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Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 12th Lesson Emerging Trends in Business Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 12th Lesson Emerging Trends in Business

Essay Answer Questions

Question 1.
Define E – business and explain the scope of E – business.
Answer:
Ther term E-business refers to the integration of business tools based on ICT to improve the functioning of the company. “E-business” refers to the use of an online support for the relationship building between a company and clients. E – business was first used by IBM in 1997. It defined E – business as “the transformation of key business processes through the use of internet technologies”. E – business is defined as the application of information and communication technologies (ICT) which support all the activities and realms of business.

E-Business uses web based technology to improve relationships with customers. Implementing an E-business project necessarily involves the deployment of a network or web – interface connecting company specific services to the client.

Scope of E – Business :
E – business can be divided into following areas.
a) E – business within the organisation

b) Business to business (B2B) :
E – business refers to an exchange of products and services by one business and another.

c) Business to customer (B2C) :
E – business refers to an exchange of products and services from a business to a customer.

d) Customer to customer (C2C) :
E – business refers to C2C transactions are being facilitated by websites like quicker, olx, where customers offer their products online to be bought by other customers.

e) Customer to business (C2B) :
C2B transactions involve provision of project work by customers on internet to the needy companies.

Most of us are aware of buying products online through some sites like Flipkart, Jabong and Amazon. Almost everything from gym equipment to laptops, apparels to Jewelries are available online in this age of E-commerce. Even people are also buying services online. Business consultants, lawyers and doctors are offering their services or advices to their potential clients via internet.

Electronic business is a super set of business cases. E – commerce is one of the aspects of e – business. Some other important aspects of e – business, which are successfully carried through the internet, are e – auctioning, e – banking, e – directories, e – engineering, e – franchising, e – gambling, e – learning, e – mailing, e – marketing e – operational resource management, etc.

i) E-commerce :
Transacting or facilitating business through internet is called e-commerce. E-commerce is short for “Electronic commerce”.

ii) E – auctioning :
The internet enables people to participate in the auction without sacrificing their personal time. In e – auctioning the people who want to participate in the auction, visit the website with a click and go through the details.

iii) E-banking :
Electronic banking is one of the most successful online businesses. E-banking allows customers to access their accounts and execute orders through use of website. Online banking allows the customers to get their money from an ATM.

iv) E-marketing :
Electronic marketing provides a worldwide platform for buying and selling of goods without having any geographical barriers. The internet allows companies to react to individual customer demands immediately without any loss of time. It does not matter where the customer is located.

v) E – trading :
E-trading is also known as “online trading” or e – broking. It is used for buying and selling stocks in stock exchanges.

Question 2.
Explain the benefits of E – business.
Answer:
E-business has many advantages which can be broadly classified into the following categories.
A) Benefits to Customer
B) Benefits to Organisation
C) Benefits to Society

A) Benefits to Customer:
i) Shopping at ease :
E – business enables customers to shop or do other transactions 24 hours a day, round the year from almost any location.

ii) Wide choice :
Customers will have more choices or more alternative products and services.

iii) Price savings :
E – business provides customers with less expensive products and services by allowing them to shop in many places and conduct quick comparisons.

iv) Exchange of information :
Allows customers to interact with other customers and exchange their opinions and experiences on products purchased.

B) Benefits to Organisation :
i) Reach beyond boundaries :
Extends the market place to national and international markets.

ii) Cost savings:
Reduces the cost of creating, processing, distributing, storing, and retrieving information. Allows reduced inventories and overheads.

iii) Competitive benefits :
Reduced processing time allows for customization of products and services for achieving competitive advantages.

iv) Earlier capital collection :
Reduces the time between the outlay of capital and the receipt of products and services.

C) Benefits to Society :
i) Environmental benefits :
Enables more individuals to work at home and to do less travelling for shopping, resulting in less traffic on the roads and lower air pollution.

ii) Public welfare :
Allows some merchandise to be sold at lower prices benefiting the poor ones.

iii) Availability of products :
Enables people in Third World countries and rural areas to enjoy produces and services which otherwise are not available to them.

Question 3.
Explain the opportunities of business enterprises in 21^st century.
Answer:
The following are the opportunities of business enterprises in 21^st century:

i) LPG :
The economic reforms initiated in the form of Liberalization, Privatization, and Globalization (LPG) have brought in structural changes which ultimately created favourable environment for business enterprises in India.

ii) Increase in size and diversification :
The 21^st century business enterprises are characterized with large-sized and highly diversified organisations. Companies are able to reduce their costs and thereby increase in profits.

iii) Increase in per capita income :
India has emerged as the fourth largest economy globally with a high growth rate with its improved per capita income. Per capita income is the measure of living standards of its people in a country. As India’s per capita income is increasing, the business opportunities are also increasing in India.

iv) Market economies:
The Indian economy being one of the largest economies in the world with a population of more than 1.2 billion is flourishing and attracting industrial, trade and service sectors all around the world.

v) E-Commerce – A gate way to global markets :
Business enterprises across the globe are discovering the benefits of electronic commerce.

vi) Technological advancements :
21^st century business enterprises are able to use ultramodern technology. With the advancement of technology, organisations are able to offer services.

vii) Expansion of financial services :
Banking insurance, debt and equity financing, micro finance sectors are helping the people to save money and to get liberal credit for their future needs.

viii) Automation of business processes :
Business Process Automotion (BPA) is the strategy that a business uses to automate processes in order to curtail costs. The objective of BPA is not only to automate business processes,but also to simplify and improve business workflows in terms of achieving greater efficiency, adapting to changing business needs and reducing potentiality human error.

ix) Growing mergers, acquisitions and foreign collaborations :
Mergers and acquisitions is a strategy of modern business enterprises for improving innovation, profitability, market share and stock prices. This helps in generating cost effectiveness.

x) Scope for international enterpreneurship :
In 21^st century, many organizations are globalizing their businesses in terms of manufacturing, service delivery, capital sourcing, or talent acquisition as a defensive strategy. Similarly these are discovering a new business opportunities in more than one country to create new products or services to suit to the diversified needs of the customers.

Question 4.
Explain the challenges of business enterprises in 21^st century.
Answer:
The following are the challenges of business enterprises in 21^st century:
1) Threat of technology :
Business organisations have to adopt themselves in tune with the changing technology and modernize their plant and equipment and processes, if not they will become outdated in the market.

2) Growing consumer awareness:
Growing consumer awareness about the products and services will continue to drive sustainability of business in 21st century. Businesses need to respond to consumer demand to gain customers and avoid losing their market share.

3) Challenges of globalization :
Globalization is leading to strategic challenges of mixed cultures and languages in the business environment.

4) Depleting natural resources:
Most of the manufacturing enterprises depend upon certain natural resources which is a key source of raw materials.

5) Economic recession :
Economic recession took place in the United States and Europe is slowly showing its affects on performance of business enterprises in other countries also.

6) Information challenges :
Information technology supported by a new world infra-structure of data communications and telecommunications i.e. use of internet, wireless, e-commerce as part of management tools and easing of technology transfer has posed a bigger challenge for 21^st century business enterprises.

7) The challenge of the environment :
Environmental degradation is one of the biggest challenges of business organisations facing today. Pollution and global warming are the challenges, which all countries are facing.

8) Corruption and bureaucratic hurdles :
Corruption is a very big hurdle for doing business. It is a barrier to the effective development of the private sector and poses business risks.

9) Changing regulatory frame work:
A changing regulatory environment is always of concern in certain industries. Two key areas of regulatory challenges are taxes and health care. The threat of increased costs due to new carbon taxes and presser to “go green” is another challenge.

10) Transparency and governance :
Corporate governance involves organizing and prioritizing a variety of interests. Modern companies are in surveillance of transparency and governance issues.

11) Corporate social responsibility:
The practical implementation of corporate social responsibility is facing lot of problems. Lack of understanding, inadequate trained personnel, coverage, etc. are a few hurdles of CSR programmes.

12) Foreign exchange risk :
Foreign exchange risk is another factor causing constant instability in the running of business organisation.

13) Security Issues:
Security threat to business has become more pronounced in 21^st century. With the proliferation of Electronic Commerce and the “Virtual Office”, threats are becoming everyday occurrence to business.

14) Human resource challenges:
One of the biggest challenges of 21^st century business is human resources – finding the right staff, training, and retaining them are concerns of the HR function.

Short Answer Questions

Question 1.
Explain the scope of E-business.
Answer:
The scope of E-business can be divided into following areas :
a) E-business within the organisation
b) Business to business (B2B) dealing
c) Business to customer (B2C) transactions
d) Customer to customer (C2C)
e) Customer to business (C2B)

The following a and b category E-business refers to an exchange of production and services by one business and another business from a business to a customer and c and d category E-business refers to transactions are being facilitated by websites where customers offer their products online, to be bought by other customers and provision of project work by customers on internet to the needy companies.

Some other important aspects of e – business, which are successfully carried through the internet, are e – auctioning, e – banking, e – directories, e – trading, etc. In the age of e – commerce almost everything from gym equipment to laptops are available online. Even people are also buying services online. Business consultants, lawyers and doctors are offering their services or advices to their potential clients via internet.

Question 2.
What are the benefits ofE – business to organizations?
Answer:
The following are the benefits of E-business to organizations.
i) Reach beyond boundaries:
Extends the market place to national and international markets.

ii) Cost savings :
Reduces the cost of creating, processing, distributing, storing and retrieving information. Allows reduced inventories and overheads.

iii) Competitive benefits:
Reduced processing time allows for customization of products and services for achieving competitive advantages.

iv) Earlier capital collection :
Reduces the time between the outlay of capital and the receipt of products and services.

Question 3.
What are the benefits ofE – business to customers?
Answer:
The following are the benefits of E – business to customers.
i) Shopping at ease:
E-business enables customers to shop or do other transactions 24 hours a day, round the year from almost any location.

ii) Wide choice :
Customers will have more choices or more alternative products and services.

iii) Price savings :
E-business provides customers with less expensive products and services.

iv) Exchange of information :
Allows customers to interact with other customers and exchange their opinions and experiences on products purchased.

Question 4.
Briefly outline the risks faced while involving in a E-business transaction.
Answer:
The following are the risks faced while involving in a E-business transaction.

1. Risk of the information being unauthorized altered while travelling the internet.
2. Risk related to confidentiality of personal information and banking information.
3. Risk relating to legal enforceability of transactions.
4. Risk of failure of electronic communications.
5. Risk to the management in controlling and clearing the E-commerce transactions.
6. Risks relating to technology like viruses and hacking.

Question 5.
What are the benefits of E-business to society?
Answer:
The following are the benefits of E-business to the society.

i) Environmental benefits:
Enables more individuals to work at home and to do less travelling for shopping, resulting in less traffic on the roads, and lower air pollution.

ii) Public welfare:
Allows some merchandise to be sold at lower prices benefiting the poor ones.

iii) Availability of products:
Enables people in Third World countries and rural areas to enjoy produces and services which otherwise are not available to them.

Very Short Answer Questions

Question 1.
business [May 17-T.S.]
Answer:
The term ‘E-business’ refers to the integration of business tools based on ICT to improve the functioning of the company. The term e-business was first used by IBM in 1997. It defined E-business as “the transformation of key business processes through the use of internet technologies”. E-business uses web based technology to improve relationship with customers.

