CBSE Class 11

Here we are providing Business Studies Class 11 Important Extra Questions and Answers Chapter 10 Internal Trade. Business Studies Class 11 Important Questions with Answers are the best resource for students which helps in class 11 board exams.

Class 11 Business Studies Chapter 10 Important Extra Questions Internal Trade

Internal Trade Important Extra Questions Short Answer Type

Question 1.
Differentiate between wholesalers and retailers.
Answer:
Difference between Wholesaler and Retailer:

Question 2.
Mention the services provided by wholesalers to retailers.
Answer:
Services to Retailers:
Wholesalers render the following services to retailers –
1. Wide Variety: A retailer has to stock a large variety of products to meet the individual tastes and needs of its customers. Since he can easily purchase the required goods of different varieties from a wholesaler, he is relieved of the botheration of collecting goods from several manufacturers.

2. Regular Supplies: A wholesaler is always well stocked with different types of goods. Therefore, the retailers are assured of a quick and regular supply of their requirements from time to time. They need not maintain a large stock of goods and have no fear of running out of stock. The wholesaler serves as their warehouse keeper from whom they can quickly replenish their stocks. The wholesaler saves the retailers from the trouble of searching out and assembling goods from several manufacturers.

3. Specialisation: The wholesalers generally specialize in one line of goods. They buy good quality goods at the minimum possible price from the manufacturers. Retailers receive the benefit of such specialization when they buy goods from wholesalers. Wholesalers advise retailers on matters like quality, price, and timing of purchase. They inform the retailers about the new products, their uses, quality, prices, etc. They may also advise on the decor of the retail outlet, allocation of shelf space, and demonstration of certain products.

4. Publicity: Wholesalers advertise their goods regularly. Such publicity helps retailers in increasing their sales. Some wholesalers also guide retailers’ in-store layout and selling techniques. The retailers are benefited as it helps them in increasing the demand for various new products.

5. Credit: Wholesalers grant liberal credit facilities to retailers. As a result, retailers can carry on a large volume of business even with a small amount of working capital. They would be placed in a difficult position if they were to buy goods on cash payment.

Question 3.
List the various types of retail trade organizations.
Answer:
Types of retail trade organization:
Retail traders may broadly be classified into two categories –

Question 4.
Explain the automatic vending machine as a source of retail trade.
Answer:
Automatic Vending Machines:
A vending machine is a new and complementary form of retailing. It is a slot machine operated by coins or tokens. The buyer inserts the coin or a token into the machine and receives a specified quantity of a product from the machine. Vending machines are used to sell prepacked and low-cost products of mass consumption, soft drinks, hot beverages, cigarettes, tickets, etc. In Delhi, Mother Dairy sells milk through vending machines.

The vending machines have become popular due to convenience in the handling of products and in the collection of payment. The customer gets a fresh supply of goods with uniform weight and quality. Moreover, vending machines can sell goods at places and at times when other types of retailing are not convenient or economical. There is a saving of labor costs. But initial investment in the machine is quite high. The machine requires regular repairs and maintenance.

The merits of vending machines are as under –

1. It is convenient for the customers to buy the goods from the machine.
2. Machines provide quick service.
3. Machine develop the habit of self-service among the customers.
4. Special peeks are to be developed by manufacturers that suit the machine.
5. Care has to be taken about replenishing the stock of the machine regularly.
6. Machines are useful in selling only consumer goods that are usually edible in nature i.e. candies, chocolate, soft drinks, coffee, etc.

Question 5.
Write an essay on the organization of wholesale trade.
Answer:
Organization of Whole Trade Board of Directors

Wholesale trade is generally carried on a large scale and a large amount of capital investment is required for it. Therefore, a wholesale firm is generally organized in the form of a joint-stock company or a partnership. The company works under the overall supervision of the board of directors and the managing director. The organization is divided into sections. Every section is managed by a sectional head. All sectional heads are responsible to the managing director. Each section is divided into various departments. The head of each department is accountable to the sectional head concerned.

The organization of wholesale trade may be divided into the following sections –
1. Administrative Section:
This section looks after the overall planning and control of the wholesale trade. It is usually divided into several departments.
(a) Records and filing department: This department handles the firm’s records and files. Filing relates to having records of the business correspondence for future reference. Proper binding is also necessary for an easy and quick location of files, whenever required.

(b) Correspondence department: This department is responsible for the receipt, typing, and despatch of all letters. Timely and prompt reply of all incoming letters is essential for the success of a business. A copy of every letter sent by the firm is sent to the filing department for ready reference.

(c) Accounts and finance department: This department is concerned with the proper maintenance of the firm’s accounts. These accounts are related to the firm’s purchases, sales, receipts, payments, debtors, creditors, etc. This department is also responsible for preparing budgets and raising the necessary funds for a business. This department works under the supervision and control of the chief accountant and clerks working under him.

(d) Labour department: This department is responsible for the recruitment, selection, training, remuneration, promotion, etc. of employees.

2. Cash Section:
This section is concerned with the receipt and payment of cash. It is the responsibility of this section to ensure that all payments are made promptly and on the due dates so that the firm enjoys a good credit standing in the market. Similarly, this department takes steps for prompt collection of debts from the firm’s debtors in order to minimize bad debt losses. For handling small payments, there is a petty cashier who is provided a small amount of impress cash. When he has spent the entire amount, the head cashier advances him some more important cash.

In some wholesale firms, there is a separate credit and collection department which keeps a check on the credit sales.

3. Planning and Executive Section: This section consists of the various functional departments.
(a) Buying department: This department is concerned with buying goods in bulk from different producers. Before buying goods it invites Quotations from the producers. After comparing different quotations with regard to price, quality of goods, delivery period, etc. it places its orders.

When the goods are received, they are compared with the order. If there is any discrepancy or damage to goods, the matter is duly settled with the supplier. After receiving the goods, arrangements are made for their storage. The buying department is headed by an expert buyer who has complete knowledge of the various producers and the market conditions.

(b) Sales department: This department is responsible for selling the goods to retailers. It conducts market surveys to find out the tastes, fashions, etc. of the customers and other market conditions. This information is passed on to the buying department. The sales department also handles the complaints of retailers. The sales manager is the head of this department. Several salespersons work under him. Their recruitment, training, remuneration, etc. is also the responsibility of the sales manager.

(c) Publicity department: This department is concerned with advertising goods in order to create demand. It also arranges fairs and exhibitions of products.

(d) Despatch department: The function of this department is to despatch goods to various retailers according to the instructions it has been given. It handles packing, marking, and labeling of goods and arranges for the delivery of goods to the retailers. Many wholesale firms have a separate warehousing department also.

Question 6.
What are multiple shops or chain stores? Explain its features, merits, and limitations.
Answer:
Chain-Stores (Meaning): Chain stores or multiple shops are a group of branch shops dealing in the same line of goods under single ownership and centralized management. A chain store is a chain of identical retail stores situated in different localities. Such a chain may be established by a manufacturer or by a merchant. It is known as chain stores in the United States and multiple shops in Europe. Bata Stores and DCM Stores are examples of chain stores in India. These normally deal in standardized and branded consumer products that have rapid sales turnover.

Distinctive Features:

1. Large Size: Chain stores are an example of large-scale retail establishments. These are located popularly in the area where a sufficient number of customers can be approached.
2. Company Form: These stores are organized as a joint-stock company. All stores are owned and controlled by the same company. There are centralized management and control.
3. Specialization: All stores in a chain deal in the same line of products, usually necessities.
4. Centralized Purchasing: Goods for all chain stores are purchased by the head office. Through centralized purchasing. These shops enjoy economies of scale.
5. Decentralized Selling: Chain stores are situated in different parts of the city and country. These shops are run by the same organization and have identical merchandising strategies.
6. Elimination of Middlemen: A chain store is a form of direct selling in which middlemen are eliminated.
7. Uniform Price: Goods are sold in all the stores at a fixed price.
8. Standardization: Decoration of stores and window displays follow a uniform style or pattern.
9. Cash Sales: Goods are sold on a cash and carry basis. There is no loss on account of bad debts.

Merits:
1. Economics of Scale: Goods for all chain stores are purchased by the head office. Such bulk buying results hr several economies like heavy discounts, saving in transport costs, etc. Benefits of specialization and centralized management are also available. Large capital permits expansion and growth.

2. Convenient Location: Chain stores are located to suit the conveniencFoftheeustometa. This helps in increasing sales turnover and in retaining contact with customers. These shops me located in fairly populous localities where a sufficient number of customers can be approached.

3. Low Operating Costs: Chain stores sell goods on a cash basis H so that there is no loss due to bad debts. There is an economy in advertising because one advertisement is enough for all the stores. Large and rapid turnover and common advertising are possible.

4. Low Price: Due to low operating costs and the elimination of middlemen, goods are sold at relatively cheaper rates. A manufacturer can establish direct contact with customers through chain stores.

5. Flexibility: If one store out of stock, supplies can be easily transferred from a nearby store belonging to the same chain. Such inter-branch transfers help to avoid loss due to shortage or surplus of stock. If a branch is not doing well it can easily be closed down and a new one can be opened in another place without really affecting the profitability of the organization as a whole.

6. Public Confidence: Fixed prices arid standard quality help to increase confidence among consumers. Customers can easily identify the chain stores on account of uniform decoration and design.

7. Diffusion of Risk: Lack of demand in one area 4oes affect the
sales in other stores. But the loss incurred by one store can easily be absorbed by profits made in other stores reducing the risk of an organization.

8. Simplicity of Control: Goods are sent to the different stores by the head, office and cash receipts are sent by each branch to the head office. Price and the other policies are uniformly laid down for all the stores. In this way, the office can exercise effective supervision and control over all the branches.

Limitations:
1. Limited Choice f Ghain deal in a limited range of products and do not offer a wide variety of choice to customers,

2. Lack of Personal Touch: The paid employees of chain stores do not take a personal interest in each and every customer Tltey adopt a ‘take it or leave it’ attitude towards the customers. The owner loses all personal contracts with the customer Lack of initiative in the employees some times leads to indifference and lack of personal touch in them

3. Lack of initiative: The employees of chain stores have no freedom to make decisions. Rigid control and uniform policies discourage initiative on their part. They cannot exhibit business opportunities or adapt to local needs. This makes them habitual of looking up to the head office for guidance on all matters and takes away creative skills of their own.

4. Heavy Overheads: The head office has to incur heavy expenditure on rent, wages, salaries, furniture, fixtures, etc.

5. No Facilities: Customers do not get credit, home delivery, or other facilities. Therefore, chain stores do not attract rich customers. This discourages certain types of people to visit multiple shops.

6. Local Competition: Chain stores are considered a threat to small independent retail stores. Therefore, local retailers are hostile towards these stores and offer tough competition.

7. Remote Control: The head office is usually far removed from the stores. Therefore, there is a lack of close contact between them.

Question 7.
Super Market is the most famous retail trade-in city. Mention its merits and demerits.
Answer:
Super Market (Self-Service Store):
Meaning:
A supermarket of Bazar is a large retailing business unit selling a wide variety of consumer goods such as food and grocery items on the basis of the low-margin appeal, wide variety, and assortments, self-service, and heavy emphasis on merchandising appeal.

A supermarket deals mostly in food and grocery items and convenience goods like household goods, hosiery items, cosmetics, medicines and drugs, electronic appliances, etc. It is generally situated at the main shopping center. Goods are kept in open racks, and the price and quality are clearly labeled on the goods.

A consumer can make a selection of goods moving from counter to counter and pick up the selected goods and place them in a trolly. After he has completed his selection, the trolly will be carried to the exit where a person computes the total charge and the buyer makes payment to the cashier and then takes delivery of goods. Thus, supermarket follows the policy of self-help’ by the customers. The customers are not pressurized by the salesmen. That is why many people are attracted to the supermarket.

The supermarket is organized on a departmental basis and a customer can buy various types of goods under one roof. A supermarket can be differentiated from the departmental store on the main ground that there are no salesmen at the super Bazar to deal with the customers. The customers are free to choose the commodities of their choice. Moreover, a supermarket does not offer certain services which are usually provided by a departmental store. For instance, a supermarket does not allow credit sales and does not provide free home delivery service.

