the responsibilities, pay and status of the employee.

2. Promotion: It leads to shifting on the employee to a higher position, carrying higher responsibilities, facilities, status and pay. Many companies follow the practice of filling higher jobs by promoting employees who are considered fit for such positions. Filling vacancies in higher jobs from within the organisation has the benefit of motivating the existing employees. It has a great psychological impact on employees. A promotion at the higher level may also lead to a chain of promotions at lower levels in the organisation.

3. Recalling of Laid Off Employees: The term lay off means temporary separation of the employees from the employer because of lack of work or shortage of raw materials, or other reasons. When the situation gets normal, the demand for labour F will increase. The management can recall laid-off employees to fill the vacant positions.

Merits of Internal Sources:
Filling vacancies in higher jobs from within the organisation has the following merits

1. Employees are motivated to improve their performance.
2. The moral of the employees is increased.
3. Industrial peace prevails in the enterprise because of promotional avenues.
4. Filling of jobs internally is cheaper as compared to getting candidates from external sources.
5. A promotion at a higher level may lead to a chain of promotions at lower levels in the organisation. Thus many employees are satisfied.
6. Transfer or job rotation is a tool of training employees for higher jobs.
7. The transfer has the benefit of shifting the workforce from the surplus departments to those where there is a shortage of- staff.

Demerits of Internal Sources:

1. When vacancies are filled through internal promotions, the scope for fresh talent is reduced.
2. The employees may become lethargic if they are sure of time-bound promotions.
3. The spirit of competition among the employees may be hampered.
4. Frequent transfer of employees may reduce the overall productivity of the organisation.

Question 10.
Explain in brief on the job methods of training.
Answer:
Under this method, the worker is given training at the workplace by his immediate supervisor. In other words, the worker learns in the actual work environment. It is based on the principle of learning by doing’. On-the-job training is considered to be the most effective method of training the operative personnel.

On the job training is suitable for imparting skills that can be learnt in a relatively short time. It has the chief advantage of strongly motivating the trainee to learn. It is not located in an artificial situation. It permits the trainee to learn on the equipment and in the work- environment, On-the-job training methods are relatively cheaper and less time-consuming. Another important factor in on-the-job training is that supervisor playing an important part in training subordinates.

There are four methods of on-the-job training described below –

1. Coaching: Under this method, the supervisor imparts job knowledge and skills to his subordinate. The emphasis in coaching or instructing the subordinate is on ‘learning by doing’ This method is very’ effective if the superior has sufficient time to provide coaching to his subordinate.

2. Understudy: The superior gives training to his subordinate as his understudy or assistant. The subordinate learns through experience and observation. This technique prepares the subordinate to assume the responsibilities of the superior’s job in case the superior is absent or . he leaves the organisation.

3. Job Rotation: The trainee is systematically transferred from one job to another so that he may get the experience of different jobs. This will broaden his horizon and capacity to do a variety of jobs. Rotation of an employee from one job to another should not be done frequently. He should be allowed to stay on a job for a sufficient period so that he ’ may acquire the full knowledge of the job.

Job Rotation is used by many organisations to develop all-round workers. The employees learn new skills and gain experience in handling, different kinds of jobs. They also come to know the interrelationship between different jobs. Job rotation is also used to place workers on the right jobs and prepare them to handle other jobs in case of need.

4. Vestibule Traning: Vestibule training is adapted to the same work environment as prevails at the actual work-place in the factory. Vestibule training is suitable where a number of persons are to be trained at the same time for the same kind of work. A vestibule training workshop may be set up by an industrial organisation when it is not possible to give training to the employees at the work-place. The training job is entrusted to – the qualified instructors. The main emphasis is on learning rather than on production.

Vestibule training is an attempt to duplicate as nearly as possible the actual conditions of the work-place. The learning conditions are carefully controlled. The trainees can concentrate on training because they are not under any pressure of work. Their activities do not interfere with the regular process of production. Thus vestibule training is very must suitable where a large number of persons are to be trained arid where mistakes are likely to occur which will disturb the production schedules.

Staffing Important Extra Questions Lomg Answer Type

Question 1.
Today staffing is the activity of personnel Department/ Human Resource Management. Explain the functions of Human Resource Management?
Answer:
Creation of Human Resource or Personnel Department: Staffing’ is the responsibility of every manager. However, in not organisation, personnel or Human Resource Department is set up under the charge of Personnel or Human Resource Manager. The personnel department serves as a service department. It performs various personnel functions assigned to it by the other departments. The Personnel Manager enjoys the status of a specialist in personnel matters. Normally, persons with post-graduate qualifications in Human Resource Management, Personnel Management and Industrial Relations are preferred for this post.

The establishment of the Personnel Department does not relieve the line managers of the staffing responsibilities. In fact, the staffing function is an inherent part of the job of every manager. The Personnel Manager is appointed to provide expert assistance to them in the performance of their staffing functions of manpower planning, employment, placement, induction, training and performance appraisal. Besides these functions, the personnel department is also responsible for motivation. Working conditions, human relations and personnel records. We shall study these functions under the heading of operative Functions or Responsibilities.

Functions of Human Resources Management.
There are two sets of functions of human resources management. These include

1. Managerial functions
2. Operative functions

1. Managerial Functions: The Human resources or Personnel Manager is a part of the management. So he performs the basic managerial functions of planning, organising, directing and controlling in relation to his department Like any other manager, the Personnel Manager performs all the managerial functions.

2. Operative Functions or Responsibilities: The operative functions are the specific responsibilities which are entrusted to the personnel department under the supervision of the Human Resource Manager. There are concerned with, employment, training, development, compensation, integration and maintenance of personnel of the organisation.