Question 2.
E-banking [Mar. 2019, 15 -T.S.]
Answer:
Electronic banking is one of the most successful online businesses. E-banking allows customers to access their accounts and execute orders through use of website. Online banking allows the customers to get their money from an Automated Teller Machine (ATM), instead of walking up to the cash desk in the bank, can view their accounts, transfer funds and can pay bills. Eg. Net Banking.

Question 3.
E-marketing
Answer:
Electronic marketing provides a worldwide platform for buying and selling of goods without having any geographical barriers. The internet allows companies to react to individual customer demands immediately without any loss of time. It does not matter where the customer is located by e-mails, etc.

Question 4.
E-commerce
Answer:
Transacting or facilitating business through Internet is called E-commerce. E-commerce is short for “Electronic commerce”. A form of business transactions conducted electronically in E-commerce.

Question 5.
E – auctioning
Answer:
The internet enables people to participate in the auction without sacrificing their personal time. In E – auctioning the people, who want to participate in the auction, visit the website with a click and go through the details of goods offered.

Question 6.
E – trading [Mar. 17 – T.S.]
Answer:
E-trading is also known as “online trading” or E – broking. It is used for buying and selling stocks in stock exchanges.

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 11th Lesson Multi National Corporations (MNCs) Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 11th Lesson Multi National Corporations (MNCs)

Essay Answer Questions

Question 1.
Define MNC and explain its features.
Answer:
The word ‘Multinational’ consists of two words Multi and National. Multi means ‘many’ and national means “country or nation”. Therefore Multinational company means a company that operates in several countries.

Multinational companies are also known as Transnational corporations or International corporations or Global corporations. They conduct business in two or more countries. These corporations possess huge capital resources, latest technology along with world wide goodwill.

Definition :
According to International Labour Organisations (ILO) report –
“An enterprise whose managerial headquarters are located in one country, while it carries out operations in a number of other countries as well.”

According to Neil. H. Jocoby “A multinational corporation owns and manages business in two or more countries.”

David E. Liliental, considering a wider parameter, defines the MNCs as “Corporations which have their home in one country but operate and live under the laws and customs of other countries as well.” For brevity, MNC refers to the business enterprise operating in more than one nation.

The essential feature of a MNC is that headquarters are located in home country and they carry operations in a number of other countries i.e. host countries.

Characteristics of MNCs:
a) Giant size :
The sales and assets of MNCs are quite large. Hence they earn supernormal profits.

b) Global operations :
MNCs carry production and marketing operations in different countries of the world. They possess all the infrastructural facilities.

c) Centralized control :
MNC has its headquarters in the home country. It exercises control over all branches and subsidiaries.

d) Dominant position and status :
MNCs carry on operations in bulk and cover many people. Hence they control the market and enjoy a dominant position and status in all operated countries.

e) Sophisticated technology :
Generally MNCs had advance technology so as to produce quality goods and services to the consumers.

f) Professional management:
MNCs employ professional trained managers to integrate and manage world wide operations to maximize profits.

g) International research and development :
MNCs internationalize their research and development operations in order to caputre the market of the host countries.

h) Easy entry :
MNCs can enter into any country easily with their huge capital, technology, and managerial skills.

i) Higher revenues :
MNCs generate huge revenues with their large size sales and benefits of large scale economies

Question 2.
Define MNC and explain the advantages of MNCs.
Answer:
The word Multinational consists of two words Multi and National. Mutli means many and national means “nations or countries”. Therefore Multinational company means a company that operates in several countries.

Multinational companies are also known as Transnational Corporations or International Corporations-or Global Corporations. They conduct business in two or more countries. These corporations possess huge capital resources, latest technology along with worldwide goodwill.

According to Neil. H. Jocoby “A multinational corporation owns and manages business in two or more countries.”

David E. Liliental, considering a wider parameter, defines the MNCs as.”Corporations which have their home in one country but operate and live under the laws and customs of other countries as well.” For brevity, MNC refers to the business enterprise operating in more than one nation.

The essential feature of a MNC is that headquarters are located in home country and they carry operations in a number of other countries i.e. host countries.

Advantages to Host Countries:
1) Provide Capital :
The MNCs provide required capital for the development of industries in under developing countries. The direct foreign investment is quite useful to the developing countries.

2) Transfer of Technology:
MNCs serve as vehicles for transfer of advanced technology to the developing countries.

3) Generate Employment :
MNCs create employment in various cadres and pay attractive salaries in the host countries.

4) Foreign Exchange :
MNCs enable the host countries to increase their exports and reduce the imports. It improves the position of balance of payments.

5) Managerial Revolution :
MNCs help to professionalise management in host countries. They employ modern management techniques and trained manager.

6) Break Monopoly :
MNCs encourage healthy competition and break domestic monopolies.

7) Growth of Domestic Business Firms:
MNCs encourage domestic suppliers, ancillary units, bankers, and other institutions to expand their activites.

8) Innovation :
MNCs bring out innovation in their production and distribution activities which are required to provide goods and services to needs of the consumers of the host country.

9) Better Standard of Living :
MNCs help to improve standard of living in host countries by providing superior products and services at a reasonable rate.

10) Improves Public Relations among Nations :
They encourage international brotherhood through international business.

Advantages to Home Countries :
1) Availability of resources:
MNCs procure the land, labour, materials at cheap rates and can supply goods and services at reasonable rates.

2) Develop exports :
MNCs encourage the export of several products. This will imporve their foreign exchange earnings.

3) Generate income :
They can earn huge income from dividends, licenising fees, royalty and profits from their operations. This will improve the home country’s income.

4) Provides employment:
MNCs provide employment to the people of home country, as managers, technicians and other staff members.

5) Make use expertise :
The MNCs make use the latest technical knowledge and expertise of managers of different countries to run their business.

Question 3.
Define MNC and explain the limitations of MNCs.
Answer:
The word Multinational consists of two words Multi and National. Mutli means many and national means “nations or countries”. Therefore Multinational company means a company that operates in several countries.

Multinational companies are also known as Transnational Corporations or International Corporations or Globed Corporations. They conduct business in two or more countries. These corporations possess huge capital resources, latest technology along with worldwide goodwill.

According to Neil. H. Jocoby “A multinational corporation owns and manages business in two or more countries.”

David E. Liliental, considering a wider parameter, defines the MNCs as “Corporations which have their home in one country but operate and live under the laws and customs of other countries as well.” For brevity, MNC refers to the business enterprise operating in more than one nation.

The essential feature of a MNC is that headquarters are located in home country and they carry operations in a number of other countries i.e. host countries.

Disadvantages of MNCs:
1) Monopolize the markets :
MNC may join hands with big business units in host country to monopolize the markets. This ultimately leads to concentration of economic power.

2) Disregard host countries’ priorities :
MNCs invest only in porfitable business and ignore priorties set by the host countries. This results in regional backwardness in the host country.

3) Imbalance in the foreign exchange remittances :
MNCs and their subsidiaries collect huge amounts in the form of dividend. This creates an imbalance in the foreign exchange remittances.

4) Transfer of outdated technology :
The MNCs transfer the outdated technology, which is unsuitable and absolute by charging higher rates.

5) Impose restrictions :
MNCs try to impose restrictions with host countries related to non transfer of technical knowlege, determination of price, etc. to discourage the exports.

6) Threat to sovereignty :
MNCs may interfere in the political affairs of the country and try to create internal disturbances.

7) Spread of foreign culture :
MNCs cause damage to the cultural values of the host countries. They spread the foreign culture and change the attitudes, desires and fashions of the people.

8) Depletion of natural resources:
MNCs cause rapid depletion of some of the natural resources in host countries.

9) Retard growth of employment :
MNCs try to provide employment to their own nations. This bias attitude of the MNCs may lead to unemployment in the host country.

10) Business strategies and practices :
MNCs dump harmful products, give deceptive advertisements attract the consumers to purchase outdated and unwanted goods.

Question 4.
What is globalisation and explain the necessity of Globalisation?
Answer:
Globalisation refers to the increasing integration of markets (exchange) and production, to include the mobility of resources (capital, labour, ‘organisation and knowledge’).

The world is moving away from self-contained national economies toward an interdependent, integrated global economic system. Globalisation refers to the shift toward a more integrated and interdependent world economy.

Globalization has two facets :

1. The globalization of markets
2. The globalization of production

1) Globalization of Markets:

• The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace
• Falling trade barriers make it easier to sell internationally
• The tastes and preferences of consumers are converging on some global norm
• Firms help create the global market by offering the same basic products worldwide

2) Globalization of Production :

• The globalization of production refers to the sourcing of goods and services from locations around the globe to take advantages of national differences in the cost and quality of factors of production like land, labour and capital
• Companies compete more effectively by lowering their overall cost structure or improving the quality or functionality of their product offering

There are two macro factors that underlie the trend toward greater globalization :
1) Low Trade Barriers:
The decline in barriers to the free flow of goods, services and capital. Advanced countries made a commitment to lower barriers to trade and investment.

2) Technological change:
Technological change has made the globalization of markets a reality. Important advances have occurred in microprocessors, telecommunications, Internet and World Wide Web, transportation technology, etc.

Short Answer Questions

Question 1.
Explain the meaning of MNC.
Answer:
The word Multinational consists of two words Multi and National. Mutli means many and national means “nations or countries”. Therefore Multinational company means a company that operates in several countries.

Multinational companies are also known as Transnational Corporations or International Corporations or Global Corporations. They conduct business in two or more countries. These corporations possess huge capital resources, latest technology along with worldwide goodwill.

According to Neil. H. Jocoby “A multinational corporation owns and manages business in two or more countries.”

David E. Liliental, considering a wider parameter, defines the MNCs as “Corporations which have their home in one country but operate and live under the laws and customs of other countries as well.” For brevity, MNC refers to the business enterprise operating in more than one nation.

The essential feature of a MNC is that headquarters are located in home country and they carry operations in a number of other countries i.e. host countries.

Question 2.
List out the features of MNCs. [Mar. 2018 – A.P. & T.S.]
Answer:
a) Giant size :
The sales and assets of MNCs are quite large. Hence they earn supernormal profits.

b) Global operations :
MNCs carfy production and marketing operations in different countries of the world. They possess ail the infrastructural facilities.

c) Centralized control :
MNC has its headquarters in the home country. It exercises control over all branches and subsidiaries.

d) Dominant position and status:
MNCs carry on operations in bulk and cover many people. Hence they control the market and enjoy a .dominant position and status in all operated countries.

e) Sophisticated Technology :
Generally MNCs had advance technology so as to produce quality goods and services to the consumers.

f) Professional Management :
MNCs employs professional trained managers to integrate and manage world wide operations to maximize profits.

g) International research and development:
MNCs internationalize their research and development operations in order to caputre the market of the’host countries.

h) Easy entry :
MNCs can enter into any country easily with their huge capital, technology and managerial skills.

i) Higher revenues :
MNCs generate huge revenues with their large size sales and benefits of large scale economies.

Question 3.
State any four merits of MNCs to host country. [Mar. 2019 – A.P. Mar. 17 – T.S.]
Answer:
MNCs help the host country in the following ways.

1. The investment level, employment level and income level of the host country increases due to the operation of MNCs.
2. The industries of host country get latest technology from foreign countries through MNCs.
3. The host country’s business also gets management expertise from MNCs.
4. The domestic traders and market intermediaries of the host country gets increased business from the operation of MNCs.
5. MNCs break protectionalism, curb local monopolies, create competition among domestic companies and thus enhance their competitiveness.
6. Domestic industries can make use of R & D outcomes of MNCs.
7. The host country can reduce imports and increase exports due to goods produced by MNCs in the host country. This helps to improve balance of payment.
8. Level of industrial and economic development increases due to the growth of MNCs in the host country.