Features:
The main features that distinguish a supermarket from other retail institutions are discussed below –

1. A supermarket generally carries a complete line of food items and groceries in addition to non-food convenience goods including drugs, cosmetics, household goods, etc.
2. Its organization resembles a departmental store. A customer can buy his requirements under one roof.
3. A supermarket operates on the principle of self-service. There are no salesmen or shop assistants to help or pressurise the customers in a supermarket. That is why it is known as a self-service store. The distribution cost is, therefore, lower.
4. A supermarket is a low-cost retail institution in comparison with Other types of retail stores. The prices of the products are generally lower than other types because of bulk purchasing, lower operational cost, and low-profit margins.

Merits:
The following are the merits of a supermarket –
1. A supermarket is a large-scale retailing store. It enjoys all the benefits of large-scale buying and selling. Because of this reason and because of large turnover, its operating costs are lower and it can sell goods at cheaper rates. These outlets are not only convenient but also economical to buyers for making their purchases.

2. Considerable attention is paid to the package of the products since there are no salesmen to convince and pressurize the customers. Many people like this distinct feature of self-service. They enjoy the freedom to ccunpar£-iii£fereat4minda of Q.product- and making a selection of goods without pressure from anybody.

3. The customers can make all their purchases under one roof. A supermarket provides goods to customers at cheaper rates because of large turnover and absence of salesforce. The administrative and distribution overheads per unit of a product are also lower.

4. Since supermarket sells only on a cash basis, there is no chance of bad debts.

Demerits:
A supermarket suffers from the following drawbacks –
1. There are certain people who give greater weightage to personal attention. Such people do not like shopping through the supermarket as there are no salesmen.

2. Supermarkets cannot handle commodities that require personal explanation by the salesmen. It works on the self-service principle.

3. Some customers handle the goods carelessly and misuse the ‘ opportunity of self-service and selection. This may cause loss to the supermarket.

4. In practice, supermarkets have not been able to create low price appeal among the customers because of higher overhead expenses.

5. Establishment and, running off a supermarket requires huge; investment, and its turnover should be higher to keep the overhead expenses under reasonable limits. Thus, a supermarket cannot be established if the necessary capital is not available and a Jarge turnover is not expected. In other words, supermarkets are not suitable for smaller towns.

Question 8.
Write in brief about Telemarketing or Teleshops in the modern world.
Answer:
Telemarketing (Teleshops): Telemarketing means a form of non-store retailing in which the seller initiates contact with a shopper ‘ and closes the sale over the phone. A telemarketer may procure the names and telephone numbers of his prospective customers from the telephone directory and other sources.

Popular products such as electrical appliances, health products, and educational aids and services such as magazine subscriptions, credit-card membership, etc. can be promoted through telemarketing. ICICI and Citibank follow this technique to popularise their credit cards among people.

A telemarketer can advertise the product, its features, uses, and price through a TV network, say Doordarshan, Metro, Zee TV, or Sony TV channel. The interested customer can place an order directly over telephone, fax, e-mail, or by post to the advertiser, say, Asian Sky Shop. The delivery may be effected through courier, or post office, or the manufacturer’s distribution van. Payment is to be made at the time of delivery. Telemarketing is a very convenient method of shopping. It is becoming popular in India.

From the point of view of the customer, buying or ‘dial-n-order’ is a very convenient method of shopping. One need not visit the store for shopping. One can place an order over the phone and make payment through a credit card. Teleshopping and getting free home delivery at residence is not only convenient but also cheaper as no middlemen are involved. The popularity of telemarketing would be attributed to the growing focus on customers.

From the point of view of the seller, telemarketing is a cheaper method of retailing. It saves expenditure on retail showrooms and salesforce. Even a firm with retail outlets or stores in major cities can reach customers at far off places through telemarketing. The growing satellite networks have created brand awareness and facilitated Telebuying and selling. The industry grew rapidly over 5 years to reach a size of2000crores with over one million consultants.

Telemarketing is a major tool of direct marketing in the USA and is gradually gaining acceptance in India. But telemarketing has the disadvantage of lack of personal touch with the buyers. Moreover, the buyer can’t inspect the goods personally before placing an order. Some people don’t like teleshopping. They get irritated when they receive unsolicited calls from the call centers, say, for the marketing of credit cards or personal loans.

Question 9.
What are Internet or Online marketing, its benefits, and the difference between traditional marketing and online marketing?
Answer:
Internet Marketing:
Internet marketing is emerging as an important form of e-commerce, In this form of marketing, orders are received and processed on the internet. The internet is the world’s largest computer network. In fact, it is a ‘network of networks’ of computers throughout the world. A computer network is basically a bunch of computers hooked together for receiving and transferring information.

The facility of linking millions of computers is provided through the internet. The use of the internet by marketers or producers for the purpose of selling their products is known as internet marketing. Internet marketing can take several forms e.g. Online services, worldwide webs (www), and CD ROMs.

Internet:
The internet is a global web or computer network that makes instantaneous global communication possible. Internet usage has surged with the development of the user-friendly World Wide Web (www) and Web browser software such as Microsoft Internet Explorer or Netscape Navigator. Users can surf the internet and send e-mails, shop for products, and can get news and other information.

The internet itself is free though the user has to pay some fee to the Internet Service Provider to be hooked up to it. Thus, the internet is changing the way marketing is done. Internet technology provides marketers with faster ‘ more efficient and much more powerful methods of designing, promoting, and distributing products, conducting research, and gathering market information.

Online Marketing:
The users of the internet are younger, educated, and more affluent. Business firms can use the internet to reach such users by sending catalogs, price lists, etc. through e-mail. Besides advertisement, the sellers can attend to the queries of the buyers and clinch the deal on-line. The buyers can on their own also log on the t computer to know about the products of different manufacturers and decide to buy the products that suit them.

The use of electronic channels for the direct marketing is on the rise these days. The term e-commerce describes a wide variety of electronic platforms such as the sending of purchase orders to suppliers via electronic data interchange (EDI), the use of fax and e-mail to conduct transactions, the use of ATMs (automated teller machines) and smart cards to facilitate payments and obtain digital cash and the use of internet an online > services.

Thousands of business firms have established their presence on the internet. A new firm, big or small, can do so in two ways:
(a) It can buy space on a commercial on-line service; or (b) It can open its own website. In the case of online service, the firm has to pay an annual fee and also a small commission as a percentage of sales.

But these days, companies prefer to set up their own websites. Such a website offers information * about the company’s history, products, and services. The company can interact with anyone visiting the website and explore the possibility of concluding sales.

Benefits of Online Marketing:
The marketers can enjoy the following benefits of internet marketing –

1. The cost of digital catalogs is much less than the cost of printing and mailing paper catalogs;
2. Digital catalogs can be revised quickly and without much difficulty.
3. The marketers achieve economy in operations. They have to maintain low inventories and incur low costs on storage and insurance.
4. Internet marketing helps in relationship building with the customers. Online marketers can interact with customers and learn from them and improve their products.
5. Marketers can contact the people who have visited their website and make them attractive offers to affect sales.
6. Orders can be received quickly.
7. The marketers can approach customers living anywhere in the world. Thus, there is no distance gap between the sellers and the buyers.
8. Marketers can size up the audience, know how many people visited their online site. This information helps in improving sales offers and advertisements.
9. Online marketers can build relationships with customers by interacting with them.

Comparison of Online and Traditional System of Marketing

Question 10.
A franchise is a buzzard in the modern marketing world. What are its merits and limitations?
Answer:
Franchise: Franchise is a commercial concession by which a company or person grants a retailer the right of selling its products or services in a specified area. The owner of a product (known as a franchiser) permits another business firm (called franchisee) to sell the product in exchange for royalty payments.

The franchise is the right or privilege to use an established business system is “a continuing relationship in which franchisee provides licensed privilege to do business plus assistance in organizing, training, merchandising and management in return for a consideration from the franchise.” A franchising operation is a contractual relationship between a franchiser and franchisee.

Thus, the franchise is a system under which the owner of a product or service grants the franchisee the exclusive right to distribute the product or service in a specific geographical area on specified terms and conditions. The owner of the product or service who grants the right to distribute is known as the franchiser. The person or firm who acquires the right or franchise is called the franchisee.

A franchise system is one in which a manufacturer grants selected retailers the exclusive right to sell their products or services in specified areas. Such retailers are required to promote and sell the product in a specific manner. There is a written agreement between the franchiser (supplier) and the independent franchisee (retailers) on the terms and conditions of the franchisee.

The franchise is found in several types of businesses. Consumer items such as cosmetics, readymade garments, television sets, V.C.R., music system, computers, machinery and equipment, automobiles, servicing of consumer durables, computer training, real estate are some of the examples where the franchise is popular. Wimpy, Nirulas, Essex farms, Snowhite Drycleaners, etc. are notable examples of franchises in India.

The franchiser receives either a fixed sum or periodical royalties for allowing the use of trademark and providing training. The franchisee pays for a reliable and proven business. He gets professional advice and national sales promotion support from the franchiser. Generally, all franchised outlets of a product or service have an identical trademark, standard symbols, standardized products, and uniform business policies. The franchisee has to raise his own finances.

Franchise arrangements may be of the following types –
1. Product and Trade Name Franchise: In this arrangement, the franchisee acquires the right to use the product and trade name of the franchiser. The franchisee can also use window-display, standardized operating procedures,s and a prescribed territory to the franchisee.

2. Exclusive Dealership: Under this system, a manufacturer signs an exclusive agency contract, with a distributor. The distributor gets the exclusive right to sell the product within a specified geographical area. The distributor agrees to certain conditions of the manufacturer, e.g. adequate stock, prices to be charged, the services to be provided, etc. The exclusive dealership is popular in automobiles.

3. Conversion Franchising: Herein an established businessman gets affiliated with a franchiser. The two share the benefits of a franchising relationship.

4. Combination Franchising: In this arrangement, two franchises share a location and management, site selection, training of the staff, financing, and marketing, record keeping, and production business also arranged.

5. This is a fully integrated and continuous relationship between a franchiser and franchisee. The relationship covers total operations of the franchise including product or service, trademark quality control, strategy, etc. Fast food restaurants such as McDonald’s are an example of such a franchise.

Merits:
The main advantages of the franchise are as follows –
1. Availability of Established Brands: The franchisee acquires the right to use the popular brand name or trademark of the franchiser. Association with an established name provides a ready market. A franchise gives a quick and easy start in business. There are greater chances of success of the franchisee because the products are well known.

2. Standardised Goods and Services: The reputation of the franchiser depends largely on the quality of products and services supplied by the franchisee. The franchiser takes steps to ensure that products and services in all the franchised outlets are uniforms. He provides the raw materials and keeps close control of the quality of goods. The quality of products helps the franchisee to satisfy his customers by offering quality products.

3. Advertising Support: The franchiser carries on advertising. The franchisee gets the benefit of such advertising and the reputation or goodwill of the franchiser. The products are well advertised in various media and are known to the people. It is easier for the franchisee to promote the sale of products.

4. Financial Assistance: Franchiser offers a wide range of financial assistance to the franchisee in the form of short-term credit, lower down payment, flexible repayment terms, etc. Financial assistance is available for plant and equipment, accounts receivable, etc.

5. Managerial Training: Franchisers provide technical and managerial training to franchisees and their staff. Prior to opening a franchise, counseling and training are provided in the professional and profitable operation of the business and in the fields of inventory management, accounting, sales promotion, advertising, etc. Assistance is also available in site selection, marketing research, in addition to ongoing business assistance.

6. Established Business Methods: The franchisee can capitalize on the accumulated knowledge, experience, and skill of the franchiser. He does not have to build a business from scratch. The franchisee buys a business that has proved its success and can, therefore, avoid many of the pitfalls faced by small business owners. The franchiser makes huge investments in the innovation of products and research and development.

7. Economies of Scale: Due to the group or cooperative purchasing,
costs of products are reduced. Mass buying provides economies of scale. The distribution system between franchisor and franchisee in the shortest possible time. Marketing costs are lowered.