A brief description of the basic responsibilities or functions of the Personnel Manager is given below –
1. Employment of Personnel: The first major responsibility of the Personnel Manager is the employment for proper kinds and a number of persons necessary to do various jobs in the Organisation. It involves .manpower, planning, recruitment, selection, placement etc. of the personnel.

Manpower planning helps to determine the manpower requirements for various departments. Recruitment is concerned with the sources of supply of work force, whereas selection involves a number of steps to employ the right type of people for various jobs. The selected employees are placed in the jobs for which they are better suited.

2. Training and Development: After placing the people on various jobs, personnel management is concerned with imparting them training to do their work efficiently. Proper development of Personnel is essential to increase their skills in the performance of their jobs. The personnel department designs and runs the appropriate training programmes for developing the necessary skills among the personnel.

3. Compensation: This function is concerned with the determination of adequate .and fair remuneration of the people for their work. The employees can be compensated both in terms of monetary as well as non-monetary rewards. Factors which must be borne in mind while fixing the compensation or remuneration of personnel are their basic need, requirements of jobs, legal provisions regarding minimum wages, the capacity of the organisation to pay, wage level afforded by the competitors etc. For fixing the wage levels, the Personnel Manager can also make use of techniques like job evaluation, performance rating etc.

4. Motivation of Workforce: Employees work in the Organisation for the satisfaction of their needs. In many cases, it is found that they do not contribute towards the organisational goals as much as they can. This happens because employees are not adequately motivated. The personnel Manager helps the various department managers to devise a system of financial and non-financial rewards to motivate the employees.

5. Maintainance of Good Working Conditions: The employees must be provided with good working conditions so that they like their work and work-place and maintain their efficiency. Working conditions influence the motivation and morale of the employees. These include the measures taken for the health, safety and comfort of the working force. The personnel department also provides for various welfare services which relate to the physical and social well-being of the employees. These may include the provision of the cafeteria, restrooms, counselling, group insurance, education of children of employees, recreational facilities etc.

6. Achieving Good Human Relations: The personnel Manager must provide an efficient system of communication to ensure the two-way exchange of information. Many time industrial disputes occur because of poor communication. The personnel manager should always keep himself in contact with, the trade union leaders to understand their grievances and attempt to remove them so that harmony is maintained in the organisation,

7. Personnel Records: It is the duty of the personnel department to maintain records of the employees working in the enterprise. It keeps full records about their training, achievement, transfer, promotion etc. It preserves many other records relating to the behaviour of personnel like absenteeism and labour turnover and personnel programmes and policies of the organisation. It also maintains various records and registers as required by the Factories Act, the employees state Insurance Act and other Labour Laws.

Question 2.
What is manpower planning? Explain the different steps to be taken while preparing Manpower Planning?
Answer:
Manpower planning or human resource planning is the process of determining scientifically the number and type of employees that an enterprise will need in a specified period of time in future. Its purpose is to ensure that the organisation will have an adequate number c of qualified persons at the proper time to perform various jobs efficiently and with personal satisfaction. Manpower planning consists of the following steps

1. Forecasting Manpower Needs: First of all number and type of personnel required are anticipated. The number of employees required in a future period can be estimated by keeping in mind the expected workload. Workload depends upon the production and sales budgets, expansion plans etc. of the company. The type of employees required is estimated by keeping in view the requirements of job vacancies to be filled. Job requirements can be determined by analysing jobs. Job analysis is a thorough analysis of the job to identify the knowledge, skills and experience required for effective performance.

2. Preparing Manpower Inventory: A detailed list of existing manpower is prepared. Then the number and quantity of existing staff are assessed to determine the extent to which manpower forecast can be met from within the organisation. The qualifications, experience, aptitude etc. Of every employee are analysed. Such an inventory of existing manpower is called manpower inventory or manpower audit.

Manpower inventory will give an idea as to how far the future requirements of manpower can be met from within the organisation. It will reveal the adequacy of manpower in terms of number and skills. Absenteeism and labour turnover and such other manpower problems are also anticipated. A comparison between manpower for cast and manpower inventory will reveal gaps in manpower to be filled in form outside.

3. Formulating Manpower Programmes: Detailed programmes are prepared for recruitment, selection, training, transfer and promotion of employees so as to meet future manpower needs, The first step in the staffing process is the estimation of manpower requirements. It is known as human resource planning or manpower planning. Under it the number and kind of personnel required by the organisation during a specified future period (e.g. one year) are determined. Then the number and type of existing personnel are assessed.

This indicates the extent to which the future manpower needs can be met from within the organisation. It also gives an idea as to how far it is necessary to recruit people from outside. Finally, programmes are formulated to recruit, select and train the required staff over the planning period.

The objectives of estimating staff requirements are to ensure that the organisation has adequate number and quality of employees to fill in the various positions. It is useful in many ways. It continuously provides the personnel required at various levels in the organisation. It enables the organisation to make full use of its resources. The organisation can meet its changing manpower needs without any problem. It is also in a position to fill in vacancies arising from the retirement of its senior managers.

While estimating man-power requirements, the managers should consider several factors which is as follows:
(a) Plans of the organisation concerning products services, expansion of operations etc:
(b) Nature and size of the organisation including the degree of decentralisation, a span of control staff units, departmentation etc.
(c) Type of technology to be adopted i.e. a degree of mechanisation and automation.
(d) Retirement schedule of the existing staff.
(e) Number of employees who may leave the organisation.
(f) the Average number of personnel absent from the job.

Systematic manpower planning necessary due to the following reasons:
(a) Future man-power needs: Future manpower needs cannot be determined without systematic manpower planning. With the help of manpower planning, an organisation can secure the services of the right type of people at the right time.

(b) Scarce talent: Modem organisations require highly specialised technicians and professionals. There is a scarcity of such talent. Manpower planning helps in ensuring an adequate supply of skilled personnel for an organisation. ,

(c) Coping with changes: Changes in technology, products, marketing conditions etc. require
changes in job content, skill requirements, kind of people etc. Manpower planning helps in avoiding a shortage of manpower in some areas and surplus in other areas.