Question 4.
Explain any four merits of MNCs to home country. [Mar. 15 – T.S.]
Answer:
MNCs home country has the following advantages.

1. MNCs create opportunities for marketing the products produced in the home country throughout the world.
2. They create employment opportunities to the people of home country both at home and abroad.
3. It gives a boost to the industrial activities of home country.
4. MNCs help to maintain favourable balance of payment of the home country in the long run.
5. Home country can also get the benefit of foreign culture brought by MNCs.

Question 5.
Explain any four disadvantages to the host country. [Mar. 17, 15 – A.P.]
Answer:

1. MNCs may transfer technology which has become outdated in the home country.
2. As MNCs do not operate within the national autonomy, they may pose a threat to the economic and political sovereignty of host countries.
3. MNCs may kill the domestic industry by monopolising the host country’s market.
4. In order to make profit, MNCs may use natural resources of the home country indiscriminately and cause depletion of the resources.

Question 6.
State any four disadvantages to home country.
Answer:

1. MNCs may join hands with big business units in host country to monopolize the markets. This ultimately leads to concentration of economic power.
2. The MNCs transfer the outdated technology, which is unsuitable and absolute by charging higher rates.
3. MNCs may interfere in the political affairs of the country and try to create internal disturbances.
4. MNCs try to provide employment to their own nations. This bias attitude of the MNCs may lead to unemployment in the host country.

Very Short Answer Questions

Question 1.
Define Globalisation.
Answer:
The world is moving away from self contained national economies toward an interdependent integrated global economic system. Globalization refers to the shift toward a more integrated and interdependent world economy.

Globalisation has two facets :

1. The globalization of markets
2. The globalization of production

Question 2.
Define FDI.
Answer:
Foreign Direct Investment (FDI) is the control of production which takes place in one country (host country) by a firm based in another country (home). FDI is the defining feature of the MNC. Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country.

Question 3.
Define MNC. [May, 17 – A.P.]
Answer:
The word ‘Multinational’ consists of two words Multi and National. Multi means ‘many’ and national means “country or nation”. Therefore Multinational company means a company that operates in several countries.

Multinational companies are also known as Transnational corporations or International corporations or Global corporations. They conduct business in two or more countries. These corporations possess huge capital resources, latest technology along with world wide goodwill.

Examples of MNCs are :
Pepsi, Hyundai, Nike, Reebok, LG, Samsung and many more.

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 10th Lesson Micro, Small and Medium Enterprises (MSMEs) Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 10th Lesson Micro, Small and Medium Enterprises (MSMEs)

Essay Answer Questions

Question 1.
Define MSMEs and explain their significance. [Mar. 2019 – T.S.]
Answer:
The term (enterprise) has been defined under section 2(e) so as to mean ‘any industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 or engaged in providing or rendering of any service or services’.

In accordance with the provision of Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two classes. They are

1. Manufacturing enterprises
2. Service enterprises.

1) Manufacturing enterprises :
Manufacturing enterprises are those business enterprises which are engaged in the manufacturing or production of goods or commodities. More specifically, these enterprises involve in converting the raw material into finished products by using plant and machinery for creating value addition to the final products.

• A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh.
• A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore.
• A medium enterprise is an enterprise where in the investment in plant and machinery is more than Rs. 5 crore but does not exceed Rs. 10 crore.

2) Service enterprises :
The enterprises involve in providing or rendering services are defined as below.

1. A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh.
2. A small enterprise is an enterprise where the investment in equipment is more than Rs. 10 lakh but does not exceed Rs. 2 crore.
3. A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

Significance of MSMEs:
MSMEs contribute nearly 8% of the country’s GDP, 45% of the manufacturing output and 40% of the exports. They provide the largest share of employment after agriculture. They are the nurseries for entrepreneurship and innovation. The Ministry of MSME has undertaken number of programmes to help and assist entrepreneurs and small businesses. Entrepreneurs who are planning to set up business, may contact National Institute for Entrepreneurship and Small Business Development (National Institute for Micro, Small and Medium Enterprises).

The significance of MSMEs can be understood from the following :
a) 90% of MSMEs in India are unregistered (out of which nearly 80% are sole proprietor firms)
b) 40% of exports in India are through MSME channel
c) 40% of employment opportunity in India is provided by MSME sector
d) MSMEs provide opportunities to the budding entrepreneurs by providing various channels of investment opportunity according to their class of investment.
e) MSMEs provide a good market for foreign companies to start venture capital businesses in India.

Question 2.
Discuss the privileges enjoyed by MSMEs.
Answer:
MSMED Act 2006 provides the following privileges to Micro, Small and Medium Enterprises.

1) Buyer’s Liability to Make Timely Payment for Goods and Service :
Section 15 envisages to ensure timely receipt of payment for their goods and services by micro and small enterprises. It casts an obligation upon the buyer of any goods or services, to make payment to the supplier, by the specified date as follows :
a) When there is an agreement in writing :
On or before the date agreed upon between them in writing. Further, in no case the period so agreed shall exceed 45 days from the day of acceptance.

b) When there is no agreement:
Before the appointed day, which means the day following immediately after the expiry of 15 days from the day of acceptance or day of deemed acceptance.

The terms ‘buyer’, ‘supplier’, day of acceptance’ have been defined in the Act, as under:

• Buyer’ means a person buying any goods or receiving any services from a supplier for consideration.
• Supplier’ means a micro or small enterprise.
• ‘Day of acceptance’ means the day of actual delivery of goods or rendering of services.

2) Interest for Delayed Payment by Buyer :
Where a buyer fails to make payment as required above, he shall be liable to pay interest on the outstanding amount. The interest shall be payable for the period of delay from the date immediately following the agreed date. The interest shall be payable at a rate three times the bank rate and compounded at monthly rests.

3) Reference of Disputes :
Any dispute relating to amount payable for any goods or services, and any interest thereon, may be referred by any party, to the Micro and Small Enterprises Facilitation Council, which shall conduct conciliation in the matter.

Short Answer Questions

Question 1.
Define Manufacturing enterprises as per MSMEs Act, 2006.
Answer:
Manufacturing enterprises are those business enterprises which are engaged in the manufacturing or production of goods or commodities. More specifically, these enterprises involve in converting the raw material into finished products by using plant and machinery for creating value addition to the final products. From the point of view of MSMEs, the manufacturing enterprises are defined in terms of investment made in plant and machinery.

• A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh.
• A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore.
• A medium enterprise is an enterprise where in the investment in plant and machinery is more than Rs. 5 crore but does not exceed Rs. 10 crore.

Question 2.
Define Service enterprises as per MSMEs Act, 2006.
Answer:
These enterprises involve in providing or rendering services. Service sector may be defined in terms of investment made in equipment.

• A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh.
• A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore.
• A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

Question 3.
Briefly explain the registration process of MSMEs. [May 17 – A.P.]
Answer:
The following are the registration requirements under the MSMED Act, 2006. As per the Act any person intending to establish-

• a micro or small enterprise, may, at his discretion.
• a medium enterprise engaged in providing or rendering of services may, at his discretion.
• a medium enterprise engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, shall file the memorandum of micro, small or, as the case may be, of medium enterprise with authority specified by the State Government or the Central Government.

Very Short Answer Questions

Question 1.
Define Micro Enterprises. [May 17-T.S.]
Answer:
In case of manufacturing enterprises a micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh. In case of service enterprises a micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh.

Question 2.
Define Small Enterprieses. [Mar. 15- A.P.]
Answer:
In case of manufacturing enterprises small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore. In case of service enterprises, a small enterprise is an enterprise where the investment in equipment is more than Rs. 10 lakh but does not exceed Rs. 2 crore.

Question 3.
Define Medium Enterprises. [Mar. 17 – A.P.]
Answer:
In case of manufacturing enterprises a medium enterprise is an enterprise where in the investment in plant and machinery is more than Rs. 5 crore but does not exceed Rs. 10 crore. In case of medium enterprises a medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

Question 4.
Define Manufacturing Enterprise. [(Mar. 2019 – A.P.) (Mar. 17 – T.S)]
Answer:
Manufacturing Enterprise :

1. Micro – Investment in plant and machinery does not exceed Rs. 25 lakh
2. Small – Investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore
3. Medium – Investment in plant and machinery is more than Rs. 5 crore but does not exceed Rs. 10 crore

Question 5.
Define Service Enterprise. [(Mar. 2019, 15 – T.S.) (Mar. 2018 – A.P. – T.S.)]
Answer:
Micro – Investment in equipment does not exceed Rs. 10 lakh
Small – Investment in equipment is more than Rs. 10 lakh but does not exceed Rs.2 crore
Medium – Investment in equipment is more than Rs. 2 crore but does not exceed Rs.5 crore

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 9th Lesson Sources of Business Finance-II Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 9th Lesson Sources of Business Finance-II

Essay Answer Questions

Question 1.
1. Explain various sources of business finance available to Indian businessmen.
Answer:
A businessman can raise funds from various sources. On the basis of the period, sources of finance can be categorized into three. They are

1. Long-term sources
2. Medium-term sources
3. Short-term sources

1) Long-term sources of finance :
It includes i) Equity shares and preference shares ii) Debentures iii) Retained earnings.

i) Equity Shares :
Equity shares are the most important source of raising long-term capital by a company. Equity shares, also known as ordinary shares and also known as ownership capital or owner’s funds. Equity shareholders do not get a fixed divident but are paid on the basis of earnings by the company. They enjoy the rewards as well as bear the risk of ownership. Their liability, however, is limited to the extent of capital contributed by them in the company.

Preferences shares :
The capital raised by issue of preference shares is called preference share capital’. In other words, as compared to the equity shareholders, the preference shareholders have a preferentail claim over dividend and repayment of capital. Preference shareholders generally do not enjoy any voting rights. A company can issue different types of preference shares by raising capital.

ii) Debentures:
Debentures are an important instrument for raising long-term debt capital. A company can raise funds through issue of debentures. It bears a fixed rate of interest. The debenture issued by a company is an aknowledgement that the company has borrowed a certain amount of money, which it promises to repay on a future date. ‘Debenture holders’ are, therefore, termed as ‘creditors of the company’.

iii) Retained Earnings :
A company generally does not distribute all its earnings amongst the shareholders as dividends. A portion of the net earnings may be retained in the business for use in the future. This is known as ‘retained earnings’. It is a source of internal financing or self financing or ‘ploughing back of profits’.

2) Medium-term sources of finance :
It includes i) Public deposits ii) Loans, from banks iii) Lease financing

i) Public deposits:
The deposits that are raised by organisations directly from the public are known as ‘Public deposits’. Any person who is interested in depositing money in an organisation can do so by filling up a prescribed form. The organisation in return issues a deposit receipt as acknowledgement of the debt. Public deposits can take care of medium-term financial requirements of a business.

ii) Commercial Banks:
Commercial banks occupy a vital position as they provide funds for different purposes as well as for different time periods. Banks extend loans to firms of all sizes and in may ways, like, cash credits, overdrafts, term loans, purchase/discounting of bills, and issue of letter of credit.

iii) Lease Financing :
A lease is a contractual agreement whereby one party i.e. the owner of an asset grants the other party the right to use the asset in return for a periodic payment. In other words it is a renting of an asset for some specified period. The owner of the assets is called the “lessor” while the party that uses the assets is known as the ’lessee’. Lease finance is an important means for modernisation and diversification in the firm. Such financing is resorted to acquiring assets like computers and electronic equipment.