8. Uniform Control System: All franchising outlets are subject to the uniform control system. Standardized inventory control enables the franchiser to have more accurate information about the merchandise available and needed. Standardized reporting procedures are also helpful. It enables the franchiser to increases his goodwill and reputation.

9. Higher Success Rate: On average, franchises survive better than other business start-ups. The success rate, of franchises, is higher than that of independently owned businesses, Therefore, franchises are more attractive to middle-aged people who are less willing to take full risk of starting their own business. Potential income can be higher than independent small businesses.

10. Benefits to Franchiser: Franchise enables the franchiser to enter a new business territory at a low cost. It is a relatively quick way to raise cash and expand business operations. Owner-operators (franchises) are highly motivated. Franchises can be used as outlets for goods and services manufactured or supplied by the franchiser. This provides economies of scale in manufacturing and purchases. The franchiser can exercise control over products, services, and processes. The franchiser gets feedback about the product’s popularity from the franchisee.

Limitations:
The franchise system suffers from the following disadvantages –
1. Fees and Royalties: Costs of a franchise include license fees and fees for the initial processing of the application. It is payable when the franchise agreement is signed and is not refundable. Other costs include down payment on equipment, decoration of the outlet, office furniture, publicity on opening, etc. The franchise has to bear travel and living expenses while undergoing training. In addition, He has to pay a royalty on a continuing basis.

2. Lack of Freedom: The franchisee does not have the freedom to run a business like an independent owner. He has to conform to the controls exercised by the franchiser to ensure quality and uniformity of standards of product or service. Quality standards and specifications for all items used in the franchise are established. The freedom of purchasing is also restricted.

3. Limited Product Line: The franchiser controls the products or services sold at the franchisee’s outlet. The franchisee cannot introduce other products except those permitted by the franchiser.

4. Restriction on Sale of Franchise: Sale, transfer, or assignment of ownership interest requires the franchiser’s approval. Even when the sale is approved, the new franchisee is required to conform to the terms and conditions of the franchise.

5. Disadvantages to the Franchiser: The franchiser cannot treat or control the franchisees like his employees. Franchisees tend to become quite vocal and demanding if they feel they are not getting fair treatment or do not see benefits in the franchise network. Extensive communications are necessary and the costs of visiting the franchisees at distant places can be high. The franchiser has to bear the expenses of administration, training, advertising, legal services, supervision, etc.

Question 11.
Wholesalers are parasites for society and should be eliminated as soon as possible. Give arguments in favor and against of elimination of wholesalers.
Answer:
Elimination of Wholesalers: Wholesalers perform several useful functions and render many vital services. They provide a ready sales outlet to manufacturers and serve as a source of a steady supply of goods for retailers. Therefore, they provide a valuable link between producers and retailers. But in recent years there has been a trend towards the elimination of wholesalers.

Growth of large-scale retailing institutions, development of quick means of transport and communication, growth of cooperative movement among consumers, the rise of specialized advertising agencies, etc. have made it possible, in certain cases, to establish a direct link between producers and retailers.

Arguments in Favour of Elimination: Some people insist that wholesalers exploit producers and retailers. Therefore, they should be eliminated and their functions should be taken over by producers and retailers.

The following arguments are given in favor of the elimination of wholesalers –
1. Reduction in Prices: Wholesalers charge a substantial margin of profit and add to the cost of distribution. This results in higher prices payable by the ultimate consumers. Prices payable by consumers can be reduced by eliminating the wholesalers.

This would increase the sales volume which would benefit the producers. Many producers want to reduce prices to maximize sales in conditions of cut-throat competition but wholesalers discourage reduction in prices. Wholesalers are the parasites of society. The customers have to bear the cost of wholesalers.

2. Faster Distribution: Wholesalers are mere transfer agents who set up unnecessary road-blocks in the process of distribution. Their, interference in the distribution channel obstructs the smooth and quick flow of goods from manufacturers to consumers. By eliminating the wholesaler’s goods can be supplied to consumers more quickly. Modem means of transportation and communication do not favor unnecessary middlemen in the channels of distribution.

3. Manipulations: Many wholesalers indulge in malpractices such as hoarding and adulteration. They push up prices by creating an artificial scarcity of goods. Such malpractices can be avoided by eliminating the wholesalers. Wholesalers do not render services correspondingly for the profits they earn while handling goods.

4. No Risk-bearing: Wholesalers assume the little risk and make no improvement in the distribution techniques. Therefore, there is little justification for the existence of wholesalers. Sometimes, even the existence of wholesalers hinders the smooth flow of goods and services.

5. Unreliable: A manufacturer faces a sudden decline in sales when wholesalers discontinue their line of goods and switch over to a different competitive line. Many wholesalers sell so many products that they are unable to give equal attention to pushing the sale of all the products.

6. Better Alternatives: Large-scale retailers such as departmental stores, chain stores, and supermarkets have adequate funds and space to buy goods in bulk directly from manufacturers. They can bear risks and promote sales on a large scale. Therefore, they do not need the services of wholesalers.

Arguments against Elimination:
Those who believe that wholesale trade is essential, give the following arguments –
1. Undivided Attention: If wholesalers are eliminated, the producer will also have to undertake the distribution of his goods in small lots to a large number of widely scattered retailers. As a result, he will not be able to concentrate fully on production. The economies of large-scale production will have to be sacrificed. Wholesalers perform many marketing functions like buying and assembling, selling, market research, advertisement, transport, etc.

2. Necessary for Small Producers: Small manufacturers are not in a position to distribute their goods. Due to a large number of small producers and retailers, wholesalers still dominate the field of distribution of goods. Wholesalers bear the risk of fluctuations in prices, purchase of raw material, etc. Above all, they will have to find out means of financing which small producers are unable to do.

3. Storage of Goods: If wholesalers are eliminated, retailers will have to maintain large stocks and bear the risk of price fluctuations. Which they are generally unable to bear due to limited capital and lack of enough space.

4. Savings in Costs: Wholesalers are experts in the task of distribution. Therefore, they save expenses through more efficient marketing of goods. They maintain a sales force that calls upon retailers regularly. Their expenses are lower than those of manufacturers’ who sell directly to retailers. By eliminating the wholesaler, costs of distribution may increase. The manufacturers are often solely dependent upon distribution by the wholesalers as they can’t handle distribution themselves.

5. Seasonal Products: Some products are produced throughout the year but their demand arises only during a particular season. If wholesalers are eliminated, producers will have to keep huge stocks of such products. They will require a large amount of capital during the off-season.

6. Financing: In case wholesalers are eliminated, the manufacturers and retailers will have to invest more capital in the business.

Conclusion: By eliminating the wholesaler, his functions cannot be eliminated. These functions will have to be performed by either producers or retailers. Therefore, the elimination of the wholesaler is desirable only in those cases where manufacturers or retailers can perform these functions more efficiently than the wholesaler. Only large and well-established producers or retailers may be in a position to do so. Therefore, a wholesaler is an essential link in the distribution of all such commodities wherein producers and retailers are small and unable to assume the burden of wholesale trade.

In brief, wholesalers neither can be nor should be eliminated because of their services to the manufacturers, retailers, consumers, and society as a whole.

Here we are providing Business Studies Class 11 Important Extra Questions and Answers Chapter 9 Small Business and Entrepreneurship. Business Studies Class 11 Important Questions with Answers are the best resource for students which helps in class 11 board exams.

Class 11 Business Studies Chapter 9 Important Extra Questions Small Business and Entrepreneurship

Small Business and Entrepreneurship Important Extra Questions Short Answer Type

Question 1.
Write the full form of the following:
SIDO, KVIC, DIC, LPG, NABARD, RSBDC, NSIC, StDBI, NCEUS, RWED, WASME, SFURTI, DWCRA, TRYSEM, WTO.
Answer:

Question 2.
Compare different small scale business on the basis of the investment.
Answer:

Question 3.
Name the major industry groups that come in the small scale sectors.
Answer:
The following major industry group comes in the small scale sectors:

1. Food Products
2. Paper Products and Printing
3. Chemical and Chemical Products
4. Basic Metal Industries
5. Electrical Machinery and Parts
6. Rubber and Plastic Products
7. Machinery and Parts expect Electrical Goods
8. Hosiery and Garments – wool product
9. Non-metal lie Mineral Products
10. Transport Equipment and Parts
11. Leather and leather products
12. Miscellaneous Manufacturing Industries
13. Beverages, Tabacco and Tobacco products
14. Repair Services
15. Cotton Textiles
16. Wool. Silk, Synthetic Fibre, and Textile
17. Jute, Hemp, and Mesta Textiles
18. Other Services.

Question 4.
What are the different forms of support offers to small industries by the Government?
Answer:
The Government provides support to anal industries in the following forms:

1. Institutional support in respect of credit facilities.
2. Provision of developed sites for the construction of sheds.
3. Provision of trading facilities.
4. Supply of machinery on hire purchase terms.
5. Assistance for domestic and export marketing.
6. Technical and financial assistance for technological Upgradation.
7. Special incentives for setting up enterprises in backward areas.

Question 5.
What are the main characteristics of a small business?
Answer:
Any small business is characterized by at least two of the following key features:

1. Management is independent. Usually, the managers are also owners.
2. Capital is supplied and ownership is held by an individual or a small group.
3. The area of operations is mainly local. Workers and owners are of one home community. Markets need not be local.
4. Relative size within the industry the business is small when compared to the biggest units in its field. The size of the top bracket varies greatly so that what might seem large in one field would be definitely small in another.

Question 6.
Distinguish between cottage and small scale industries.
Answer:
The basis of classification between the cottage and small-scale business is that the cottage industry embraces a predominantly manual process of work.

The difference between the small-scale and cottage industries are basically two:

1. Small-scale industries are mainly located in urban centers as separates establishments, the cottage industries are generally associated with agriculture and provide subsidiary employment in rural areas.
2. Small-scale industries produce goods with partially or wholly mechanized equipment employing outside labor, while cottage industries involve operations mostly by hand which is carried on primarily with the help of members of the family.

Question 7.
What are the main objectives/features of small scale business?
Answer:
Objectives of small-scale business:

1. To provide an opportunity for large-scale employment at a minimum cost.
2. To provide a steady source of income to the low-income groups living in rural and urban areas of the country.
3. To meet the growing demands of the consumer’s goods and simple producers goods.
4. To mobilize resources of capital and skill and their optimum utilization.
5. To eliminate the economic backwardness of rural and underdeveloped regions in the country.
6. To attain self-reliance.
7. To reduce regional imbalances.
8. To effect an integration of the activities of a small business with the rural economy on the one hand and with the large scale business on the other.
9. To reduce disparities in income, wealth, and consumption.
10. To provide substitutes for various industrial products now being imported into the country.
11. To improve the quality of industrial products manufactured in the cottage industry sector and to enhance both production and exports.
12. To remove the problems created by urbanization and the consequent growth of big towns and cities.

Question 8.
Discuss the role and importance of small-scale enterprises in the economic development of India?
Answer:
The small-scale sector promotes entrepreneurship and helps to earn foreign exchange and is very important to the Indian economy.

The following points will highlight the importance of small scale enterprises.

1. Innovation and productivity: It is the small-scale enterprises that lead to innovation and productivity although they do not maintain their own research and development wings.
2. Individual tastes, fashion, and personalized service: Small- scale firms are receptive to change in taste and fashions of consumers and in adjusting the production process accordingly.
3. Symbols of national identity: They are locally owned and controlled. They can strengthen the social system and cultural traditions of India. They are perceived as valuable symbols of national identity.
4. The tendency of dispersal over wide-area: Small-scale enterprises have a tendency to disperse over wide areas. More than 62.19% of the units are located in the backward areas.

Question 9.
What type of problems faced by small scale sector in the field of marketing?
Answer:
Problems faced by the small scale sector in marketing their products are briefly enumerated below:

• Lack of standardization.
• Financial weakness.
• Unfamiliarity with expert activities-procedures and market know-how.
• Poor designing.
• Poor quality.
• Ignorance of potential markets.
• Competition.
• Lack of quality control.
• Lack of precision.
• Lack of knowledge of marketing.
• Distribution contacts.
• Poor finish.
• Poor bargaining power.
• Brand preferences.
• The scale of production.
• Lack of service after-sales.