(d) Growth and expansion: Manpower planning is necessary for ensuring replacements from time to time due to retirement and death of existing employees. Moreover, an organisation can properly meet its manpower requirements arising out of expansion and growth schemes. Manpower planning helps in optimum utilisation of manpower and in minimising the cost of labour. Workers who become redundant due to automation can be absorbed in new jobs after some training. This helps to improve industrial.

Question 3.
Describe three off-the-job methods of training.
Answer:
Off-the-job Training: Off-the-job training as the name itself indicates, refers to training conducted away from the actual work setting. There may be a special site in the organization itself or in a non-organizational location elsewhere (for example, vocational school or university). Off-the-job training is particularly useful and appropriate for certain managerial skills such as interpersonal abilities and also for certain production jobs where machinery is employed to control the pace of work-an example may be the assembly-line operation and is also useful for some technical jobs where teaching expertise is found elsewhere.

Some of the common methods of off-the-job training include lectures, conferences, group discussions, role-playing, case studies, programmed instruction, and T. group training.

(a) Lectures and classroom instruction: Classroom training is conducted off the job and is probably the most familiar method. It is an effective means of imparting the information and knowledge quickly to a large chunk of members „ with limited knowledge or no knowledge of the subjects being taught. Lecturing is particularly useful for teaching the factual material, concepts, principles, theories and their application to job situations.

In general, classroom instructions are more frequently used for technical, professional and managerial employees. These ‘ lectures are formally organized talks by the training specialists themselves. Lecturing is an effective method and is interesting especially when able lecturers are employed to impact the knowledge – technical or otherwise. But the disadvantages of lecturing include:

1. the learners may be passive instead of active.
2. there is no feedback from the audience regarding their lecturers.
3. a clear and vigorous presentation on the part of the lecturer requires a great deal of preparation;
4. the untrained and inexperienced lecturer may deliver an unpalatable lecture, he might rumble of pack too much redundant „ information in a single lecture leaving the important technical details.
5. lecturing emphasizes the routine memorization of facts rather than the practical aspects of a job. However, the lecture method in training is useful to introduce the subject matter its overview, its principles, laws, classification, and summaries etc. to the listeners. Because of its simplicity and efficiency in imparting knowledge, the lecture method is still alive in work organizations.

(b) The conference method: Instead of indulging in straight lecturing, some organizations prefer to hold conferences where participants are required to pool their ideas, viewpoints, suggestions and discuss them at conferences. Conferences provide a common plate form for intensive and through group discussion and result in suggesting the improved methods of performing work in the organization.

The conference allows the trainee to look at the problem from a broad angle allow him to analyse it more carefully and arrive at conclusion. Conference method is ideal for analysing problems and issues concerning organizations and their members’ conferences reduce the dogmatism and promote understanding between members. Upon close and intensive discussions, members will be willing to accept change, if any for the betterment of the organization. Conferences method has several limitations such as

1. it is limited to a small group of people ranging from fifteen to twenty-five.
2. progress of learning is slow because all the members have ‘ full freedom to speak and in the curiosity of participation some. members may come out with totally irrelevant issues, and
3. some members may feel that the whole conference is useless unless they are made aware of the objectives of holding the conference.

(c) Group discussion: Also known as team discussion, or seminar in the group discussion the members are requested to present papers and discuss the papers in a common platform. The trainees are allowed to read their respective papers and this is followed by a thorough critical discussion. While preparing the paper, the trainee has free access to files concerning the subject and compile the information.

After consulting the necessary files the trainees may discuss the ramifications and complexities of a particular job or work and suggest solutions for the probable problems the trainees are likely to encounter in near future.

(d) Roleplaying: The role-playing goes by a variety of names, such as psychodrama. role-reversal, social-drama, and soon. Role-playing involves the spontaneous acting out of a situation by two or more people under the specific direction of a trainer. The notable characteristic of role-playing is that dialogue usually ensues and the trainees are enthusiastic, playing out their roles.

In role-playing, trainees act out a given role as they would be performing in a stage play. The role players are informed only about the situation and of the role they are expected to play. Role-playing primarily involves hiring, firing, discussions about the grievance procedures employed, employer-employee relationships. The primary advantages of role-playing include

1. development of leadership skills and decision-making skills of the entire group.
2. trainees learn the importance of participation in bringing about the acceptance of resource allocation decisions.
3. human interaction and sensitivity are emphasized in role-playing and
4. it brings desired changes in employee attitudes and behaviour. However, role-playing can be very time consuming and without competent leadership, it could be a waste of time.

(e) Case studies: Another sophisticated off-the-job- training is through case studies. The case study is based on the firm belief that managerial competence can best be attained through the study contemplation and discussion of concrete cases. The trainees are given the cases and are asked to identify the basic problem and suggest solutions. The case study is primarily useful for supervisory personnel and serves as a useful technique for developing decision-making and problem-analysing skills to the middle managers.

(f) Programmed instruction: Programmed instruction involves breaking, information into meaningful units and rearranging them in a proper sequence to form a learning package. Programmed learning consists of three functions:

1. presenting questions, facts or problems to the learner.
2. allowing the trainee to respond and
3. providing the necessary feedback on the accuracy of his answers. Programmed instruction makes use of books or manuals but normally it is supported by electronic teaching machines, computer systems. In practice, the trainee reads a particular set of materials and then responds to questions usually multiple-choice questions or true-false type questions. If the answer is correct the trainee proceeds to answer the next question. However, if the answer is incorrect the trainee is furnished additional information and is required to respond to questions on that material. This procedure is repeated until the trainee has answered correctly.