3) Short-term sources of finace :
It includes i) Bank credit ii) Trade credit iii) Installment credit iv) Advances v) C.P (Commercial Paper)

i) Bank credit :
Commercial banks extend the short-term financial assistance to business firms by means of bank credit. Bank credit may be provided in the following forms i) loans ii) cash credit iii) overdraft.

ii) Trade credit:
Trade credit is the credit extended by one trader to another for the purchase of goods and services. Trade credit facilitates the purchase of supplies without immediate payment. Trade credit is commonly used by business organisations as a source of short-term financing.

iii) Installment credit:
This is another method by which the assets are purchases and possession of goods is taken immediately but the payment is made in installment over a pre-determined period of time. Generally, interest is charged on the unpaid price.

iv) Advances:
Some business organisations get advances from their customers and agents against orders and this source is short term source of finance for them.

v) Commercial Paper (CP) :
Commercial paper is an unsecured promissory note issued by a firm to raise funds for short period, varying from 90 days to 364 days. It is issued by one firm to other business firms, insurance, companies, pension funds and banks. The amount raised by CP is generally very large. As the debt is totally unsecured, the firms having good credit rating can issue the CP.

Question 2.
Discuss the main sources of finance available to companies for meeting long-term as well as short-term financial requirements.
Answer:
A businessman can raise funds from various sources. On the basis of period, sources of finance can be categorized into three. They are Q

1. Longterm sources
2. Mediumterm sources
3. Short-term sources

Long-term sources of finance :
It includes i) Equity shares and preference shares ii) Debentures iii) Retained earnings.

i) Equity Shares :
Equity shares are the most important source of raising long-term capital by a company. Equity shares, also known as ordinary shares and also known as ownership capital or owner’s funds. Equity shareholders do not get a fixed divident but are paid on the basis of earnings by the company. They enjoy the rewards as well as bear the risk of ownership. Their liability, however, is limited to the extent of capital contributed by them in the company.

Preferences shares :
The capital raised by issue of preference shares is called ‘preference share capital’. In other words, as compared to the equity shareholders, the preference shareholders have a preferentail claim over dividend and repayment of capital. Preference shareholders generally do not enjoy any voting rights. A company can issue different types of preference shares by raising capital.

ii) Debentures:
Debentures are an important instrument for raising long-term debt capital. A company can raise funds through issue of debentures. It bears a fixed rate of interest. The debenture issued by a company is an aknowledgement that the company has borrowed a certain amount of money, which it promises to repay on a future date. ‘Debenture holders’ are, therefore, termed as ‘creditors of the company’.

iii) Retained Earnings :
A company generally does not distribute all its earnings amongst the shareholders as dividends. A portion of the net earnings may be retained in the business for use in the future. This is known as ‘retained earnings’. It is a source of internal financing or self financing or ‘ploughing back of profits’.

Short-term sources of finance :
It includes i) Bank credit ii) Trade credit iii) Installment credit iv) Advances v) C.P
(Commercial Paper)

i) Bank credit:
Commercial banks extend the short-term financial assistance to business firms by means of bank credit. Bank credit may be provided in the following forms i) loans ii) cash credit iii) overdraft.

ii) Trade credit:
Trade credit is the credit extended by one trader to another for the purchase of goods and services. Trade credit facilitates the purchase of supplies without immediate payment. Trade credit is commonly used by business organisations as a source of short-term financing.

iii) Installment credit:
This is another method by which the assets are purchases and possession of goods is taken immediately but the payment is made in installment over a pre-determined period of time. Generally, interest is charged on the unpaid price.

iv) Advances:
Some business organisations get advances from their customers and agents against orders and this source is short term source of finance for them.

v) Commercial Paper (CP) :
Commercial paper is an unsecured promissory note issued by a firm to raise funds for short period, varying from 90 days to 364 days. It is issued by one firm to other business firms, insurance, companies, pension funds, and banks. The amount raised by CP is generally very large. As the debt is totally unsecured, the firms having good credit rating can issue the CP.

Question 3.
Write a comparative evolution of the various methods that are opend to meet the financial requirements of a business firm.
Answer:
A businessman can raise funds from various sources. On the basis of period, sources of finance can be categorized into three. They are

1. Long-term sources
2. Medium-term sources
3. Short-term sources

i) Long-term sources of finance :
It includes i) Equity shares and preference shares ii) Debentures iii) Retained earnings.

i) Equity Shares:
Equity shares are the most important source of raising long-term capital by a company. Equity shares, also known as ordinary shares and also known as ownership capital or owner’s funds. Equity shareholders do not get a fixed divident but are paid on the basis of earnings by the company. They enjoy the rewards as well as bear the risk of ownership. Their liability, however, is limited to the extent of capital contributed by them in the company.

Preferences shares :
The capital raised by issue of preference shares is called ‘preference share capital’. In other words, as compared to the equity shareholders, the preference shareholders have a preferentail claim over dividend and repayment of capital. Preference shareholders generally do not enjoy any voting rights. A company can issue different types of preference shares by raising capital.

ii) Debentures:
Debentures are an important instrument for raising long-term debt capital. A company can raise funds through issue of debentures. It bears a fixed rate of interest. The debenture issued by a company is an aknowledgement that the company has borrowed a certain amount of money, which it promises to repay on a future date. ‘Debenture holders’ are, therefore, termed as ‘creditors of the company’.

iii) Retained Earnings :
A company generally does not distribute all its earnings amongst the shareholders as dividends. A portion of the net earnings may be retained in the business for use in the future. This is known as ’retained earnings’. It is a source of internal financing or self financing or ‘ploughing back of profits’.

2) Medium-term sources of finance :
It includes i) Public deposits ii) Loans from banks iii) Lease financing

i) Public deposits :
The deposits that are raised by organisations directly from the public are known as ‘public deposits’. Any person who is interested in depositing money in an organisation can do so by filling up a prescribed form. The organisation in return issues a deposit receipt as acknowledgement of the debt. Public deposits can take care of medium-term financial requirements of a business.

ii) Commercial Banks :
Commercial banks occupy a vital position as they provide funds for different purposes as well as for different time periods. Banks extend loans to firms of all sizes and in may ways, like, cash credits, overdrafts, term loans, purchase/discounting of bills, and issue of letter of credit.

iii) Lease Financing :
A lease is a contractual agreement whereby one party i.e. the owner of an asset grants the other party the right to use the asset in return for a periodic payment. In other words it is a renting of an asset for some specified period. The owner of the assets is called the “lessor” while the party that uses the assets is known as the ‘lessee’. Lease finance is an important means for modernisation and diversification in the firm. Such financing is resorted to acquiring assets like computers and electronic equipment.

3) Short-term sources of finance :
It includes i) Bank credit ii) Trade credit iii) Installment credit iv) Advances v) C.P (Commercial Paper)

i) Bank credit:
Commercial banks extend the short-term financial assistance to business firms by means of bank credit. Bank credit may be provided in the following forms i) loans ii) cash credit iii) overdraft.

ii) Trade credit:
Trade credit is the credit extended by one trader to another for the purchase of goods and services. Trade credit facilitates the purchase of supplies without immediate payment. Trade credit is commonly used by business organisations as a source of short-term financing.

iii) Installment credit:
This is another method by which the assets are purchases and possession of goods is taken immediately but the payment is made in installment over a pre-determined period of time. Generally, interest is charged on the unpaid price.

iv) Advances:
Some business organisations get advances from their customers and agents against orders and this source is short term source of finance for them.

v) Commercial Paper (CP) :
Commercial paper is an unsecured promissory note issued by a firm to raise funds for short period, varying from 90 days to 364 days. It is issued by one firm to other business firms, insurance, companies, pension funds and banks. The amount raised by CP is generally very large. As the debt is totally unsecured, the firms having good credit rating can issue the CP.

Question 4.
What do you mean by Specialized Financial Institutions? Why are these needed?
Answer:
Specialised financial institutions are the institutions which have been set up to serve the increasing financial needs of commerce and trade in the area of venture capital, credit rating and leasing, etc.

1) IFCI Venture Capital Funds Ltd. (IVCF):
Formerly known as Risk Capital and Technology Finance Corporation Ltd. (RCTC), is a subsidiary of IFCI Ltd. It was promoted with the objective of broadening entrepreneurial base in the country by facilitating funding to ventures involving innovative product or process or. technology.

2) ICICI Venture Funds Ltd :
Formerly known as Technology Development and Information Company of India Limited (TDICI), was founded in 1988 as a joint venture with the UTI. Subsequently, it became a fully owned subsidiary of ICICI. It is a technology venture finance company, set up to sanction project finance for new technology ventures. The industrial units assisted by it are in the fields of computer, chemicals, drugs, diagnostics, engineering, etc.

3) Tourism Finance Corporation of India Ltd (TFCI) :
TFCI is a specialised financial institution set up by the Government of India for promotion and growth of tourist industry in the country. Apart from conventional tourism projects, it provides financial assistance for non-conventional tourism projects like amusement parks, ropeways, car rental services, ferries, etc.

Question 5.
Critically examine the advantages and disadvantages of raising funds by issuing shares of different types.
Answer:
Joint stock companies’ capital is divided into number of equal parts known as shares. A company can issue different types of shares to get funds from the investors to suit their requirement. Under the Companies Act 1956 a company can issue only two types of shares.

1. Preference shares
2. Equity shares.

1) Preference shares :
As compared to the equity shareholders, the preference shareholders have a preferential claim over divided and repayment of capital. Preference shares resemble debentures as they bear fixed rate of return. Preference shares have some characteristics of both equity shares and debentures. Preference shareholders generally do not enjoy any voting rights.

Merits or Advantages:

• Preference shares provide reasonably steady income in the form of fixed rate of return and safety of investment.
• Preference shares are useful for those investors who want to get fixed rate of return with comparatively low risk.
• It is a superior security over equity shares.
• Payment of fixed rate of dividend to preference shares may enable a company to declare higher rates of dividend for the equity shareholders in good times.
• Preference capital does not create any sort of charge against the assets of a company.

Limitations:

• Preference shares are not suitable for those investors who are willing to take risk and are interested in higher returns.
• Preference capital dilutes the claims of equity shareholders over assets of the company.
• The rate of dividend on preference shares in generally higher than the rate of interest on debentures.

2) Equity shares :
Equity shares are the most important source of raising long-term capital by a company. Equity shares, also known as ordinary shares represent the ownership of a company and thus the capital raised by issue of such shares is known as ownership capital or owner’s funds. Equity shareholders do not get a fixed dividend but are paid on the basis of earnings by the company. Their liabilities, however, is limited to the extent of capital contributed by them in the company. They have a right to participate in the management of a company.

Merits:

• Equity shares do not create any obligation to pay a fixed rate of dividend.
• Equity shares can be issued without creating any charge over the assets of the company.
• It s a permanent source of capital and the company need not repay it except under liquidation.
• Equity shareholders are the real owners of the company who have the voting rights.

Limitations:

• Investors who want steady income may not prefer equity shares as equity shares get fluctuating returns.
• The cost of equity shares is generally more as compared to the cost of raising funds through other sources:
• Issue of additional equity shares dilutes the voting power, and earnings of existing equity shareholders.
• More legal formalities and procedural delays are involved while raising funds through issue of equity shares.