Here we are providing Business Studies Class 11 Important Extra Questions and Answers Chapter 8 Sources of Business Finance. Business Studies Class 11 Important Questions with Answers are the best resource for students which helps in class 11 board exams.

Class 11 Business Studies Chapter 8 Important Extra Questions Sources of Business Finance

Sources of Business Finance Important Extra Questions Short Answer Type

Question 1.
Explain the meaning of finance and its importance in business.
Answer:
Significance of Business Finance: Business is concerned with the production and distribution of goods and services for the satisfaction of the needs of society. For carrying out various activities, business requires money. Finance is the lifeblood of business.

No business firm can carry on its operations smoothly and successfully without the availability of the right amount of funds at the right cost and at the right time. In the absence of finance, the production and selling of goods and services are not possible.

The success of a business enterprise depends, to a great extent. On the manner in which it raises, employs, and disburses its funds. In business, finance is required
(a) for establishing an enterprise
(b) for purchase of fixed assets and current assets, i.e. for carrying on present operations
(c) for expansion, growth, and modernization of business.

In modern business, the significance of business finance has increased due to an increase in the scale of business, use of capital-intensive techniques, shortage of finance, and increase in competition.

Adequate finance provides the following benefits to a business concern:

1. The firm can meet its liabilities in time. Prompt payment of debts helps in raising its credit-standing. As a result, the firm can easily borrow funds as and when necessary.
2. The firm can take advantage of business opportunities For example, it can buy materials in bulk at a low price.
3. The firm can carry on its business smoothly and without any interruptions.
4. The firm can replace its plant and machinery in time, thereby improving the efficiency of its operations.
5. The firm can face recession, trade cycles, and other crises more easily and confidently.
6. The requirement for fixed and working capital increases with the growth and expansion of the business. At times, additional funds are required for upgrading the technology employed so that the cost of production or operations can be reduced.

Question 2.
Explain in brief the various types of business finance and their uses.
Answer:
Types of Business Finance and their uses:
On the basis of nature and purpose served finance used in a business is of the follow ing kinds –
1. Long-term Finance:
Long-term sources fulfill the financial requirement of an enterprise fora period exceeding 5 years. Long-term finance refers to the fundraised for a long period of time. Such finance is used for investment in fixed assets such as land, building, plants, machinery, furniture, fixtures, etc. Fixed assets are those assets that are required for permanent use and are not meant for sale. Long-term finance is used for meeting the permanent needs of businesses. It is used again and again to generate revenue.

Such finance cannot be taken out of the business without closing down the firm or without reducing the scale of operations. Long-term finance is raised from shareholders, debenture holders, financial institutions, and retained earnings. The amount of long-term funds required depends upon the nature and size of the business. For example, a factory requires more long-term funds than a shop.

Similarly, a large factory needs greater long term funds than a small factory. Long-term sources of finance include shares and debentures, long-term borrowings, and loans from financial institutions.

2. Medium-term Finance:
This type of finance is required for investment in permanent working capital and for repayment of assets. It is also used for modernization and expansion. It is raised for a period of more than one year but less than five years. Medium-term finance is raised from debenture holders, financial institutions, public deposits, and commercial banks.

3. Short-term Finance:
Short-term funds are those which are required for a period of not exceeding one year. It is used for meeting the short-term needs of the business. It is also known as working capital. Working capital is the capital required for meeting the day-to-day needs of the business, e.g. purchase of materials and payment of wages, salaries, rent, taxes, freight charges, etc. short-term finance is raised from public deposits, commercial banks, trade credit, factoring, customer advances, etc.

Short-term funds can be used over and over again from year to year. Seasonal businesses that must build inventories in anticipation of selling requirements often need short-term financing for the interim period between seasons. Wholesalers and manufacturers with a major portion of their assets tied up in inventories or receivables also require a large number of funds for a short period.

Question 3.
What is the term Trading on Equity? Explain with the help of an example.
Answer:
Trading on Equity:
Trading on equity is an arrangement under which the management raises funds by issuing securities that carry a fixed rate of interest or dividend which is less than the average earnings of the company to increase the return on equity shares. If a company can earn more than the rate of fixed dividend or interest, excess earnings will goto equity shareholders; and they would thereby earn higher earnings per share than they would have without the use of gearing of capital structure.

For instance, Mahindra company has an equity capital of Rs.40,00,000, and Kodak company has an equity capital of Rs. 16,00,000 and 15% debentures of Rs.24,00,000. Both have earnings of Rs. 10,00,000 which is 25% on the total capitalisation of Rs.40,00,000. Assuming the tax rate of 50% on corporate income, the shareholders of Kodak company will have the benefit of trading on equity. Their return is 20% compared to 12.5% in the case of Mahindra Company as shown in Table.

Question 4.
Differentiate between Equity Share and Preference Share
Answer:
Difference between Equity Share and Preference Share:

Question 5.
Differentiate between Shares .and Debentures.
Answer:
Difference between Share and Debentures:

Question 6.
Explain the term Lease-financing. Give in brief its merits and limitations.
Answer:
Lease-financing:
A lease is a contractual agreement in which one party i.e. the owner of an asset grants the other party the right to use the assist in return for a specific period for payment. The owner of the assets is called the lessor while the other party that uses the assets is known as the lessee.

Lease financing provides an important means of modernization and diversification to the firm. Such type of financing is more prevalent in the acquisition of assets like computers and electronic equipment which becomes obsolete quicker because of fast-changing technological developments.

Following are the merits of lease-financing:
(a) It enables the lessee to acquire the asset with a lower investment.
(b) It provides finance without diluting the ownership or control of the business.
(c) The lease agreement does not affect the debt raising capacity of an enterprise.
(d) The risk of obsolescence is born by the lesser. This allows greater flexibility to the lessee to replace the asset.

Limitations:
The limitations of lease-financing are as under –

1. A lease arrangement may impose restrictions to allow the lessee to make any alteration or modification in the asset.
2. It may result in higher payout obligation in case the equipment is not found useful and the lessee opts for premature termination of the lease agreement.
3. The lessee never becomes the owner of the assets. It depriver him of the residual value of the assets.

Question 7.
Classify the sources of funds on the basis of ownership.
Answer:
On the basis of ownership the sources of fund are divided into two types:

1. Owner’s capital,
2. Borrowed capital.

Owner’s capital or Owner’s fund: The capital of the owner of the business falls under this category.

It is got from three resources:

1. Equity shares,
2. Preference shares and
3. Retained earnings.

Features:

1. Owner funds are treated as risk capital i.e., provision of loss, low profits, etc.
2. Owned funds are the permanent source of capital.
3. Owners fund different front management.
4. There is no need for security for the owner’s fund.

Advantages:

1. Owner’s capital forms the basis for raising loans.
2. It is the permanent source of capital.
3. This management is separate from ownership. Therefore professional managers can be employed to work efficiently.
4. Capital forms the basis on which owner acquire their rights to control the activities of the company.
5. In this type of capital, no security is required, the assets of the company are free to be used for raising loans.

Borrowed funds: Funds obtained from the parties, separate from the owner of an enterprise are known as borrowed funds:

1. Borrowed funds can be raised for a specific period.
2. There must be security for raising funds through debentures.
3. A fixed charge is made on assets due to borrowing funds.
4. Borrowed funds are payable after the specific period.
5. There is much control on the company due to the non-interference of creditors.

Advantages:

1. It does not affect the owner’s control over management.
2. Interest is treated as an expense. Therefore the amount of tax liability is reduced.
3. It provides flexibility to the capital structure. Finance may be raised when it is required and repaid when it is not required.

Limitations:

1. Payment of interest and repayment of the loan cannot be avoided even if there is no profit.
2. It requires securities to be offered against the loans.

Question 8.
What is Trade Credit? State its merits and limitations?
Answer:
Trade credit is the credit extended by one trader to another for the purchase of goods and services. It is used as short term financing. It is granted to those parties which have a sound financing position and goodwill. The volume and period of the credit depending upon various factors such as goodwill of the purchasing firm, the financial position of the seller, volume of purchases, past record of payment, and degree of competition in the market.

Merits:
The following are the merits of trade credit:

1. It is a convenient and regular source of funds.
2. It may be readily available in case the creditworthiness of the customers is known to the seller.
3. It does not create any charge on the assets of the firm.
4. It promotes the sales of an organization.
5. It helps in increasing the stock in order to meet expected demand in the sales volume in near future.

Limitations:

1. Easy availability may induce a firm to “indulge in overtrading.
2. Only a limited amount of funds can be generated.
3. It is a costly source of funds as compared to others.

Question 9.
Explain Commercial Banks and Financial Institutions as a source of business finance.
Answer:
Commercial Banks:
Commercial Banks are a very important source of finance. They provide funds for different purposes and for different periods. They provide loans to all firms and finance them by the way of cash credits, overdraft, purchase/selling, and the issue of letters of credit. The Interest rate depends upon the type of loan and the interest rate of an economy. The loan is repaid either in a lump sum or in installments. The borrower is required to provide some security or create a change on the assets of the firm before a loan is sanctioned by a commercial bank.

Merits:

1. They provide timely finance as and when needed by the business.
2. Information supplied to the bank by the firm is kept confidential, so the secrecy of the firm can be maintained.
3. Not many formalities required like an issue of prospectus and underwriting for raising loans from banks.
4. The loan from a bank is a flexible source of finance, a loan is taken as and when required and repaid in advance when funds are not needed.

Limitations:

1. Funds available from the bank generally for a short and medium period.
2. The procedure of obtaining funds from banks is slightly difficult because the bank makes a detailed investigation of the company affairs and may ask for the security of assets and personal securities.
3. In some cases, difficult terms and conditions are imposed by the bank for the grant of loan which affects the smooth running of the business.

Financial institutions: For the development of industry’s’ and business center and state governments established various financial institutions to provide finance and assistance, They provide both owned capital and loan capital for the long and medium-term. In addition to providing financial assistance, these institutions also conduct market surveys and provide technical assistance and managerial services to people who run the enterprises.

This source of financing is considered suitable when large funds for a larger duration are required for the expansion, reorganization, and modernization of an enterprise.

Merits:

1. They provide long-term finance.
2. They also provide financial, managerial, and technical advice and consultancy to business enterprises.
3. Raising a loan from this institution increases the goodwill of the borrowing company in the capital market.
4. As repayment of the loan can be made in easy installments, it does not prove to be much of a burden on the business.
5. The funds are made available even during periods of depressions.

Limitations:

1. Raising loans from a financial institution is time-consuming and expensive because they follow too many formalities.
2. Certain restrictions are imposed on the power of the borrowing company.

They may have their nominees in the Board of Directors of the borrowing company thereby restricting the powers of the company.

Question 10.
“Finance is the lifeblood of business.” Is this statement true? Explain.
Answer:
Yes, it is true that ‘Finance is the lifeblood of the business. No business firm can carry on its operation smoothly and successfully without the availability of the right amount of funds at the right cost and at the right time. In the absence of finance, the production and selling of goods and services are not possible.

In business, finance is required for:

• establishing an enterprise
• purchase of fixed and current assets
• expansion, growth, and modernization of business.

In modem business, the significance of business finance has increased due to an increase in the scale of business, use of capital-intensive techniques, shortage of finance, and increase in competition.

Sources of Business Finance Important Extra Questions Long Answer Type

Question 1.
What is equity share? Mention its merits and demerits as it is the source of raising permanent capital in the company.
Answer:
Equity (Ordinary) Shares: Equity shares is the most important source of raising long term capital by a company. Equity shares represent the ownership of a company and thus the capital raised by the issue of such shares is known as ownership capital or owner’s funds. Equity shares are those shares which do not carry any special or preferential rights in the payment of annual dividend or repayment of capital.

The rate of dividend on such shares is not fixed. Dividend on equity shares is paid out of the residual profits left after paying interest on debentures and dividend on preference shares.

Similarly, equity shareholders are paid at the time of winding up of the company after all debts and preference shareholders have been paid in full. They are entitled to receive what is left after all prior claims have been satisfied. Therefore, equity shareholders are the real risk-bearers. But they share in the increasing profits of the company. They enjoy full voting rights in the management and control of the company.