Programmed instruction method is appreciated because it incorporates several learning techniques including movement from simple to complex material and provision of feedback. Research reveals that programmed instruction is one of the more effective methods for building knowledge and retention of that knowledge.

(g) T-group training: Also frequently known as sensitivity training T-group training is a process in which several individuals work together for several days for the purpose of buildings self-awareness, understanding of group processes and a greater understanding of interpersonal relationships. The trainees are encouraged to portray their feelings, abilities and needs in building interpersonal relationships.

The basic purpose of sensitivity training to increase the participant’s insight into his own behaviour and the behaviour of others by encouraging an open expression of feelings in the trainer-guided T group laboratory.

Question 4.
Write short notes one
1. Employment Tests
2. Evolution of HRM
Answer:
1. Employment Tests: An employment test is a mechanism (either a paper and pencil test or an exercise) that attempts to measure certain characteristics of individuals. These characteristics range from aptitudes, such as manual dexterity, to intelligence to personality.

Important tests used for selection of employees:
(a) Intelligence Tests: This is one of the important psychological tests used to measure the level of intelligence quotient of an individual. It is an indicator of a person’s learning ability or the ability to make decisions and judgements.

(b) Aptitude Test: It is a measure of individuals potential for learning new skills. If indicates the person’s capacity to develop. Such tests are good indices of a person’s future success score.

(c) Personality Tests: Personality tests provide clues to a person’s emotions, his reactions, maturity and value system etc. These tests provide an overall personality. Hence these are difficult to design and implement.

(d) Trade Test: These tests measure the existing skills of the individual. They measure the level of knowledge and proficiency in the area of professions or technical training. The difference between aptitude test and trade test is that the former measures the potential to acquire skills and the later the actual skills possessed.

2. Evolution of HRM: Human Resource Management has replaced the traditional concept of labour welfare and personnel management. HRM in its – present form has evolved from a number of significant inter-related developments, which date back to the era of industrial revolution emergence of trade union movement lead to the need of a person who could act as an effective line between the owners and workers.

Thus the concept of labour welfare officer came into the being.

His role was limited to the bare minimum welfare activities of employees. In fact, he was looked down by both the workers and the owners.

With the introduction of the factory system, thousands of persons began to be employed under one roof. The job of hiring people for the organisation was given to one man, who later on was assigned the responsibility of recruitment, selection and placement of personnel.

This led to the emergence of a personnel officer in the first place and personnel manager, later on.

Human relations approach recognizes the human factor as the most important instrument of success in the organisation. Fast-changing technological developments, how our, necessitated new skills development and training of employees. People came to be recognized as a valuable resource, which can be further developed. Increase in the scope of the work led to the replacement of personnel manager to the human resource manager. Hence HRM came to mainstream activity due to the failure of the earlier concepts to promote the potential benefit of effective management of the people.

Question 5.
What is the importance of staffing function in today’s environment?
Answer:
Importance of staffing:
Human resources are the foundation of any business. The right people can help you take your business to the top: the wrong people can break your business. Hence staffing function has assured greater ” importance their days because of the rapid advancement of technology, increasing the size of the organization and complicated behaviour of human beings. Human resources are the most important asset of an organisation.

The ability of an organisation to achieve its goals depends upon the quality of its human resources. Therefore, staffing is a very important managerial function. No organisation can be successful unless it can fill and keep filled the various positions provided for in the structure with the right kind of people.

Proper staffing ensures the following benefits to the organisation:

1. helps in discovering and obtaining competent personnel for various jobs;
2. makes for higher performance, by putting the right person on the right job;
3. ensures the continued survival and growth of the enterprise through the succession planning for managers;
4. helps to ensure optimum utilization of human resources.

By avoiding overmanning, it prevents updo utilisation of personnel and high labour costs. At the same time, it avoids disruption of work by indicating in advance the shortage of personnel; and improves job satisfaction and morale of employees through objective assessment and fair rewarding of their contribution. Staffing function must be performed efficiently by all organisation. If the right kind of employees is not available, it will lead to wastages of materials, time, efforts, resulting in lower productivity and poor quality of products.

The enterprise will not be able to sell its products profitably. It is therefore essential that the right kind of people must be available in the right number at the right time. They should be given adequate training so that wastage is minimum: They must also be induced to show higher productivity and quality by offering them. proper incentives.

Staffing and Human Resource Management (HRM): The affiances and effectiveness of an organization in achieving its goals are determined to a great extent on the competence, motivation and general effectiveness of its human resources. Managing the human component or an organisation is the most important task because the performance of the organisation depends upon how well this function ” is performed. Human resource management is that part of management process which develops and managers the human element of the enterprise considering their resourcefulness in terms of total knowledge, skills, creative abilities, talents, aptitudes and potential for effectively contributing to the organisational objectives.

Human Resources Management is concerned with all aspects of managing the human resources of an organisation. More specifically, human resource management involves determining the organisation’s need of human resources, recruiting and selecting the best available employees, developing counselling and rewarding employees, acting as a liaison with unions and government organisations and handling matters related to the well being of employees. Each of these functions is necessary to some degree irrespective of type and size of the organisation.

Here we are providing Class 12 Accountancy Important Extra Questions and Answers Chapter 10 Accounting Ratios. Accountancy Class 12 Important Questions and Answers are the best resource for students which helps in class 12 board exams.

Class 12 Accountancy Chapter 10 Important Extra Questions Accounting Ratios

Accounting Ratios Important Extra Questions Very Short Answer Type

Question 1.
What will be the effect on current ratio if a bills payable is discharged on maturity? (CBSE SP 2019-20)
Answer:
The current ratio will increase

Question 2.
Debt Equity Ratio of a company is 1:2. Purchase of a Fixed asset for ₹ 5,00,000 on long term deferred payment basis will increase, decrease or not change the ratio?
Answer:
Increased

Question 3.
It is a simple arithmetical expression of relationship between two figures. Name the term.
Answer:
Ratio

Question 4.
The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they become due. Name a ratio used for this purpose.
Answer:
Current Ratio.