Short Answer Questions

Question 1.
What are the sources of Short-term finance?
Answer:
The short-term loans and credits are raised by a firm for meetings its working capital requirements. There are generally for short-period not exceeding accounting period, i.e. one year. The main sources of short-term funds are as follows.
1) Bank credit :
Commercial banks extend the short-term financial assistance to business firms by means of bank credit. Bank credit may be provided in the form of loans and cash credit, overdraft, etc.

2) Trade credit:
Trade credit is the credit extended by one trader to another for the purchase of goods and services. Trade credit facilitates the purchase of supplies without immediate payment. Trade credit is commonly used by business organisations as a source of short-term financing.

3) Installment credit:
This is another method by which the assets are purchases and possession of goods is taken immediately but the payment is made in installment over a pre-determined period of time.

4) Advances :
Some business organisations get advances from their customers and agents against orders and this source is short term source of finance.

5) Commercial paper :
Commercial paper emerged as a source of short term finance in our country in the early nineties. Commercial paper is an unsecured promissory note issued by a firm to raise funds for a short period, varying from 90 days to 364 days. It is issued by one firm to other business firms, insurance companies, pension funds and banks.

Question 2.
What are the sources of Long-term finance?
Answer:
The sources of long-term finance are i) Issue of shares ii) Issue of debentures iii) Retained earnings.

i) Issue of shares:
The capital obtained by issue of shares is known as ‘share capital’. The capital of a company is divided into small units called ‘shares’. Each share has its nominal value. There are two types of shares normally issued by a company. These are ‘equity shares’ and ‘preference shares’. The money raised by issue of equity shares is called ‘equity share capital’ while the money raised by issue of preference share is called ‘preference share capital’. It is important method of raising long-term finance.

ii) Issue of debentures:
Debentures are an important instrument for raising long-term debt capital. A company can raise funds through issue of debentures. It bears a fixed rate of interest. The debenture issued by a company is an acknowledgment that the company has borrowed a certain amount of money, which it promises to repay on a future date. ‘Debenture holders’ are, therefore, termed as ‘creditors of the company’.

iii) Retained Earnings :
A company generally does not distribute all its earnings amongst the shareholders as dividends. A portion of the net earnings may be retained in the business for use in the future. This is known as ‘retained earnings’. It is a source of internal financing or self financing or ‘ploughing back of profits’.

Question 3.
What are the sources of Medium-term finance?
Answer:
The sources of Medium-term finance are

1. Public deposits
2. Loans from Banks
3. Lease Financing

i) Public deposits :
Industries receive deposits from the public. These deposits are called public deposits. The period of public deposits used to be short (i.e for three years). So public deposits have been a very important source for working capital requirements.

ii) Loans from Banks :
Commercial banks occupy a vital position as they provide funds for different purposes and for different periods. They extend loan facility in the form of cash credit, overdraft, term loans and purchasing discounting bill of exchange. The borrower is required to provide some security or to create a charge on the assets of the firm before a loan is sanctioned.

iii) Lease Financing :
A lease is a contractual obligation whereby the lessor or owner grants the lessee the right to use the asset in return for a periodic payment known as lease rent. At the end of the lease period the asset goes back to the lessor. Lease financing is an Important means for modernisation and diversification in the firm. Such R&smcing is resorted to in acquiring assets like computers and electronic equipment.

Question 4.
Discuss the need for specialized financial institutions.
Answer:
Specialised financial institutions are the institutions which have been set up to serve the increasing financial needs of commerce and trade in the area of venture capital, credit rating and leasing, etc.
1) IFCI Venture Capital Funds Ltd. (TVCF) :
Formerly known as Risk Capital and Technology Finance Corporation Ltd. (RCTC), is a subsidiary of IFCI Ltd. It was promoted with the objective of broadening entrepreneurial base in the country by facilitating funding to ventures involving innovative product or process or technology.

2) ICICI Venture Funds Ltd :
Formerly known as Technology Development and Information Company of India Limited (TDICI), was founded in 1988 as a joint venture with the UTI. Subsequently, it became a fully owned subsidiary of ICICI. It is a technology venture finance company, set up to sanction project finance for new technology ventures. The industrial units assisted by it are in the fields of computer, chemicals, drugs, diagnostics, engineering, etc.

3) Tourism Finance Corporation of India Ltd (TFCI) :
TFCI is a specialised financial institution set up by the Government of India for promotion and growth of tourist industry in the country. Apart from conventional tourism projects, it provides financial assistance for non-conventional tourism projects like amusement parks, ropeways, car rental services, ferries, etc.

Question 5.
Explain the advantages and disadvantages of equity source of Finance. [Mar. 2019. 17 – A.P.]
Answer:
Advantages of equity source of Fiance :

1. Equity shares do not create any obligation to pay a fixed rate of dividend.
2. Equity shares can be issued without creating any charge over the assets of the company.
3. It is a permanent source of capital and the company need not repay it except under liquidation.
4. Equity shareholders are the real owners of the company who have the voting rights.
5. In case of profits, equity shareholders are the real gainers by way of increased dividends and appreciation in the value of shares.

Limitations:

• Investors who want steady income may not prefer equity shares as equity shares get fluctuating returns.
• The cost of equity shares is generally more as compared to the cost of raising funds through other sources.
• Issue of additional equity shares dilutes the voting power, and earnings of existing equity shareholders.
• More legal formalities and procedural delays are involved while raising funds through issue of equity shares.

Question 6.
Differentiate between the Equity shares and Preference shares. [Mar. 2019; May 17 -T.S.]
Answer:

Question 7.
Differentiate betwene a Share and a Debenture. [Mar. 2019, 18, 17 – A.P. & T.S.; May 17; Mar. ’15 – A.P.; May 17 – T.S.]
Answer:

Very Short Answer Questions

Question 1.
Business finance
Answer:
The rquirements of funds by business firm to accomplish its various activities is called business finance. Finance is considered as the life blood of any organisation. The success of an industry depends on the availability of adequate finance. Finance is also labeled as capital of a company.

Question 2.
Bank loan
Answer:
A loan is a direct advance made in lumpsum against some security. A specified amount is sanctioned by the bankers to the customer. The loan amount is paid in cash or credited to customers a/c. The customer has to pay interest on the amount from the date of sanctioning the loan.

Question 3.
Debentures
Answer:
Debentures are an important instrument for raising long term debt capital. A company can raise funds through issue of debentures. It bears a fixed rate of interest. The debentures issued by a company is an acknowledgement that the company has borrowed a certain amount of money which it promises to repay on a future date. ‘Debenture holders’ are therefore, termed as ‘creditors of the company’.

Question 4.
Trade credit
Answer:
Trade credit is the credit extended by one trader to another for the purchase of goods and services. Trade credit facilitates the purchase of supplies without immediate payment. Such credit appears in the records of the buyer of goods as ‘sundry creditors’ or ‘accounts payable’.

Question 5.
Equity share [Mar. 2018, 15 -A.P.]
Answer:
According to Companies Act, 1956, shares which are not preference shares are equity shares. Equity shares are earlier known as ordinary shares. These are so called because they do not have any special right in payment of dividend and repayment of capital earlier all equity shareholders had equal voting rights. But the recent amendment in the Companies Act 2000, permits companies to issue equity shares with differential voting rights. Equity capital need not be refunded during the life time of the company. Equity shares facilitate the company to get the benefits of leverage.

Question 6.
Preference share [Mar. 2018 – T.S.; Mar. 17 – A.P. & T.S.]
Answer:
As per Section 85 of the Indian Companies Act 1956, preference shares are those shares which carry special rights in respect of dividends and also repayment of capital at the time of winding up. The rate of dividend on these shares are fixed.

Preference shareholders arerpaid dividends when the company makes profits.

If nothing is mentioned in the Articles of Association, preference means preference as to both the payment of dividend and repayment of capital.

Preference shareholders have no voting rights. Hence they have no voice in the management. Investors who prefer a constant rate of return and less risk purchase preference shares.

Question 7.
Retained earnings [Mar. 15; May, 17 – T.S.]
Answer:
Retained earnings is also known as “Ploughing back of profits”. Retained earnings refers to the reinvestment of undistributed profits. It is a very good source of business finance. A part of profit is transferred to the reserves every year. After a few years, it becomes a large amount which is then employed for modernisaton and expansion of business.

As per Indian Companies Act, 1956, Companies are required to transfer a part of their profits to reserve.

Question 8.
Deferred shares
Answer:
The rights of the deferred shareholders with regard to payment of dividend and repayment of capital are deferred (postponed). Deferred shareholders rank last so far as payment of dividend and return of capital is concerned. These shares are generally small in denomination. These shareholders try to manage the company with economy and efficiency.

These shares are issued to the promoters of the company. So these shares are also called promoters shares or management shares. When the company prospers, the deferred shareholders get dividend.

According to Companies Act 1956, no public company or which is subsidiary of a public company cannot issue deferred shares.

Question 9.
State Financial Corporation
Answer:
The State Financial Corporation was established by the Government of India in 1951 with a view to provide financial assitance to small and medium scale industries which are beyond the scope of Industrial Finance Corporation of India. Its share capital is subscribed by respective state governments, RBI, LIC and commercial banks.

Question 10.
Commercial Banks
Answer:
Commercial banks occupy a vital position as they provide funds f or different purposes as well as for different time periods. Banks extend loans to firms of all size and in many ways, like, cash credits, overdrafts, term loans, purchase/discounting of bills and issue of letter of credit.

Question 11.
Financial Institutions
Answer:
Banks provide funds for different purposes. Another important source of rasing finance is from the finanical institutions like Industrial Finance Corporation of India, Industrial Development Bank of India, Industrial Credit and Investment Corporation of India. Such institutions provide long term and mediun terms on easy installments to big industrial and business houses.

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 8th Lesson Sources of Business Finance-I Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 8th Lesson Sources of Business Finance-I

Essay Answer Questions

Question 1.
What is business finance? Explain its need and significance in business organizations. [Mar. 2018, 17, 15 – A.P. & T.S.; May 17 – A.P. & T.S.]
Answer:
Finance is considered as the life blood of any organisation. The requirements of funds by business firm to accomplish its various activities is called business finance. According to B.O. Wheeler “Finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of a business enterprise.”

Need and significance in business finance:
1) For the fixed capital requirements of business :
In order to start a business, finance is required to purchase fixed assets like land and buildings, plant and machinery, furniture and fixture, etc.

2) For the working capital requirements of business :
Working capital is utilised for holding current assets such as the purchase of material, payment of wages, transporta¬tion charges, etc.

3) For expansion and growth of business :
Finance is required to increase produc¬tion, to install more machines to set up a R & D centre etc.

4) For diversification :
Business finance is needed to start new activity in business. Entering into new business and new lines of activities is known as diversification.

5) For Survival :
Business finance is required to carry out the various business operations in continuity. Without the required finance, organisations cannot survive for long.

6) For liabilities :
To meet liabilities of business, be it long-term or short, a business requires sufficient finance, e.g. for payment of loan installments, creditors, etc.

7) For payment of expenses :
Business finance is needed for paying salaries, wages, taxes, advertisements and other expenses like rents, etc.