Thus, the distinctive characteristics of equity shares are as follows:

1. The holders of equity shares are the main risk bearers. They provide risk capital because when the company fails and is, closed, equity shareholders may lose their entire investment.
2. Equity shareholders are likely to enjoy higher returns and considerable increases in the value of their shares.
3. Equity shareholders have a residual claim in the company. The income left after payment of interest to creditors and dividend to preference shareholders belongs to equity shareholders.
4. Equity share capital improves the creditworthiness of the company and the confidence of the creditors. It is the basis on which loans can be raised.
5. The voting rights of these shareholders provide them a right to participate in the management of the company.
6. Equity shareholders have the right to elect directors. They can collectively ensure that the company is managed in their best interests.

Advantages:
As a source of finance, equity shares offer the following benefits –
1. Permanent Capital: Equity shareholders provide the permanent funds of a company. There is no obligation to return the money except at the time of winding up the company. As it stands last of claims, it provides a cushion for creditors in the event of winding up of a company.

2. No Obligation as to Dividend: Equity shares do not impose an obligation to pay a fixed dividend. Dividends are payable only if the
company has adequate profits. Equity shareholders stand by the company through thick and thin.

3. No Charge on Assets: Funds can be raised through equity shares without creating any charge on the assets of the company. For issuing equity shares, the company is not required to mortgage or pledge its assets. The assets remain free of charge for borrowing money in the future.

4. Source of Prestige: A company with substantial equity capital has a high credit-standing. Creditors readily lend money to it because they regard equity capital as a safety shield. It provides confidence to prospective loan providers.

5. Small Denomination The nominal or face value of an equity share is generally quite low, such as Rs. 10. Therefore, equity shares have a wide appeal. The company can mobilize huge funds from investors belonging to different income groups.

6. Suitable for adventurous investors: Equity shares are suitable for investors who are willing to assume the risk for higher returns. Equity shares are the ideal investment for bold and enterprising investors. They get handsome dividends and the value of their holdings appreciates during boon periods. In addition, they enjoy full voting power in the management of the company. They also have the pre-emptive right to buy new shares. The company has to first offer its new shares to the existing shareholders in proportion to their existing holdings.

Disadvantages/Limitations:
Equity shares suffer from the following limitations –

1. No Trading on Equity: If a company issues only equity shares, it cannot obtain the benefits of trading on equity.

2. Danger of Overcapitalisation: Equity share capital is not refundable during the lifetime of a company. A mistake in estimating financial requirements may, therefore, result in overcapitalization, particularly when the company’s earning capacity declines. Equity capital may remain idle and underutilized. The cost of equity shares is generally more as compared to the cost of raising funds through other sources.

3. Perpetuation of Control: Any new issue of equity shares must be offered first to the existing shareholders. As a result, there is a concentration of control in a few hands.

4. Takeover Bids: Equity shares have proportionate voting rights. Persons who seek to gain control over a company may indulge in undesirable practices, such as cornering of votes, the formation of groups, and abuse of proxy rights. Issue of additional equity shares dilutes the voting rights and earnings of existing shareholders.

5. Speculation: During boom periods, profits of a company and dividends on equity shares tend to increase. This leads to excessive speculation in the prices of equity shares. Investors who want steady income may not prefer equity shares as equity shares get fluctuating returns.

6. Unsound Dividend Policy: During boom periods proiltsTend to increase. The directors may decide to distribute higher dividends to win the cooperation of equity shareholders. They may overlook reserves for contingencies, replacements, etc.

7. Dividends Controlled by Directors: The rate of dividend is decided by the Board of Directors. Shareholders cannot demand higher dividends than those recommended by the Board. Therefore* investors may consider the equity shares unsafe and non-remunerative.

8. High Risk: Equity shareholders sink and swim with the company. During the depression, they get no dividend and the market value of their holdings falls drastically. The collateral arid resale value also declines. Equity shareholders lose heavily if the company fails and goes into liquidation. Therefore, equity shares do not appeal to the investors who want the safety of their investment and a regular and fixed return. More formalities and procedural delays are involved while raising funds through the issue of equity shares.

Question 2.
What are preference shares that mention their types, merits, and demerits?
Answer:
Preference shares: The preference shares are those which carry preferential rights at to the payment of dividend at a fixed rate and as to the repayment of capital.

Thus, preference shareholders enjoy the following two preferential rights over the equity shareholders:
1.They are entitled to receive a fixed rate of dividend out of the net profits of the company prior to the declaration of dividend on equity shares.

2. They get priority over the equity shareholders regarding the return of capital in case of winding up of the company. Preference shares resemble debentures as they bear a fixed rate of return.

Features of Preference Shares:
Besides the above two preferential rights (features), the preference shares may carry the following additional features –

1. They don’t carry the voting rights as are enjoyed by the equity shareholders.
2. If preference shares are cumulative and the dividend is not paid in a particular year, then the dividend will be carried forward to the next year.
3. If preference shares are redeemable, they will be retired at the end of their term. Preference shares may be classified as follows:
4. Cumulative and Non-cumulative Preference Shares: When dividends go on accumulating if they are not paid, preference shares are said to be cumulative. If in a particular year, they are not paid the dividend, they will be paid such arrears in the next year before any dividend can be distributed among the equity shareholders. But the dividend on non-cumulative shares does not accumulate if the dividend is not paid in any year. If the company is unable to pay dividends in a particular year, the shareholder’s right to the dividend in respect of that year is lost forever.
5. Convertible and Non-convertible Preference Shares: If the preference shareholders are given a right to convert their shares into equity shares within a given period of time, such shares will be known as convertible preference shares. The preference shares which cannot be converted into equity shares are known as non-convertible preference shares.

3. Redeemable and Irredeemable Preference Shares: Redeemable preference shares are those which in accordance with the terms of their issue, will be repaid on or after a certain date. The preference shares which cannot be redeemed during the lifetime of the company are known as irredeemable preference shares. Such shares are refunded only at the time of winding up of the company.

4. Participating and Non-participating Shares:
In addition to the two basic preferential rights, the participating shares may carry either or both the following rights –
(a) a right to participate in the surplus profits left after paying a dividend to the equity shareholders; and
(b) a right to participate in the surplus assets left after the repayment of capital to the equity shareholders on the winding up of the company.

But non-participating shares don’t have these additional rights.

Merits of Preference Shares:
The issue of preference shares has the following benefits –

1. The preference shares attract funds from those investors who prefer the safety of their investments and a fixed rate of return on their investments. They provide a reasonable steady income in the form of fixed-rate return and safety of the investment.
2. The management can retain control over the company by issuing preference shares to outsiders because the preference shareholders have only restricted voting rights.
3. Preference shareholders are entitled to a fixed rate of dividend which enables the equity shareholders to get the higher dividend. These are useful for those investors who want fixed rate a return with comparatively low risk.
4. Preference shares do not impose a heavy burden on the company because they carry a fixed rate of dividend.
5. By issuing preference shares, a company can raise finance for the long-term without creating any charge over its assets.

Demerits of Preference Shares:
There are certain limitations of raising funds by issuing preference shares. These include –

1. The investors may not like preference shares as they have restricted voting rights only. Preference shares are not suitable for those investors who are willing to take risks and interested in higher returns.
2. Because of the issue of the preference shares, the rights of equity shareholders over the assets of the company are diluted.
3. The issue of these shares restricts the flexibility of the company in certain cases.
4. The existence of preference shares may affect the creditworthiness of the company.
5. As the dividend on these shares is to be paid only when the company earns a profit. There is no assured return for the investors. Thus, these shares may not be very attractive to investors.
6. The dividend paid is not deductible from profits as an expense. Thus, there are no tax savings as in the case of interest on loans.

Question 3.
Define debenture as a source of borrowed capital, its important features, and types of debentures issued by a company.
Answer:
Debentures/Bonds:
Debentures are an important instrument for raising long term debt capital. A company can raise funds through the issue of debentures, which bear a fixed rate of interest. Debentures constitute the borrowed funds of a company. They are known as creditorship securities because debenture holders are the creditors of a company. Debenture capital may, therefore, be called debt capital.

A debenture is a document or certificate issued by a company under its seal as an acknowledgment of its debt. It is also an undertaking to repay the specified sum with interest to its holder. Holders of debentures are called debenture holders. A company can issue different types of debentures. Issue of zero interest debenture (LID) which does not carry an expected rate of interest has also become popular in recent years.

Characteristics:
The main features of debentures are as follows –

1. Debentures represent borrowed funds.
2. Interest on debentures is paid at d fixed-rate at specified intervals,
3. Interest is payable every year irrespective of whether there are profits or not. ,
4. Debentures generally carry no voting rights financing through debentures do not dilute the control of equity’ shareholders.
5. Debentures may involve a charge on the assets of the company.
6. If interest and the borrowed sum is not paid to debenture holders in time, they can take legal action (including winding-up) against the company.
7. Debentures are generally repayable after a specified period of time.

Types Of Debentures:
Debentures can be of the following kinds –
1. Naked or Unsecured Debentures: Such debentures are unsecured and do not carry a charge on the assets of the company. They are mere promises to pay without any security. No property is mortgaged or pledged with the holders of such debentures. In case of default in payment by the company, they can only file a suit for recovery of money. Holders of these debentures are treated as ordinary creditors.

2. Secured or Mortgage Debentures: Such debentures carry a fixed or floating charge on the assets of the company. A mortgage deed is executed by the company describing the terms and conditions of the issue. In case of default by the company, the debenture holders can recover money from the mortgaged property. A fixed charge is created on some definite and existing assets of the company.

The company cannot use these assets without the consent of the debenture holders. On the other hand, a floating charge can be created on both existing and future assets. The company can deal in such assets in the usual course of business. The charge goes on shifting from asset to asset and becomes fixed when the company goes into liquidation

or stops business or makes default in repayment. Any charge created by a company in favor of debenture holders must be registered with the Registrar of Companies within thirty days of its creation.

3. Redeemable Debentures: These debentures are repayable after a predetermined period during the lifetime of the company. These can be repaid on the specified date on demand by the debenture holders or on a notice of redemption by the company. In case of such debentures, the company reserves the right of paying off the principal on or after a particular date. These are also known as perpetual debentures.

4. Convertible Debentures: Such debentures carry an option to their holders to convert their holdings into equity shares after a specified period. The debenture holders can become shareholders. These debentures are more attractive for investors.

5. Non-convertible Debentures: The holders of such debentures have no right to get them converted into shares. They always remain creditors of the company. In recent years, the practice of issuing debentures that are partially convertible into equity shares have gained momentum.

6. Registered Debentures: The names of the holders of such debentures are recorded in the company’s books. Interest and the principal sum are paid only to the registered holders. Such debentures can be transferred only by a transfer deed and not by delivery alone.

7. Bearer Debentures: Bearer debentures are such which can be transferred by mere delivery’ from the bearer of the debenture without any formal notice by the company. The company keeps no record of such debentures.

Question 4.
Foreign Currency convertible bonds (FCCBS) and Foreign Direct Investment (FDI) is the investment instruments in international financing. Explain in brief the merits and demerits of these instruments of investments.
Answer:
Foreign Currency Convertible Bonds (FCCBs):
Foreign currency convertible bonds are equity-linked debt securities that are to be converted into equity shares or depository receipts after a specified period. Thus, a holder of FCCB has the option of either converting them into equity shares at a predetermined price or exchange rate or retaining the bonds. The FCCB’s are issued in a foreign currency and carry a fixed interest rate which is lower than the rate of any other similar non-convertible debt instrument.

FCCBs have the following advantages and disadvantages –

Advantages:

1. The convertible bond gives the investor the option to convert the bond into equity shares at a price or redeem the bond at the end of a specified period, usually three years.
2. The investor is assured a minimum fixed interest-earning which is lower than the rate of any other similar instrument.
3. FCCBs are easily convertible and, therefore, offer liquidity.
4. Companies prefer FCCBs as a dilution of equity is delayed. It allows the company to avoid any current dilution in earnings per pure that a further issue of equity shares would cause.
5. FCCB can be freely traded and the issuing company has no control Over the transfer mechanism and is not aware of the ultimate beneficiary.