Question 5.
X Ltd. has a Debt-Equity Ratio at 3 : 1. According to the management it should be maintained at 1 : 1. What is the choice to do so?
Answer:
To increase the equity or reduce the debt.

Question 6.
How the solvency of a business is assessed by Financial Statement Analysis? (CBSE Delhi 2012)
Answer:
With the help of solvency ratios.

Question 7.
Assuming that the debt to equity ratio is 1 : 2, state giving reason, whether the ratio will improve, decline or will have no change in case equity shares are issued for cash. (CBSE Foreign 2006)
Answer:
Decrease.

Question 8.
Debt to equity ratio of a company is 08 : 1. State whether long term loan obtained by the company will increase, decrease or not change the ratio. (CBSE Outside Delhi 2008)
Answer:
Increase.

Question 9.
Inventory Turnover ratio of a company is 3 times. State, giving reason, whether the ratio improve, decline or do not change because of increase in the value of closing stock by ₹ 5,000. (CBSE Outside Delhi 2008)
Answer:
Decrease.

Question 10.
Trade Receivables Turnover Ratio of a company is 6 times. State with reason whether the ratio will improve, decrease or not change due to increase in the value of closing inventory by ₹ 50,000. (CBSE Foreign 2008)
Answer:
No change. .

Question 11.
If a company has earned ₹ 10,00,000 as profit before interest and tax, ROI is 20%. State the capital employed in the company.
Answer:
₹ 5,00,000

Question 12.
What will be operating profit if operating ratio is 88.94? (CBSE Delhi 2009)
Answer:
Operating Profit = 100 – 88.94 = 11.06

Question 13.
State with reason whether repayment of long-term loan will result in increase, decrease or no change of debt- equity ratio. (CBSE Outside Delhi 2010 Compt.)
Answer:
Decrease.

Question 14.
A company has Share Capital of ₹ 5,00,000, Reserves and Surplus of ₹ 2,00,000 and Debt Equity Ratio of 1.8 : 1. It has issued additional Share Capital of ₹ 2,00,000 for cash and bonus shares of₹ 1,00,000. What will be new Debt Equity Ratio?
Answer:
1.4 : 1

Accounting Ratios Important Extra Questions Short Answer Type

Question 1.
(a) Calculate Revenue from operations of BN Ltd. From the following information:

Goods were sold at a profit of 25% on cost.
(b) The Operating ratio of a company is 60%. State whether ‘Purchase of goods costing ₹20,000’ will increase, decrease or not change the operating ratio. (CBSE Delhi 2019)
Answer:
(a) Current Assets ₹8,00,000


(b) The operating ratio will not change, as there will be equal increase in purchases and closing inventory and hence cost of revenue from operation will remain unchanged.

Question 2.
(a) Calculate ‘Total Assets to Debt ratio’ from the following information:

(b) The Debt Equity ratio of a company is 1:2. State whether ‘Issue of bonus shares’ will increase, decrease or not change the Debt Equity Ratio.
Answer:
a)

Where Total Assets = Total liabilities
= Share capital + long-term borrowings + surplus + General Reserve + Current Liabilities +Long-term provisions
₹ 4,00,000 + ₹ 1 ,80,000 + ₹ 1,00,000+ ₹ 70,000 + ₹ 30,000 + ₹ 1,20,000
= ₹ 9,00,000
Debt = Long-term borrowings + long-term provision
= ₹ 1,80,000 + ₹ 1,20,000
₹ 3,00,000
b) Debt equity ratio of a company will not change due to issue of bonus shares, as neither the debt not equity is effected because R & S is converting into share capital.

Question 3.
The operating ratio of a company is 80%. State whether the following transactions will increase, decrease or not change the ratio :
(i) Purchased goes in íedit ₹ 20,000
(ii) Paid wae ₹ 5000
(iii) Redeemed ₹ 8000. 9% debentures
(iv) Sold goods ₹ 50,000 for cash
Answer:

Question 4.
From the following information of Shiva Ltd., calculate total assets to debt ratio : (CBSE Outside Delhi 2019)

Answer:
Total Assets to Debts Ratio = \(\frac { Total Assets }{ Long Term Debt }\)
= 15,40,000/3,00,000 = 5.13
Total Assets = Fixed Assets + Non Current investments + Currents Assets
= ₹ 15,40,000
Debt = Total Liabilities – Equity Share Capital – Preference Share Capital – Reserves & Surplus – Current Liabilities = 3,00.000

Question 5.
From the given information, calculate the following ratios
(i) Operating Ratio
(ii) Inventory Turnover Ratio Information:

Answer:

Question 6.
(a) Net profit after interest and tax of M Ltd. was ₹ 1,00,000. Its Current Assets were ₹ 4,00,000 and Current Liabilities were ₹ 2,00,000. Tax rate was 50%. Its Total Assets were ₹ 10,00,000 and 10% Long term debt was ₹ 4,00,000.
Calculate Return of Investment.