Question 2.
What are the various factors that determine the selection of sources of finance? [Mar. 2019 – T.S. Mar. 17 – A.P.]
Answer:
Financial needs of business are of different types-long term, short term, fixed and fluctuating. Therefore, business firms resort to different types of sources for raising funds.

i) Cost :
The fact of cost is of two types i) cost of procurement of funds ii) cost of utilising funds. These cost factors deciding about the source of funds will be utilised by an organisation.

ii) Financial strength and stability of operations:
In the choice of source of funds for business should be in a sound financial position so as to be able to repay the principal amount and interest on the borrowed amount.

iii) Form of organisation and legal status :
The form of unit organisation and status influences the choice of a source for raising money.
Ex : A partnership firm cannot raise money by issue of equity shares.

iv) Factor of time period :
Business units should plan according to the time period for which the funds are required. Ex : Short term need purposes depend upon by the business unit through trade creditors for long term finance sources such as issue of shares and debentures.

v) Risk profile factor:
Business should evaluate each of the source of finance in terms of the risk involved Ex: Issued equity shares, these are to be repaid only at the time of winding up and dividends are not paid if the profits are not available. There is little risk involved. On the other hand a loan is to be repaid as per schedule and the interest is to be paid whether the firm earns profit or not.

vi) Control:
A particular source of fund may affect the control and power of the owners on the management of a firm. As equity shareholders enjoy voting rights, financial institutions may take control of the assets or impose conditions as part of the loan agreement.

vii) Effect on credit worthiness :
Depending on certain sources of finance may affect the credit worthiness in the market. Ex: Issue of secured debentures may affect the interests of the creditors and they may not be willing to extend further loans to the company.

viii) Flexibility and ease :
Another aspect affecting the choice of a source of finance is the flexibility and ease of obtaining funds. Restrictive provisions, detailed investigation and documentation in case of borrowings from banks and financial institutions for example may be the reason that business organisations may not prefer it, if other options are readily available.

ix) Tax benefits :
Various sources may also be weighed in terms of their tax benefits. Tax is not deducted on dividend of preference shares. Interest paid on loans and debentures is tax deductible. In order to take advantages of tax benefits firms may issue debentures to take loans.

Short Answer Questions

Question 1.
What are the various types of capital required for business enterprises?
Answer:
Nature of Business Fiances :
Whether it be manufacturing or trading concern business finance is required which is called initial capital. The amount of capital required depends upon the nature and size of business. It consists of owner’s contribution and borrowing from different sources.

On the basis of the purpose of financial requirements of a business, business finance may be classified into two types.

1) Fixed capital:
The capital which is used to acquire fixed assets such as land and buildings, plant and machinery, etc. is called the “Fixed Capital”. These assets remain with the business for a long period. Capital required by the business concern to meet its long term needs is known as fixed capital. It is permanently kept in the business. It cannot be easily realised.

2) Working capital:
The capital required by a business organisation to run its day- to¬day operations such as payment of wages, salaries, electricity bills, purchase of raw-material, etc. is called working capital. The capital used in current assets is called working capital.

Current assets are those which can be converted into cash within a period of one year. Therefore it is also called circulating or revolving capital.

The working capital of the business concern depends on the nature of the business, size of business, production policy, etc.

Question 2.
Explain the classification of sources of finance.
Answer:
A brief explanation of classifications and the sources of finance is given below.

1) On the basis of period:
On the basis of period, sources of funds can be categorized into 1) Long term 2) Medium-term finance 3) Short-term finance. The long-term sources fulfil the financial requirements of an enterprise for a period exceeding five years. Such financing is generally required for the acquisition of fixed assets. Where the funds are required for a period more than one year but less than five years, medium-term sources of finance are used. Short term funds are those which are required for short duration i.e. a period not exceeding one year.
Ex : Trade credit, Bank Overdrafts, etc.

2) On the basis of ownership :
On the basis of ownership, the sources can be classified into owner’s funds and borrowed funds. Owner’s funds are those which are provided by the owners which include issue of equity shares and retained earnings. Borrowed funds refer to the funds raised through loans or borrowings. The sources include loans from commercial banks, loans from financial institutions, issue of debentures, public deposits, and trade credit.

3) On the basis of generation :
Sources of finances can be generated from internal or from external sources. Internal sources of funds are those that are generated from within the business. Ex : Retained earnings, depreciation of funds, etc. External sources of funds include those sources that lie outside an organisation. E.g: Shares, debentures, public deposits, etc.

Very Short Answer Questions

Question 1.
Business finance:
Answer:
The term finance means money for funds. Financing means making money available when it is needed. It refers to money required for business purposes. Finance is the life blood of every organisation. The prosperity of a business unit mainly depends upon the availability of finance.

Question 2.
Fixed Capital [Mar. 2019 – A.P. m Mar. 2018, 17 – T.S. ; May 17 – A.P.]
Answer:
The capital which is used to acquire fixed assets such as land and buildings, plant and machinery, etc. is called “Fixed Capital”. These assets remain with the business for a long period. These items are not purchased for sale. In other words, capital required by the business concern to meet its long term needs is known as ‘Fixed capital’. It is permanently kept in the business. It cannot be easily realised.

Question 3.
Working Capital: [Mar. 2019; May 17 – T.S.]
Answer:
The capital required by a business organisation to run its day- to-day operation such as payment of wages, salaries, electricity bills, purchase of raw-material, etc. is called “Working Capital”. The capital used in current assets is also called “Working capital”.

Current assets are those which can be converted into cash within a period of one year. Therefore it is also called circulating or revolving capital.

The working capital of the business concern depends on the naturee of the business, size of the business, production policy, etc.

Question 4.
Long – term finance :
Answer:
The capital required for long period are termed as long term finance. This is usually required for period between 7 years to 20 years. This type of capital is used to acquire fixed assets such as land and buildings, plant and machinery, for working capital and also for expansion and modernization of the business. Long term finance can be raised through issue of shares, issues of debentures, loan from banks and other financial institutions, retained earnings, etc.

Depending upon the need any one of the above sources can be conveniently used to procure long term capital or finance.

Question 5.
Short – term finance :
Answer:
Funds raised for a period not exceeding one year is called short-term capital or short-term finance. This type of finance is used to meet day-to-day operating expenses of business such as purchase of raw materials, wages, salaries, etc. The amount of funds required depends upon nature of business, time gap between order and delivery of stocks, operating cycle and the volume of business.

It can be raised through Trade credit, Bank Credit, Advances from Customers, Bank Loans, Retained earnings and Bills of Exchange.

Question 6.
Internal sources of finance :
Answer:
Internal sources of funds are those which are generated from within the business. E.g.: Ploughing back of profits, retained earnings, collection of receivables disposing of surplus inventories, and depreciation of funds, etc.

Question 7.
External sources of finance :
Answer:
External sources of funds include those sources that lie outside an organisation, such as shares, debentures, public deposits, borrowing from commercial banks and financial institutions, suppliers, lenders, and investors.

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 7th Lesson Formation of a Company Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 7th Lesson Formation of a Company

Essay Answer Questions

Question 1.
Discuss the procedure to form a company.
Answer:
A Joint Stock Company requires a number of legal formalities to be complied with before it is brought into existence. Formation means the establishment of a company by fulfilling all formalities. The important steps to be taken by the company for formation are shown in the following chart.

1) Promotion :
Promotion is the first stage in the formation of a company. It involves identification of business opportunity or idea, detailed investigation, assembling the requirements, and financing proposition. Promotion is the process of organization and planning the finance of business enterprise under the corporate firm.

2) Incorporation or Registration :
A company being an artificial person comes into existence only after its registration with the Registrar of Companies. It is the legal process through which an enterprise obtains recognition as a separate legal entity. Private or public limited companies must file all the necessary documents with the Registrar to obtain the Incorporation Certificate. With this certificate the company gets a separate legal entity. For this purpose a number of steps have to be taken for registration.

3) Capital subscription :
After incorporation of a company the next step will be to raise the capital. A public company cannot commence business unless the minimum subscription as stated in the prospectus is subscribed. If a company does not receive 90 percent of the issue amount from the public as subscription within 120 days, it has to refund the amount to the applicant as per the guidelines of Securities Exchange Board of India (SEBI) guidelines within 10 days.

4) Commencement of business:
A public company has to file the following certificates, to get the certificate of commencement.

• A declaration that a prospectus or statement in lieu of prospectus has been filed
• A declaration that directors have taken up their qualification shares and paid them.
• A declaration that minimum subscription amount has been allotted and collected.
• A statutory declaration by the Secretary of the company or a Director that all the formalities relating to commencement of business are duly complied with.

A scrutiny is made by the Registrar with all the documents and issues a “Certificate of commencement of business”. The process of company formation comes to an end with the issue of this certificate.

Question 2.
Describe various steps involved in promoting a company.
Answer:
Promotion is the first stage in the formation of a company. It involves identification of a business opprotunity or idea, analysis of its prospects, gathering the relevant information and taking steps to implement it. Promotion is considered as putting an idea into practice.

Definition:
“Promotion is the process of organizing and planning the finance of a business enterprise under the corporate form.” – L.H. Haney

“Promotion starts with the conception of the idea from which the business is to evolve and continue down to the point at which the business is fully ready to begin operation as a going concern.” – Guthmann and Dougal

To be successful the idea of business must be exposed and investigation chart given the stages of promotion.

1) Discovery of an idea :
The success of business depends on the selection of a business line. The promoter has to form an idea about the type of business and its prospects. The promoter should analyse the strengths and weaknesses of the proposed idea, and develop the idea with the help of technical experts.

2) Detailed investigation :
At this stage various factors relating to the proposed unit are to be studied from the pratical point of view. To find out the strong and weak points of the idea a detailed investigation is conducted. The promoter shall estimate demand for the product, and then thinks of arranging finance and also considers the availability of workers, plant and machinery, raw materials, and cost of production. For this purpose technical experts, financial consultants, etc. are consulted.

3) Assembling requirements :
After making sure that proposed business is feasible and profitable the promoters make arrangements to assemble the requirements like directors appointment, selecting the place for unit, contacting the suppliers of raw materials purchasing of plant and machinery, etc.

4) Financing proposition :
The promoter decides about the capital structure of the company. In this process, he determines how much share capital will be issued, type of shares and debentures to be issued, and the nature of loans to be borrowed from financial institutions or banks for a long period.

Question 3.
Explain the process involved in Incorporation of a company.
Answer:
A company being an artificial person comes into an existence through incorporation. A Joint Stock Company whether private or public limited must be registered with the Registrar of Companies. It is called incorporation. For that purpose the joint stock companies must file all the necessary documents with the Registrar to obtain the Incorporation Certificate. With this certificate the company gets a status of legal entity.

A number of steps have to be taken up before getting a company registered.

1) Application for approval of name :
For approval, an application is to be submitted to the Registrar of Companies of the state and obtain the approval name. A company may adopt any name which is not prohibited under the Emblems and Names Act, 1950. The Registrar is expected to approve the name within 14 days of the receipt of application.

2) Preparation of Memorandum of Association (MoA) :
MoA is the constitution of company which describes its objects, scope and the relationship with outside world. This main document must be carefully drafted, stamped and signed by seven members in case of a public company and two members in case of a private company. As per the new amendment of the Act, 1950 one member is enough to sign on MoA in case of private company.

3) Preparation of Articles of Association (AoA) :
This is the second document which contains rules and regulations relating to the internal management and also the capital structure of the business. A public limited company may not require to file its own Articles of Association. However, it may adopt model clauses prescribed in Table A, Schedule I of the Act. A private company is required to submit its articles and duly signed by the signatories.