Disadvantages:

1. Interest on bonds is payable in foreign currency which involves an exchange risk. Companies with low debt-equity ratios and large forex earnings potential only opt for FCCBs.
2. FCCBs involve the creation of more debt and forex outgo in the form of interests.
3. If the investors do not convert the bonds into equity shares there is a burden of repayment.

Foreign Direct Investment (FDI): Foreign direct investment (FDI) denotes direct investment in the equity shares, debentures, or bonds of Indian companies by foreign investors. FDI is channelized in the form of direct foreign contribution to the equity capital of the company and is all into domestic equity invested by the Indian shareholders of the companies.

Foreign Direct Investment refers to the investment made by a company in manufacturing and/or marketing facilities in a foreign country. The investment made by Enron in a power plant in India is an example of foreign direct investment. The investing foreign company is called the ‘Parent Company’ and the investment made is known as an affiliate’.

FDI includes:

1. investment in setting up a new subsidiary or branch in a foreign country,
2. expansion of overseas subsidiary or branch and
3. acquisition of an overseas enterprise. The flow of foreign direct investment in India has been increasing steadily since 1991 due to the policy of economic liberalization and globalization. Several MNCs have made a substantial investment in their operations in India.

Foreign direct investment has costs and benefits to the home country (the country of origin of the investor company, e.g. USA in the case of Enron) as well as the host country (the foreign country in which FDI is made, e.g. India). FDI can be routed through GDRs and ADR’s. It is regulated by Government policy as regards FDI.

Benefits to Home Country:

1. Trade barriers like tariffs and quotas can be overcome through FDI.
2. The company can export its competitive strengths such as organization and management through FDI.
3. FDI increases business activity in the home country through exports of technology, machinery, and equipment.
4. The increased industrial activity in the home country enhances employment opportunities.
5. The inflow of foreign currency in the form of dividends, interest, etc. improves the balance of payment position of the home country. For example, Nissan Motor Company repatriated profits to Japan from its FDA in the UK.
6. The firms can learn skills from their exposure to foreign countries. These skills can be transferred to the industry in the home country.

Costs to the Home Country:

1. Industry and employment position in the home country may suffer when the firms enter foreign markets. For example, the entry of US Textiles in Central America caused retrenchment in LISA.
2. The current account position of the home country suffers because FDI is a substitute for direct exports.

Benefits to the Host Country:

1. FDI enlarges business activity in the host country through the establishment of new industries and the development of ancillary industries.
2. Employment opportunities in the host country are enhanced.
3. The host country receives scarce resources such as foreign capital, technology, machinery, equipment, organization, and management. Transfer of these resources facilitates economic and social development in the host country. The government of India has been encouraging FDI to develop the Indian industry, infrastructure, and service sectors.
4. FDI improves the foreign exchange resources and balance of payments position of the host country. It provides for the production of goods and services domestically. This in turn reduces the imports of the host country. Further, the foreign companies export.

Question 5.
What are the main factors affecting the choice of the source of funds?
Answer:
Every business enterprise has different needs for finance. Some need long-term finance or some need for a short time. Some want a large sum of money and some want a small sum of money. Short term borrowing offers the benefit of reduced cost due to reduction of idle capital, but long term borrowings are considered a necessity on many grounds. Every source of finance has its own limitation, therefore it is advisable to use a combination of sources, instead of relying only on a single source.

The following factors affect the choice of this combination, making it a very complex decision for the business –
1. Cost: Cost of procurement of funds and cost of utilizing the funds, both costs should be taken into account while deciding about the source of fund.

2. Risk profile: Businesses should evaluate each of the sources of finance in terms of the risk involved.

3. Purpose and Time Period: Business should plan according to the time period for which the funds are required. Short-term finance can be arranged through borrowing funds at a low rate of interest through trade credit, commercial paper, etc. for long-term finance, issue of share and debentures are more suitable. The purpose for which funds are required needs to be considered so that the source is matched with the use.

4. Financial strength and stability of operations: The financial strength of a business is very important in deciding the source of funds. The business should be in a sound financial position and has a stability of return, so as to be able to repay the loan.

5. Control: A particular source of funds may affect the control and power of the owner on the management of a firm. A business firm should choose a source keeping in mind the extent to which they are willing to share their control over the business.

6. Form of organization and legal status: The form of organization and its legal status influences the choice of a source for raising money. For example, sole tradership cannot borrow funds by issuing shares to the public. Only joint-stock companies raise funds like this.

7. Tax benefits: Various sources of funds may also weigh in terms of their benefits. For example, while the dividend on preference share is not tax-deductible, interest paid on debenture and loan is tax-deductible.

8. Effects on creditworthiness: The dependence of a business on certain sources may affect its creditworthiness in the market. For example, the issue of secured debentures may affect: the interest of unsecured creditors, it may adversely affect their willingness to extend further loans to the firm.

9. Flexibility and ease: Restrictive provisions, detailed investigation, and documentation in case of borrowings from banks and financial institutions, for example, maybe reasons that a business organization may not opt for it if other options are readily available.

Here we are providing Business Studies Class 11 Important Extra Questions and Answers Chapter 7 Formation of a Company. Business Studies Class 11 Important Questions with Answers are the best resource for students which helps in class 11 board exams.

Class 11 Business Studies Chapter 7 Important Extra Questions Formation of a Company

Formation of a Company Important Extra Questions Short Answer Type

Question 1.
Explain briefly the meaning of promotion of a Company9.
Answer:
Meaning of Promotion: The term promotion is used as the sum total of activities by which a business enterprise is brought into existence. It is a term of business, not of law. Promotion consists of the. business operations by which a company is established.

It is the process of planning and organising the finances and other resources of a business enterprise in the corporate form. According to C.W. Gerstenberg, “Promotion is the discovery of business opportunities and the subsequent organisation of funds, property and management ability into business concern for the purpose of making profit therefrom.”

Promotion is the process of the discovery of a business idea, its investigation and assembling of necessary resources to set-up a business as a profitable concern. The person or group of persons who perform the work of promotion and form a company as a going concern are known as a promoter. A promoter is an entrepreneur or businessman who gives birth to a business concern. A promoter may be an individual, a firm or a company.

According to S. Francis Palmer, “Promoter means a person who originates the scheme of promotion of the company, has the Memorandum and Articles prepared, executed and registered and finds the first directors, settles the terms of preliminary contracts and prospectus (if any) and makes arrangements for advertising and circulating the prospectus and the capital.”

Thus a promoter is a person or a group of persons who conceive the idea of the formation of a company, and takes necessary steps for its incorporation, raising of capital and making it a going concern. In order to perform the task of promotion successfully, a promoter must have several essential qualities. Fertile imagination, sound judgement, initiative, resourcefulness and organising ability are the main qualities of a successful promoter.

Promotion may be done for several objectives, e.g. to start a new business, to expand an existing business or to take over an existing business. Out of this starting, an altogether new business is the most difficult task.

Question 2.
Draw up the various stages of formation of the company.
Answer:

Question 3.
Explain briefly the various types of promoters.
Answer:
Types of Promoters: Promoters can be of the following kinds:
1. Entrepreneur Promoters: An entrepreneur conceives the idea of a new business and performs all the work for establishing it as a going concern. He continues to manage and control the business promoted by him. Small-scale enterprises, such as sole proprietorships and partnerships are promoted by entrepreneurs. He undertakes risk and takes initiative in promoting the company.

2. Professional Promoters: These promoters are specialists in promoting new business ventures. Large-scale enterprises are generally promoted by experts. These experts possess the necessary skills and knowledge in the promotion. They promote a business as a going concern and then sell the proposition or hand-over its management and control others.

These promoters are interested only in looking out tor business reality. He needs to be action-oriented. He will assemble resources, prepare necessary document give a name to the company opportunities and converting them into business units in return for handsome remuneration. There are very few professional promoters in India. They initiate new enterprises and find out the persons who can supply capital.

3. Occasional Promoters: This type of promoters promote a business once a while rather than on a regular basis. Promotion is not their main job and after promoting a company they go back to their original occupation. For example, an engineer or a technical expert may promote a business to commercially exploit a patent or invention discovered by him. They manage the company’s affairs even after incorporation of the company.

4. Financial Promoters: These promoters float new companies during favourable conditions in the securities market. Banks and other financial institutions also perform the work of promotion owing to their experience in the financial sector. Investment bankers become active in the field of promotion when the securities market is able to absorb new issues of equity shares. In India, the Industrial Development Bank of India and other financial institutions carry out the work of promoting industrial concerns.

5. Government: Nowadays, the government has become the biggest promoter. For example, the Government of India has established several basic, strategic and defence industries to speed up the process of economic development in the country. It has promoted large-scale enterprises in iron and steel, coal, shipping, fertilisers, electronics, engineering, insurance, tourism, hotels, etc.

Question 4.
A promoter has various qualities. Explain in brief.
Answer:
Qualities of a Promoter: A promoter should possess the following qualities.

1. Vision: A promoter requires a sound imagination and a clear but realistic view of the future. He analysis the prospects of a company and brings together the men, materials and machinery.
2. Alert mind: The promoter should be alert enough to notice business opportunities that can be used to advantage. An invention, a patent, a natural resource, an unsatisfied or poorly satisfied need are examples of such opportunities.
3. Resourcefulness: A promoter should be able to mobilise financial, human and physical resources so a
4. Risk-taking ability: The promoter should be able to bear the calculated risks of the business. Sometimes, an idea may be good but technically not possible to execute.
5. Tact: A promoter needs to be tactful so as to persuade people to invest money in the new venture.
6. Patience: Considerable patience is necessary to wait till the business idea takes a practical shape. Sometimes, it so happens that a project is technically feasible and viable, but chances of it being profitable are very little, the idea may have to be adopted later by investigating into details which require patience.
7. Analytical ability- The promoter should be able to carefully examine each idea and opportunity in terms of costs and benefits.

Question 5.
Define ‘Memorandum of Association’ and ‘Articles of Association’ as these are public documents.
Answer:
Memorandum of Association: The Memorandum of Association is the principal or most important document of a company. According to Lord Macmillan, “The Memorandum of Association sets out the constitution of the company. It is, so to speak, the charter of the company and provides the foundation on which the structure of the company is built. It enables persons, who deal with the company, to know its permitted range of activities.” In the words of Lord Cains, “the Memorandum of Association of a company is its charter and defines the limitations of the power of the company established under the Act.

The Memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated.” It also lays down the scope of operations of the company beyond which it cannot operate. The purpose of the Memorandum of Association is to enable the shareholders, creditors and others who deal with the company to know its permitted range of activities. In fact, it can be considered as the .foundation on which the structure of a company is based. Its primary importance lies in the fact that a company cannot undertake such operations which are not mentioned in its memorandum.

Great care should be taken in preparing the Memorandum of Association because a company cannot go beyond the limits laid down in the Memorandum.

The Memorandum of Association must be
(a) printed,
(b) divided into suitable paragraphs numbered in sequence, and
(c) signed by the required number of persons in the presence of at least one witness.

The Memorandum must be published in sufficient numbers because it is a public document and a copy has to be given on demand and at a nominal charge. The facsimile and common seal of the company should be filed on the Memorandum. The Companies Act contains different forms of Memorandum (in Schedule 1), one each for companies limited by shares, companies limited by guarantee without shares capital, and unlimited company.

In brief Lord Justice Browen, “a Memorandum of Association is a fundamental document of a company which is also known as the charter of the company. It lays down the object and scope of activities and limitations on the power of a company beyond which the company cannot go. It is a document which contains all conditions upon which a company is allowed to be incorporated.

Articles of Association: Articles of Association are the bylaws of a company. They contain rules and regulations for the management of the internal affairs of a company. They define the mode and manner in which the company’s business is to be carried on. Articles of Association are public document. Outsiders dealing with the company are supposed to have read the Memorandum and Articles of the company. They are entitled to believe that the company conduct its business according to the rules and regulations. This is known as the Doctrine of Indoor Management.

A private company, a company limited by guarantee and an unlimited company, must prepare and file their own Articles of Association. But a public company limited by shares may adopt Table A in the First Schedule of the Companies Act, in case it does not want to prepare and file its own Articles of Association. While preparing the Articles great care should be exercised.