(b) Rate of Gross profit on Revenue from operations of a company is 25%. Its Gross profit is ₹ 5,00,000. Its Shareholders’ Funds are ₹ 25,00,000; Non-current Liabilities are ₹ 8,00,000 and Non-current Assets are ₹ 23,00,000.
Calculate its Working Capital Turnover Ratio.
Answer:
(a) Return on Investment = \(\frac { Profit before interest and tax }{ Capital employed }\) x 100
Profit before interest and tax = ₹1,00,000 + ₹1,00,000 + ₹40,000
= ₹240,000
Capital employed = ₹8,00,000
Therefore, Return on Investment = ₹2,40,000/₹ 80,00,000 x 100
= 30%

(b) Working Capital Turnover ratio = Revenue from operations/Working Capital
Gross Profit = ₹5,00,000
So, Revenue from operations = ₹20,00,000
Working Capital = Shareholders Funds + Non Current liabilities – Non Current Assets
= ₹25,00,000 + ₹80,00,000 – ₹2300,000
= 10,00,000
Working Capital Turnover ratio = ₹20,00,000/₹ 10,00,000 = 2 times

Question 7.
(a) From the following details, calculate opening inventory: Closing inventory ₹ 60,000; Total Revenue from operations ₹ 5,00,000 (including cash revenue from operations ₹ 1,00,000); Total purchases ₹ 3,00,000 (including credit purchases ₹ 60,000). Goods are sold at a profit of 25% on cost.
(b) Current Assets of a company are 17,00.000. Its current ratio is 2.5 and Liquid ratio is 0.95. Calculate Current Liabilities and Inventory.
Answer:
(a)


(b)

Question 8.
Find the value of current liabilities and current assets, if current Ratio is 2.5 : 1, liquid ratio is 1.2 : 1 and the value of inventory of the firm is ₹ 78,000.
Answer:

₹ 60,000 = Current Liabilities
Current Assets = 2.5 x ₹ 60,000
=₹ 1,50,000

Question 9.
From the following compute (a) Current Ratio (b) Quick Ratio

Answer:
(a)

(b)

Question 10.
From the following compute Current Ratio

Answer:

Question 11.
(i) What is meant by solvency of business?
(ii) From the following details obtained from the financial statements of Jeev Ltd., calculate interest coverage ratio:
Net Profit after tax ₹ 1,20,000,
12% Long-term Debt ₹ 20,00,000,
Tax Rate 40%
Answer:
(i) Solvency is the ability of a company to meet its long term financial obligations and. the interest on due
dates.

Question 12.
Akshara Ltd. has 8% Debentures of ₹ Interest Coverage Ratio.
Answer:

Question 13.
From the following information related toNaveen Ltd. calculate
(a) Return on Investment and
(b) Total Assets to Debt Ratio.
Information: Fixed Assets 75,00,000; Current Assets ₹ 40,00,000; Current Liabilities ₹27,00,000; 12% Debentures ₹80,00,000 and Net Profit before Interest, Tax and Dividend ₹ 14,50,000. (Delhi 2015)
Answer:

Question 14.
From the following compute:
(a) Debt to Equity Ratio
(b) Total Assets to Debt Ratio
(c) Proprietary Ratio

Answer:
(a)

Question 15.
Assuming that the Debt-Equity Ratio is 2:1, state giving reasons which of the following transactions would . (i) Increase; (ii) Decrease; Not alter the Debt-Equity Ratio:
(i) Issue of new shares for cash
(ii) Conversion of debentures into equity shares.
(iii) Sale of a fixed asset at profit.
(iv) Purchase of a fixed asset on long-term deferred payment basis.
(v) Payment to creditors (CBSE Guidance Notes 2014)
Answer:
Statement showing the effect of various transactions on Debt-Equity Ratio.

Question 16.
Calculate amount of Opening Trade Receivables and Closing Trade Receivables from the following figures:

Answer:

Question 17.
(i) What is meant by ‘Activity Ratios’?
(ii) From the following information calculate inventory turnover ratio; Revcnuc from operations 16,00,000; Average Inventory 2,20,000; Gross Loss Ratio 5%. (CBSE Outside Delhi 2016)
Answer:
(i) Activity Ratio: It refers to the ratio that are calculated for measuring the efficiency of operations of business based on effective utilisation of the resourcess.
Objective of its ratio is to pinpoint the efficiency with which assets are used for generating revenues.
Inventory Turnover Ratio \(\frac { Cost of revenue from operation }{ Average inventory}\)
Cost of revenue from operation = Revenue from operation + Gross loss.
= ₹ 16,00,000 + ₹ 80,000
= ₹ 16,80,000
Average Inventory = ₹ 2,20,000
Inventory Turnover Ratio = \(\frac { ₹ 16,80,000 }{ 2,20,000 }\)
= 7.64 Times.

Question 18.
Calculate Working Capital Turnover Ratio from the following

Answer:

Question 19.
Cost of Revenue from Operations = 3,00,000
Inventory Turnover Ratio = 6 Times
Find out the value of Opening Inventory, if opening inventory is 10,000 less than the closing inventory. (CBSE Guidance Notes 2014)
Answer:

Question 20.
(i) What is meant by ‘Profitability Ratios’?
(ii) From the following information calculate inventory turnover ratio; Revenue from operations ₹16,0,000; Average Inventory ₹ 2,20,000; Gross Loss Ratio 5%. (CBSE Outside Delhi 2016)
Answer:
(i) Profitability Ratio: Profitability ratio are calculated to assess the performance and efficiency of an enterprise. It is to analyse the earning capacity of the firm.

(ii) Inventory Turnover Ratio = \(\frac { Cost of Revenue from operation }{ Average inventory }\)
Cost of Revenue from operation = Revenue from operation + Gross loss.
= 16,00,000 + 80,000 ‘16,80,000
Average Inventory = ‘ 2,20,000
Inventory Turnover Ratio = \(\frac { 18,60,000 }{ 2,20,000 }\)
= 7.64 times.

Question 21.
(i) What is meant by ‘Liquidity of Business’?
(ii) From the following information calculate operating ratio.
Revenue from operations ₹ 6,80,000; Rate of Gross Profit on cost 25%; Selling expenses ₹ 1,44,000; Administrative expenses ₹ 73,000. (CBSE Outside Delhi 2016)
Answer:
(i) Liqudky of Business: A measure of the extent to which a business has cash to make immediate and short term obligation.
(ii)

Question 22.
(a) X Ltd. has a current ratio of 3.5: 1 and quick ratio of 2: 1. If excess of current assets over quick assets represented by Inventory is 24,000 calculate current assets and current liabilities.