4) Preparation of other documents :
At the time of incorporation of a company the following documents are to be prepared and submitted to the Registrar of Companies.

• Consent of the first directors
• Promoters should execute a power of attorney in favour of one of the promoters or an advocate who is to carry out the formalities required for registration.
• When the location of the registered office is finalized, prior to incorporation, the notice of it is to be filed. If not, within 30 days of its registration it is to be submitted.
• When a company by its Articles appoints any person to act as Director, Manager, Secretary their particulars have to be filed within 30 days along with MoA and AoA of the company.

5) Statutory declaration :
A declaration that all the requirement under, the Companies Act, 1950 have been complied with in Form no. 1 is to be filed with the Registrar.

6) Payment of registration fee :
If the prescribed fees has to be paid towards registration of company.

7) Incorporation certificate :
The Registrar is satisfied with all requirements under the Companies Act, 1950, issues a certificate called “Certificate of Incorporation. With the receipt of this certificate, the company gets its recognition as a corporate body.

Question 4.
What is Memorandum of Association? Explain its clauses.
Answer:
The Memorandum of Association is the most important main document of the company. It is constitution and charter of the company. It provides the foundation on which the company structure is built. It defines the scope of the company’s activities as well as its relation with the outside of the company. The contents of the MoA cannot be altered at the option of directors or even the shareholder. It is to be altered only with Government’s and court approval in many cases. The purpose of the memorandum is to enable the shareholders, creditors, and those who deal with the company to know what is the permitted range of activities of the enterprise.

The memorandum has to be divided into paragraphs consecutively numbered and has to be printed. It should be signed by seven members in case of public company and by two members in case of private company.

Memorandum of association contains the following clauses :

1) Name clause :
The name of the company should be specified in this clause. A company can choose any name it likes, however it should fulfil the following conditions.

• The proposed name should not be identical or similar to the name of existing company.
• The proposed name should not convey any connection or link with a government department or local authority.
• The name of the public company should end with the word ‘Limited’, while that of private company should contain the word ’Private limited1.
• The proposed name should not be objectionable under the provisions of Emblems and Names Act, 1950.

The name of the company must appear on the outside of every office, or place of business, in one of the local languages and on all cheques, bills, letters, notices and other official publications, etc. of the company.

2) Situation Clause :
Every company will have a registered office. This clause should specify the place and the state in which registered office is located. It is necessary to determine the legal jurisdiction and to make correspondence. If the registered office is not confirmed on the date of incorporation, it should communicate the address to the registrar within 30 days of its incorporation. The purpose of stating the registered office is that all communications, notices, circular, etc. are sent to the registered office.

3) Objects Clause:
It is the most important clause in the memorandum of association. It defines powers of the company and the scope of its activites. A company is not authorised to do any business outside the purview of the objects clause. The objects of the company must be legal and very clearly defined. It contains main objects and other objects. Great care should be taken in drafting this clause.

4) Liability Clause :
It contains the nature of liability of its members. It means that the liability of a member is limited to the nominal value of shares held by him. The sharholders are not liable for the debts of the company. A company registered with unlimited liability is not required to give this clause in memorandum.

5) Capital Clause :
It contains the capital structure of the company. The amount of capital required by the company is stated in this clause. This is called Authorised capital or Registered capital. The capital is divided into small units called ‘Shares’. The company must mention the number and kinds of shares issued and the value of each share. Company is not authorised to issue shares over and above authorised capital.

6) Subscription or Association Clause :
This clause contains the names of signatories to the memorandum. The memorandum must be signed by at least seven persons in case of public limited company and by at least two persons in case of a private limited company. Each subscriber must take at least one share in the company. The subscribers declare that they agree to incorporate the company and agree to take the shares stated against their names. The signatures of the subscribers are attested by at least one witness each.

Question 5.
What is Articles of Association and also explain its contents.
Answer:
The Articles of Association of a company are its bye-laws or rules and regulations that govern the internal management of the company and the conduct of the business. It determines the relationship between the company and its members as well as among the members themselves. Articles of Association determine the powers of the directors and officers of the company. It must be printed, divided into paragraphs, numbered consecutively and signed by each subscriber of the memorandum and filed with the Registrar.

The contents of Articles of Association:

The Articles of Association is the document which contains the rules and regulations to be followed for the purpose of internal management of the company. It generally contains the following.

1. Rules and regulations.
2. Rules of preliminary contracts.
3. Provisions regarding use of common seal.
4. Procedure of issuing share capital, number and value of shares, issue of shares, , calls on shares, lien on members’ shares, etc.
5. Procedure for transfer and forfeiture’ of shares.
6. Procedure for issue of debentures and stocks.
7. Procedure for alteration of capital
8. Provisions regarding conducting the general meetings, special meetings, voting, proxies, etc. resolutions.
9. Rules regarding appointment of Directors and their remuneration.
10. Provisions relating dividends and reserves.
11. Preparation of Accounts and Audit, and method of appropriation of profits.
12. Winding-up procedure
13. Maintenance of Bank Accounts.

These bye-laws are very useful in inter management of the company.

Question 6.
What is prospectus? Explain the contents of prospectus.
Answer:
A private company can start its business immediately after receiving the Certificate of Incorporation. Whereas a public company has to raise the necessary capital from the public. In that connection the company have to invite the public to subscribe for shares in their company. This invitation to the public is known as “Prospectus”.

Definition :
As per Section 2(36) of the Companies Act, 1956, a prospectus is defined as “Any document described for issued as propectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for purchase of any shares in, or debentures of a body corporate”.

Any advertisement offering shares or debentures of the company for sale to the public is called’Prospectus’.

Contents of Prospectus:
Every prospectus should disclose the matter as specified in Part -1 of Schedule-II to the Compnies Act. Some of the contents which every prospectus must include are

1. Name and full address of the company.
2. The particulars of the signatories to the memorandum of association and the number of shares taken up by them.
3. Name, addresses, and occupations of members of the Board of Directors.
4. The minimum subscription amount fixed by the promoters.
5. The details of property acquired if any.
6. The time of opening of the subscription list.
7. The capital structure of the company, and particulars of issue.
8. The amount payable on application, allotment, and calls.
9. Basis for the issue price
10. The particulars of preferential treatment given to any person for subscribing shares or debentures.
11. The addresses of the underwriters if any.
12. Particulars about reserves and surpluses.
13. The amount of preliminary expenses.
14. The name and address of Auditor.
15. Particulars regarding voting rights at the meetings of the company.
16. Management perception of risk factors.
17. ‘Disclosure of investors’ grievances and redressal system.

Short Answer Questions

Question 1.
What are different types of promoters?
Answer:
The following are different types of promoters.
1) Professional promoters :
The professional promoters are specialized promoters. Specialized promotion is their whole time occupation.

2) Accidental promoters :
They are not specialists in company formation. They promote own firms as entrepreneurs.

3) Financial promoters :
These are the promoters who float new enterprises during favourable conditions in the securities market.

4) Technical promoters :
This type of promoters promote new enterprises on the basis of their specialised knowledge and training in technical fields.

5) Institutional promoters :
These are promoters who provide technical, managerial and financial assistance for the promotion of a company.

Question 2.
Discuss the differences between Memorandum of Association and Articles of Association.
Answer:
Differences between Memorandum of Association and Articles of Association :

Question 3.
Explain the functions of promoters. [May 17 – T.S.]
Answer:
Promoter is the person who assembles the men, money and the materials into a going concern. Promoters are those who take various steps in setting up a business organisation. Promoter is mainly concerned with the promotion of a business venture. Discovery, investigation, assembling and financing, etc. are performed by the promoter.

Functions:

• A promoter conceives an idea for the setting up of a business.
• Promoter makes preliminary investigation and ensures the future prospects of business.
• Promoter brings together various individuals who agree to associate with him and share the business responsiblities.
• He prepares various documents and gets the company incorporated.
• Promoter raises the required finances and gets the company going.

Very Short Answer Questions

Question 1.
Define Promotion.
Answer:
Promotion means undertaking such a step, which would persuade a large number of people to come together for achieving a common goal through the company form of organisation. According to L.H. Haney, “Promotion may be defined as the process of organising and planning the finance of a business enterprise under the corporate form”.

Question 2.
Define MOA.
Answer:
According to Lord Cairns, “Memorandum of Association of a company is charter and defines the limitation of the powers of a company. It contains the fundamental conditions upon which alone the company is allowed to be incorporated”. The Memorandum of Association is the constitution of the company. It is the charter of the company. It provides the foundation on which the company structure is built. It defines the scope of the company’s activities as well as its relation with the outside world.

Question 3.
Minimum Subscription :
Answer:
The minimum amount of capital to be collected by a public limited company before its allotment of shares is known as “minimum subscription”. A public limited company cannot start business unless a minimum subscription as stated in the prospectus has been subscribed. It is fixed by taking into account the following requirements.

• Amount required for the purchase of property.
• Amount required for working capital.
• Amount required for payment of preliminary expenses.
• Amount required for any other expenditure for the formation of company.

Question 4.
Statement in lieu of prospectus :
Answer:
If the public company does not raise its capital by the public issue of shares, then it need not publish a prospectus. In such a company capital may be collected privately and shares may be allotted by the mutal agreement of a few people. Such public company having a share capital, and not issuing prospectus must prepare a statement in lieu of the prospectus and file it with the Registrar of Companies.

Question 5.
Criminal liability for misstatements in Prospectus:
Answer:
In case of Mis-statements or Misrepresentation in Prospectus, it gives rise to impose civil or criminal liability to pay compensation to the persons, who subscribed the shares relying on such false information in the prospectus and also criminal libaility to pay a fine up to Rs. 5000/- or imprisonment up to 2 years or both.

Question 6.
Certificate of commencement of business:
Answer:
A public limited company cannot commence its business unless it received a certificate of business commencement. This certificate is not compulsory for private limited company. It means private company can commence its business without the certificate of business commencement. The Registrar of Companies issues this certificate only when all the legal documents are submitted. Further, the registrar issues this certificate only on the confirmation of collection minimum subscription.

Question 7.
Prsopectus.
Answer:
A prospectus is a document which invites the public to promote funds to the company by way of subscribing to its shares and debentures. The history, nature, and profitability of the company is depicted in the prospectus.

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 6th Lesson Joint Stock Company – Formation Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 6th Lesson Joint Stock Company – Formation

Essay Answer Questions

Question 1.
What is a joint stock company? What are its features of it?
Answer:
Business units may be classified into two types. They are :
1) Non-corporate business units
2) Corporate business units.
The basic demerits of non-corporate business units (i.e., sole proprietorship concerns, partnership firm, joint Hindu undivided family concerns) are limited sources and unlimited liability. To overcome these demerits new business units i.e. corporate business units came into existence.

A Joint Stock Company is one kind of corporate business unit. A joint stock company is a voluntary association of persons formed for undertaking some big business activity. It is established by law and can be dissolved by law. The company has a separate legal entity so that even if its members die, the company remains in existence. The money so contributed constitutes capital of the company. The capital of the company is divided into small units called shares. Since members invest their money by purchasing the shares of the company they are known as shareholders and the capital of the company is known as share capital.

Company – Definition :
“A company is an artificial person created by law, having a separate legal entity with a perpetual succession and a common seal.” – Section 566 of the Companies Act, 1956

“A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership.

Features:
1) An artificial person created by law :
A company is an aritficial person created by law and existing only in contemplation of law. It is intangible and invisible legal person having no body and soul. .

2) Seperate legal entity :
A company has an independent existence a part from its members. Its assets and liabilities belong to the company and not to its members. It can own property, have a bank account, take a loan, sue (file a case in court) and be sued in its own name.

3) Formation :
A company comes into existence through the operation of law. So, registration must be under the Companies Act.

4) Common seal as a substitute for signature:
A company cannot sign the documents as it is not a natural person. So, each company has a common seal which is like its signature. When any authorised person puts the seal on any paper or document, it is a legal evidence of an act done by the company.

5) Perpetual existence :
A company is an artificial person created by a process of law. Hence, it enjoys perpetual succession (permanent existences) i.e. it never dies. It is said that “members may come and members may go but the company goes on forever”. A company is not affected by death of a member or a new member coming in place of an old member. A company is wound up by law only. It has to act through its directors and employees.

6) Limited liability of members:
The liability of every shareholder is limited to issue price of the shares allotted to him. If the shares are fully paid up-, he is not subject to any further liability.

7) Transferability of shares:
The members of the company (public company) are free to transfer or dispose the shares held by them to any person as and when they like. They do not need the consent of other shareholders to transfer their shares. But in case of private company some restrictions are imposed for transfering shares.

8) Membership :
To form a joint stock company, a minimum of two members are required in case of private limited company and seven members in case to public limited company. The maximum limit is fifty in case of private limited company. There is no maximum limit on the number of members in case of a public limited company.

9) Democratic management:
Since the number share holders are very large and may be distributed at different geographical locations, it becomes difficult for them to carry on operational management of the company on day-to-day board. This gives rise to the need of separation of the management and ownership.

10) Statutory regulations are to be followed :
A company has to comply with and abide by a number of statutory requirements. A company is governed by the Companies Act and it has to invariably follow the various provisions of the Act. For ‘ instance, such companies should submit a number of returns to the government and also its accounts have to be audited by a Chartered Accountant.

Question 2.
Explain the advantages and disadvantages of a joint stock company.
Answer:
A joint stock company is an artificial person created by law with a fixed capital, divisible into transferable shares, with perpetual succession and common seal. The company has a separate legal entity. It must be compulsorily registered. The capital of a company is divided into small units called shares. Any one who holds or buys share in a company is called shareholder.

Joint Stock Company – Advantages:
1) Limited liability :
The liability of shareholders is limited. The risk of loss is limited to the issue price of theshares.

2) Large financial resources :
Company form of organisation enables to mobilise huge financial resources because of principles of limited liabilities and diffusion of ownership. It collects funds in the form of shares of small denominations so that people with small means can also buy them. Benefits of limited liability and transferability of shares attract investors.

3) Continuity of existence :
A company has perpetual or continuous existence. Members may go or new members may come in, but the company goes on for ever.

4) Benefits of large scale operation :
A joint stock company can undertake business on large scale. As a result it can derive all the advantages of large scale production.

5) Liquidity :
The transferability of shares act as an added incentive to investors. The shares of a public company can be traded easily in the stock exchange. The public can buy shares when they have money. The prospective investors can invest and convert shares into cash whenever they need money.

6) Professional management :
Companies, because of their complex nature of activities and large volume of business, require professional managers at every level of their operation. This leads to efficiency in management of their business affairs.

7) Research and development :
A company generally invests a lot of money on research and development for improved processes of production, designing and innovating new products, improving quality of product, new ways of training its staff, etc.

8) Tax benefits :
Although the companies are required to pay tax at a high rate, in effect, their tax burden is low as they enjoy many tax exemptions under Income Tax Act.

Joint Stock Company – Disadvantages :
1) Too many legal formalities:
Formation of a company is a time – consuming process and also expensive. Many legal formalities have to be observed and several legal documents have to be prepared and filed. Delay in formation may deprive the business the momemtum of an early start.

2) Lack of motivation :
The directors and other officers of a company have little personal involvement in the efficient management of a company. Separation between ownership and control and absence of a direct link between effort and reward may lead to lack of personal interest and incentive. It is difficult to keep peronal touch with all the customers and employees. As a result, efficiency of business operations may be low.

3) Delay in decisions :
Redtapism and bureaucratic hurdles do not permit quick decisions and prompt action in company form of organisation. There is little scope for personal initiative and a sense of responsibility. Paid employees like to play safe and tend to shift responsibility. There is lack of flexibility of operations in a company.

4) Economic oligarchy :
The management of company is supposed to be carried on according to the collective will of its members. But in practice, there is rule by a few (Oligarchy). Often directors try to mislead the members and manipulate voting power to maintain and continue their control.

5) Corrupt management:
In a company, there is often danger of fraud and misuse of property by dishonest management. Fake companies may be formed to deprive the investors of their hard-earned money. Unscrupulous people may manipulate annual accounts to show artificial profits or losses for their personal gain.

6) Excessive government control :
A company has to submit many statements and returns to the government. Excessive government control leads to waste of time for the company.

7) Unhealthy speculation :
A few individuals may corner the shares to gain control over the company.

8) Conflict of interests :
Company is the only form of business wherein a permanent conflict of interests may exist. In a company conflicts may continue between shareholders and board of directors or between shareholders and creditors or between management and workers.

9) Lack of secrecy :
Under the Companies Act, a company is required to disclose and publish a variety of information on its working. Widespread publicity of affairs makes it almost impossible for the company to retain its business secrets. The accounts of a public company are open for inspection to public.

Question 3.
Distinguish between a private company and a public company. [Mar. 2019 – A.P. & T.S. – Mar. 2018 – T.S.]
Answer:
On the basis of number of members or public interest companies may be classified into

1. Public company
2. Private company

1) Public company :
According to Companies Act, Public company means a company which (a) is not a private company; (b) has a minimum paid-up capital of ₹ 5 lakhs or such higher paid-up capital and (c) is a private company which is a subsidiary of a company which is not a private company.

2) Private company:
According to Companies Act, Private company means a company which has a minimum paid up capital of one lakh rupees or such higher paid up capital as may be prescribed and by its articles. Restricts the right of members to transfer its shares. Limits the number of its members to 50. Prohibits any invitation to the public to subscribe to any shares in, or debentures of the company. Prohibits any invitation or acceptance of deposits from persons other than its members, directors, and relatives.

Differences between Private company and Public company

Short Answer Questions

Question 1.
List out and briefly explain different types of companies.
Answer:

1) Chartered Companies:
The companies which are established by the Royal charter or special sanction of the Royal Head of the State are called chartered companies. Such companies are granted special privileges and powers to achieve the defined objectives.
E.g.: East India Company.

2) Statutory Company :
These companies are formed by the enactment of special Act by Parliament or State Assembly. The Reserve Bank of India, the State Bank of India, Life Insurance Corporation of India, etc. are the examples of Statutory Companies.

3) Registered Company:
All those companies that are registered under the Companies Act 2013 are called Registered Companies.

4) Government Company :
Government company means any company in which not less than 51% of the paid up capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a government company.

5) Private Company :
A private company is a very suitable form for carrying on the business of family and small concerns. It is registered under the Companies Act 2013.

6) Public Company :
According to the section 2 (71) of the Companies Act of 2013 a company is a said to be public company (a) It is not a private company (b) It has a minimum paid up capital of ₹ 5,00,000 and above (c) It is a private company which is subsidiary of any public company.

7) Companies limited by shares :
In these compaines the liability of the members is limited to the extent of the value of shares held by them.

8) Companies limited by guarantee :
In these companies the members’ liability is not only up to the face value of the shares but also extended to the amount guaranteed by them.

9) Unlimited Companies:
In these companies the liability of the members is unlimited. The members are fully liable for all the debts of the company.

10) Holding Company :
Where one company controls the management of another company, the controlling company is called ‘Holding Company’.
E.g.: If.company A holds more than 5,1% of paid1 up share capital of company B, the company A is called holding company.

11) Subsidiary Company :
Where one company controls the management of another company such- company so controlled fs called subsidiary company.
E.g. : If company A holds more than 51% of paid up share capital of company B, the company B is called subsidiaiy company.

12) Indian Company:
A company registered in Indian having place of business in India called Indian company. It may be a private company or a public company.

13) Foreign Company :
A foreign company is one that is incorporated outside India but has business operations in India.

14) National Company:
Such companies confine their operations within the boundaries of the country in which they are registered.

15) Multi-national Company :
Such companies which extend the areas of their operations beyond the country in which they are registered.

Question 2.
What are the features of a public company?
Answer:
A joint stock company is an artifical person created by law with a fixed capital, divisible into transferable shares, with perpetual succession and common seal. The company has a seperate legal entry. It must be compulsorily registered. The capital of the company is divided into small units called shares. Any one who holds or buys share in a company is called shareholder. Thus a company is defined as an association of persons, having a separate legal existence, perpetual sucession and a common seal.

On the basis of public interest company may be classified into two types.

1. Private Limited Company
2. Public Limited Company.

Public Limited Company – Features :
It is suitable form of company for carrying on the business at large scale involving huge amount of capital. According to section 2(71), Public company is one which has the following features.

• The minimum paid up capital is ₹ 5,00,000.
• The minimum number of members is seven.
• The maximum number of members is unlimited. Such a company must use the word “Ltd” as part of its name.

A public company must write public limited or simply limited after its name. Steel Authority of India Limited, Bajaj Auto Limited, Reliance Industries Limited, and Hindustan Lever Limited are the examples of public companies.

Question 3.
What are the features of a private company?
Answer:
Sole proprietorship, Joint Hindu family and partnership form of business organisations could not meet the needs of modern industry and commerce because of their limitations like limited resources, unlimited liability, etc. The need for another form of organisation free of the above limitations was felt thus joint stock type of company came into existence as it can raise large resources with risk of unlimited liability, deploy huge capital, use modern technology, introduce specializations and run with professionalism.

On the basis of public interest company may be classified into two types

1. Private limited company
2. Public limited company.

Private Limited Company – Features :
According to section 2(68) of the Companies Act 2013 private company means company which has a minimum paid up capital of one lakh rupees or such higher paid – up-capital as may be prescribed and by its articles.

1. Restricts the rights of members to transfer its shares.
2. Limits, the number of its member to 50.
3. Prohibit any invitation to the public to subscribe to any shares in, or debentures of the company.
4. Prohibits any invitation or acceptance of deposits from persons other than its members, directors, and relatives.

Very Short Answer Questions

Question 1.
Define company.
Answer:
The word ‘Company’ implies a group of people who voluntarily agree to form a company and derived from the Latin word ‘com’ i.e., with or together and ’panis’ i.e., bread. It refers to an association of persons discussing matters and taking food together. However, in law company is termed as a company which is formed and registered under the Companies Act 2013.

“A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership.” -L.H. Haney

Question 2.
What is a Government company? [Mar. 2019 – A.P. & T.S.Q Mar. 2018 – A.P.]
Answer:
Government company means any company in which not less than 51% of the paid up capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a government company.

Question 3.
What do you mean by a statuatory company?
Answer:
There are companies formed by the enactment of special Act by Parliament or State Assembly. The Reserve Bank of India, the State Bank of India, Life Insurance Corporation of India, etc. are the examples of Statutory Companies.

Question 4.
Chartered Company
Answer:
The companies which are established by the Royal charter or special sanction of the Royal Head of the State are called chartered companies. Such companies are granted special privileges and powers to achieve the defined objectives.
iE.g.: East India Company.