Anything contained in the Articles which is against the Memorandum of Association or against The Companies Act shall be null and void. The Articles of Association should be printed, properly divided into paragraphs, consecutively numbered and signed by the signatories to the Memorandum in the presence of at least one witness. The Articles of Association are subordinate to the Memorandum of Association.

Question 6.
What is ‘Statement in lieu of Prospectus*?
Answer:
Statement in lieu of Prospectus: A public company having a share capital may sometimes decide not to approach the public for securing the necessary capital because it may be confident of obtaining the required capital privately. In such a case, it will have to file a ‘Statement in lieu of Prospectus’ with the Registrar. A ‘Statement in lieu of Prospectus’ is drafted in accordance with the particulars set out in “Schedule III” of the Companies Act. It .contains information very much similar to a prospectus:

It must be duly signed by all the directors and a copy thereof must be filed with the Registrar at least three days before the allotment of the shares. However, a private company is a riot required to either file “Prospectus” or a “Statement in the lie of Prospectus” with the Registrar. ‘Statement in lieu of Prospectus’ must be dated and signed by each director. It should not contain any untrue or misleading statement. Provisions regarding the penalty for issuing a misleading prospectus are also applicable to untrue details given in a statement in lieu of prospectus. A private company is not required to file either a prospectus or a statement in lieu of prospectus as it is not permitted to raise funds.

Formation of a Company Important Extra Questions Long Answer Type

Question 1.
What is the procedure adopted for the alteration of various clauses of Memorandum of Association?
Answer:
Alternation of the Memorandum: The Memorandum of Association can be altered in accordance with the procedure laid down in the Companies Act.

The provisions of the Act are as follows:
1. Alteration of Name Clause: A company can change its name in the following manner.
(a) If the name registered is identical with or similar to the name of an existing company, bypassing an ordinary resolution and obtain ing written approval of the Central Government;

(b) Bypassing a special resolution and obtaining the written consent of the Central Government in other cases.
It may be pointed out and delete that the word ‘private’ to the name of the company does not require the approval of Central Government. But where the addition of the word ‘private’ becomes essential due to the conversion of a public company into a private company, such conversion | is effective only with the approval of the Central Government.

2. Alternation of Registered Office Clause: This clause can be altered in the following ways.
(a) If the registered office is to be shifted from one state to another, bypassing a special resolution and obtaining the sanction of the Registrars of both the states;
(b) If the office is to be shifted from one town to another in the same state, bypassing a special resolution;
(c) If the office is to be shifted from one locality to another in the same town, bypassing an ordinary resolution.

The Registrar of Companies shall register the confirmation of the change of registered office and the alteration made in the memorandum of association within 30 days from the date of filing the documents of change.

3. Alteration of Object Clause: In order to alter its object clause, a company must pass a special resolution and obtain the permission of the Company Law Board.

The Company Law Board must satisfy the following conditions before granting permission:
(a) The objections, if any, of the Registrar of Companies have been obtained.
(b) Sufficient notice has been given to every creditor and other persons whose interest may be affected by the proposed alteration; and
(c) With respect to every creditor either his consent has been obtained or his debt has been discharged.

An alteration in the object clause is permissible if it is necessary to enable the company
(a) To carry on its business more economically or efficiently;
(b) To enlarge the area of its operations;
(c) To carry on some other business which can be profitably combined with the existing business;
(d) To amalgamate with any other company or association;
(e) To attain its main purpose by new or improved means;
(f) To restrict or abandon any of the objects specified in the Memorandum; and.
(g) To sell or dispose of the whole or part of the company’s property.

A special resolution must be passed at a general meeting of the company for alteration of the object clause. The resolution must state reasons or purposes for doing so.

4. Alteration of Liability Clause: If a company wants to make an alteration which imposes any additional liability on its members, it must pass a unanimous resolution in a meeting of its members. The liability of the members automatically becomes unlimited if their number is reduced below seven in case of a public company and below two in a private company. The liability of members may be increased if the members agree in writing consent may be given either before or after the alteration.

5. Alteration of Capital Clause: A company must pass a special resolution and obtain the approval of the Company Law Board. In case the capital is to be reduced, the permission offline court is also required. The court may direct that the company must write the words ‘reduced’ after its name and all the official documents of the company will bear this word. Where the alteration involves the return of capital or reduction in uncalled capital, the consent of creditors must be obtained.

A company may reduce its capital in the following ways:
(a) By extinguishing or reducing the liability of members for uncalled capital;
(b) By paying off some part of capital;
(c) By writing off or cancelling any paid-up capital which is lost; and
(d) By any other method approved by the court.

A company may alter its capital to:
(a) Increase the amount of share capital;
(b) Consolidate the divide its capital into shares of higher denominations;
(c) Subdivide the shares into those of smaller denominations;
(d) Cancel the unissued capital;
(e) Convert fully paid shares into stock or vice versa; and
(f) Reduce the amount of share capital.

6. Alteration of Subscription Clause: In this clause, the subscribers declare that they desire to be bound to assist information of a company and no subscriber can withdraw his name on any ground after registration of the company.

Question 2.
Explain the various contents of Article of Association and its alteration.
Answer:
Articles of Association: The Articles of Association of a company contain the rules relating to the management of its internal affairs. The articles define the duties, the rights and the powers of the Board of Directors as between themselves and the company at large, and the mode and form in which the business of the company is to be carried on, and the mode and form in which changes in the internal regulations of the company may be made.

Articles of association contain the rules angulations for regulating the internal affairs of the company. The subscribers df the memorandum may include in it all such regulations as they deem fit. But everything included in it must be subject to the Companies Act and Memorandum of Company.

A public company limited by shares may opt for the adoption of Table A (i.e. the model set of 99 articles given in Schedule I of Companies Act). The other types of companies are required to file their articles of association along with the Memorandum at the time of registration. The Articles of Association should be printed, divided into paragraphs and numbered consecutively, and signed by each signatory to the memorandum in the presence of at least one attesting witness.

Contents of Articles of Association: The Articles of Association usually contain the provisions relating to the following matters:

1. The amount of share capital and different types of shares.
2. Rights of each class of shareholders.
3. Lien on shares, forfeiture of shares for non-payment of calls and transfer and transmission of shares.
4. Procedures tor conduct of meetings, voting, quorum, poll and proxy.
5. Appointment, removal and remuneration of directors and their powers and duties.
6. Procedure regarding alteration of share capital.
7. Matters relating to the distribution of dividend.
8. Matters relating to the keeping of statutory books.
9. Procedure regarding the winding up of the company.
10. Adoption of preliminary contracts.
11. Redemption of preference shares.
12. Rights of members.
13. Borrowing powers.
14. Reserves and capitalization of reserves.

Alteration of Articles: A company may change its Articles of Association by passing a special resolution subject to the following conditions.

1. The alteration must not be contrary to the Memorandum and the Companies Act. The alteration should not allow the company to do something which is forbidden by the Memorandum.
2. It must be bona fide and in the interest of the company as a whole.
3. It must not result in a breach of contract with outsiders.
4. The alteration must not purport sanction anything illegal or against public policy.
5. It must not have the effect of increasing the liability of members.
6. It should not amount of fraud by the majority on the monetary. Any alteration which constitutes the discrimination of interest of minority is a fraud on them.
7. If the alteration involves converting a public company into a private company, the approval of the Central Government must be obtained.

Question 3.
What is Prospectus? Mention its importance and various important contents.
Answer:
Prospectus: The purpose of issuing a prospectus is to acquaint the investors with the proposed company and induce them to invest in its shares. The law with a view to protecting the interest of investors regulates the issue and the contents of the prospectus.

A prospectus means “any prospectus, notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares or debentures of a company.” The term “Prospectus”, therefore, includes any document which invites deposits from the public or invites offers from the public to purchase shares or debentures of a company.

The essential elements of a prospectus are as follows:

1. There must be an invitation to the public.
2. The invitation must be made “by or on behalf of the company”.
3. The invitation must be “to subscribe or purchase its shares or debentures or such other instruments”.
4. Every prospectus issued must contain the matters specified by the provisions of the Companies Act.

Importance of Prospectus: Investors make up their minds about investment in a company primarily on the basis of the information contained in the prospectus. Therefore, there must not be a misstatement in the prospectus and all significant information must be duly disclosed.

The prospectus of a company serves the following purposes:

1. It reflects the future policies and programmes of the company.
2. It serves as an invitation to the public to subscribe to the shares and debentures of the company.
3. It provides a legal document of the terms and conditions on which shares and debentures have been issued.
4. It identifies the persons who can be held responsible for any untrue statements made in it.

Contents of a Prospectus: Prospectus is the only document through which the prospective investors can evaluate the soundness of the company.

It must contain at least the following broad particulars:

1. Company’s name and address of its registered office, nature of business of the company.
2. The main objects of the company and other objects.
3. The number and classes of shares, if any, and the nature and extent of the interest of the holders in the property and profits of the company. Rights attached to the shareholders are also mentioned.
4. The details about the redeemable preference shares intended to be issued, if any, i.e., the date and mode of redemption etc, details regarding debentures also if any.
5. Qualification shares of directors, if any.
6. Any provision in the articles as to the remuneration of the directors, managing director or otherwise.
7. The names, addresses, and occupations of the directors, managing director or manager.
8. The “minimum subscription” that is, the minimum amount which, in the opinion of directors must be raised by the issue of shares.
9. The time of the opening and closing of the subscription list.
10. To amount payable on application and allotment of each class of share.
11. Rights, privileges and restrictions attached to each class of shares.
12. A reasonable time and place at which copies of audited balance sheets and profit and loss accounts of the company may be inspected.
13. Names and addresses of auditors, bankers, brokers and solicitors.
14. Names and addresses of underwriters and commission payable to underwriters.

Question 4.
What is a misleading statement in a prospectus and give its consequences?
Answer:
Mis-statement or untrue statement in the prospectus: If a prospectus contains misstatements or omits material facts, it will give rise to many consequences. A misstatement or an untrue statement is one which is misleading in the form and context in which it has been included in the prospectus. A prospectus shall also be deemed to have an untrue statement if the omission of any matter from it is calculated to mislead those who act on the faith of the prospectus.

Consequences of Misleading Prospectus: If a prospectus contains misstatements, the aggrieved party will have remedies against the company, directors, promoters and legal experts. A prospectus must be prepared very carefully. In an effort to influence the investors, a company may make exaggerated statements about its operations and future prospects. But a prospectus must contain full and honest disclosure of all material facts. To avoid preparing a misleading prospectus, it should be ensured that material facts are not concealed and no false details are given.

The persons responsible for issuing a misleading prospectus face civil and criminal liability.
1. Civil Liability: If the prospectus contains false information or incomplete details due to the negligence of the directors, it amounts to misrepresentation. The persons who invest money in the company on the basis of such misrepresentation have the right to avoid the contract and claim refund of their money. They can also claim damages from the company and from those who have authorised the issue of a misleading prospectus. An aggrieved subscriber of shares or debentures may sue directors, promoters etc. for payment of loss or damages caused to him by the misrepresentation in the prospectus issued. Subscriber must prove that he has suffered loss by reason of the omission of a matter from the prospectus.

A person accused of misrepresentation in a prospectus can avoid liability if he proves that:
(a) He had withdrawn his consent before the issue of the prospectus and that it was issued without his consent or authority;
(b) The prospectus was issued without his knowledge or consent and he had given reasonable notice to this effect after he came to know about it;
(c) After the issue of the prospectus but before allotment, on becoming aware of the misrepresentation, he had withdrawn his consent and given public notice to that effect;
(d) The statement was based on the statement of an expert who had given his consent to it;
(e) He genuinely believed the statement to be true; or
(f) The statement was based on an official document.

The directors etc., however, will not be liable for the compensation of loss, if it is proved that they honestly believed the statement to be true.

2. Criminal Liability: If the directors of a company deliberately, conceal information, they are punishable with a fine extending to Rs. 5,000 or imprisonment up to two years or both. If the public is fraudulently induced to invest money, the penalty may extend to a fine of Rs. 10,000 or imprisonment of five years or both.

A person accused of deliberate or fraudulent misrepresentation may avoid his ability by proving that:
(a) The statement was immaterial; or
(b) He had reasonable grounds to believe and did believe that the statement was true.

An expert who has given his consent to issue the prospectus containing an untrue statement made by him shall be liable to every subscriber who takes shares on the faith of his statement. The aggrieved shareholder is entitled to claim damages under the general law i.e. Contract Act. An expert shall not be liable if he proves that he was competent to make the statement and that he had reasonable ground to believe that statement was true at the time of allotment of securities. Expert includes an engineer, a valuer, an accountant and any other person whose profession gives authority to a statement made by him.

Here we are providing Business Studies Class 11 Important Extra Questions and Answers Chapter 6 Social Responsibilities of Business and Business Ethics. Business Studies Class 11 Important Questions with Answers are the best resource for students which helps in class 11 board exams.

Class 11 Business Studies Chapter 6 Important Extra Questions Social Responsibilities of Business and Business Ethics

Social Responsibilities of Business and Business Ethics Important Extra Questions Short Answer Type

Question 1.
Explain in brief the concept of social responsibility of business.
Answer:
Concept of Social Responsibility:
Meaning and Rationale: Business in today’s world is recognized and accepted as a social and economic activity of society. The business is carried on within the societal norms in order to satisfy the needs of the society. All the factors of production i.e. Men, machines, materials, money, and equipment are supplied by the society to the business as such business owes its existence to the society.

The society originates, sustains, and manages to conduct its affairs in the. the interest of society. In other words, social responsibility is the obligation of the business towards different groups of society; in addition to its profit earning.

• “Social responsibility is the personal obligation of everyone, as he acts for his owner’s interests to assure that right and legitimate interests of all others do not impinge.”-Knootz O’Donnel
• “In the real sense, the assumption of social responsibilities implies recognition and understanding of the aspiration of society and determination to contribute to its achievement”-George A. Steiner

The business has its obligation to pay a reasonable return to its owners, to pay interest at competitive rates to investors, to pay reasonable remuneration to employees, supply goods to customers at reasonable rates, and to conduct the affairs of the business in accordance with social commitment and values.

Question 2.
“Customers are the foundation of the business.” Explain the statement in the light of the social consciousness of consumers.
Answer:
Peter F. Drucker, the management Guru, rightly states that the customers are the foundation stone of any business. The ultimate objective of any business to gain maximum profit can only be achieved by providing the right goods and services to consumers and try to provide maximum satisfaction to consumers. In the opinion of Butler, “The customers hold a topmost place in the organization hierarchy.

It is, therefore, necessary that businesses should avoid adulteration, substandard product, defective measurement or weights, deceptive and advertisements, and omission from services and courtesy. Business premises is for customers not the customers for the business.

The business has the following obligation towards customers:
1. Need-based production: Business should produce only those goods which satisfy the expectation and aspirations of the customers.

2. Supplying goods at a reasonable price: Every business aims at producing goods at the minimum cost. It should supply goods to customers at a reasonable price. The price of the commodity must be reasonable and competitive.

3. Appropriate distribution: The producers and manufacturers should make their goods and services at the appropriate places and times, so that customers may not face more difficulties in acquiring them. The increase in the number of middlemen will increase the price. The channels of distribution must be sufficient to maintain the smooth supply of goods to customers. The importance of customers in business must be recognized and accepted by every firm.

Question 3.
Discuss the responsibilities of business towards employees or workers.
Answer:
Workers are the major force in any organization. They do not only work as a factor of production but also helps in working the other factors. It is rightly said that the owner of a business simply invests capital in the business, but employees/workers invested their entire life for the benefit of the organization. Therefore, it is the prime duty of the business to fulfill its humane, social, and business obligations.

The responsibility of business towards employees or workers may be discussed as under:
1. Fair wages: it is the social, moral humane, and business responsibility of every firm to pay a reasonable amount of wages to employees in order to live a respectable life in society.

2. Security of the job: Workers must feel part and parcel of the organization and treat themselves as a permanent assist in the business. He should contribute his best without fear of being removed and retrenched.

3. Creating a congenial atmosphere of work- Working conditions must be congenial to work. The place of work should be clean, properly ventilated, and free from dirt and suffocation. There should be proper arrangement of safety measures to avoid accidents.

4. Scientific selection and training of workers: The selection and appointment of workers should be based on testing. Employees should be selected strictly as per the requirements of the works. In other words, the right workers should be appointed for the right jobs.

Late Prime Minister Pandit Jawahar Lai Nehru rightly conclude that
“In the present economic and industrial structure, the relationship between workers and customers should not be that of owner and workers but workers should be treated as partner and colleague and in this vim; there can be the peaceful solution of all the economic problems.”

Question 4.
Explain the concept of ‘Human Rights’. Also mention cases for Human Rights.
Answer:
Concept of Human Rights: Human rights provide equality to individuals in their interests. Human rights basically meant to provide a basis for justifying one’s action and provide protection and assistance. Human rights lay stress on the concept of humanity. All big business organizations should follow and promote human rights.

Cases for Human Rights- Human rights have received high priority in our society’. In order to get these rights, many movements have also appeared.

The following statements may be mentioned in favor of human rights in general, in society’ and in particular in business.
1. Protection against Human Injustice- Businessmen generally do not protect government patterns and establish their own social and economic parameters. Human rights come to light when people think that injustice being perpetuated.

2. Provides Benchmarks for Law Land Policies: After independence, certain basic rights became natural which do not act under any law or policy. These rights take precedence over the particular laws and standards created by society.

3. Respecting the Human Values: Some human rights are taken as basic rights. These rights are the overriding significance of human rights over others, human rights, and legal rights and provide entitlements beyond legal jurisdiction should be respected by others.

There is a great difference between human and legal rights. One may have a legal right to do something inhumane but for doing any work of humanity there is no need to have legal rights. Legal rights are derived from the constitution and policies while human rights derived independently. Human rights are based on human norms. Entitlement of human rights can derive from a system of human standards independently of any particular legal system. These rights prohibit todo something inhumane.

United Nation declares the following as Human Rights:

• The right to work, free choice of employment, good working conditions, right of protection against unemployment.
• Right of just or favorable remuneration.
• Right to form and join trade unions.
• Reasonable limitation of working hours and periodic holidays with pay.

Question 5.
Outline the major Environmental Pollution Control Activities,
Answer:
Major Environmental Pollution Control Activities:

1. National conservation strategy in 1992, policy statement for environment and development, Policy statement for abatement of pollution 1992, National Forest Policy 1988, and in 1986. Environment (Protection) Act was initiated for pollution control.
2. Standards related to air, water, and noise levels were formulated by a multi-disciplinary group keeping in view the international standards, technologies, and impact on health and the environment.
3. Action plans and identification of 17 categories of major polluting industries.
4. Identification of 24 major polluted areas for pollution control.
5. Factories were asked to use coal wherein % of smoke will not be more than 34%.
6. Action plans for 141 polluted rivers started.
7. In order to reduce the pollution from automobiles, cleaner fuels, low sulfur diesel, and compressed natural gas (CNG) should be used at the manufacturing stage.
8. Starting of clean technologies for big industries.
9. FortheclustersofSSI units ‘Common Effluent Plants’ was set up.
10. The echo mark scheme started to increase the production/consumption of Environment-friendly products.
11. A zoning atlas was prepared to get environmental informational district level.
12. Environmental epidemiological studies were initiated in seven critically polluted areas to study the impact of the environment on health.
13. Financial assistance to initiate pollution control environments and to shift industries in the outer places.
14. Environment Pollution (Prevention & control) authority was established.
15. Prohibition of smoking in public places and use of polythene bags.

Question 6.
What are the various factors influencing business ethics?
Answer:
Factors Influencing Business Ethics: The main determinants of business ethics are as follows:
1. Social values- Social forces and pressures exercise considerable influence on business ethics. Often, different groups in society compel businessmen to discontinue unethical practices. Morality, behavior, beliefs emerge from social values, social forces exercise influence on business to observe ethics in business.

2. Legislation: Laws are generally passed to keep a check on unethical practices. They are their use of social pressures. When society considers a practice unethical, it may exercise its influence to get that practice declared illegal. For example, the Monopolies and Restrictive Trade Practices Act has made monopolistic trade practices illegal in India. Prevention of Food Adulteration Act 1976, Drugs and Cosmetics Act 1946, Prevention of Black-marketing and Maintenance of Supply of Essential Commodities Act 1980 has to enact to keep a check on malpractices of business.

3. Government rules and regulations: Government regulations provide guidelines for acceptable practices. For example, the government has made it compulsory for tobacco companies to give the statutory warning “smoking is injurious to health” in the advertisements for cigarettes.

4. Industry norms: In some industries and trades, specific codes of conduct have been laid down. In addition, many organizations have laid down guidelines for regulating the behavior of their employees. Most industries have an ethical climate that governs the code of conduct of the employees. An individual working in the enterprises to observe the code of conduct of the enterprise, and norms established in the industry.

5. Personal Yahies-The personal beliefs of the individuals working in an organization also influence business ethics. However, sometimes there is a conflict between personal moral values and company goals. Generally, employees look to their superiors and tend to adopt their values and actions. The behavior of competitors and associates also influences business ethics. An honest businessman must-keep their personal interest subordinate to die interest of society.

6. Professionafisation: Professional managers normally tend to have higher ethical standards than family managers. Therefore, the growing professionalization of management has exercised a healthy influence on ethics in business. These days professionalism of management has been generating more ethics in the business.

Question 7.
Write short notes on CSR?
Answer:
It is the responsibility of every form of business enterprise to act in a socially desirable manner. But the concept of CSR is corporate social responsibility used particularly with reference to a company. It may be defined as achieving commercial success in ways that honor ethical values and respect people, communities, and the natural environment. It means addressing the legal, ethical, commercial, and other expectations that society has from corporate who should take decisions and actions that fairly balance the claims of stake-holders. CSR is viewed as a comprehensive set of policies, practices, and programs that are integrated into business operations, supply claims, and decision-making processes throughout the company.

Question 8.
List the environmental problems that cause damage to the natural environment?
Answer:
The United Nations has identified eight problems that cause damage to the natural environment.

These are:

1. Ozone depletion
2. Global warning
3. Solid and hazardous wastes
4. Water pollution
5. Freshwater quality and quantity
6. Deforestation
7. Land degradation
8. Danger to biological diversity.

Question 9.
Define Corporate Governance?
Answer:
It is originated intheUnitedKingdomforthepurposeofimproved accountable to directors to shareholders, with emphasis on more transparent auditing and increased responsibilities of independent directors and division of roles of chairman and managing directors for safeguarding the interest of the shareholders.

Question 10.
What are the main ground rules of ethics?
Answer:
The following are some rules which all human beings should follow in life.

1. Be trustworthy
2. Have respect for other
3. Own responsibility
4. Be fair in dealing
5. Be caring towards well being of others.
6. Prove to be a good citizen

Question 11.
Write the effects of pollution?
Answer:
Pollution: The injection of harmful substances into the environment is called pollution. It changes the physical, chemical, and biological characteristics of air, land, and water. Pollution harms human life and the life of other species. It also degrades living conditions while wasting or depleting raw material resources. It also damages our historical monuments. It causes risks to the environment, human health and damage to natural and man-made resources.

Question 12.
Give some examples of Business ethics.
Answer:

1. Giving enough dividends to the shareholder on their investment.
2. Making goods available of good quality and quantity at a reasonable price.
3. Making timely payments to the suppliers.
4. Having healthy competition with the competitors.
5. Observing the government laws and helping the government by paying taxes in time.
6. Making employment to the society.
7. Saving the environment from getting polluted.

Question 13.
“The concept of social responsibility is ultimately in the interest of business community itself.” Do you agree? Explain.
Answer:
“The concept of social responsibility is ultimately in the interest of the business community itself. I agree with this statement because business is an organ of society and it operates in a socio-economic environment. It can justify its existence by fulfilling its obligations to society. No doubt business is an economic institution and it cannot survive without economic performance. But economic results depend upon the goodwill and support of the society’. Business gains support only when it assumes its social responsibilities.