(b) From the following information calculate Inventory Turnover Ratio. Revenue from Operations: 4,00,000 Average Inventory : ‘ 55,000. The rate of Gross Loss on revenue
from Operations was 10%. (CBSE Sample paper Delhi 2016, 2017)
Answer:
(a)

(b)

Question 23.
From the following caLculate the cross Profit Ratio and Working Capital Turnover Ratio:

Answer:
(a) Gross Profit Ratio = Gross Profit / Net revenue from operations + 100
Gross Profit = Revenue from Operations – Cost of revenue from Operations
= 30,00,000 – 20,00,000 ₹ 10,000
Net Revenue from operations = ₹ 30,00,000
Gross Profit Ratio = 10,00,000 / 30,00,000 x 100 = 33.3%

(b) Working Capital turnover ratio = Net revenue from operations/Working Capital
Net revenue from operations = ₹ 30,00,000
Working Capital = Current Assets – Current Liabilities = 6,00,000 – 2,00,000
= ₹ 4,00,000
Working capital turnover ratio = 30,00,000/4,00,000 = 7.5 times

Question 24.
(a) From the following information, compute ‘Debt-Equity Ratio’:

(b) The current ratio of X. Ltd is 2: 1. State with reason which of the following transaction would
(i) increase;
(ii) decrease or
(iii) not change the ratio:
(1) Included in the trade payable was a bills payable of 9,000 which was met on maturity.
(2) Company issued 1,00,000 equity shares of 10 each to the Vendors of machinery purchased. (CBSE Delhi 2014)
Answer:

Question 25.
From the following calculation:
(a) Net Profit Ratio
(b) Operating Profit Ratio

Answer:

(b)

Question 26.
The motto of Yash Ltd., an advertising company is ‘Service With Dignity’. Its management and work force is hard-working, honest and motivated. The net profit of the company doubled during the year ended 31.03.2014. Encouraged by its performance company decided to give one month extra salary to all its employees. Following is the Comparative Statement of Profit and Loss of the company for the years ended 31st March 2013 and 2014.

Answer:
Net Profit Ratio = Net Profit after taxi Revenue from operations x 100
As on 31.03.2013 = 3,00,000/10,00,000 x 100
As on 31.03.2014 = 6,00,000/15,00,000 x 100
= 40%

Question 27.
Assume that the Debt-Equity Ratio is 2 : 1. State giving reasons whether this ratio would increase, decrease or remain unchanged in the following cases (Any two):
(a) Purchase of fixed asset on a credit for 2 months.
(b) Purchase of fixed asset on a long-term deferred payment basis.
(c) Issue of new shares for cash.
(d) Issue of bonus shares.
(e) Stile of fixed asset at a loss of ₹3,000. (CBSE 2010 Delhi)
Answer:
(a) Purchase of fixed asset on a credit for 2 months will not change debt-equity ratio because there is no change in shareholders’ funds.

(b) Purchase of fixed asset on a long-term deferred payment basis will increase debt equity ratio because of increased long-term debts. (Calculated on the basis of liabilities side approach)

(c) Issue of new shares for cash will decrease debt-equity ratio because of increased shareholders’ funds.

(d) Issue of bonus shares will not change debt-equity ratio because of not change because one item of shareholders’ funds has been replaced by another item.

(e) Sale of fixed assets at a loss will increase debt-equity ratio because of reduced shareholders’ funds due to sale of fixed assets at loss.

Question 28.
The gross profit ratio of a company is 50%. State with reason whether the decrease in rent received by ₹ 15,000 will increase, decrease or not change the ratio. (CBSE 2009 Compartment Delhi)
Answer:
Gross profit ratio will not change because decrease in rent received does not affect gross profit.

Question 29.
The debt equity ratio of Ratan Ltd. is 3 : 1. Giving reasons, state whether the ratio will increase, decrease or not change because of the following transactions:

(i) Issued equity shares of ₹ 1,00,000.
(ii) Discounting a bill of exchange of₹ 50,000 at a discount of 10%.
(iii) Redemption of debentures of₹ 70,000. (CBSE 2013 Compartment OD)
Answer:
(i) Issue of equity shares will decrease debt-equity ratio because of increased shareholders’ funds.
(ii) Discounting a bill of exchange will increase debt-equity ratio because of lower shareholders’ funds.
(iii) Redemption of debentures will increase debt-equity ratio because proportion of decrease in total debts is lower than proportion of decrease in shareholders’ funds.

Question 30.
The quick ratio of a company is 2 : 1. State giving reasons (for any four), which of the following would improve, reduce or not change the ratio:
(a) Purchase of machinery for cash,
(b) Purchase of goods on credit,
(c) Sale of furniture at cost,
(d) Sale of goods at a profit,
(e) Cash received from debtors. (CBSE 2011 Compartment Delhi)
Answer:
(a) Purchase of machinery for cash will decrease quick ratio because of lower amount of quick assets.
(b) Purchase of goods on credit will reduce quick ratio because there is no change in quick assets while current liabilities have increased.
(c) Sale of furniture at cost will.improve quick ratio because of increase in quick assets.
(d) Sale of goods at a profit will improve quick ratio because of increase of quick assets.
(e) Cash received from debtors will not change quick ratio because one type of quick asset has been converted into another type of quick asset.

Question 31.
The Quick ratio of a company is 0.8 : 1. State with reason whether the following transactions will increase, decrease or not change the quick ratio :
(1) Purchase of loose tools ₹ 2,000.
(2) Insurance premium paid in advance ₹ 500.
(3) Sale of goods on credit t 3,000.
(4) Honoured a bills payable ₹ 5,000 on maturity. (Delhi 2017)
Answer:

Question 32.
The proprietary ratio of M. Ltd. is 0.80 : 1. State with reasons whether the following transactions will increase, decrease or not change the proprietary ratio :
(i) Obtained a loan from bank ₹ 2,00,000 payable after five years.
(ii) Purchased machinery for cash ₹ 75,000.
(iii) Redeemed 5% redeemable preference shares ₹ 1,00,000.
(iv) Issued equity shares to the vendors of machinery purchased for ₹ 4,00,000. (Outside Delhi 2017)
Answer:

Question 33.
The Current Ratio of a company is 2 : 1. State giving reasons which of the following would improve, reduce or not change the ratio:
(a) Cash paid to trade payables
(b) Sale of fixed tangible assets for cash
(c) Issue of new shares for cash
(d) Payment of final dividend already declared.
Answer:

Question 34.
The Current Ratio of A Ltd. is 4.5 : 1 and Liquid Ratio is 3: 1. Inventories are 3,00,000. Calculate Current Liabilities. (CBSE Guidance Notes 20M)
Answer:

Question 35.
From the following information, compute Debt-Equity Ratio:

Answer:
Debt-Equity Ratio = \(\frac { Long-term Debts }{ Shareholders Funds }\)
Long-term Debts = Long-term Borrowings + Long-term Provisions
= ₹ 2,00,000 + ₹ 1,00,000 = ₹ 3,00,000
Shareholders’ Funds = Non-current Assets + Current Assets – Long-termBorrowings – Longterm Provisions – Current Liabilities
₹3,60,000 + ₹90,000 – ₹2,00,000 – ₹ 1,00,000 – ₹50,000
= ₹4,50,000 – ₹ 3,50,000 = ₹ 1,00,000

Debt-Equity Ratio = \(\frac { ₹ 3,00,000 }{ ₹ 1,00,000 }\)
= 3:1

Question 36.
From the following information, compute ‘Proprietary Ratio’:

Answer:
Proprietary Ratio = \(\frac { Shareholders’ Funds }{ Total Assets }\)
Shareholders’ Funds = Non-current Assets + Current Assets – Long-term Borrowings – Long-term Provisions – Current Liabilities
= ₹ 3,60,000+₹ 90,000 – ₹ 2,00,000 – ₹ 1,00,000 – ₹ 50,000= ₹ 1,00,000
Total Assets = Non-current Assets + Current Assets
= ₹ 3,60,000 + ₹ 90,000 = ₹ 4,50,000
Proprietary Ratio = \(\frac { ₹ 1,00,000 }{ ₹ 4,50,000 }\)
= 22.22%

Question 37.
Calculate Working Capital Turnover Ratio from the following:

Answer:

Question 38.
For the year ended March 31,2017, Net Profit after tax of K X Limited was ₹ 6,00,000. The company has ₹ 40,00,000 12% Debentures of ₹ 100 each.
(a) Calculate Interest Coverage Ratio assuming 40% tax rate.
Answer:
(a) Interest Coverage Ratio= Net Profit before Interest and Tax/ Interest on Long-Term Debts
Net Profit after Tax = 6,00,000 Tax Rate = 40%
Net Profit before tax 100/(100 – Tax) x Net Profit after tax
= 100/60 x 6,00,000= 10,00,000
Net Profit before Interest & Tax – Net Profit before tax + Interest on Long-Term Debts
= 10,00,000 + 4,80,000 = 14,80,000
Interest Coverage Ratio = Net Profit before Interest and Tax Interest on Long-Term Debts
= 14,80,000 / 4,80,000 = 3.08 Times

Question 39.
(a) Net profit after interest and tax ₹ 1,00,000; Current assets ₹ 4,00,000; Current liabilities ₹ 2,00,000; Tax rate 20%; Fixed assets ₹ 6,00,000; 10% Long term debt ₹ 4,00,000. Calculate Return on Investment.

(b) Rate of Gross profit on cost of a company is 25%. Its Gross profit is ₹ 5,00,000. Its shareholders’ Funds are ₹ 12,00,000; Current liabilities are ₹ 3,00,000 and Current Assets are ₹ 10,00,000. Calculate its Working Capital Turnover ratio. (Compt. Delhi 2017)
Answer:

Question 40.
With the help of the following information, calculate Return on Investment. Net profit after interest and tax ₹6,00,000; 10% Debentures ₹ 10,00,000; Tax @ 40%; Capital Employed ₹ 80,00,000. (CBSE Compartment Delhi 2015)
Answer:
Return on Investment = Net Profit before Interest, tax and Dividend/Capital Employed x 100
Net Profit before Tax = 6,00,000 x 100/60 = 10,00,000
Net Profit before Interest, tax and Dividend 10,00,000 + 1 ,00,000 = 11,00,000
Capital Employed = 80,00,000
Return on Investment = 11,00.000/80,00,000 x 100
= 13.45%

Question 41.
Calculate Gross Profit Ratio from the following:

Answer:
Gross Profit Ratio = \(\frac { Gross Profit }{ Revenue from Operations }\) x 100
Gross Profit = Revenue from Operations – Cost of Revenue from Operations
Cost of Revenue from Operations Opening Inventories + Purchases – Returns outwards + Wages – Closing Inventories
= 50,000 + 1,50,000 – 20,000 + 1,00,000 – 40,000
= 1,50,000
Gross Profit = 2,50,000 – 1,50,000
= 1,00,000

Gross Profit Ratio = \(\frac { 1,00,000 }{ 2,50,000 }\) x 100 = 40%

Question 42.
From the following Calculate Operating Ratio

Answer:

Question 43.
From the following calculate Return on Investment (or Return on Capital Employed)

Answer: