Arihant CBSE Class 11 Business Studies Term 2 Book

CBSE Term II
2022
Business
Studies
Class
XI
CBSE Term II
2022
Business
Studies
Class
XI
Complete Theory Covering NCERT
Case Based Questions
Short/Long Answer Type Questions
3 Practice Papers with Explanations
Author
Aman Sharma
ARIHANT PRAKASHAN (School Division Series)

CBSE Term II
2022
ARIHANT PRAKASHAN (School Division Series)
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CBSE Term II
2022
Contents
CHAPTER
Sources of Business Finance -
CHAPTER
Small Business and Entrepreneurship Development -
CHAPTER
Internal Trade -
CHAPTER
International Business -
Practice Papers - -
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CBSE Term II
2022
Syllabus
CBSE Term II Class XI
Theory - Marks Duration - hrs

PART B : FINANCE AND TRADE Periods Marks
. Sources of Business Finance
. Small Business and Entrepreneurship Development
. Internal Trade
. International Business
Total
Project Work Part -
PART B FINANCE AND TRADE

Unit : Sources of Business Finance
Business finance: Concept and Importance State the meaning, nature and importance
of business finance.
Owners funds- equity shares, preferences share, Classify the various sources of funds into
retained earnings, Global Depository receipt owners funds.
GDR , American Depository Receipt ADR and State the meaning of owners funds.
International Depository Receipt IDR concept Understand the meaning of Global
Depository receipts, American Depository
Receipts and International Depository
Receipts.
Borrowed funds: debentures and bonds, State the meaning of borrowed funds.
loan from financial institution and commercial Discuss the concept of debentures, bonds,
banks, public deposits, trade credit and loans from financial institutions and
commercial banks, Trade credit
Distinguish between owners funds and
borrowed funds.
CBSE Term II
2022
Unit : Small Business and Entrepreneurship Development

Entrepreneurship Development ED : Concept Understand the concept and need of
and Need. Process of Entrepreneurship Entrepreneurship Development ED ,
Development: Start-up India Scheme, ways to Intellectual Property Rights
fund startup. Intellectual Property Rights and Understand the process of Entrepreneurship
Entrepreneurship Development
Small scale enterprise Definition Understand the definition of small

enterprises
Role of small business in India with special Discuss the role of small scale business in
reference to rural areas India with special reference to rural areas
Government schemes and agencies for small Appreciate various schemes of NSIC
scale industries: National Small Industries and DIC with special reference to rural,
Corporation NSIC and District Industrial backward area.
Centre DIC with special reference to rural,
backward areas
Unit : Internal Trade

Internal trade - meaning and types of services State the meaning and types of internal trade.
rendered by a wholesaler and a retailer Appreciate the services of wholesalers and
retailers.
Large scale retailers-Departmental stores, chain Highlight the distinctive features of

stores concept departmental stores, chain stores
Unit : International Trade

International trade: concept and benefits Understand the concept of international trade.
Describe the benefit of international trade to
the nation and business firms.
PROJECT WORK IN BUSINESS STUDIES ONLY ONE PROJECT : GUIDELINES AS

GIVEN IN CLASS XII CURRICULUM
CBSE Circular
Acad - 51/2021, 05 July 2021
Exam Scheme Term I & II
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CBSE Term-II Business Studies XI 3
CHAPTER 1
Sources of
Business Finance
In this Chapter...
l Meaning of Business Finance
l Owner’s Funds
l Borrowed Funds
Meaning of Business Finance 5. Necessary for Availing the Opportunities Business can
take the advantage of opportunities to earn more, only if
The requirement of funds by business to carry out its various it has adequate finance at its disposal.
activities is called business finance. It is basically concerned
with acquisition of funds, use of funds and distribution of Financial Needs of Business
profits by a business enterprise. The financial needs of the business can be categorised into
the following
Nature of Business Finance
l
The concept of business finance is very wide and is used in 1. Fixed Capital Requirements
every type of business house. To start a business, fixed assets such as land, plant,
l
It includes all types of funds needed to start, run, expand machinery, etc are required. The amount which is required to
and diversify the business. purchase these assets is known as fixed capital requirements
l
The primary goal of business finance is to increase the of the enterprise. The following points should be
corporate value. remembered regarding fixed capital requirements
l
Fixed capital requirements are more for a manufacturing
Importance of Business Finance firm as compared to a trading firm.
1. Necessary to Start Business Every new venture needs l
Fixed capital requirements are more for a business operating
finance to buy plant and machinery, land and building, on a large scale.
raw material, etc. l
Fixed capital requirements should be financed through
2. Necessary to Face Economic Cycle During recession long-term sources of finance.
and depression, business needs finance to overcome
problems of decreased profitability. 2. Working Capital Requirements
3. Necessary for Growth A company needs significant A business also needs finance to carry out the various routine
financial investment to acquire new capital, staff or activities such as purchase of raw material, payment of
inventory to fuel the growth. electricity bill, rent, etc. The amount required to meet these
needs is known as the working capital requirements of the
4. Necessary for the Payments of Debts Prompt payment
business. The following points should be kept in mind
of debts can be possible only because of adequate
regarding the working capital requirements
arrangement of finance.
4 CBSE Term-II Business Studies XI
l
The shorter the operating cycle, the lesser will be the amount of working capital required and vice-versa.
l
Working capital requirements are generally met through short-term sources of finance.
l
Working capital requirement for a business selling goods on credit or having slow sales turnover is more than otherwise.
l
Working capital requirement increases during festive season, expansion of business, shifting to a new location and payments
of current debts.
Classification of Sources of Finance

Sources of funds can be classified on the basis of period, ownership and source of generation, as illustrated in the chart below
Sources of Funds Classification
On the basis of period On the basis of ownership On the basis of source of generation
Long-term Short-term Owner's Funds Borrowed Funds Internal Sources External Sources
Equity shares Trade credit Equity shares Debentures Financial institutions
Equity share capital
Retained earnings Factoring Retained earnings Loans from banks Loan from banks
Retained earnings
Preference shares Banks Loans from financial Preference shares
Debentures Commercial institutions Public deposits
Loan from financial paper Debenture
Public deposits
institutions Lease financing
Lease financing
Loan from banks Commercial papers
Commercial papers
Trade credit
Medium-term Factoring
Loan from banks
Public deposits
Loan from financial
institution
Lease financing
The broad classification of these sources have been discussed ahead.
Classification on the Basis of Period

On this basis of period, sources of funds can be classified as
1. Long-term Sources These sources provide finance to business firms for a period exceeding five years.
2. Medium-term Sources These sources provide finance to business firms for a period exceeding one year but less than
five years.
3. Short-term Sources These sources provide finance to business firms for less than one year.
Classification on the Basis of Ownership

On this basis of ownership, sources of funds can be classified as
1. Owner’s Funds Funds or finance provided by the owners of the business is referred to as owner’s funds.
2. Borrowed Funds The funds that are raised by way of loans and credit from the public, banks and financial institutions
are termed as borrowed funds.
Classification on the Basis of Source of Generation

On the basis of source of generation, sources of funds can be classified as
1. Internal Sources These include all those funds which are generated from within a business, such as, from collection of
receivables, disposing off surplus inventories and ploughing back of profit. These sources can however, fulfil only
limited needs.
2. External Sources These include all those funds which are generated from outside a business. These sources carry a
cost but large amounts can be raised through these sources.
Payment of fixed rate of dividend to preference shares may

Owner’s Funds
l
enable a company to declare higher rates of dividend for

Funds or finance provided by the owners of the business is the equity shareholders.
referred to as owner’s funds. Owner’s fund include l
Preference shareholders have a preferential right of
l
Equity Shares repayment over equity shareholders.
l
Preference Shares l
Preference capital does not create any sort of charge
l
Retained Earnings against the assets of a company.
l
Global Depository Receipt (GDR)/International
Depository Receipt (IDR) Demerits of Preference Shares
l
American Depository Receipt (ADR) l
Preference shares are not suitable for those investors who
are willing to take risk.
Equity Shares l
Preference capital dilutes the claims of equity shareholders
The capital obtained by issue of shares is known as share over assets of the company.
capital. Equity share capital is a prerequisite to the creation l
The rate of dividend on preference shares is generally
of a company. Equity shareholders do not get a fixed higher than the rate of interest on debentures.
dividend but are paid on the basis of earnings by the l
These shares may not be very attractive to the investors as
company. They are known as the residual owner of the the dividend on these shares is to be paid only when the
business. company earns profit.
l
There is no tax saving as dividend paid is not deductible
Merits of Equity Shares
from profits as expense.
l
Equity shares are suitable for investors who are willing to
assume risk for higher returns. Retained Earnings
l
There is no burden on the company to pay the dividend. A portion of the net earnings retained in the business for use
l
Equity capital serves as permanent capital as it is to be in the future is known as retained earnings. This is also
repaid only at the time of liquidation of a company. referred to as ‘ploughing back of profits’.
l
Equity capital provides credit worthiness to the company.
l
Funds can be raised through equity issue without creating Merits of Retained Earnings
any charge on the assets of the company. l
Retained earnings is a permanent source of funds.
l
It does not involve any explicit cost in the form of interest,
Demerits of Equity Shares dividend or floatation cost.
l
Equity shares get fluctuating returns. l
There is a greater degree of operational freedom and
l
The cost of equity shares is generally more as compared to flexibility.
the other sources of funds. l
It enhances the capacity of the business to absorb
l
Issue of additional equity shares dilutes the voting power of unexpected losses.
existing equity shareholders. l
It may lead to increase in the market price of the equity
l
More formalities and procedural delays are involved while shares.
raising funds through issue of equity shares.
Demerits of Retained Earnings
Preference Shares l
Dissatisfaction amongst the shareholders as they would get
The preference shares give preference shareholders following lower dividends.
two rights l
It is an uncertain source of funds as the profits of business
l
Right to receive a fixed rate of dividend, out of the net are fluctuating.
profits of the company, before any dividend is declared for
l
The opportunity cost associated with these funds is not
equity shareholders. recognised by many firms.
Right to receive their capital after the claims of the company’s
Global Depository Receipts (GDRs)/
l
creditors have been settled, at the time of liquidation.

International Depository Receipts (IDRs)
Merits of Preference Shares The local currency shares of a company are delivered to the
l
Preference shares provide reasonably steady income in the depository bank. The depository bank issues depository
form of fixed rate of return. receipts against these shares. Such depository receipts
l
It does not affect the control of equity shareholders over denominated in US dollars are known as Global Depository
the management. Receipts (GDR).
GDR is an instrument issued abroad by an Indian company Loan from Financial Institutions
to raise funds in some foreign currency and is listed and
traded on a foreign stock exchange. The financial institutions established by the central as well as
state governments provide both owned capital and loan capital
American Depository Receipts (ADRs) for long and medium term requirements. This source of
financing is considered suitable when large funds for longer
The depository receipts issued by a company in the USA are duration are required for expansion, reorganisation and
known as American Depository Receipts. It is similar to a modernisation of an enterprise.
GDR except that it can be issued only to American citizens
and can be listed and traded on a stock exchange of USA. Merits of Loan from Financial Institutions
l
Financial institutions provide long-term finance, which are
Borrowed Funds not provided by commercial banks.
The funds that are raised from external funds by way of
l
Many of these institutions provide financial, managerial and
loans and credit from the public, banks and financial technical advice and consultancy to business firms.
institutions are termed as borrowed funds. Borrowed funds l
Obtaining loan from financial institutions increase the
include goodwill of the borrowing company in the capital market.
l
Debentures and bonds l
It is not a burden on the business as repayment of loan can
l
Loan from financial institutions be made in easy instalments.
l
Loan from commercial banks
l
The funds are made available even during periods of
depression, when other sources of finance are not available.
l
Public deposits
l
Trade credit Demerits of Loan from Financial Institutions
l
Financial institutions follow rigid criteria, many formalities,
Debentures and Bonds time and money consuming procedures for grant of loans.
Debenture issued by a company is an acknowledgment that l
Certain restrictions such as restriction on dividend payment
the company has borrowed a certain amount of money, are imposed by the financial institutions.
which it promises to repay at a future date. Debenture l
Financial institutions may have their nominees on the board
holders are paid a fixed stated amount of interest at of directors of the borrowing company thereby restricting
specified intervals say six months or one year. the powers of the company.
Bonds are also loan instruments and resemble debentures in
all aspects except one i.e., no pre-determined rate of Special Financial Institutions
interest is announced at the time of issuing bonds, but a l
Industrial Finance Corporation of India (IFCI)
specific rate of interest is announced while issuing l
State Financial Corporations (SFCs)
debentures. l
Industrial Credit and Investment Corporation of India
(ICICI)
Merits of Debentures l
Industrial Development Bank of India (IDBI)
l
It is preferred by investors who want fixed income at lesser l
State Industrial Development Corporation (SIDCs)
risk. l
Unit Trust of India (UTI)
l
Debentures are fixed charge funds and do not participate l
Industrial Investment Bank of India Ltd. (IIBI)
in profits of the company. l
Life Insurance Corporation of India (LIC)
l
The issue of debentures is suitable in the situation when
the sales and earnings are relatively stable. Loan from Commercial Banks
l
Financing through debentures does not dilute control of
Banks extend loans to firms of all sizes and in many ways, like,
equity shareholders on management.
cash credits, overdrafts, term loans, purchase/discounting of bills
l
Financing through debentures is less costly as compared and issue of letter of credit. The rate of interest charged by
to cost of preference or equity capital. banks depends on various factors such as the characteristics of
the firm and the level of interest rates in the economy. Such
Demerits of Debentures
loans are used for medium to short periods.
l
As fixed charge instruments, debentures put a permanent
burden on the earnings of a company. Merits of Loan from Commercial Banks
l
In case of redeemable debentures, the company has to
l
Banks provide timely assistance to business by providing
make provisions for repayment on the specified date. funds as and when needed by it.
l
With the issue of debentures, the capacity of a company
l
Secrecy of business can be maintained as the information
to further borrow funds reduces. supplied to the bank by the borrowers is kept confidential.
l
Formalities such as issue of prospectus and underwriting Demerits of Public Deposits
are not required for raising loans from a bank. l
New companies generally find it difficult to raise funds
l
Loan from a bank is a flexible source of finance as the loan through public deposits.
amount can be increased according to business needs. l
It is an unreliable source of finance as the public may not
respond when the company needs money.
Demerits of Loan from Commercial Banks l
Collection of public deposits may prove difficult in case of
l
Funds are generally available for short periods. the size of deposits required is large.
l
Banks make detailed investigation of the company’s
affairs, financial structure etc., and may also ask for Trade Credit
security of assets and personal sureties. Trade credit is the credit extended by one trader to another for
l
In some cases, difficult terms and conditions are imposed the purchase of goods and services. Such credit appears in the
by banks for the grant of loan. records of the buyer of goods as ‘sundry creditors’ or ‘accounts
payable’. Trade credit is commonly used by business
Public Deposits organisations as a source of short-term financing.
The deposits that are raised by organisations directly from
Merits of Trade Credit
the public are known as public deposits. Rates of interest
offered on public deposits are usually higher than that
l
Trade credit is a convenient and continuous source of funds.
offered on bank deposits. Public deposits can take care of
l
Trade credit may be readily available in case the credit
worthiness of the customers is known to the seller.
both medium and short-term financial requirements of a l
Trade credit helps to promote the sales of an organisation.
business. The acceptance of public deposits is regulated by l
Trade credit can be availed in situation when any firm wants
the Reserve Bank of India.
to increase its existing inventory levels to a higher level.
Merits of Public Deposits
l
It does not create any charge on the assets of the firm while
providing funds.
l
The procedure of obtaining deposits is simple.
l
Cost of public deposits is generally lower than the cost of Demerits of Trade Credit
borrowings from banks and financial institutions. l
Availability of easy and flexible trade credit facilities may
l
Public deposits do not usually create any charge on the induce a firm to indulge in overtrading.
assets of the company. l
Only limited amount of funds can be generated through
l
The control of the company is not diluted as the trade credit.
depositors do not have voting rights. l
It is generally a costly source of funds.
Difference between Owners’ Funds and Borrowed Funds

Basis Owner’s Funds Borrowed Funds
Meaning It comprises the funds contributed by the owners and the It comprises funds taken in the form of loans and
amount of profit reinvested by them in the business. advances from other parties.
Nature It is a permanent source of finance. It is not a permanent source of finance.
Risk It is subject to the risks of the business, therefore it is referred It is not subject to the risks of the business. Loans
to as risk capital. are required to be repaid also in case of losses.
Control The owners of these funds control the affairs of the company. The owners of these funds have no say in the affairs
of the company.
Reward Owner’s funds earn rewards in the form of share in profit, as in Borrowed funds earn rewards in the form of
the form of dividend. interest.
Security These funds are raised without providing for security of assets. These funds are raised on security of assets.
Order of Payment They rank last in the order of payment. They have priority in the order of payment.
Nature of Obligation The obligation of payment of return is not fixed. The obligation of payment of return is fixed.
Rate of Return The rate of return is not fixed on owner’s funds. It fluctuates The rate of return on borrowed funds is fixed.
year after year.
Chapter
Practice
5. Funds needed for the day-to-day operations is
PART 1 called ………. capital of the company.
(a) fixed (b) loan
Objective Questions (c) permanent (d) working
Ans. (d) working
l
Multiple Choice Questions 6. In order to avoid failure in non-payment, fixed
1. Requirement of funds by business to carry out its capital requirements should be met through which
various activities is known as type of source of finance?
(a) business management (a) Long-term sources
(b) business finance (b) Short-term sources
(c) business budgeting (c) Medium-term sources
(d) financial management (d) None of the above
Ans. (b) A business requires funds for each and every activity Ans. (a) Long-term source of finance gives more opportunity
from its commencement till it’s winding up. This to the borrower to repay the debt thereby helping in
requirement of funds is known as business finance. avoiding the failure of non-repayment.
2. Primary goal of business finance is to 7. Mary owns a small farm to grow fruits. She wants to
(a) increase corporate value purchase neighbouring land and convert it to farm
(b) increase brand value for increasing the variety of fruits. She wishes to
(c) reduce debt burden take tractor and some other machine for the same.
(d) avail opportunities
She will also need money to purchase the land.
Which source of finance is required by Mary?
Ans. (a) Increase in brand value, reduction of debt burden and
availing opportunities are the secondary goals of business (a) Short-term (b) Medium-term
finance, while primary goal is to increase corporate value. (c) Long-term (d) Both (a) and (b)
Ans. (c) Mary will be able to pay only when her new farm
3. Fixed capital requirements of a manufacturing starts giving high quantity of fruits which will require
concern are long time, therefore, she requires long-term finance.
(a) same as that of a trading concern
(b) more than that of a trading concern
8. Statement I Medium-term funds remain invested
in a business for more than 1 year but less than 5
(c) less than that of a trading concern
years.
(d) None of the above
Ans. (b) Fixed capital requirements of a manufacturing Statement II Payment of dividend on equity shares
concern are more since they require more machine and is compulsory.
other factory tools as compared to trading concerns. Alternatives
4. The working capital requirements of a business is (a) Statement I is correct and statement II is wrong
high if …… (b) Statement II is correct and Statement I is wrong
(a) sales turnover of business is high (c) Both the statements are correct
(b) it sells goods on credit (d) Both the statements are incorrect
(c) it has any expansion plans Ans. (a) Equity shareholders are the residual owners of the
(d) All of the above company. So, dividend is only paid when amount is left
after making payment to all other liabilities.
Ans. (d) All the mentioned options lead to more requirement of
working capital majorly in the form of high inventory 9. Directors of X Ltd wants to expand the company, for
levels, high outflow of cash and low inflow of cash. this they need land, new factory shed and machines.
Being the financial advisor of the company which Ans. (d) Retained earnings do not involve any explicit cost as it
source from the following you will recommend does not involve any form of interest, dividend or
them? floatation cost. As the profits of business are fluctuating, it
(a) Debentures is an uncertain source of fund.
(b) Inter-corporate deposits 14. Non-payment of debts on time results in
(c) Loan from commercial banks (a) higher interest costs (b) loss of goodwill
(d) Equity shares (c) fines and penalties (d) All of these
Ans. (d) Acquisition of land and construction of factory shed on Ans. (d) Non-payment of debts on time results in imposition of
it takes time. This means that the factory will not generate fines or penalties by the lender. In normal course of
any revenues for that time period. Therefore, funds business, money is borrowed at compound interest rates
required for the construction of the factory should be which means interest is charged on interest therefore, if
arranged from sources which are of long-term and do not there is any delay in repayment, interest costs would be
require fixed interest payments. Debentures requires higher. Extraordinary delay may also result in court cases
fixed interest payment while inter-corporate deposits and leading to loss of goodwill.
loans from commercial banks are short-term in nature.
Therefore, equity is the best option among the given
15. Unsecured debentures are also known as ……..
options. debentures.
(a) simple (b) naked
10. Equity share capital represents (c) collateralised (d) Both (a) and (b)
(a) fixed capital of the company Ans. (d) Both (a) and (b)
(b) loan capital of the company
(c) permanent capital of the company 16. The depository receipts issued by the company in
(d) fluctuating capital of the company the USA are known as ………. .
Ans. (c) Equity shares are permanent source of capital which (a) GDR (b) ADR
are redeemed only at the winding up of the company. (c) FDR (d) Both (b) and (c)
11. Statement I Participating preference shares Ans. (b) ADR
participate in the management of the company. 17. One of the demerits of loan from financial institutions
Statement II The owner funds are a permanent is that, financial institutions may put …… in the
source of finance. board of directors of the borrowing company which
Alternatives restricts their power.
(a) Statement I is correct and statement II is wrong (a) independent directors
(b) Statement II is correct and Statement I is wrong (b) nominee directors
(c) Both the statements are correct (c) experts
(d) Both the statements are incorrect
(d) auditors
Ans. (b) Participating preference shares can participate for
Ans. (b) nominee directors
additional dividend of the company. They cannot take
part in the management of the company. 18. Companies generally invites public deposits for a
12. Instead of distributing entire profits to the owners in period up to
the form of dividend, some profits are re-invested in (a) 5 years (b) 3 years
business in order to finance the future earnings of (c) 4 years (d) 10 years
the business. This is known as .......... . Ans. (b) 3 years
(a) ploughing back (b) dividend
(c) working capital (d) dividend stripping 19. Statement I In certain situations, collection of
Ans. (a) ploughing back
public deposits is difficult.
Statement II The dividends to be paid to the
13. Statement I Retained earnings involve any explicit preference shareholders are fluctuating.
cost in the form of interest, dividend or floatation cost.
Alternatives
Statement II Retained earnings are an uncertain (a) Statement I is correct and statement II is wrong
source of fund. (b) Statement II is correct and Statement I is wrong
Alternatives (c) Both the statements are correct
(a) Statement I is correct and statement II is wrong (d) Both the statements are incorrect
(b) Statement II is correct and Statement I is wrong Ans. (a) Collection of public deposits may prove difficult, when
(c) Both the statements are correct the size of deposits required is large. The dividends to be
(d) Both the statements are incorrect paid to the preference shareholders are fixed.
20. ……is the credit extended by one trader to another Ans. (c) In public deposit, the depositors of company are not
for the purchase of goods and services. given any voting rights.
(a) Loan (b) Trade Credit 5. Assertion (A) Borrowed funds are not considered as
(c) Trade Loan (d) Both (a) and (b) permanent source of capital.
Ans. (b) Trade Credit Reason (R) Borrowed funds are raised from
external source and are required to be paid back
l
Assertion–Reasoning MCQs after a stipulated period.
Directions (Q. Nos. 1 to 7) There are two Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
statements marked as Assertion (A) and Reason (R). (R) is the correct explanation of Assertion (A)
Read the statements and choose the appropriate 6. Assertion (A) To overcome problems during
option from the options given below difficult times, a business needs finance.
(a) Both Assertion (A) and Reason (R) are true and Reason
(R) is the correct explanation of Assertion (A) Reason (R) During recession and depression, the
(b) Both Assertion (A) and Reason (R) are true, but Reason sales of the business go down and the profitability is
(R) is not the correct explanation of Assertion (A) adversely affected.
(c) Assertion (A) is true, but Reason (R) is false Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
(d) Assertion (A) is false, but Reason (R) is true (R) is the correct explanation of Assertion (A)
1. Assertion (A) The procedure of obtaining funds 7. Assertion (A) Tax benefits are available on dividend
from commercial banks is complex. paid on preference shares.
Reason (R) Banks make detailed investigation of Reason (R) Dividend paid on preference shares is
the company’s affairs, financial structure, etc. an appropriation of profits.
Interest charged by banks depends upon a number Ans. (d) Tax benefits are not available on dividend paid on
of factors, such as nature of advance, period for preference shares because of the reason given.
which the loan is taken, etc. l
Case Based MCQs
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
(R) is the correct explanation of Assertion (A). 1. Direction Read the following text and answer the
2. Assertion (A) Financing through debentures is less question no. (i) to (vi) on the basis of the same.
costly. A company is searching options to raise ` 20,000
Reason (R) Debentures do not carry voting rights. crore from the financial market for diversification
Therefore, financing through debentures does not and modernisation of existing projects. It hired the
dilute the control of equity shareholders on services of a renowned financial consultancy firm
management. for suggesting options for the same. The financial
Ans. (b) The interest paid on debentures is admissible as an consultancy firm suggested a list of options to the
expense according to the provisions of income tax. This board of directors of the company.
helps a company to reduce its tax liability. Therefore, It was decided that for the immediate requirement
financing through debentures is less costly. of ` 1,500 crore, the company will make a new issue
3. Assertion (A) Payment of dividend on equity shares of shares without diluting the right of existing
is compulsory. shareholders according to the terms and conditions
of the company and ` 4,500 crore, would be raised
Reason (R) Voting rights are conferred upon equity
by taking loans from financial institutions.
shareholders and they participate in the affairs of
the business. It was further decided to raise capital to the term of
Ans. (d) Equity shareholders are the residual owners of the ` 6,000 crore through debentures. All these options
company. So, dividend is only paid when amount is left were accepted by the board of directors. The board
after making the payment for all other liabilities. further decided that trade credit can be used to
finance short-term capital requirements. The
4. Assertion (A) The control of the company is not company also decided that they will use their
diluted when they go for public deposits. undistributed profits in case of shortfall of funds.
Reason (R) The depositors of company are given (i) It was decided that for the immediate requirement
minor voting rights to keep their preference in of ` 1,500 crore, the company will make a new issue
consideration. of shares at a fixed rate of dividend without diluting
the control of existing shareholders, according to
the terms and conditions of the company. Name the source of raising capital. The company is also
type of financial securities issued by the company. considering using retained earnings for the same.
(a) Equity shares (i) Name the source of owned capital which is available
(b) Debentures free of cost.
(c) Commercial papers (a) Equity shares (b) Preference shares
(d) Preference shares (c) Retained earnings (d) Bonds
Ans. (d) Preference shares Ans. (c) Retained earnings
(ii) Which of the following sources of finance used by (ii) Vinita is of the view to finance the fund requirements
company does not involve any cost? from owned capital sources rather than from
(a) Shares borrowed capital sources as the risk of borrowed
(b) Debentures capital is …. and cost is ….. .
(c) Trade credit (a) high, low (b) low, high
(d) Loans from financial institutions (c) low, low (d) high, high
Ans. (c) Trade credit Ans. (a) high, low
(iii) Debentures are said to be the economical source of (iii) If the cash flow position of the company is strong,
finance because of which of the merits? the company can raise the required capital by
(a) Low floatation cost (b) Tax benefits
issuing ……… to enjoy tax benefits.
(a) shares
(c) No loss of control (d) Fixed interest
(b) bonds
Ans. (b) Tax benefits
(c) debentures
(iv) ` 4,500 crore would be raised by taking loans from (d) commercial papers
financial institutions. Loans from financial institutions
Ans. (c) debentures
are provided for
(iv) The control of shareholders over management will
(a) short-term (b) medium-term
get diluted if the company raises the capital by
(c) long-term (d) Both (b) and (c)
(a) equity shares (b) debentures
Ans. (d) Both (b) and (c)
(c) loans (d) preference shares
(v) The board of directors further decided that trade Ans. (a) equity shares
credit can be used to finance short-term capital (v) Which of the owned source can be used by
requirements. Identify one of the sources of trade company without much of regulations?
credit. (a) Raising share capital
(a) Banks (b) Traders
(b) Retained earnings
(c) Suppliers (d) Customers
(c) Using ADR/GDR
Ans. (b) Traders
(d) Both (b) and (c)
(vi) The usage of undistributed profits indicates the Ans. (b) Retained Earnings
usage of which source of capital?
(vi) Which of the following is a merit of retained
(a) Bonds (b) Equity shares
earnings?
(c) Preference shares (d) None of these
(a) Retained earnings are permanent source of funds for an
Ans. (d) The undistributed profit indicates retained earnings. organisation.
2. Direction Read the following text and answer the (b) It enhances the capacity of business to absorb unexpected
losses.
question no. (i) to (vi) on the basis of the same. (c) This source offers a greater degree of operational freedom
Vinita is the finance manager of Kipla pharma Co. As and flexibility.
the company wants to import a piece of new (d) All of the above
machinery from Japan for its expansion, the capital Ans. (d) All of the above
requirements for the same are estimated to be ` 5 3. Direction Read the following text and answer the
crore. Vinita reported that the company is not in a question no. (i) to (vi) on the basis of the same.
position to bear extra burden of paying interest so the
company should use owned capital sources than Sahil Ltd. a firm manufacturing textile, wished to
borrowed capital. diversify their business. They were considering two
options, either to diversify into manufacturing
The board of directors are confident about the sales toothpaste or switches. They wanted to invest in the
turnover and cash flow position of the company in the purchase of land, to set up a manufacturing unit in
coming years and supports the borrowed capital the backward areas of Gujarat. The finance manager
of the company was asked by the management to do

financial planning by identifying most suitable
PART 2
source of raising long-term funds for financing the
investment decisions and short-term sources for Subjective Questions
working capital decisions.
The objective was to keep the financial risks as low
l
Short Answer (SA) Type Questions
as possible. Therefore, the company decided to 1. Why is finance important for business?
source the raw materials using a source of finance Ans. Finance is the life blood of the business. Funds are
which facilitates the purchase of supplies without required to commence and carry on business. All business
immediate payment. Moreover, apart from the activities such as planning, organising, managing,
outside funds used, the company also decided to controlling, purchasing, selling, directing, marketing, etc
plough back the profits. The company also decided cannot take place without finance. Business needs funds
that after a certain point of time, they will release for purchasing fixed and current assets, for day-to-day
their IPO and get benefit of the bull run of the operations, purchase of raw material, to pay salaries, etc.
market. 2. For the successful running of a business, it is
(i) Identify which of the following is not the long-term necessary to determine the amount of working
source of finance? capital. Do you agree? If yes, then give reasons in
(a) Equity shares (b) Retained Earnings support of your answer.
(c) ADR (d) Public deposits Ans. Yes, I agree with the statement. Working capital is that
Ans. (d) Public deposits portion of capital which is used to conduct day-to-day
operations. It is very important for a business to
(ii) Name the source of finance having least financial determine the required amount of working capital.
risk on the business.
The reasons for estimating required working capital are
(a) Debentures (b) Trade credit
(i) Prosperity and progress of the projects can be
(c) Equity shares (d) Public deposits
maintained by adequate working capital.
Ans (c) Equity shares
(ii) Adequate working capital enables a firm to improve
(iii) “…. facilitates the purchase of supplies without the efficiency and profitability of its operations.
immediate payment.” Identify the source of finance (iii) It is also required to channelise the day-to-day
stated above. operations. That’s why it is also called circulating or
(a) Commercial paper (b) Retained earnings revolving capital.
(c) Subsidy (d) Trade credit 3. Komalika wants to start her own business dealing in
Ans. (d) Trade credit high end crockery items. She decides to arrange for
(iv) Which of the following long-term source of finance initial finance from her savings. However, her
is also known as ploughing back of profits? savings are not enough to fulfil all the initial needs
(a) Preference shares (b) Lease financing of the business. She seeks help of her husband, who
(c) Retained earnings (d) Equity shares works in government sector.
Ans. (c) Retained earnings He advises her that to start her business with
(v) Which of the following factor appears to be the limited finance and then use the revenues earned
primary factor taken into consideration by the by the business to fulfil other financial
management? requirements. Is the view of Komalika’s husband
(a) Cost (b) Degree of risk justified? Why or why not?
(c) Financial strength (d) Tax benefit Ans. No, I don’t think that the view of Komalika’s husband is
justified. Adequate finance is required in the business
Ans. (b) Degree of risk
because of following reasons
(vi) Which of these sources of finance would be raised (i) Necessary to Start Business Every new venture
through IPO as stated in the last line of the text? needs money to buy plant and machinery or to
(a) Preference shares (b) Lease financing conduct certain activities. All financial needs will not
(c) Retained earnings (d) Equity shares be estimated in the absence of this concept.
Ans. (d) Equity shares
(ii) Necessary for Business Cycle No matter how well Share Capital Total amount raised by issue of shares
the business is doing, a good finance manager has to constitute the share capital of the company.
prepare for rainy or even for stormy season. Business Shareholders The persons who buy shares are referred to
and economic cycles bring dark clouds that one can’t as ‘shareholders’.
predict. That’s why financial plans are created for In the given example, number of shares issued are 10,000,
downturns. share capital is of ` 1,00,000 and the persons who
(iii) Necessary for Growth Success can bring a business purchase these shares are the shareholders.
to a difficult crossroads. Sometimes in order to attain
more or to achieve greater success, a company needs 7. Discuss the features of equity shares as a source of
significant financial investment to acquire new finance.
capital, staff or inventory. This can only be possible Ans. Features of equity shares are
after proper arrangements of business finance. (i) The equity shareholders are the primary risk bearers
4. What are the different expenditures that any firm as they provide fixed capital to the business.
incurs in (ii) The equity share capital is not redeemable during
(i) Short-term (ii) Medium-term the lifetime of the company.
(iii) Long-term (iii) Returns are uncertain as the rate of dividend is not
fixed.
Ans. (i) Short-term
(a) Purchase of raw material. (iv) Equity shareholders can participate in the
company’s decisions and management.
(b) Payment of telephone bill, electricity bill, etc.
(ii) Medium-term 8. Preference shareholders have some preferential rights
(a) Expenditure made on renovation of office. in the capital structure of any company. Comment.
(b) Expenditure made on the promotion of company’s Ans. The following preferential rights are enjoyed by
product. preference shareholders
(iii) Long-term (i) Receiving a fixed rate of dividend, out of the net
profits of the company, before any dividend is
(a) Purchase of building
declared for equity shareholders.
(b) Purchase of machinery
(ii) Preference over equity shareholders in receiving
5. Differentiate between owner’s funds and borrowed their capital after the claims of the company’s
funds on the basis of creditors have been settled but before any amount is
(i) Reward paid to equity shareholders at the time of liquidation.
(ii) Security 9. Preference shares are not suitable for those
(iii) Order of payment investors who are willing to take risk and are
Ans. Difference between owner’s funds and borrowed funds. interested in higher returns. This highlights one of
the demerits of preference shares. State any other
Basis Owner’s Funds Borrowed Funds
four demerits of preference shares.
Reward Owner’s funds earn rewards Borrowed funds earn Ans. Demerits of preference shares are
in the form of share in profit, rewards in the form of
as in the form of dividend. interest. (i) These shares dilute the claim of equity shareholders
over the assets of the company.
Security These funds are raised These funds are
without providing for raised on security of (ii) The company has to pay higher rates of dividends to
security of assets. assets. the preference shareholders as compared to interest
on debentures.
Order of They rank last in the order They have priority in
Payment of payment. the order of payment. (iii) The dividend on these shares is to be paid only when
the company earns profit. Thus, the returns are not
6. Sun Rise company issues 10,000 shares of ` 10 each assured and they are unable to attract the investors.
for a total value of ` 1,00,000. With reference to the (iv) The dividend paid on preference shares is not
given statement, explain the meaning of the term deductible from profits as expense. Thus, there is no
share, share capital and shareholders. tax savings, as in the case of interest on loans.
Ans. Shares The capital of a company is divided into small 10. Shares are used to raise funds by the company.
units and each such unit is referred to as a ‘share’. Each However, there is a distinction in shares. There are
share forms a unit of ownership and is offered for sale to two types of shares – preference and equity.
raise the capital of the company. Shares are classified as Differentiate between equity shares and preference
equity shares and preference shares. shares on any three basis.
Ans. The differences between equity shares and preference 12. Though retained earnings are firm’s own source of
shares are (any three) funding and they are free to use them but using
Basis Equity Shares Preference Shares retained earnings can sometimes prove to be
disadvantageous. Do you agree? Explain.
Participation in Full right to No right to Ans. Yes, I agree that using retained earnings can sometimes
Management participate. participate. prove to be disadvantageous. Following points helps in
Sequence of Dividend is paid last Preference is given in explaining the demerits of retained earnings
Dividend of all. payment of dividend. (i) Excessive ploughing back may cause dissatisfaction
amongst the shareholders, as they would get lower
Sequence of On winding up of the Preference is given in
dividends.
Refund of company, capital is refunding the capital.
Capital refunded after (ii) As the profits of business are fluctuating, it is an
preference shares. uncertain source of fund.
(iii) Firms do not recognise the opportunity cost
Refund of Not possible at all. Capital can be
Capital During refunded in case of associated with this source, leading to sub-optimal
Lifetime redeemable use of funds.
preference shares. 13. What is the difference between GDR and ADR?
Permanency of Dividend is Dividend is certain (NCERT)
Dividend uncertain as it and fixed.
fluctuates with the Ans. Basis GDR ADR
amount of divisible
Location of Global Depository American Depository
profits decision of
Financial Receipts (GDR) can Receipts (ADR) can
board of directors.
Markets be bought and sold be bought and sold
in many only in America.
11. Amar owns a small farm in which he grows flowers. international
He is able to earn a small amount of profit, but being markets.
of an ambitious nature, he wants to take over a Disclosure Issue of GDRs do Issue of ADRs require
neighbouring farm and increase the range of flowers Requirements not require strict strict disclosure
he is selling. disclosure requirements.
requirements.
He is of the view that he will need long-term finance
for this purpose and plans to take a bank loan to pay Liquidity GDRs are less ADRs are more
for the take-over. He has already borrowed money to liquid. liquid.
buy a new tractor. Maintenance Maintenance costs Maintenance costs of
Costs of GDRs are less ADRs are more than
On the basis of above case, answer the following than that of ADRs. that of GDRs.
questions.
(i) What is meant by ‘long-term sources of finance’? 14. A seminar was held in New York on the problems
(ii) Identify and explain a form of internal finance Amar generally classified into owners fund and borrowed
could have used to buy the tractor.
funds. ABC Ltd. can raise required funds by
(iii) What factors would the bank consider before
employing both the above mentioned sources to
granting loan to Amar?
fulfill its needs of finance.
Ans. (i) Long-term sources of finance means those sources
which provide finance to business firms for a period Its topic was “The difference finance sources
exceeding five years. available at the global level in the modern context”.
(ii) A form of internal finance which Amar could have 200 representatives from different countries
used to buy the tractor is ‘retained earnings’. These participated in this seminar. All the representatives
earnings are a part of trading profits which are not expressed their respective opinions.
withdrawn by the proprietor, but are reinvested by
them in the business. One of the sources of finance discussed in the
seminar was such through which the foreign
(iii) The bank would consider the following factors
before granting loan to Amar companies could issue their securities in India.
(a) Amount of loan required. Looking at the great possibilities of obtaining
(b) Period for which the loan is required. capital from the investors in India, all of them
(c) Security offered. showed a great interest in the discussion of the
(d) Profit earning capacity of the business source.
(e) Repayment schedule of any previous loan taken.
Another source of finance which created interest in 17. State the demerits of public deposits.
everyone was the source through which money Ans. Demerits of public deposits are
could be obtained from the investors in America and (i) New companies generally find it difficult to raise funds
other European countries. Since this source was through public deposits due to lack of goodwill.
concerned with a very big area, the number of (ii) It is an unreliable source of finance as the public may
people who took interest in its was also large. One not always respond when the company needs money.
of the Indian representatives throw light on the (iii) Collection of public deposits may prove difficult,
special characteristics of this source. You are particularly when the size of deposits required is
required to identify the source discussed by large.
highlighting the relevant lines.
Ans. (i) Indian Depository Receipts (IDR)
18. The company getting finance through public
deposits enjoys some benefits. Explain.
Line ‘‘One of the sources of finance ……… securities
Ans. Following points illustrate the benefits of public deposits
in India.’’
to the company
(ii) Global Depository Receipts (GDR)
(i) The procedure of obtaining deposits is simple and
Line “Another source …. …. European countries”. does not contain restrictive conditions.
(iii) American Depository Receipts (ADR) (ii) Cost of public deposits is generally lower than the
Line “In the final session … … only in America.’’ cost of borrowings from banks and others institutions.
15. Mahindra and Mahindra was the first company in (iii) Public deposits do not usually create any charge on
India to issue convertible zero interest debentures the assets of the company.
in January 1990. Recently, the board of Titan (iv) As the depositors do not have voting rights, the
Industries has approved the issue of partly control of the company is not diluted.
convertible debentures on a right’s basis to raise 19. Along with financial assistance, financial institutions
around ` 126.83 crore. The issue will comprise also provide technical assistance and managerial
21 lakh partly convertible debentures of ` 600 each services to business units. This reflects one of the
in the ratio of one partly convertible debenture for merits of obtaining finance through financial
every 20 equity shares held in the company to the institutions. Write any three more such merits.
shareholders. Ans. Merits of obtaining finance from financial institutions are
On the basis of above case, answer the following as follows
questions (i) Financial institutions provide long-term finance,
(i) Explain the meaning of convertible zero interest which is not provided by the commercial banks.
debentures issued by Mahindra and Mahindra. (ii) A financial institution, before extending financial
(ii) Explain the meaning of partly convertible debentures support to a business unit, conducts detailed study
on right’s basis. (NCERT) about its state of affairs. Only a promising and sound
Ans. (i) Convertible zero interest debentures are debentures business is able to get a loan from these institutions.
which carry no interest and are convertible into So, if a firm gets a loan from these institutes, then
equity shares at the end of a specified period. this will also help in raising the goodwill of the
(ii) Partly convertible debentures on right’s basis means borrowing company in the capital market.
that a part of these debentures will be converted into (iii) Repayment can be made in easy instalments therefore;
equity shares at the end of the stipulated period and it does not prove to be a burden on the business.
that these debentures can be subscribed by only 20. State the disadvantages of financial institutions as a
existing equity shareholders of the company.
source of finance.
16. What advantages does issue of debentures provide Ans. Disadvantages of financial institutions as a source of
over the issue of equity shares? finance are as follows
Ans. Following are the advantages of issuing debentures (i) Too many formalities are required by these institutes
instead of equity shares to grant a loan.
(i) Debentures are fixed charge funds and do not (ii) Restrictions are imposed by these institutes on
participate in the profits of the company. companies such as restrictions on the payment of
(ii) Financing through debentures does not dilute dividends or restrictions on the autonomy of
control of shareholders on management as management.
debentures do not carry voting rights. (iii) Generally, the financial institutions have their
(iii) Financing through debentures is less costly as nominees in the Board of Directors of the borrowed
compared to cost of equity capital as the interest company. This restricts their powers and the
payment on debentures is tax deductible. borrowed companies feel helpless in certain cases.
21. Mr. Anil Singh has been running a restaurant for (iii) Every successive issue of equity shares dilutes the
the last two years. The excellent quality of food has voting power and earnings of existing equity
shareholders.
made the restaurant popular in no time. Motivated
by the success of his business, Mr. Singh is now (iv) Many formalities and procedural delays are involved
contemplating the idea of opening a chain of similar while raising funds through equity.
restaurants at different places. 2. Rohit Ltd. is a manufacturing firm which has been
However, the money available with him from his running in deep losses due to the onset of
personal sources is not sufficient to meet the pandemic. The company wants to innovate the
expansion requirements of his business. products to increase the sales and have therefore
His father told him that he can enter into a decided to purchase a new machinery for the same.
partnership with the owner of another restaurant, The company decided to use its funds which it has
who will bring in more funds, but it would also saved over the years to fund this machinery. Which
require sharing of profits and control of business. source of finance is highlighted here? Define. Also,
give the merits of the same.
He is also thinking of taking a bank loan. As a
Ans. The source of finance highlighted here is ‘retained
financial consultant, state the various sources of earnings’. It means that part of trading profits which are
owned funds and debt funds that Anil Singh can use. not distributed in the form of dividends, but retained by
(NCERT)
directors for future expansion of the company. This is also
Ans. The various sources of owned funds that Anil Singh can referred to as ‘ploughing back of profits’.
use are Merits of retained earnings are
(i) Selling a part of his business to other partners. (i) Retained earnings are a permanent source of funds
(ii) Issuing equity shares and preference shares (if he for an organisation.
decides to form a joint stock company). (ii) Retained earnings do not involve any explicit cost in
The various sources of debt funds are (any two) the form of interest, dividend or floatation cost.
(i) Loan from commercial banks. (iii) This source offers a greater degree of operational
(ii) Loan from specialised financial institutions. freedom and flexibility.
(iii) Issue of debentures (if he decides to form a joint
stock company). (iv) It enhances the capacity of business to absorb
unexpected losses.
l
Long Answer (LA) Type Questions 3. Debenture issued by a company is an
acknowledgment that the company has borrowed a
1. State any three merits and three limitations of certain amount of money, which it promises to
equity shares.
repay at a future date. However, there are both
Ans. Merits of equity shares are (Any three)
merits and demerits of debentures. Explain those
(i) Equity shares are suitable for those investors who merits and demerits.
are willing to assume risk for higher returns.
Ans. Merits of debentures are (any three)
(ii) Payment of dividend to the equity shareholders is
(i) It is preferred by investors who want fixed income at
not compulsory. Therefore, there is no burden on the
lesser risk.
company.
(ii) Debentures are fixed charge funds and do not
(iii) It is considered as a good source of long-term finance.
participate in profits of the company.
A company is not required to pay back the equity
capital during its lifetime. It is repaid only at the time (iii) The issue of debentures is suitable in the situation
of liquidation of company. Also, since it is paid in last, when the sales and earnings are relatively stable.
even on liquidation, therefore it provides a cushion for (iv) Financing through debentures does not dilute
creditors. Thus, it is a permanent source of capital. control of equity shareholders on management.
(iv) Funds can be raised through equity shares without (v) Financing through debentures is less costly as
creating any charge on the assets of the company. compared to cost of preference or equity capital.
These assets can be mortgaged to raise finance from Limitations of debentures are
other sources. (i) As fixed charge instruments, debentures put a
Demerits of equity shares are as follows (Any three) permanent burden on the earnings of a company.
(i) Investors who want steady income may not prefer (ii) In case of redeemable debentures, the company has to
equity shares due to fluctuating returns. make provisions for repayment on the specified date.
(ii) The cost of equity shares is more as compared to (iii) With the issue of debentures, the capacity of a
other sources of funds. company to further borrow funds reduces.
4. Differentiate between shares and debentures on the than IFCI as it covers not only public limited
basis of companies, but also private limited companies,
partnership firms and proprietary concerns.
(i) Nature of finance (ii) Nature and rate of return
(iii) Life Insurance Corporation of India (LIC) It was
(iii) Status of holders (iv) Degree of control
set up in 1956 under the LIC Act, 1956 after
(v) Security offered (vi) Level of risk nationalising 245 existing insurance companies. It
Ans. The differences between shares and debentures are mobilises savings in the form of insurance premium
Basis Shares Debentures and makes it available to industrial concerns in the
form of direct loans and underwriting and
Nature of Shares are a part of Debentures are a part of subscribing to shares and debentures.
Finance owner’s fund. debt fund.
Nature Dividend is the return Interest is the return on 6. Commercial banks accept deposits from general
and Rate on shares. The rate of debentures. The rate of public and extend loans to those who are in need.
of Return dividend is not fixed interest is fixed and is This also includes companies who are in need of
and is dependent on required to be paid even capital for multiple business purposes. Getting
the profits of the if the company incurs
company and the losses. finance from commercial banks has some merits
decision of the and some limitations, explain.
management. Ans. Merits of loan from commercial banks are
Status of Shareholders are Debenture holders are (i) Banks provide timely assistance to business by
Holders deemed to be the deemed to be the providing funds as and when needed by it.
owners of the company. creditors of the company. (ii) Secrecy of business can be maintained as the
Degree Shareholders can Debenture holders are in information supplied to the bank by the borrowers is
of exercise reasonable no position to control the kept confidential.
Control degree of control on the affairs of the business as
affairs of the business they do not have the right (iii) Formalities such as issue of prospectus and
by exercising their to vote. underwriting are not required for raising loans from
right to vote. a bank.
Security No security is required Security is required to (iv) Loan from a bank is a flexible source of finance as
Offered to be offered at the be offered, either by the loan amount can be increased according to
time of issue of shares. creating a charge on business needs
assets or by mortgaging Limitations of loan from commercial banks are
the assets, at the time of
issue of debentures. (i) Funds are generally available for short periods.
Level of Shareholders assume a Risk is comparatively
(ii) Banks make detailed investigation of the company's
Risk high level of risk. lower for debenture affairs, financial structure etc., and may also ask for
holders. security of assets and personal sureties.
(iii) In some cases, difficult terms and conditions are
5. Write a short note on the following three financial imposed by banks for the grant of loan.
institutions 7. Sujeet is a proprietor of a stationery trading firm. The
(i) Industrial Finance Corporation of India (IFCI) business of the firm is flourishing over last 18 months.
(ii) State Financial Corporations (SFCs) Sujeet decided to expand the product line and
(iii) Life Insurance Corporation of India (LIC) include basic confectionery items as well. He
Ans. (i) Industrial Finance Corporation of India (IFCI) It negotiated deals with multiple suppliers and stroked
was established in July, 1948 as a statutory contracts in such a way that he facilitated the
corporation under the Industrial Finance purchase of supplies without immediate payments.
Corporation Act, 1948.
Which source of finance is highlighted here? Also,
Its objectives include assistance towards balanced
regional development and encouraging new explain the concept of the same and write three
entrepreneurs to enter into the priority sectors of the merits and demerits each.
economy. IFCI has also contributed to the Ans. The source of finance highlighted here is ‘trade credit’.
development of management education in the Trade credit facilitates the purchase of supplies without
country. immediate payment.
(ii) State Financial Corporations (SFCs) They are Such credit appears in the records of the buyer as sundry
established by the state governments under the State creditors or accounts payable. It is commonly used by
Financial Corporations Act, 1951 for providing business organisation as a source of short-term financing.
medium and short-term finance to industries which It is granted to those customers who have reasonable
are outside the scope of the IFCI. Its scope is wider amount of financial standing and goodwill.
Merits of trade credit are (ii) Financial Strength The financial strength of an
(i) Trade credit is a convenient and continuous source enterprise is also a key determinant in making the
of funds. choice of funds. If the firm is financially strong with
(ii) It may be readily available in case the credit a steady flow of income, then it can raise finance by
worthiness of the customers is known to the seller. issuing debt instruments. Otherwise, owner’s funds
would be the logical choice.
(iii) It helps to promote the sale of an organisation.
(iii) Form of Organisation The form of organisation also
Demerits of trade credit are influences the decision of a finance manager while
(i) This may motivate a firm to overtrade. deciding about the source of finance.
(ii) Only limited amount of funds can be raised through As we are aware that there are various forms of
this source. business organisations such as sole proprietorship,
(iii) It is generally a costly source of fund as compared to partnership, joint stock company, etc. A joint stock
others, as sellers charge more for goods sold on company can raise funds from various sources, but
credit. on the other side a sole proprietor has access to
limited sources to raise funds.
8. X-cellent company is well established domestically.
It manufactures educative toys for children. The (iv) Control It is also an important factor to be
considered while raising finance. If the existing
company has recently analysed the prospects of
owners do not want to dilute their control on the
going global and founds them to be very promising. business, then they should opt for debt funds,
Now, it wants to choose suitable funds to finance otherwise they can raise finance from owner’s funds.
the proposition. (v) Degree of Risk The risk associated with each of the
State some of the factors which should be considered source is different. Thus, a finance manager must
by X-cellent company, before making a choice for evaluate the degree of risk involved in each source to
source of funds. make an appropriate choice.
Ans. Following points should be considered to make a choice (vi) Tax Benefit To avail tax benefits, companies consider
for source of funds every possible source very minutely. They should
(i) Cost Two types of costs are there viz. the cost of remember that interest paid on debt funds would be
procurement and the cost of utilising the funds. admissible as business expense and will generate tax
These two costs should be considered very carefully benefits, but dividend paid will not give any such
before making a choice. benefit to the firm.
Chapter Test
Multiple Choice Questions
1. Which of the following can be the negative implications of non-payment of debts?
(a) Higher interest costs (b) Loss of goodwill
(c) Fines and penalties (d) All of these
2.The return earned by ………….. is known as interest.
(a) equity shareholders (b) preference shareholders
(c) debenture holders (d) Both (b) and (c)
3. Equity shareholders are also called ……… of company.
(a) borrowers (b) partners
(c) owners (d) Both (b) and (c)
4. Statement I Public deposits are not issued against security of assets of the company.
Statement II FCCBs are issued in foreign currency.
Alternatives
(a) Statement I is correct and statement II is wrong (b) Statement II is correct and Statement I is wrong
(c) Both the statements are correct (d) Both the statements are incorrect
5. Statement I Public deposits are issued in foreign currency.
Statement II Debentures create charge on assets of the company.
Alternatives
(a) Statement I is correct and statement II is wrong (b) Statement II is correct and Statement I is wrong

1. What do you mean by fixed capital? What type of organisation need more fixed capital?
2. Mridul is an ambitious man. He wants to participate in the affairs of the company. What will he choose amongst the
two— preference share or equity share? Also, give reason for the same.
3. Devika is considering taking loan from a commercial bank for her business. Advise her on the same by highlighting the
cons of borrowing from commercial bank.
4. “Umya manufacturers” is a firm manufacturing cricket balls in India. The company had been fairly successful in last many
years. The owners of the firm decided to raise finance from public and launched its IPO. The company received positive
feedback from the market and used the IPO proceedings to expand its manufacturing to pink cricket balls as well. The
company earned lot of profits in the following year. Instead of distributing entire profits to the owners in the form of
dividend, some profits were re-invested in business in order to finance the future earnings of the business.
(i) Identify the source of finance discussed in the last part of the passage.
(ii) Highlight the demerits of the given method.
5. Name and explain any four reasons as to why businesses require finance.
Long Answer (LA) Type Questions
1. Burman Ltd. is a medicines trading firm. The family owning the business has got some ancestral land vacant in the recent
times. The company decides to make use of this land and expand its product line. Consequently, it started to trade the
medical equipments as well. The company needed to purchase raw materials, payment of electricity bill, rent, etc.
(i) Identify and define the type of business finance needed by the company. Also, what type of source of finance is required
for the same?
(ii) On what factors, these requirements are dependent upon?
2. Differentiate between owner’s fund and borrower’s fund on the basis of
(i) Meaning (ii) Nature (iii) Risk (iv) Control
(v) Nature of obligation (vi) Rate of return
Answers
1. (d) 2. (c) 3. (c) 4. (c) 5. (b)
For Detailed Solutions
Scan the code
CHAPTER 2
Small Business and

Entrepreneurship
Development
In this Chapter...
Entrepreneurship Development Small Scale Enterprises
Startup India Scheme Government Assistance to
Intellectual Property Rights (IPR) Small Business Units
2. Lawful and Purposeful Activity The object of

Entrepreneurship entrepreneurship is lawful business. It is important to
Development take note that one may try to legitimise unlawful actions
as entrepreneurship on the grounds that just as
Entrepreneurship development refers to the process of entrepreneurship entails risk, so does illicit businesses.
enhancing entrepreneurial skills and knowledge through
structured training and institution-building programmes. 3. Innovation Entrepreneurship is creative in the sense that
it involves innovation, introduction of new products,
The whole point of entrepreneurship development is to discovery of new markets and sources of supply of inputs,
increase the number of entrepreneurs. Entrepreneur technological breakthroughs as well as introduction of
creates an enterprise through the process called newer organisational forms for doing things better,
entrepreneurship. cheaper, faster and, in the present context, in a manner
Entrepreneurship is the process of setting up one’s own that causes the least harm to the ecology/ environment.
business as distinct from pursuing any other economic 4. Organisation of Production Entrepreneur, in response to
activity, be it employment or practising some profession. a perceived business opportunity, mobilises the resources
Entrepreneur is the person who set-up an enterprise, take into a productive enterprise or firm. In an economy with
the risks, accumulates all the resources required to carry out a well-developed financial system, he has to convince
production or perform services and creates an innovative just the funding institutions and with the capital so
product or service. arranged he may enter into contracts of supply of
Enterprise The output of the process, i.e., the business unit equipment, materials, utilities (such as water and
is called an enterprise. electricity) and technology.
5. Risk-taking Entrepreneurship involves risk as individuals
Characteristics of Entrepreneurship opting for a career in entrepreneurship take a bigger risk
1. Systematic Activity Entrepreneurship has certain that is involved in a career in employment or practice of
temperamental, skill and other knowledge and a profession as there is no ‘assured’ payoff. However,
competency requirements that can be acquired, learnt entrepreneurs are so sure of their capabilities that they
and developed, both by formal educational and can convert situations with higher risks into
vocational training as well as by observation and work opportunities.
experience.
Need of Entrepreneurship Development Startup India Initiative Action Points

1. Employment Opportunities It enables entrepreneurs to 1. Simplification and Handholding Friendly and flexible,
create more/additional employment opportunities for youth. simplifications are announced.
2. Economic Independence Entrepreneurs develop 2. Startup India Hub It is a single point of contact for the
substituted products of imported goods and prevent the entire startup ecosystem to enable knowledge exchange
over-dependence on the other countries. and funding access.
3. Capital Formation It encourage the establishment of
3. Legal Support and Fast-tracking Patent Examination
new industries in economy leading to capital formation
The scheme for Startups Intellectual Property
in country.
Protections (SIPP) is envisaged to facilitate protection
4. Development of Backward and Tribal Areas It leads to of patents of innovative startups.
scattering of economic activities in all areas of the country.
5. More Utilisation of Natural Resources It enables the 4. Easy Exit In the event of a business failure and wind
economy to utilise and explore the abundant of natural up of operations, procedures are being adopted to
resources. reallocate capital and resources towards more
productive avenues.
6. Economic Growth and Development It provides the
base of industrialisation leading to economic growth and 5. Harnessing Private Sector for Incubator Setup The
development. government envisages setting up of incubators across
the country in PPP mode.
Entrepreneurship Development Process 6. Tax Exemption The profits of startup initiatives are
(EDP) exempted for income tax for a period of three years.
It is a process meant to develop entrepreneurial abilities
among entrepreneurs. It is a process to Ways to Fund Startup
l
enhance the motivation, knowledge and skills of potential 1. Bootstrapping It is considered as the first funding
entrepreneurs. option which involves entrepreneur’s personal savings
l
reforming the entrepreneurial behaviour. and resources.
l
assist entrepreneurs to develop their own ventures. 2. Crowd Funding It is the pooling of resources by a
group of people for a common goal.
Startup India Scheme 3. Angel Investment Angel investors are individuals with
The Startup India Scheme is a flagship initiative of the surplus cash who offer capital and even offer mentoring
Government of India with an objective to carve a strong or advice.
ecosystem for nurturing innovation and startups in the country. 4. Venture Capital There are professionally managed
The Government of India aims to empower startups to grow funds which are invested in companies that have huge
through innovation and design. The scheme specifically aims to potential. Venture capitalists also provide expertise and
l
trigger an entrepreneurial culture, inculcate mentorship.
entrepreneurial values in the society at large and influence 5. Incubators They provide professional services that
the mindset of people towards entrepreneurship. facilitates the development of new business by
l
create awareness about the charms of being an providing resources, support and advice. e.g.,
entrepreneur and the process of entrepreneurship, (i) Innovation and Entrepreneurship (SINE), IIT
especially among the youth. Mumbai.
l
encourage more dynamic startups by motivating enducated (ii) Technology Business Incubator, IIT Delhi.
youth, scientists and technologists to consider 6. Accelerators These are organisations that offer a range
entrepreneurship as a lucrative, preferred and viable of support service and funding opportunities for
career. startups. e.g.,
l
support the early phase of entrepreneurship development, (i) Amity Innovation Incubator
including the pre-startup, nascent, as well as, early post
(ii) IAN Business Incubator, Kyron
startup phase and growth enterprises.
l
broad base the entrepreneurial supply by meeting specific 7. Micro Finance and NBFCs Micro finance is basically
needs of under-represented target groups, like women, access to financial services to those who either do not
socially and economically backward communities, have access to conventional banking services or have
scheduled castes and scheduled tribes; under represented not qualified for a bank loan.
regions to achieve inclusiveness and sustainable NBFCs (Non-Banking Financial Corporation) provides
development to address the needs of the population at the banking services without meeting legal
bottom of the pyramid. requirement/definition of a bank.
be renewed for further 5 years after expiration of this

Intellectual Property Rights (IPR) term, during which a registered design can only be
“Intellectual Property (IP) is defined as the creation of the used after getting a license from its owner and once the
mind, inventions, literary and artistic works and symbol validity period is over, the design is in public domain.
name, images and designs used in commerce.” 6. Plant Variety It is essentially grouping plants into
— World Intellectual Property Organisation (WIPO) categories based on their botanical characteristics. It is
a type of variety which is bred and developed by
Importance of IPRs farmers. This helps in conserving, improving and
l
Exclusive right on the use of IP is the biggest motivation making available plant genetic resources. e.g. hybrid
behind creation of intellectual property. versions of potatoes, etc. Such protection promotes
l
Customers get improved goods and services due to IPR. investment in R&D, recognises Indian farmers as
l
Entrepreneurs are enabled to earn more revenue due to cultivators, conservers and breeders as well as facilitates
IPR. high quality seeds and planting material. This leads to
l
It is cost saving mechanism for society through effectively the growth of the seed industry.
utilisation of resources. 7. Semiconductor Integrated Circuits Layout Design A
semiconductor is an integral part of every computer chip.
Types of IPRs A semiconductor layout design means a layout of
1. Copyright It is a legal right created by the law that transistors and other circuitry elements used and
grant the creator of an original work’s exclusive rights formed on a semiconductor material, as an insulating
for its use and distribution. Following works are material or inside the semiconductor material. Its
protected under copyright design is to perform an electronic circuitry function.
l
Original literary, dramatic, musical or artistic works. 8. Trade Secret It is a information that is not generally
l
Sound recording, films and broadcasts. known to public and confers economic benefit. It is the
l
Typographical arrangements of published editions. subject of reasonable efforts by the holder to maintain
its secrecy. e.g. CoCa Cola’s recipe is a trade secret.
2. Trademark It provides recognisable sign, design or
Trade secrets are protected without any procedural
expression which identifies products or services of a
formalities for an unlimited period.
particular source from those of others. e.g., McDonald’s
double arches, Apple computer’s, Apple sign of IP and Business
Android.
Protecting and managing the intellectual property is the most
3. Geographical Indication It is primarily an indication crucial thing for any business enterprise. In order to remain
which identifies agricultural, natural or manufactured ahead of the competitors, every business has to continuously
products (handicrafts, industrial goods and food stuffs) innovate.
originating from a definite geographical territory, where
Moreover, every business enterprise must respect others’ IP,
a given quality, reputation or other characteristic are
not only on ethical grounds, but also legal. Intellectual rights
essentially attributable to its geographical origin.
can be critical in aiding new ventures monetise their ideas
GIs are part of our collective and intellectual heritage and establish competitiveness in the market by extending the
that needs to be protected and promoted. protective umbrella offered by IPRs.
Goods protected and registered as GI are categorised
into agricultural products, natural, handicrafts,
manufactured goods and food stuffs.
Small Scale Enterprises
Small scale enterprises are defined in terms of their size. The
GI represents collective goodwill of a geographical
size of an enterprise depends on a number of parameters
region, which has built itself over centuries.
such as number of persons employed in business, capital
4. Patent Patent is an exclusive right granted in respect of invested in business, volume of output, power consumed, etc.
an invention which may be product or process that Micro, Small and Medium Enterprises Development
provides a new and inventive way of doing something.
(MSMED) Act, 2006 defines small enterprises in the
The examples of patents are telephone radio, optical following manner
fibre, i-pod and ballpoint pens. For Industrial/Manufacturing Enterprises
5. Design A ‘design’ includes shape, pattern and 1. Micro Enterprise In micro enterprise, the investment
arrangement of lines or colour combination that is in plant and machinery does not exceed ` 25 lakh.
applied to any article. It is a protection given to
aesthetic appearance or eye-catching features. The term 2. Small Enterprise In small enterprise, the investment in
of protection of a design is valid for 10 years, which can plant and machinery is more than ` 25 lakh but does
not exceed ` 5 crore.
3. Medium Enterprise In medium enterprise, the 5. Provide Business Opportunities The skills and talents
investment in plant and machinery is more than of people can be channelled into business ideas, which
` 5 crore but does not exceed ` 10 crore. can be converted into reality with little or nil capital
For Service Enterprises investment.
1. Micro Enterprise In micro enterprise, the investment 6. Low Cost of Production They also enjoy the advantage of
in equipment does not exceed ` 10 lakh. low cost of production due to minimum establishment
and running costs.
2. Small Enterprise In small enterprise, the investment
in equipment is more than ` 10 lakh but does not 7. Quick Decisions Due to the small size of the
exceed ` 2 crore. organisation, quick and timely decisions can be taken
without consulting many people.
3. Medium Enterprise In medium enterprise, the
investment in equipment is more than ` 2 crore but 8. Customised Production They are best suited for
does not exceed ` 5 crore. customised production i.e., designing the product as per
the tastes/ preferences/needs of an individual.
Some Other Types of Small Scale Enterprises 9. Maintain Good Personal Relations Small industries
1. Village Industries Village industry has been defined as have the inherent strength of adaptability and have
any industry located in a rural area which produces any personal touch with both customers and employees.
goods, renders any service with or without the use of
power and in which the fixed capital investment per Role of Small Scale
head or artisan or worker is specified by the central Industries in Rural India
government, from time to time.
1. Non-farm Employment Rural households have varied
2. Cottage Industries Cottage industries are also known and multiple sources of income and participate in a wide
as rural industries or traditional industries. They are range of non-agricultural activities due to setting up of
not defined by capital investment criteria as in the case agro-based rural small industries.
of other small scale industries. However, cottage
industries are characterised by certain features like 2. Employment for Artisans Cottage and rural industries
play an important role in providing employment
l
These are organised by individuals, with private opportunities in the rural areas.
resources.
l
They normally use family labour and locally available 3. Prevention of Migration Development of rural and
talent. village industries can also prevent migration of rural
population to urban areas in search of employment.
l
The equipment used is simple. Capital investment is
small. 4. Poverty Alleviation Small industries are significant
absorbers of surplus labour, thereby addressing the
l
They produce simple products, normally in their own
problems of poverty and unemployment.
premises.
l
They use indigenous technology for production of 5. Socio-economic Aspects These industries contribute
goods. towards socio-economic aspects such as reduction in
income inequalities, etc.
Role of Small Scale Industries (SSI) in India
Problems of Small Business
1. Contribution in GDP Small industries contribute
almost 40% of the gross industrial value added and 45% Small scale industries are at a distinct disadvantage as
of the total exports (direct and indirect) from India. compared to large scale industries. Following are the major
problems that are faced by small business
2. Employment Generation In India, small industries are
the second largest employers of human resources, after 1. Finance One of the severe problems faced by SSIs is
the non-availability of adequate finance to carry out its
agriculture.
operations. These units lack in credit worthiness and
3. Supply Variety of Products Small industries in our have a small capital base. As a result, they heavily depend
country supply enormous variety of products which on local financial resources and frequently become the
include goods of mass consumption such as readymade victims of exploitation by the money lenders.
garments, hosiery goods, stationery items, soaps and Due to delayed payment from customers and locking up
detergents, domestic utensils, etc. of their capital in unsold stocks, small units suffer from
4. Balanced Regional Development These industries can lack of adequate working capital. Banks also do not
be opened anywhere in the country, without any provide funds to them.
locational constraints and the benefits of industrialisation 2. Raw Materials If the required materials are not
can be reaped by every region. available, small businesses have to compromise on the
quality or have to pay high price to get good quality

materials. Their bargaining power is relatively low due to Government Assistance to
the small quantity of purchases made by them. Small Business Units
They cannot afford to buy in bulk because they do not
Government, both at the central and state level, has been
have the facility to store material and neither do they
actively participating in promoting self employment
have the necessary finance.
opportunities. With respect to this, it has introduced various
3. Managerial Skills Small business is generally promoted schemes and has extended institutional support to the small
and operated by a single person, who may not possess and rural industries.
technical and managerial skills to run the business. Forms of support offered to small industries by the
4. Labour Due to low remuneration, talented people are Government are stated below
not attracted to work with small business, firms as they l
Institutional support in respect of credit facilities.
cannot afford to pay higher salaries to the employees this
affects employee willingness to work hard and produce
l
Provision of developed sites for construction of sheds.
more. Thus, productivity per employee is relatively low l
Provision of training facilities.
and employee turnover is generally high. l
Supply of machinery on hire export marketing.
5. Marketing Small scale enterprises are unable to meet l
Technical and financial assistance for technological
the expenses of marketing activities. They depend on upgradation.
middlemen who exploit them by paying low prices for l
Special incentives for setting up of enterprises in
their goods and delaying their payments. backward areas.
6. Quality Many small business organisations do not
adhere to desired standards of quality. Instead, they Institutional Support to SSIs
concentrate on cutting the cost and keeping the prices The government has extended institutional support to SSIs
low. As they do not maintain quality, they are not able to by opening special institutions which cater to the financial
compete in global markets. and other needs of the SSIs.
7. Capacity Utilisation Due to lack of marketing skills The various institutions which help in the growth and
leading to lack of demand, many small business firms development of SSIs are discussed below
have to operate below full capacity due to which their
operating costs tend to increase. This leads to sickness National Small Industries Corporation (NSIC)
and closure of the business. This was set up in 1955 to promote, aid and foster the
8. Technology Use of outdated technology is often stated as growth of small-scale units in India.
a serious problem of such enterprises. This results in low If performs the following functions
productivity and uneconomical production. l
It supplies indigenous and imported machines and raw
9. Sickness Prevalence of sickness in small industries has materials to small scale industries on hire-purchase
become a point of worry for both the policy-makers and schemes.
the entrepreneurs. The causes of sickness are both
internal and external.
l
It exports the product of small units and help to establish
their credit worthiness.
l
Internal problems include lack of skilled and trained
labour, managerial and marketing skills.
l
It helps in upgradation of technology.
l
External problems include delayed payment, shortage
l
It provides mentoring and advisory services.
of working capital, inadequate loans and lack of demand l
It serves as technology business incubator.
for their products. l
It develops software technology parks and technology
10.Global Competition In the present context of transfer centres.
Liberalisation, Privatisation and Globalisation (LPG) l
It launches various schemes and extends support to help
policies being followed by several countries across the small scale entrepreneurs.
world. Small businesses feel threatened from the global Various Schemes and Support
entrepreneurs in the following are as Programmes launched by NSIC
l
Competitions from medium and large industries as well
1. Performance and Credit Rating Scheme It involves
as multinational companies.
sensitising the small industries about the need of
l
High quality standards, technological skills, financial credit rating and encouraging the small business units
credit worthiness, managerial and marketing to maintain good financial track record.
capabilities of large industries.
2. Marketing Support Extended to MSMEs NSIC
l
Due to strict requirements of quality certification like
extends marketing support to MSMEs through the
ISO 9,000, small industries have limited access to
following activities
markets of developed countries.
l
NSIC organises international technology exhibitions in Some other Institutional Support to SSIs
foreign countries where micro, small and medium
1. National Bank for Agriculture and Rural
enterprises can showcase their products.
Development (NABARD) The NABARD was set up
l
NSIC also organises domestic exhibitions where MSMEs on 15th July, 1982 to provide finance to rural areas
can showcase their products. in order to promote integrated rural development.
l
Support for co-sponsoring of exhibitions organised by It is an apex institution that provides finance to rural
other organisations/industry/associations/ agencies. and small industries and organises training and
l
NSIC organises buyer-seller meets for MSMEs, where development programmes for rural entrepreneurs.
bulk and departmental buyers such as the railways, 2. The Rural Small Business Development Centre
defence, large companies, etc are invited. (RSBDC) It was set up by the world association for
l
NSIC conducts intensive campaigns to spread awareness small and medium enterprises and is sponsored by
regarding the various schemes of the government which NABARD. It aims at providing managerial and
are for the benefit of micro, small and medium technical support to current and prospective micro
enterprises. and small entrepreneurs in rural areas.
3. Other support to MSMEs It has organised various programmes on rural
Printing brochures and catalogues and preparing
l entrepreneurship, skill upgradation workshops,
CDs and short films to spread information related to the training programmes and counselling camps in
products offered by MSMEs. various villages.
Development of websites which help MSMEs to market
l 3. Rural and Women Entrepreneurship Development
their products. (RWED) Programme This programme encourages
Development and disbursement of material which spreads
l rural people and women to establish entrepreneurial
awareness related to various programmes. ventures. It aims at promoting a conducive business
Preparing a directory which contains updated
l
environment and in building human capacities to
information related to various MSMEs. support entrepreneurial initiatives.
Conducting studies to explore and access new markets,
l It provides the following services
businesses and product ranges for both domestic and l
Creating a business environment which encourages
international markets. initiative of rural and women entrepreneurs.
Hosting international delegations and networking events.
l l
To enhance human and institutional capacities.
l
To provide training for women entrepreneurs.
District Industries Centre (DIC) l
To render other advisory services.
The district industries centre programme was launched on 1st
May, 1978, with a view to provide all the services and support 4. Scheme of Fund for Regeneration of Traditional
facilities to entrepreneurs, to set up small and village industries Industries (SFURTI) A special fund has been
at district level. created by the government to make the traditional
industries more productive and competitive. The
Support Functions by DIC government started this fund in 2005 by investing
l
Identification of suitable schemes for the entrepreneurs ` 100 crore.
interested to set up small industries in rural areas. This scheme is implemented by the ministry of agro
l
Preparing feasibility reports for proposed projects. and rural industries, in collaboration with state
l
Helping the entrepreneurs in arranging for credit. governments. The main objectives of this scheme are
l
Helping the entrepreneurs to have access to raw material and
l
To improve the technology of traditional units.
machinery. l
To create sustained employment opportunities.
l
Extending various support services to entrepreneurs. l
To set up traditional industries in various parts of
the country.
Chapter
Practice
7. A business centre that offers working space and
PART 1 specialised support for new start ups is known as
(a) Isolator (b) Injector (c) Incubator (d) Integrator
Objective Questions Ans. (c) Incubators provide professional services that facilitates
the development of new business by providing resources
like working space etc., support and advice.
l
8. Statement I The purpose of geographical
1. People who own, operate and take risk of a business indications is to encourage innovation in
venture is called .............. . manufacturing field.
(a) aptitude (b) employee Statement II Certification mark certifies the
(c) entrepreneur (d) entrepreneurship quality of product.
Ans. (c) entrepreneur Alternatives
(a) Statement I is correct and Statement II is wrong
2. The main objective of entrepreneurship
(b) Statement II is correct and Statement I is wrong
development is to
(c) Both the statements are correct
(a) to increase literacy
(b) to increase number of entrepreneurs
(c) to increase GDP Ans. (b) The purpose of geographical indications is to
encourage innovation in the scientific field.
(d) All of the above
Ans. (b) to increase number of entrepreneurs 9. A …… is an exclusive right granted by government
3. Entrepreneurship development leads to the which provides the exclusive right to exclude all others
establishment of industries. This helps in …. . and prevent them from using or offering from sale.
(a) capital formation (b) economic growth (a) copyrights (b) patent
(c) Both (a) and (b) (d) None of these (c) proprietary rights (d) trademark
Ans. (b) patent
Ans. (c) Both (a) and (b)
10. Literary work is protected under
4. ……… is the single point of contact for the entire
(a) Patent (b) Trademark
start-up ecosystem to enable knowledge exchange
(c) Copyright (d) Crowd funding
and funding access.
Ans. (c) Copyright
(a) Start India fund (b) Start India forum
(c) Start India hub (d) Start India meeting 11. Statement I Entrepreneurship development leads
Ans. (c) Start India hub to concentration of economic activities in few areas
of the country.
5. Sundeep is individual with surplus cash and Statement II For start-ups, there will be
interested to invest in upcoming start-ups. Which government inspection regarding such compliance
method is suitable for him? from second year onwards.
(a) Crowd funding (b) Venture capital Alternatives
(c) Boot strapping (d) Angel investment (a) Statement I is correct and Statement II is wrong
Ans. (d) Angel investment (b) Statement II is correct and Statement I is wrong
6. ……… is the funding a project by raising money
from a large number of people for a common goal.
Ans. (d) Entrepreneurship development leads to scattering of
(a) Boot strapping (b) Crowdsourcing
economic activities in all areas of the country. There is no
(c) Venture capitals (d) Angel investments government inspection of such start-ups regarding such
Ans. (b) Crowdsourcing compliance for first three years.
12. ………….. provides subsidised loans to youth to Decide the category to which M/s XYZ belongs?
establish their business if their family income is less (a) micro enterprise (b) small enterprise
than ` 1,00,000. (c) medium enterprise (d) cottage industry
(a) Prime Minister Vikas Yojana Ans. (a) M/s XYZ belongs to micro enterprise because its total
(b) Prime Minister Business Scheme investment is only ` 23 lakh (i.e. cost of Plant and
(c) Prime Minister Grameen Yojana machinery + Factory shed + Land). Research and
(d) Prime Minister Rozgar Yojana development cost and industrial saftey equipments are
not the part of investment in plant and machinery.
Ans. (d) Prime Minister Rozgar Yojana
13. In India, industries are classified on the basis of 17. Statement I Small industries are able to maintain
good personal relations with customers.
investment in plant and machinery. Amount of
………. in a village industry per head artisan Statement II Small scale industries suffer from lack
cannot exceed is ` 50,000. of adequate working capital.
(a) working capital investment Alternatives
(b) cash investment (a) Statement I is correct and Statement II is wrong
(c) fixed capital investment (b) Statement II is correct and Statement I is wrong
(d) Both (a) and (c) (c) Both the statements are correct
Ans. (c) fixed capital investment (d) Both the statements are incorrect
Ans. (c) Small scale industries have the inherent strength of
14. Statement I Small business has generally short adaptability and have personal touch with both customers
gestation period. and employees. Due to delayed payment from customers
Statement II Small scale industries are considered and locking up of their capital in unsold stocks, small
good for countries that have less labour and surplus units suffer from lack of adequate working capital. Banks
capital. also do not provide funds to them.
Alternatives 18. ……… institution is setup as an Apex Bank to
(a) Statement I is correct and Statement II is wrong provide direct/indirect financial assistance under
(b) Statement II is correct and Statement I is wrong different schemes and also coordinates the
(c) Both the statements are correct functions of other institution in similar activities.
(d) Both the statements are incorrect (a) SIDBI (b) IDBI
Ans. (a) Small scale industries are considered good for (c) NSIC (d) NABARD
countries like India, that have surplus labour and less Ans. (a) SIDBI
capital.
19. Government at various levels are providing
15. M/s ABS is a small enterprise engaged in the assistance to small businesses by various means. By
production of springs. It supplies its entire output helping small industries, government aims at
to tractor manufactures. M/s ABS can be classified (a) prevention of migration (b) poverty alleviation
as a (c) employment to artisans (d) All of these
(a) ancillary industry Ans. (d) By providing assistance to small business, government
(b) tiny industry aims to achieve various targets by a single means. When
(c) secondary industry industries are established in rural areas, people don’t have
(d) traditional industry to move to cities in order to find work and on the other
Ans. (a) Any enterprise which supplies not less than 50% of its hand, rural poor and artisans get job. Therefore, it can be
total production to any other industry is known as said that by helping small business, government achieves
‘ancilliary industry’. all of these goals.
16. M/s XYZ a small scale enterprise has following 20. Which institution is at top of hierarchy in the
investments in its business administrative setup for the promotion and
development of the small scale, agro and rural
Research and development cost ` 3 lakh industries?
Plant and machinery ` 8 lakh (a) SIDO
Factory shed ` 5 lakh (b) NSIC
Industrial safety equipments ` 3 lakh (c) Ministry of MSME
(d) Ministry of Industrial Affairs
Land ` 10 lakh
Ans. (c) Ministry of MSME
l
Assertion–Reasoning MCQs
(R) is the correct explanation of Assertion (A)
Directions (Q. Nos. 1 to 7) There are two
6. Assertion (A) Entrepreneurship development helps
statements marked as Assertion (A) and Reason (R).
in generating employment opportunities.
Read the statements and choose the appropriate
option from the options given below Reason (R) Entrepreneurship development enables
(a) Both Assertion (A) and Reason (R) are true and Reason the economy to utilise and explore the abundant of
(R) is the correct explanation of Assertion (A) natural resources.
(b) Both Assertion (A) and Reason (R) are true, but Reason Ans. (b) Entrepreneurship development enables entrepreneurs
(R) is not the correct explanation of Assertion (A) to create more/additional employment opportunities for
(c) Assertion (A) is true, but Reason (R) is false youth by creating more businesses and workplaces.
(d) Assertion (A) is false, but Reason (R) is true 7. Assertion (A) Small scale industries capture the
1. Assertion (A) Entrepreneurship development is opportunity at the right time by saving time correctly.
considered as a continuous process. Reason (R) Small scale industries are small in size,
Reason (R) Entrepreneurship development which allows them to take quick decisions.
involves learning which is a never-ending process. Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
(R) is the correct explanation of Assertion (A)
l
Case Based MCQs
2. Assertion (A) Entrepreneurship development helps
in capital formation of country. 1. Direction Read the following text and answer the
Reason (R) Entrepreneurs develop and produce question no. (i) to (vi) on the basis of the same.
substituted products of imported goods and prevent Mayank, after completing his master’s degree in
the over-dependence on the other countries. management, decided to start his own enterprise
Ans. (b) It encourage the establishment of new industries in with the name Mayank Food Industries in his
economy which increase in the capital formation rate in village in Himachal Pradesh and opted for
country. labour-intensive techniques to provide employment
to local people.
3. Assertion (A) The industrial units for whom the
output is manufactured are referred to as ‘main units’. He took the help of DIC, a government institution
for promoting small scale industries to get
Reason (R) Ancillary small industrial unit
knowledge about incentives and schemes launched
manufactures parts, components, sub-assemblies,
by the government for opening small scale
tools or intermediate products for other industrial
industries. It was estimated that, the food and
units.
beverages plant to be set up will require a fixed
Ans. (d) The industrial units for whom the output is
capital investment of ` 80 lakhs.
manufactured are referred to as ‘parent units’.
The working capital requirements is estimated to
4. Assertion (A) Small scale industries can be opened be ` 20 lakhs. The directors of the company
anywhere in the country, without any locational decided to raise the capital by issuing shares as well
constraints and the benefits of industrialisation can as taking loans from financial institutions. In
be reoped by every region. addition to this, to thrive the business, the directors
Reason (R) The latent skills and talents of people decided to take benefit of various policies and
can be channelled into business ideas, which can be programmes formulated by the ministry.
converted into reality with little or nil capital With all these products, they were able to produce
investment anywhere. extremely high quality and delicious food recipes.
Ans. (c) These industries produce products using simple This led to creation of intellectual property right for
technologies and depend on locally available resources in the firm.
terms of both material and labour, thus, they can be opened
anywhere in the country, without any locational constraints. (i) The category into which this industry will be placed
under MSMED Act is
5. Assertion (A) Small scale industries enjoy the (a) micro enterprises
advantage of low cost of production. (b) small scale manufacturing enterprises
Reason (R) The establishment and running cost of (c) small service enterprises
small-scale industries are minimum. Locally (d) medium enterprises
available resources are less expensive. Ans. (b) small scale manufacturing enterprises
(ii) The Directors of the company decided to raise the Beverages Industry” in rural area of Odisha and opted
capital by issuing shares as well as taking loans from for labour intensive technique, due to easy
financial institutions. The shares are the example of availability of cheap labour.
……… capital source. The finance manager has estimated the investment
(a) internal, long-term (b) external, long-term of ` 2 crore to acquire plant and machinery and ` 80
(c) internal, borrowed (d) external, borrowed lakhs for meeting operating expenses of this new
Ans. (a) internal, long-term unit. The company did not want to dilute the
(iii) Mayank has entrepreneurship skills as shown in ownership and did not want any interference from
above case. Which of the following indicates investors/lenders. Also, it expects good cash flow
entrepreneurship? return from the new unit.
(a) Setting up one’s own business For arrangement of finance and availing professional
(b) Pursuing employment services that facilitates the development of new
(c) Practising profession business, they approached a body which is located
(d) All of the above in their universities.
Ans. (a) Setting up one’s own business
(i) Which category of SSI, ‘‘Lajawaab Foods and
(iv) DIC stands for which of the following? Beverage Industries’’ belongs to?
(a) District Industrial Centre (a) Micro enterprises (b) Small enterprises
(b) Development and Industrial Corporation (c) Medium enterprises (d) Cottage industry
(c) Department of Infrastructure and Capital Formation Ans. (b) Small enterprises
(ii) Which of the following is not a feature of
Ans. (a) District Industrial Centre
entrepreneurship?
(v) Which organisation is responsible for implementing (a) Systematic activity (b) Risk element
and monitoring various policies and programmes (c) Profession (d) Dynamic process
formulated by the ministry of micro, small and Ans. (c) Profession
medium enterprises?
(iii) Post-training stage of ED programme does not
(a) NSIC (b) SIDBI
(c) NABARD (d) SIDO
include
(a) Management Skill Development
Ans. (d) SIDO
(b) Guidance in Project Implementation
(vi) “With all these products, they were able to produce (c) Sustaining Motivation
extremely high quality and delicious food recipes.” (d) Providing-follow up
Which IPR is highlighted in this line? Ans. (a) Management Skill Development
(a) Patents (b) Copyrights
(c) Trademarks (d) Trade secrets
(iv) The finance manager has estimated the investment
of ` 2 crore to acquire plant and machinery and ` 80
Ans. (d) Trade secrets
lakh for meeting operating expenses of this new
2. Direction Read the following text and answer the unit. The company did not want to dilute the
question no. (i) to (vi) on the basis of the same. ownership and did not want any interference from
Three friends, after completing their graduation, investors/lenders. Also, it expects good cash flow
decided to open their own business and to create return from the new unit. Which form of capital
employment opportunities for others too. After their would be better for the company?
meeting with the manager of DIC, they attended (a) Equity capital (b) Long-term loans
entrepreneurship development programme. As a (c) Preference capital (d) Loans from commercial bank
result of their entrepreneurship, Zayka Food Ans. (b) Long-term loans
Industries is created and operated successfully by (v) “For arrangement of finance and availing
them. professional services that facilitates the
To create a feeling of belongingness in the customers development of new business, they approached a
body which is located in their universities.’’ Which
and for branding purposes, they started to use ‘hat’ as
way to fund start-up is highlighted here?
a symbol on all their products. Soon, this become an
(a) Accelerators (b) Incubators
intellectual property for the company. After getting a
(c) Private equity (d) Venture capital
good response in the market, now one of them is
Ans. (b) Incubators
planning to set up a new unit “Laajwaab Foods and
(vi) “To create a feeling of belongingness in the customers (a) Balanced regional growth
and for branding purposes, they started to use ‘hat’ as (b) Low cost of production
a symbol on all their products.” Which IPR is (c) Customised production
highlighted in the line? (d) All of the above
(a) Patents (b) Copyrights Ans. (d) Balanced Regional Growth The raw materials are
(c) Trademarks (d) Trade secrets sourced from the nearby villages.
Ans. (c) Trademarks Customised Production The firm is known to produce
products as per the individual customer tastes and
3. Direction Read the following text and answer the preferences.
question no. (i) and to (vi) on the basis of the same.
Low Cost of Production The goods are sold at a cheap
Siraj is a handicraft artist. He has been doing the price because cost of production is low.
work for different firms for more than 10 years. Now, (iv) Which problem of small scale industries is
he has decided to set up his own enterprise in his highlighted in the line, “Siraj is finding it difficult
small town. to manage all the work since he has never
He has employed three local people and invested managed business to such an extent”?
` 5 lakh. He has received lot of assistance with (a) Quality (b) Capacity utilisation
government policies. The raw materials are sourced (c) Managerial skills (d) Finance
from the nearby villages. The firm is known to Ans. (c) Managerial skills
produce products as per the individual customer
(v) “He got finance from an institution that provides
tastes and preferences. The goods are sold at a cheap
finance to rural and small industries and organises
price because cost of production is low. However, as
training and development programmes for rural
the business is growing, Siraj is finding it difficult to
entrepreneurs.” Which institution is highlighted
manage all the work since he has never managed
in this line?
business to such an extent.
(a) NSIC (b) RSBDC
In the recent times, company has also faced the (c) NABARD (d) Ministry of MSMEs
problem of arranging finance for funding increasing
Ans. (c) NABARD
purchase orders of big tickets. But to his rescue, he
got finance from an institution that provides finance (vi) One of the big textiles players has entered this
to rural and small industries and organises training handicraft space and has started poaching Siraj’s
and development programmes for rural employees at higher salaries. Which problem of
entrepreneurs. small business is highlighted in this line?
(a) Managerial skills (b) Labour
However, he has now got a new problem at hand.
(c) Finance (d) Quality
One of the big textiles players has entered this
handicraft space and has started poaching Siraj’s Ans. (b) Labour
employees at higher salaries. Siraj is now seeking a
solution to this.
(i) In which category, Siraj’s firm falls into? PART 2
(a) Micro enterprises (b) Small enterprises
(c) Medium enterprises (d) None of these Subjective Questions
Ans. (a) Investment is less than ` 25,00,000.
(ii) “He has received lot of assistance with government
l
policies.” Which ministry is the nodal ministry for 1. What is meant by entrepreneurship development?
formulation of policy and coordination of central Explain.
assistance for the promotion and development of Ans. Entrepreneurship development refers to the process of
small scale industries in India? enhancing entrepreneurial skills and knowledge
(a) Ministry of micro enterprises through structured training and institution building
(b) Ministry of small enterprises programmes. It focuses on individual who wishes to
(c) Ministry of medium enterprises start or expand a business.
(d) None of the above The whole point of entrepreneurship development is to
Ans. (d) Ministry of Micro, Small and Medium Enterprises increase number of entrepreneurs and to create
entrepreneurship culture within society. One trained
(iii) Which role of small scale industries in India is
entrepreneur can guide other on how to start their own
highlighted in the passage?
enterprises. Now-a-days, it is treated as an important tool simplifications are announced. Government of India
of industrialisation and a solution of unemployment in has launched a mobile app and a website for easy
country. online registration.
(ii) Startup India Hub The objective is to create a
2. Chris and Craig were having a discussion about single point of contact for the entire startup
entrepreneurship development. Chris suggested ecosystem and enable knowledge exchange and
that there were no pre-requisites for access to funding. Start-up India Hub will be key
entrepreneurship development whereas Craig stakeholder of entrepreneurs. It will be their friend,
suggested that there are some pre-requisites. Who mentor and guide to hold their hand.
– Chris or Craig is correct? Explain. (iii) Legal Support and Fast-tracking Patent
Ans. Craig is correct because there are some pre-requisites for Examination The scheme for Startups Intellectual
entrepreneurship development. Following are the Property Protections (SIPP) is envisaged to facilitate
pre-requisites protection of patents, trademarks and designs of
innovative and interested startups.
(i) Intelligence (ii) Motivation
(iii) Knowledge (iv) Sustained efforts (iv) Easy Exit In the event of a business failure and wind
(v) Human factor up of operations, procedures are being adopted to
(vi) Government assistance/Grant reallocate capital and resources towards more
productive avenues. This will promote
(vii) Opportunity experimentation with new and innovative ideas,
(viii) Industrial technology without fearing complex and long drawn exit
3. What is Entrepreneurship Development Process process. A start-up can close its business within 90
days from the date of application of winding up.
(EDP)?
Ans. EDP is a process to help an individual in strengthening 6. Sana and Vishal are friends who have been planning
his entrepreneurial motive and in acquiring skills and for a start-up. With the money they had, they did
capabilities necessary for playing his entrepreneurial role initial research and proof of concept. To fund their
effectively. EDP is not merely a training programme. It is idea, a professionally managed fund institution
a process to provided them the funding. Identify this source to
(i) enhance the motivation, knowledge and skills of fund the start-up and explain.
potential entrepreneurs. Ans. The way to fund the start-up highlighted is venture capital.
(ii) reforming the entrepreneurial behaviour. Venture capital are professionally managed funds who
(iii) assist entrepreneurs to develop their own ventures. invest in companies that have huge potential in future.
4. The government has launched startup India scheme They focus on sale rather than profit of ventures. This
for promoting startup culture in the country. What type of funding is often obtained in exchange for an
equity stake in business. Generally, such funding is
are the major objectives of this scheme?
involved in software, technology and bio-technology. It
Ans. Following are the objectives of startup India scheme bridges the gap where traditional sources of funds cannot
(i) trigger an entrepreneurial culture, inculcate participate actively in funding new venture. e.g., Nexus
entrepreneurial values in the society at large and Venture Partner, Kalaari Capital, Accel Partners.
influence the mindset of people towards
entrepreneurship. 7. ST foods Inc is a company preparing Rajasthani food.
(ii) create awareness about the charms of being an The company has 23 outlets in Rajasthan and Gujarat.
entrepreneur and the process of entrepreneurship, The company prepares its foods with recipes unique
especially among the youth. to it and uniform across outlets. These recipes have
(iii) encourage more dynamic startups by motivating been the driving force of business and are not known
enducated youth, scientists and technologists to to general public. Identify and explain the
consider entrepreneurship as a lucrative, preferred intellectual property right discussed.
and viable career.
Ans. The IPR discussed is trade secret.
(iv) support the early phase of entrepreneurship
development, including the pre-startup, nascent, as It is an information that
well as, early post startup phase and growth (i) is not generally known to public.
enterprises. (ii) confers economic benefit.
5. What are some of the key action points of Start (iii) is the subject of reasonable efforts by the holder to
maintain its secrecy.
India Initiative?
For example CoCa Cola’s recipe is trade secret. KFC
Ans. Action points of Start India Initiatives are as follows (any
keep secret ingredients in its recipe.
three)
(iv) is protected without any procedural formalities for
(i) Simplification and Handholding In order to make an unlimited period.
compliance for startups, friendly and flexible,
8. Write short note on (ii) Small Enterprise In small enterprise, the

investment in equipment is more than ` 10 lakh but
(i) Design does not exceed ` 2 crore.
(ii) Plant variety (iii) Medium Enterprise In medium enterprise, the
(iii) Semiconductor Integrated Circuits Layout investment in equipment is more than ` 2 crore but
Design does not exceed ` 5 crore.
Ans. (i) Design A 'design' includes shape, pattern, and 12. Differentiate between ancillary unit and tiny unit
arrangement of lines or colour combination that is on any three basis. (NCERT)
applied to any article. It is a protection given to Ans. The differences between an ancillary unit and a tiny unit
aesthetic appearance or eye-catching features. The
are
term of protection of a design is valid for 10 years,
which can be renewed for further 5 years after Basis Ancillary Unit Tiny Unit
expiration of this term, during which a registered Meaning An ancillary unit is A tiny unit is the
design can only be used after getting a license from the unit which business enterprise
its owner and once the validity period is over, the supplies not less than whose investment in
design is in public domain. 50% of its production plant and machinery is
(ii) Plant Variety It is essentially grouping plants into to the parent unit. not more than ` 25 lakh.
categories based on their botanical characteristics. It Investment Investment limit in Investment limit is ` 25
is a type of variety which is bred and developed by Limit such unit is ` 5 crore. lakh in this type of unit.
farmers. This helps in conserving, improving and
Assistance Parent unit assists the No such assistance is
making available plant genetic resources. For
of Parent ancillary unit by there.
example, hybrid versions of potatoes. Unit providing technical
(iii) Semiconductor Integrated Circuits Layout Design and financial help.
A semiconductor layout design means a layout of
transistors and other circuitry elements used and 13. Highlight the importance of small scale industries
formed on a semiconductor material, as an insulating
material, or inside the semiconductor material. Its
in Indian employment and GDP context.
design is to perform an electronic circuitry function. Ans. Following points highlight the importance of SSIs in
Indian employment and GDP
9. Identify any six major industries that are grouped (i) Contribution in GDP Small industries in India
in the small-scale sector of India. account for 95% of the industrial units of the country.
Ans. Six major industries are They contribute almost 40% of the gross industrial
(i) Food product value added and 45% of the total exports (direct and
(ii) Chemical and chemical products indirect) from India.
(iii) Leather and leather products (ii) Employment Generation In India, small industries
are the second largest employers of human
(iv) Hosiery and garments resources, after agriculture. They generate more
(v) Repair services employment opportunities per unit of capital
(vi) Beverages, tobacco and tobacco products invested as compared to large industries. Thus, they
are considered good for countries like India, that
10. What are the three types of enterprises with respect have surplus labour and less capital.
to manufacturing?
Ans. The three types of enterprises with respect to 14. Apart from increasing the employment
manufacturing are opportunities and adding to the GDP, small scale
(i) Micro Enterprise In micro enterprise, the industries contribute and assist a country like India
investment in plant and machinery does not exceed in numerous ways. Do you agree? Give reasons.
` 25 lakh. Ans. Yes, I agree with the statement that apart from increasing
(ii) Small Enterprise In small enterprise, the the employment opportunities and adding to the GDP,
investment in plant and machinery is more than ` 25 small scale industries contribute and assist a country like
lakh but does not exceed ` 5 crore. India in numerous ways. The reasons for the same are
(iii) Medium Enterprise In medium enterprise, the (any three)
investment in plant and machinery is more than (i) Supply Variety of Products Small industries in our
` 5 crore but does not exceed ` 10 crore. country supply enormous variety of products which
include goods of mass consumption such as
11. Service enterprises can be divided into three readymade garments, hosiery goods, stationery
categories majorly. Mention about these categories. items, soaps and detergents, domestic utensils, etc.
Ans. Service enterprises are categorised as follows Sophisticated goods such as electrical goods,
(i) Micro Enterprise In micro enterprise, the engineering goods, drugs, etc are also manufactured
investment in equipment does not exceed ` 10 lakh. by these industries.
(ii) Balanced Regional Development As these regarding a seminar on government’s assistance for a
industries produce products using simple small business aimed at young entrepreneurs.
technologies and depend on locally available
resources in terms of both material and labour, Excited with the news, the three friends decided to
thus, they can be opened anywhere in the country, attend the seminar. They were told about the
without any locational constraints and the benefits financial and other assistance offered by the central
of industrialisation can be reaped by every region. and state governments under the rural employment
(iii) Provide Business Opportunities They provide generation programme to the educated youth. They
ample opportunity for entrepreneurship. The found that toys were in demand and decided to
latent skills and talents of people can be manufacture toys. They started a small scale industry
channelled into business ideas, which can be
in their village by taking financial assistance with the
converted into reality with little or nil capital
investment. help of khadi and village industries commission.
(iv) Low Cost of Production They also enjoy the Today, they are successful makers of toys and in the
advantage of low cost of production. This is near future. They plan to get into export market as
because the establishment and running cost are well.
minimum. Locally available resources are less (i) Which problems were faced by Amar, Akbar and
expensive. Due to lower cost of production, they Anthony, when they decided to set up a small
have competitive strength.
business?
15. Vijay runs his small factory for producing cotton (ii) Which institutions helped Amar, Akbar and
goods. He wants to venture into other countries Anthony in establishing their small scale
but could not. Moreover, some MNCs have come industry?
up in the country giving tough times to Vijay. Ans. (i) Amar, Akbar and Anthony faced the following
Which problem of small scale industries is problems when they decided to set up a small
highlighted here? business
Ans. In the given text, ‘global competition’ is highlighted as (a) Problems related to identification of a business idea.
the problem of small scale industry.
(b) Problems related to location of business.
Small businesses feel threatened from the global
(c) Problems related to procurement of materials and
entrepreneurs in the following areas
machines required for the business.
(i) Competitions from medium and large industries as
well as multinational companies. (d) Problems related to finance and marketing
(ii) High quality standards, technological skills, (ii) Following institutions helped Amar, Akbar and
financial credit worthiness, managerial and Anthony in establishing their small scale industry
marketing capabilities of large industries. (a) District Industries Centre
(iii) Due to strict requirements of quality certification (b) Khadi and Village Industries Commission
like ISO 9,000, small industries have limited access
to markets of developed countries. 17. Explain in detail, the following three problems of
small scale industries in the country
16. Amar, Akbar and Anthony are three good friends
who have completed a vocational course in (i) Finance (ii) Marketing
entrepreneurship. After their school education (iii) Raw Materials
finding the job market tough. They were Ans. (i) Finance One of the severe problems faced by SSIs is
contemplating the idea of setting up a small the non-availability of adequate finance to carry out its
business using the skills they had learnt in their operations. These units lack in credit worthiness and
have a small capital base. As a result, they heavily
course. However, they knew very little about depend on local financial resources and frequently
business. become the victims of exploitation by the money
They were wondering what business to start, lenders.
where to locate it, how to procure machinery and (ii) Marketing Small scale enterprises are unable to meet
materials needed for the business, how to raise the expenses of marketing activities. They depend on
money and how to market. They came across a middlemen who exploit them by paying low prices for
their goods and delaying their payments.
notification given by the district industries centre
located near the industrial estate in Balanagar (iii) Raw Materials If the required materials are not
available, small businesses have to compromise on the
Ranga Reddy District of Andhra Pradesh quality or have to pay high price to get good quality
materials. Their bargaining power is relatively low Ans. The two banks are NABARD and SIDBI
due to the small quantity of purchases made by (i) National Bank for Agriculture and Rural
them. They cannot afford to buy in bulk because Development (NABARD) The NABARD was set up
they do not have the facility to store material and on 15th July, 1982 to provide finance to rural areas in
neither do they have the necessary finance.
order to promote integrated rural development. It is
18. What are the different forms of support offered to an apex institution that provides finance to rural and
small industries by the government? small industries and organises training and
Ans. Forms of support offered to small industries by the
development programmes for rural entrepreneurs.
government are (ii) Small Industries Development Bank of India
(i) Institutional support in respect of credit facilities. (SIDBI) It was established in April, 1990 as a wholly
owned subsidiary of IDBI, under the Small
(ii) Provision of developed sites for construction of
Industries Development Bank of India Act, 1990. Its
sheds.
main object is to promote, finance and develop the
(iii) Provision of training facilities. small scale sector in India. It provides direct and
(iv) Supply of machinery on hire export marketing. indirect financial assistance to small business
(v) Technical and financial assistance for technological organisations under various schemes. It coordinates
upgradation. the functions of other institutions engaged in similar
(vi) Special incentives for setting up of enterprises in activities.
backward areas.
22. Under NCEUS, what issues are being considered?
19. ‘Kamna’ is SSI engaged in the manufacturing of Ans. Following issues are being considered under National
handloom sarees. 60% of the share capital of this Commission for Enterprises in Unorganised Secotor
unit is jointly owned by Sumitra and her daughter (i) Growth poles for the informal sector in the form of
Kamayani. What form of concessions is the above clusters, in order to get external economic aid.
unit entitled to? (ii) Potential for public private partnership in imparting
Ans. ‘Kamna’ is a women enterprise. If a small scale industry’s the skills required by the informal sector.
more than 51% share capital is owned by women or a (iii) Provision of micro finance and related services to the
group of women, individually or jointly, then it is informal sector.
referred to as a ‘women enterprise’. Such types of (iv) Providing social security to the workers in the
enterprises can avail the following concessions from the informal sector.
government
(i) Low rate of interest on loans l
(ii) Easy repayment facility.
1. Explain the characteristics of entrepreneurship in
20. Write a short note on detail.
(i) Small Industries Development Organisation Ans. The following are the characteristics of entrepreneurship
(ii) National Small Industries Corporation (i) Systematic Activity Entrepreneurship has certain
Ans. (i) Small Industries Development Organisation temperamental, skill and other knowledge and
(SIDO) This organisation is also referred to as office competency requirements that can be acquired,
learnt and developed, both by formal educational
of the development commissioner, SSI. It is attached
and vocational training as well as by observation and
to the ministry of micro, small and medium
work experience.
enterprises and is responsible for implementing and
monitoring various policies and programmes (ii) Lawful and Purposeful Activity The object of
formulated by the ministry. entrepreneurship is lawful business. It is important
to take note that one may try to legitimise unlawful
(ii) National Small Industries Corporation (NSIC) It is actions as entrepreneurship on the grounds that just
a public sector enterprise of the ministry of micro, as entrepreneurship entails risk, so does illicit
small and medium enterprises and has been businesses.
providing marketing support to the medium and (iii) Innovation Entrepreneurship is creative in the
small industries under the marketing assistance sense that it involves innovation, introduction of new
scheme. products, discovery of new markets and sources of
21. Explain the two banks established by the support of supply of inputs, technological breakthroughs as well
as introduction of newer organisational forms for
government for the purpose of development of
doing things better, cheaper, faster and in the
small-scale industries and rural development. present context, in a manner that causes the least
harm to the ecology/ environment.
(iv) Organisation of Production Entrepreneur, in (d) Defuses Social Tension Entrepreneurship

response to a perceived business opportunity, development can help channelising the talent
mobilises the resources into a productive enterprise or and energies of frustrated unemployed youth of
firm. In an economy with a well-developed financial India. In other words, it can raise harmony
system, he has to convince just the funding within society.
institutions and with the capital so arranged he may
enter into contracts of supply of equipment, materials, (e) Discovering New Markets It helps the
utilities (such as water and electricity) and technology. entrepreneurs in discovering new market in
country and outside country.
(v) Risk-taking Entrepreneurship involves risk as
individuals opting for a career in entrepreneurship (f) Helpful in Selection of Project and Product It
take a bigger risk that is involved in a career in helps entrepreneurs in evaluating various
employment or practice of a profession as there is no projects and products and choose the most
‘assured’ payoff. However, entrepreneurs are so sure suitable one which can be established and
of their capabilities that they can convert situations started easily, gives maximum profit with least
with higher risks into opportunities. possible risk and which have scope for further
development.
2. According to ILO’s latest report, the number of the
unemployed in country will increase to 18.6 million in 3. Ritvik is a graduate from University of Delhi. He
2018 and 18.9 million in 2019 against 18.3 million in decided to start-up just after the graduation. He
2017. The International Labour Organisation (ILO) took on going edtech wave in his stride and set up
has said in its latest report that India could witness a a blended (offline + online) model of learning
higher unemployment rate of 3.5% in 2018, a little extra-curricular activities. He started boot
more than that of 3.4% as projected earlier. Exports are strapped with the savings of his internship
saying that unemployment is up because “Make in stipend. However, he is struggling to expand on
India”, “Start-up India” and other official schemes are the model because of lack of funds. Suggest him
not working in proper manner due to lack of six ways to raise more capital.
entrepreneurial skills among the youth. Ans. Ways for him to raise capital are
(i) Identify the concept which can reduce the (i) Bank Loan Funding from bank will involve the
unemployment problem of India. usual process of sharing the business plan and the
(ii) State the need of this concept in India. valuation details, along with project report based
on which the loan is sanctioned.
Ans. (i) Entrepreneurship development can reduce the
unemployment problem in India. (ii) Government Programmes that Offers Start-up
Capital Most popular scheme is Pradhan Mantri
(ii) For a developing economy like India, need of
Micro Units Development and Refinance Agency
entrepreneurship development arises due to the
following reasons Limited (MUDRA) which started with an initial
corpus of ` 20,000 crore to extend benefits to
(a) Eliminates Poverty and Unemployment The around 10 Lakh SMEs.
basic problem of India is poverty and
(iii) Angel Funding Angel Investments take very
unemployment, Entrepreneurship development
early-stage business under their wing while
can help the unemployed youth to opt for
venture capital or equity investors do not like to
self-employment and entrepreneurial as a career.
commit capital to tiny business. Many household
(b) Capital Formation The various development names, like Google, Facebook were financed in
banks like IDBI, IFCI, SIDBI take initiative in their earliest stages by angel investors. e.g. Mumbai
promoting entrepreneurship through fund. Angels, Hyderabad Angels Lets Venture, etc.
Entrepreneurship development encourage the (iv) Venture Capital These are professionally managed
establishment of new industries in economy which funds who invest in companies that have huge
is a cause of capital formation. potential in future. They focus on sale rather than
(c) Improvement in Per Capita Income profit of ventures. This type of funding is often
Entrepreneurship development encourages new obtained in exchange for an equity stake in
startups which is big cause of increase in per business. e.g. Nexus Venture Partner, Kalaari
capita income of India. Capital, Accel Partners.
(v) Incubators They provide professional services that (i) Non-farm Employment Traditionally, rural
facilitates the development of new business by households in India were exclusively engaged in
providing resources, support and advice. In India, agriculture. But now, rural households have varied
more than 50% of the incubators are located in and multiple sources of income, and participate in a
universities indicating role of universities in wide range of non-agricultural activities alongwith
supporting new start-ups. e.g., the traditional rural activities of farming and
(a) Innovation and Entrepreneurship (SINE), IIT agricultural labour. This can be largely attributed to
Mumbai the setting up of agro-based rural small industries.
(ii) Employment for Artisans Cottage and rural
(b) Technology Business Incubator IIT Delhi
industries play an important role in providing
(vi) Accelerators These are organisations that offer a employment opportunities in the rural areas,
range of support service and funding opportunities for especially to the traditional artisans and the weaker
startups. They provide capital and investment in sections of society.
return for start-up equity. They target set action to
(iii) Prevention of Migration Development of rural and
boost the development and growth of a startups. e.g.
village industries can also prevent migration of
(a) Amity Innovation Incubator rural population to urban areas in search of
(b) IAN Business Incubator, Kyron employment.
4. What do you mean by intellectual property rights? (iv) Poverty Alleviation Village and small industries are
Also, explain its importance. significant as producers of consumer goods and
absorbers of surplus labour, thereby addressing the
Ans. Intellectual property rights are the intellectuals emerged problems of supply, poverty and unemployment.
from the human mind and the legal right on these human (v) Promoting SSI and Rural Industrialisation
intellects. It is used to protect brand name, design, Promotion of small scale industries and rural
technology. industrialisation has been considered by the
Importance of Intellectual Property Rights is as follows Government of India as a powerful instrument for
(i) Exclusive right on the use of IP is the biggest realising the twin objectives of “accelerated
motivation behind creation of intellectual property. industrial growth and creating additional productive
(ii) Customers get improved goods and services due to employment potential in rural and backward areas.”
IPR. (vi) Socio-economic Aspects These industries contribute
(iii) Entrepreneurs are enabled to earn more revenue towards socio-economic aspects such as reduction in
due to IPR. income inequalities, dispersed development of
industries and linkage with other sectors of the
(iv) It is cost saving mechanism for society through
economy.
effectively utilisation of resources.
(v) In India, the union cabinet on 13th May, 2016 7. Small-scale industries have got some inherent
approved the national intellectual property right problems. These are the problems which have been
policy to promote entrepreneurs. in system for many years now and make the
5. What do you mean by rural industry? Also, explain development of small scale industries much more
its features. challenging. Discuss any six such problems.
Ans. Rural industry is also known as cottage industry or Ans. Problems of small-scale industries are
traditional industry. It is not defined by capital (i) Managerial Skills Small business is generally
investment criteria as in the case of other small scale promoted and operated by a single person, who may
industries. However, cottage industries are characterised not possess technical and managerial skills to run the
by certain features which are as follows business.
Following are the features of cottage industry (ii) Labour Due to low remuneration, talented people
(i) It is organised by individuals, with private resources. are not attracted to work with small business, firms
as they cannot afford to pay higher salaries to the
(ii) It normally uses family labour and locally available
employees.
talent and is labour intensive.
This affects employee willingness to work hard and
(iii) In cottage industry, simple equipments are in use.
produce more. Thus, productivity per employee is
(iv) In it, capital investment is small. relatively low and employee turnover is generally
(v) It produces simple products, normally in their own high.
premises. (iii) Quality Many small business organisations do not
(vi) It produces goods using indigenous technology. adhere to desired standards of quality. Instead, they
concentrate on cutting the cost and keeping the
6. Small scale industries play a pivotal role in rural prices low. As they do not maintain quality, they are
economy of a country. Comment. not able to compete in global markets.
Ans. The role of small scale industries in rural India is
explained in the following points
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(iv) Capacity Utilisation Due to lack of marketing skills (i) Land Every state offers developed plots for setting up
leading to lack of demand, many small business of industries. The terms and conditions may vary.
firms have to operate below full capacity due to Some states don’t charge rent in the initial years,
which their operating costs tend to increase. This while some allow payment in instalments.
leads to sickness and closure of the business. (ii) Power Power is supplied at a concessional rate of 50
(v) Technology Use of outdated technology is often percent, while some states exempt such units from
stated as a serious problem of such enterprises. This payment in the initial years.
results in low productivity and uneconomical (iii) Water Water is supplied on no-profit, no-loss basis or
production. with 50 percent concession or exemption from water
(vi) Sickness Prevalence of sickness in small industries charges for a period of 5 years.
has become a point of worry for both the (iv) Sales Tax In all Union Territories, industries are
policy-makers and the entrepreneurs. The causes of exempted from sales tax, while some states extend
sickness are both internal and external. exemption for 5 years period.
(a) Internal problems include lack of skilled and (v) Octroi Most states have abolished octroi.
trained labour, managerial and marketing skills. (vi) Raw Materials Units located in backward areas get
(b) External problems include delayed payment, preferential treatment in the matter of allotment of
shortage of working capital, inadequate loans scarce raw materials like cement, iron, steel, etc.
and lack of demand for their products. (vii) Finance Subsidy of 10-15 percent is given for
building capital assets. Loans are also offered at
8. Discuss any six incentives provided by concessional rates.
Central/State Government for setting up small
(viii) Marketing Assistance Government tries to solve
scale units in backward or hilly areas. (NCERT) their marketing problem by improving information
Ans. Some of the common incentives provided by the and also provide guarantee for sale of goods.
government for industries in backward and hilly areas (ix) Tax Holiday Exemption from paying taxes for 5 or 10
are (any six) years is given to industries established in backward,
hilly and tribal areas.
Chapter Test
1. Trade secret is the information that
(i) confers economic benefits (ii) is generally known to public
(iii) is subject to reasonable efforts by the holder to maintain its secrecy
Alternatives
(a) Both (i) and (ii) (b) Both (ii) and (iii) (c) Both (i) and (iii) (d) (i), (ii) and (iii)
2. For which of the following, copyright protection is not available?
(a) Literary work (b) Music work (c) Artistic work (d) Assembling
3. The investment limit of SSIs does not exceed ……… .
(a) ` 50,00,000 (b) ` 1,00,00,000 (c) ` 2,50,00,000 (d) ` 5,00,00,000
4. India is one of the fastest growing economies of the world. In order to give a further boost to India’s growth, large
scale industrial units are required. MSME are still relevant in Indian context because there is
(a) high capital investment and high population (b) lack of population and higher capital investment
(c) lack of capital investment and lack of population (d) lack of capital investment and higher population
5. Statement I Copyright is used for preventing the copy of original idea.
Statement II Trademark helps in protection of scientific inventions.
Alternatives
(a) Statement I is correct and Statement II is wrong (b) Statement II is correct and Statement I is wrong

1. Khana Kahazana is a popular show aired on Zee Network. It has a page on Facebook that goes by the name “Zee
Khana Khazana” (here in after referred to as ZKK). The page is said to be dedicated to food and recently we (the
community of food bloggers) found that they are regularly stealing photographs from food bloggers and websites for
their features. Identify and explain the intellectual asset rights which are violated by ZKK.
2. Distinguish between a small scale business unit and large scale business unit on the basis of nature, type of labour,
scale of operation and capital.
3. Write a short note on the following ways to fund start-up
(i) Incubators (ii) Accelerators
4. ‘Nut and Bolt’ is a small-scale unit supplying 80% of its production to Action Tractors. State and explain to which
category of SSI does ‘Nut and Bolt’ belong to?
5. Entrepreneurship does not emerge spontaneously. Rather, it is the outcome of a dynamic process of interaction
between a person and his/her environment. Ultimately, the choice of entrepreneurship as a career lies with an
individual, yet he/she must see it as a desirable, as well as, a feasible option. In the light of the statement, explain any
four features of entrepreneurship.
1. The National Small Industries Corporation Ltd. is a Government of India enterprise under the Ministry of Micro, Small
and Medium Enterprises (MSME). It operates through a country wide network of offices and technical centres in the
country. NSIC has a B2B web portal. The portal provides small and medium sized enterprises in India, an access to
customers around the globe exclusively, once they get themselves listed with NSIC portal for an annual fee.
The portal facilitates transactions between buyers and sellers without any intervention. It has features which will enable
virtual buyer-seller meets and assist in request of quotations for business orders. It also host a database of small and
medium companies’ details, products, catalogues and pictures.
(i) Write a short note on NSIC.
(ii) The above text tells about the assistance provided by NSIC to the small and medium enterprises for marketing their
products. Give any two more modes of marketing assistance provided by NSIC.
2. What role does SIDBI play in promoting SSIs?
Answers For Detailed Solutions

Multiple Choice Questions Scan the code
1. (c) 2. (d) 3. (b) 4. (d) 5. (a)
CHAPTER 03
Internal Trade
In this Chapter...
Trade
Internal Trade
Wholesaler
Retailers
Fixed Shop-Large Retailers
2. Retail Trade It refers to purchasing relatively small

Trade quantity of goods from wholesalers and selling them to
It refers to buying and selling of goods and services with the ultimate consumers.
objective of earning profit. It bridges the gap between the Chain of Retail Trade includes
producer and the consumer. The importance of trade in
Wholesalers → Retailers → Consumers
modern times has increased, as new products are being
developed everyday and are being made available for
consumption throughout the world. Wholesaler
Wholesale trade is performed by wholesalers. They serve as
Classification of Trade an important link between manufacturers and retailers.
Trade can broadly be classified into two categories Wholesaler provide various services to the manufacturers as
well as the retailers, that are mentioned below
1. Internal Trade Trade which takes place within a
country is called internal trade.
Services to Manufacturers
2. External Trade Trade which takes place between two
1. Facilitating Large Scale Production Wholesalers
or more countries is called external trade.
collect small orders from a number of retailers and pass
on the pool of such orders to the manufacturers
Internal Trade enabling them to produce on a large scale and take
Internal trade means movement of goods within the advantage of the economies of scale.
boundaries of the nation or country. In such trade, all 2. Bearing Risk The wholesale merchants bear variety of
payments are received and made in the national currency. risks such as the risk of fall in prices, theft, pilferage,
Internal trade aims at equitable distribution of goods within a spoilage, fire, etc. and therefore, they relieve the
nation speedily and at a reasonable cost. manufacturers from bearing these risks.
3. Financial Assistance The wholesalers provide financial
Classification of Internal Trade assistance to the manufacturers in the sense that they
generally make cash payment for the goods purchased
1. Wholesale Trade It refers to purchasing goods and
by them.
services in large quantity from manufacturers and
4. Expert Advice As the wholesalers are in direct contact
reselling them to retailers, who then sells them to the
with the retailers, they are in a position to advice the
ultimate consumers. manufacturers about various aspects including
Chain of Wholesale Trade includes customer’s tastes and preferences, market conditions,
competitive activities and the features preferred by the
Manufacturers → Wholesalers → Retailers → Consumers
buyers.
5. Help in Marketing Function The wholesalers take care 3. Enabling Large-scale Operations On account of
of the distribution of goods to a number of retailers. retailer’s services, the manufacturers and wholesalers
This relieves the manufacturers from many of the are freed from the trouble of making individual sales to
marketing activities and enables them to concentrate on consumers in small quantities.
the production activity. 4. Collecting Market Information As retailers remain in
6. Facilitate Production Continuity The wholesalers direct and constant touch with the buyers, they serve as
facilitate continuity of production activity throughout an important source of collecting market information
the year by purchasing the goods as and when these are about the tastes, preferences and attitudes of customers.
produced and storing them till the time these are 5. Help in Promotion Retailers participate in promotional
demanded by retailers or consumers in the market. activities in various ways and thereby, help in
7. Storage Wholesalers reduce the burden of promoting the sale of the products.
manufacturers of providing for storage facilities for the
finished products by taking delivery of goods when Services to Consumers
these are produced in factory and keeping them in 1. Regular Availability of Products The most important
godowns/warehouses. service of a retailer to consumers is to maintain regular
availability of various products produced by different
Services to Retailers manufacturers.
1. Availability of Goods The wholesalers make the 2. New Products Information By arranging effective
products of various, manufacturers readily available to display of products, retailers provide important
the retailers, relieving the retailers from the work of information about the arrival, special features, etc of
collecting goods from several producers. new products to the customers.
2. Marketing Support The wholesalers perform various 3. Convenience in Buying Retailers generally buy goods
marketing functions and provide support to the retailers. in large quantities and sell these in small quantities,
They undertake advertising and other sales promotional according to the requirements of their customers
activities to induce customers to purchase the goods. leading to great convenience to the customers.
3. Grant of Credit The wholesalers generally extend 4. Wide Selection Retailers generally keep stock of a
credit facilities to their regular customers which help variety of products of different manufacturers enabling
retailers to manage their business with small amount of the consumers to make their choice out of a wide
working capital. selection of goods.
4. Specialised Knowledge Wholesalers pass on the benefit 5. After-sales Services Retailers provide important
of their specialised knowledge to the retailers by after-sales services in the form of home delivery, supply
informing the retailers about the new products, their of spare parts and attending complaints of customers.
uses, quality, prices, etc. 6. Provide Credit Facilities The retailers sometimes
5. Risk Sharing The wholesalers purchase in bulk and sell provide credit facilities to their regular buyers.
in small quantities to the retailers. Being able to
purchase smaller quantities, retailers are in a position to Fixed Shop-Large Retailers
avoid the risk of storage, theft, misuse, etc. These retailers operate from a fixed shop on a very large
scale. Their area of operation is wide. These are retail shops
Retailers which maintain permanent establishment to sell their
merchandise. Therefore, they do not move from place to
Retail trade is performed by retailers. A retailer is engaged in place to serve their customers. They are of following types
the sale of goods and services directly to the ultimate
consumers. Retailer represents the final stage in the
distribution process. Departmental Stores
A retailer offers various services to manufacturers/ It is a large establishment offering a wide variety of products,
wholesalers and consumers that are mentioned below classified into well-defined departments. For example, there
may be separate departments for toiletries, medicines,
Services to Wholesalers/Manufacturers furniture, groceries, electronics, clothing and dress material
within a store.
1. Help in Distribution of Goods Retailers help in the
distribution of their products by making them available Features of Departmental Stores
to the final consumers, who may be scattered over a
large geographic area.
l
A modern departmental store may provide all facilities
such as restaurant, travel and information bureau,
2. Personal Selling By undertaking personal selling efforts, telephone booth, restrooms, etc.
the retailers relieve the producers from this activity and
greatly help them in the process of actualising the sale
l
These stores are generally located at a central place in the
of the products. heart of a city.
l
As the size of these stores is very large, they are generally l
The manufacturing/procurement of merchandise for all the
formed as a joint stock company managed by a board of retail units is centralised at the head office, from where the
directors. goods are despatched to each of these shops according to
l
A departmental store combines both the functions of their requirements.
retailing as well as warehousing. l
Each retail shop is under the direct supervision of a branch
l
They have centralised purchasing arrangements. All the manager, who is held responsible for its day-to-day
purchases in a department store are made centrally by the management.
purchase department of the store. l
All the branches are controlled by the head office, which is
concerned with formulating the policies and getting them
Advantages of Departmental Stores implemented.
1. Attract Large Number of Customers As these stores l
The prices of goods in such shops are fixed and all sales are
are centrally located, they attract a large number of made on cash basis.
customers during the best part of the day. l
The head office normally appoints inspectors, who are
2. Convenience in Buying By offering large variety of concerned with day-to-day supervision of the shops, in
goods under one roof, the departmental stores provide respect of quality of customer service provided, adherence
great convenience to customers. to the policies of the head office, etc.
3. Attractive Services Some of the services offered by it
include home delivery of goods, execution of telephone Advantages of Chain Stores
orders, grant of credit facilities and provision for 1. Economies of Scale As there is central procurement, the
restrooms, telephone booths, restaurants, saloons, etc. multiple-shop organisation enjoys the economies of scale.
4. Economy of Large-scale Operations As these stores are 2. Elimination of Middlemen By selling directly to the
organised at a very large scale, these stores enjoy the consumers, the multiple-shop organisation is able to
benefits of large-scale operations. eliminate middlemen.
5. Promotion of Sales The departmental stores are in a 3. No Bad Debts Since all the sales in these shops are
position to spend considerable amount of money on made on cash basis, there are no losses on account of
advertising and other promotional activities. bad debts.
4. Transfer of Goods The goods not in demand in a
Limitations of Departmental Stores particular locality may be transferred to another locality
1. Lack of Personal Attention It is very difficult to provide where it is in demand.
adequate personal attention to the customers in these 5. Diffusion of Risk The losses incurred by one shop may
stores. be covered by profits in other shops.
2. High Operating Cost As these stores give more 6. Low Cost The multiple shops have lower cost of
emphasis on providing services, their operating costs business due to centralised purchasing, elimination of
tend to be on the higher side. middlemen and centralised promotion of sales.
3. High Possibility of Loss As a result of high operating 7. Flexibility Under this system, if a shop is not operating
costs and large scale operations, the chances of at a profit, the management may decide to close it or
incurring losses in a departmental store are high. shift it to some other place.
4. Inconvenient Location As a departmental store is
generally situated at a central location, it is not Limitations of Chain Stores
convenient for the purchase of goods that are needed at 1. Limited Selection of Goods Some of the multiple shops
short notice. deal only in limited range of products and not of other
manufacturers.
Chain Stores or Multiple Shops 2. Lack of Initiative The personnel do not take the
They are networks of retail shops that are owned and initiative to use their creative skills to satisfy the
operated by manufacturers or intermediaries. A number of customers as they are habitual of looking up to the head
shops with similar appearance are established in localities office for guidance.
and these shops normally deal in standardised and branded 3. Lack of Personal Touch Lack of initiative in the
consumer products, which have rapid sales turnover. For employees sometimes leads to indifference and lack of
example, an outlet of Reebok. personal touch in them.
4. Difficult to Change Demand In case of sudden change
Features of Chain Stores of demand, the management may have to sustain huge
l
These shops are located in fairly populous localities, where losses because of large stocks lying unsold at the central
sufficient number of customers can be approached. depot.
Chapter
Practice
PART 1 5. Time utility is being provided by ……
(a) retailers (b) stockists
Objective Questions (c) wholesalers (d) Both (a) and (c)
Ans. (c) Wholesalers keep the goods with themselves for a
l
Multiple Choice Questions period of time till they are demanded by the retailers
thereby creating a time utility.
1. Basic objective of trade is 6. Statement I No custom duty or import duty is
(a) social service levied on internal trade.
(b) profit
(c) environmental protection
Statement II Storage facility provides with time
utility.
Alternatives
Ans. (b) Trade refers to buying and selling of goods and it’s
basic objective is to earn profit. (a) Statement I is correct and Statement II is wrong
(b) Statement II is correct and Statement I is wrong
2. Government levies taxes in order to generate funds (c) Both the statements are correct
to perform its various functions. Internal trade is (d) Both the statements are incorrect
liable to Ans. (c) No custom duty or import duty is levied on internal
(a) customs duty (b) import duty trade as goods are part of domestic production and are
(c) GST (d) export duty meant for domestic consumption. Storage helps in
Ans. (c) In internal trade, movement of goods and services is bridging the gap between the time of
confined to the domestic territory of the nation. production/procurement and the consumption of goods.
Therefore, customs duty, import duty and export duty is
not leviable on them. GST (Goods and Service Tax) is an
7. Statement I Wholesaler purchase in bulk quantity
indirect tax levied in India on sale of goods and services and sell in small lots to retailers.
within the domestic territory. Statement II The wholesalers perform various
3. Wholesaler not just buys goods from manufacturers marketing functions and provide support to the
but they also help manufacturer in marketing of the consumer.
product by Alternatives
(a) storing goods in bulk quantities (a) Statement I is correct and Statement II is wrong
(b) making cash payment (b) Statement II is correct and Statement I is wrong
(c) transportation facilities (c) Both the statements are correct
(d) conveying retailers’ feedback to manufacturer (d) Both the statements are incorrect
Ans. (d) The wholesalers are in direct contact with retailers. Ans. (a) The wholesalers perform various marketing functions
Therefore, they advise manufacturers about various and provide support to manufacturers and retailers.
aspects related to customers taste, preferences, market 8. Wholesaler provides financial assistance to
conditions, etc. manufacturers through
4. Wholesalers perform various …….functions which (a) bulk selling of goods to them
increases the demand of goods and ultimately (b) loans
increases the profits for retailers and manufacturers (c) purchase of goods in small quantities for cash
(a) financing (d) bulk purchasing of goods in cash
(b) distribution Ans. (d) Manufacturers sell goods in bulk to wholesaler against
(c) marketing cash payments. Therefore, it can be said that wholesalers
(d) tax planning provide financial assistance to manufacturers by bulk
Ans. (c) marketing purchasing of goods against cash payments.
9. What types of service is not offered by retailers to 14. In departmental stores, sales are …….according to
manufacturers and wholesalers? different departments.
(a) New product information (a) unsegmented (b) centralised
(b) Personal selling (c) decentralised (d) None of these
(c) Helps in promotion Ans. (c) decentralised
(d) Helps in distribution of goods
15. Statement I Sales in chain stores are done on cash
Ans. (c)Helps in promotion
and credit basis.
10. Retailers provide various services to the ultimate Statement II Multiple shops normally deal in
customers. One of such services is after sales standardised and branded consumer products.
service. Retailers provide after sale services to Alternatives
consumers in form of (a) Statement I is correct and Statement II is wrong
(a) regular availability of goods (b) Statement II is correct and Statement I is wrong
(b) credit facility (c) Both the statements are correct
(c) wide selection (d) Both the statements are incorrect
(d) home delivery Ans. (b) Sales in chain stores are done on only cash basis.
Ans. (d) Retailers usually have their place of business in a
close proximity to the places where consumers live or 16. Appollo Pharmacy has retail outlets running 24
market places. Due to this, they are able to provide hours a day and 7 days week. These retail outlets
important after sale services like home delivery of goods, are spread across the country and have centralised
supply of spare parts, mirror repairs or replacement, etc. purchasing and decentralised sales mechanism for
sale of medicines and health care related goods to
11. Statement I Departmental stores have a
its customers. Which type of business outlet is
decentralised purchasing department, whereas
highlighted in this paragraph?
sales are centralised in different departments.
(a) Departmental Store (b) Chain store
Statement II Departmental stores can manage with (c) Both (a) and (b) (d) None of these
less amount of capital. Ans. (b) Chain store
Alternatives
(a) Statement I is correct and Statement II is wrong 17. Manufacturers sell goods directly through …… and
(b) Statement II is correct and Statement I is wrong thus, eliminates unnecessary middlemen in the sale
and purchase of goods.
(d) Both the statements are incorrect (a) street vendors (b) multi brand retail stores
(c) departmental stores (d) chain stores
Ans. (d) Departmental stores have a centralised purchasing
department, whereas sales are decentralised in different Ans. (d) chain stores
departments. Departmental stores can manage with huge 18. Each retail outlet (in chain stores setting) is under
amount of capital. the direct supervision of a …….. who is responsible
12. Under which of the following areas, departmental for its day-to-day operations.
stores are not at in advantageous position over (a) head officer (b) customer executive
smaller forms of retail businesses? (c) branch manager (d) None of these
(a) Number of customers Ans. (c) branch manager
(b) Operating costs
(c) Sales promotion
19. Which of following is/are the example(s) of chain
(d) Scale of operations stores?
Ans. (b) Operating costs are high for departmental stores (a) Bata showroom (b) Dominos
because they have to maintain the stores in a (c) Raymond shop (d) All of these
standardised manner and create different departments. Ans. (d) All of these
They also have to hire high number of staff. 20. Nature Beauty is a company with cosmetics stores
13. Which type of retail business acts as suppliers of a all over the country. The procurement of raw
wide variety of products under one roof ? materials and manufacturing of merchandise for all
(a) Departmental store the retail units is centralised. Which type of store is
(b) Chain store highlighted here?
(c) Mail order houses (a) Departmental Store (b) Chain store
(d) Multiple shops (c) Both (a) and (b) (d) None of these
Ans. (a) Departmental store Ans. (b) Chain store
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Assertion-Reasoning MCQs 6. Assertion (A) It is convenient for customers to
purchase goods from these departmental stores.
Directions (Q.Nos. 1-7) There are two statements marked
as Assertion (A) and Reason (R). Read the statements and
Reason (R) Departmental stores offer a large variety
choose the appropriate option from the options given of goods under one roof.
below. Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
(a) Both Assertion (A) and Reason (R) are true and (R) is the correct explanation of Assertion (A)
Reason (R) is the correct explanation of Assertion (A). 7. Assertion (A) Wholesalers relieve manufacturers from
(b) Both Assertion (A) and Reason (R) are true, but bearing multiple risks.
Reason (R) is not the correct explanation of
Assertion (A).
Reason (R) The wholesalers provide cash payment to
(c) Assertion (A) is true, but Reason (R) is false.
the manufacturers for the goods purchased.
(d) Assertion (A) is false, but Reason (R) is true. Ans. (b) Wholesalers bear multiple risks of theft, pilferage, fire,
change in process etc. and relieve the manufacturers from
1. Assertion (A) No custom duty or import duty is the same.
levied on internal trade.
Reason (R) Goods involved in internal trade are
l
Case Based MCQs
part of domestic production and are meant for 1. Direction Read the following text and answer
domestic consumption. question no. (i) to (vi) on the basis of the same.
Ans. (a) Both Assertion (A) and Reason (R) are true and
Reason (R) is the correct explanation of Assertion (A). Lavanya Cosmetics Ltd. located in Gujarat is a
manufacturer of herbal cosmetic items and a leading
2. Assertion (A) Wholesalers bear risk which would enterprise in the industry. Its products are demanded
have been borne by the retailers. all over the country. Seeing the increasing demand in
Reason (R) The wholesale merchants deal in October and November, their marketing and sales
goods in their own name, take delivery of the department has made a special herbal cosmetics gift
goods and keep the goods purchased in large lots hamper which is not only economic but has got a very
in their warehouses. attractive packing too.
Ans. (d) In the process given in the reason, wholesalers For the distribution of such hampers at all places, they
bear risk which would have been borne by the have made an agreement with Sharma traders who
manufacturers. will buy from them such hampers in large quantities
3. Assertion (A) Wholesalers inform the retailers and will reach the products to retailers in every state
about the new products, their uses, quality, so that they can meet their orders in time. In Gujarat,
prices, etc. the company has opened its own retail outlet named
Reason (R) The wholesalers specialise in one ‘Lavanya Stores’ few months ago which is showing
line of production. very good response of customers and increasing their
sales turnover.
Ans. (a) Both Assertion (A) and Reason (R) are true and
Reason (R) is the correct explanation of Assertion (A). Inspired from the growth of sales of their retail store,
they are having plans to open such stores in
4. Assertion (A) Retailers serve as an important Rajasthan, Delhi and Punjab too. For testing the
source of collecting market information about
markets in these states, they decided to place the
the tastes, preferences and attitudes.
products in some big stores which offer a wide variety
Reason (R) Retailers are not in direct and of products, classified into well-defined segments in
constant touch with the buyers. the store.
Ans. (c) Retailers remain in direct and constant touch with With the success in these markets, the management
the buyers and therefore, serve as an important source
decided to open more stores. They are planning to
of collecting market information about the tastes,
preferences and attitudes.
establish the system in such a way that the prices of
the goods are fixed and sales are made on cash basis.
5. Assertion (A) Retailers enable the consumers to Daily sales are to be deposited in a local bank account
make their choice. and details to this regard will be sent to the head
Reason (R) The retailers sometimes provide office. However, the company faced an
credit facilities to their regular buyers. unprecedented problem that the employees working
Ans. (b) Retailers generally keep stock of a variety of in these stores work on the instructions of the head
products. This enables the consumers to make their office and do not stand to benefit in any way by the
choice. sales made by them. This affects their performance.
(i) Which of the following is incorrect regarding the (vi) Which problem of this kind of stores is highlighted in
services provided by wholesalers to the lines, “the employees working in these stores work
manufacturers? on the instructions of the head office and do not stand
(a) Regular availability of products to benefit in any way by the sales made by them”?
(b) Help in marketing function (a) Lack of personal touch
(c) Bearing risk (b) Lack of initiative
(d) Storage (c) Lack of personal attention
Ans. (a) Regular availability of products (d) High operating costs
(ii) “In Gujarat the company has opened its own Ans. (b) Lack of initiative
retail outlet, few months ago which is showing a 2. Direction Read the following text and answer
very good response of customers and increasing question no. (i) to (vi) on the basis of the same.
their sales turnover.Inspired from the growth of Footwear Ltd. located in Mumbai manufactures
sales of their retail store they are having plans to shoes. It imports raw material from Italy and dyes
open such stores in Rajasthan, Delhi and Punjab from Japan. The design quality and durability of the
too.” ldentify the type of fixed retail shop shoes manufactured by this Company has made it
mentioned here. number one company in that area. Now the company
(a) Market traders wishes to sell its products in all the states of India as
(b) Multiple shops well as in international markets.
(c) Departmental stores
The marketing managers advised to strengthen the
(d) General store
distribution channel by appointing more wholesalers
Ans. (b) Multiple shops for each area. But one of the board of directors was of
(iii) “For the distribution of such hampers at all the view that if they sell the product directly to
places, they have made an agreement with Sharma retailers, they will be able to get competitive price
Traders.” Which type of intermediary Sharma for their products, which will result in increased
Traders is in internal trade? sales turnover and eventually the profits.
(a) Wholesalers The promoters of the company have come up with a
(b) Retailers different proposition. They believe that the company
(c) Commission agent should open its own stores in different parts of the
(d) Salesman country. After lot of discussion, it was decided to go
Ans. (a) Wholesalers ahead with the board of director’s proposal that they
(iv) “They are planning to establish the system in should sell the products directly to retailers. They
such a way that the prices of the goods are fixed also believe that retailers will provide important
and sales are made on cash basis. Daily sales are information about the arrival of products to the
to be deposited in a local bank account and customers by arranging effective display of products.
details to this regard will be sent to the head (i) ...… serves as the link between wholesalers and
office.” Identify the feature of such stores. customers.
(a) Central location (a) Suppliers (b) Retailers
(b) Provision of services (c) Manufactures (d) All of these
(c) Centralised control Ans. (b) Retailers
(d) Corporate status
(ii) Which of the following is incorrect regarding the
Ans. (c) Centralised control
services provided by retailers to consumers?
(v) “….. they decided to place the products in some (a) Provide after sales services
big stores which offers a wide variety of products, (b) Offer wide selection of goods
classified into well-defined segments in the (c) Provide credit facilities to regular buyers
store.” Which type of fixed shop is highlighted (d) None of the above
here? Ans. (d) None of the above
(a) Chain stores
(iii) Trade is an important function of
(b) Departmental stores
(a) wholesalers (b) retailers
(c) Mail order houses
(c) manufactures
(d) Both (a) and (b)
(d) Both wholesalers and retailers
Ans. (b) Departmental stores
Ans. (d) Both wholesalers and retailers
(iv) Which of the following statements regarding reasons They decided that they will go with the option that
for international business are correct? Simon suggested. They also set up retail chain
(a) Unequal distribution of natural resources among nations with many mom-and-pop stores. They believe that
or differences in their productivity levels these stores will help them in creating place
(b) Availability of various factors of production differs among utility. Moreover, these stores will tell the
nations consumers about their products helping them to
(c) Labour productivity and production costs differ among boost sales.
nations due to various socio-economic, geographical and
political reasons (i) Which fixed-shop large retailer John highlighted?
(d) All of the above (a) Departmental stores
Ans. (d) All of the above (b) Chain stores
(v) Which of the following is the proposition of the (c) Mail order houses
promoters? (d) None of the above
(a) Mail order houses (b) Chain stores Ans. (a) Departmental stores
(c) Departmental stores (d) None of these (ii) Which fixed-shop large retailer Simon
Ans. (b) Chain stores highlighted?
(vi) Which service to customer by retailer is highlighted (a) Departmental stores (b) Chain stores
in the line, “They also believe that retailers will (c) Mail order houses (d) None of these
provide important information about the arrival of Ans. (b) Chain stores
products to the customers by arranging effective (iii) Which merit of a particular business type was
display of products.”? highlighted by Simon?
(a) Regular availability of products (a) No bad debts (b) Low cost
(b) New products information (c) Flexibility (d) Economies of scale
(c) Convenience in buying Ans. (c) Flexibility
(d) Wide selection
(iv) Which demerit of a particular business type was
Ans. (b) New products information highlighted by Brad?
3. Direction Read the following text and answer (a) Lack of initiative
question no. (i) to (vi) on the basis of the same. (b) Lack of personal touch
John, Brad and Simon are three friends who wants (c) Loss due to change in demand
to start a business of trading and manufacturing high (d) Limited selection of goods
quality herbal products. They have been trying to Ans. (b) Lack of personal touch
figure out the right mode of running the business by (v) Which service of retailers to manufacturers is
evaluating each and every option. highlighted in the line, “They also set up retail
John thinks that they should place the products in chain with many mom-and-pop stores. They
big stores where there is already a cosmetics section believe that these stores will help them in creating
so that customers can easily find the product. place utility.”?
Simon is of the different view who believes that they (a) Help in distribution of goods
should open their own stores in different cities and (b) Personal selling
localities so that they develop a unique brand image. (c) Enabling large-scale operations
(d) Help in promotion
He gives the argument that if a store is incurring
Ans. (a) Help in distribution of goods
loss, then it can be closed down or shifted to some
other place, without any significant effect on the (vi) Which service of retailers to consumers is
company. highlighted in the line, “Moreover, these stores
will tell the consumers about their products
However, Brad produces counter-argument by
helping them to boost sales.”?
saying that due to operating on a large scale and lack
(a) Regular availability of products
of initiative on the part of employees, their dealings (b) New products information
with customers will lack personal touch. Therefore, (c) Convenience in buying
he suggested that they should deliver the goods at (d) Wide selection
home with a personalised note. They decided to
Ans. (b) New products information
further explore the options.
PART 2 The new partners want appointment of wholesalers

to distribute the products though Shyam is not in
Subjective Questions favour of this idea.
(i) What marketing options are available with the
firm?
l
(ii) Should wholesalers be appointed to sell the
1. What do you mean by trade? Also explain its products? Why?
classification. Ans. The options available with the firm are
Ans. Trade refers to buying and selling of goods and services (i) The firms may open its own sale outlets in different
with the objective of earning profit. It bridges the gap parts of the city to sell its products. The firm may
between the producer and the consumer. appoint wholesalers and retailers for the distribution
Trade can broadly be classified into two categories of its products.
(i) Internal Trade Trade which takes place within a (ii) In this case, it is advisable to appoint wholesalers
country is called internal trade. because of the following reasons
(ii) External Trade Trade which takes place between (a) The firm does not have enough capital to open new
two or more countries is called external trade. stores and even the firm does not have capability to
raise funds.
2. Explain the concept of internal trade along with its (b) By appointing wholesalers, the firm would be
key features. (NCERT) relieved of the botheration of marketing its products.
Ans. When buying and selling of goods and services take place (c) Though wholesalers take away a part of the profits
within a country, it is referred to as internal trade. margin, they provide useful services in return.
Some of the important features of internal trade are These services are
(i) All payments are made in the national currency. l
They sell goods to retailers and big customers.
(ii) Generally, there are no restrictions on the l
They can arrange for advertisement of goods
movements of goods. and display of goods at retail outlets.
(iii) Several alternative modes of transport are available In nutshell, the wholesalers would provide
for carrying goods. specialised services to market the products.
This would allow the firm to concentrate on
3. Wholesalers serve two-way purpose by providing increasing production and also quality.
warehousing facilities. Comment. (NCERT)
Ans. Two-way purpose is served by wholesalers by providing 5. A very successful Ayurveda Company of the
warehousing facilities in the following manner country sells its products to distributors who sell
(i) Wholesalers take delivery of goods when these are the products to wholesalers as and when demand is
produced in factory and keep them in their generated. These wholesalers demand the products
godowns/warehouses, which reduces the burden on from distributors depending upon the market
manufacturers for providing storage facilities for the demand and trends. The company contacts doctors
finished products. of the country who prescribes the ayurvedic
(ii) Warehousing by wholesalers relieves the retailers of medicines to the patients. These patients demand
the work of collecting goods from several producers the medicines from chemists who in turn ask the
and keeping huge inventory of the same. wholesalers to supply them the medicines. Identify
4. Shyam started a hosiery factory with just 4 workers and explain two types of internal trade highlighted
to manufacture ladies wear. The firm tasted success in the above passage. Also, quote the lines to
in business and installed new machines and hired substantiate the answers.
more workers and engaged supervisors. Though his Ans. (i) Wholesale Trade “These wholesalers demand the
business was expanding, he was able to manage the products from distributors depending upon the
market demand and trends.”
marketing part of the business. He sold directly to
customers and also to retailers in his city. About 6 Wholesale trade refers to purchasing goods and
services in large quantity from manufacturers (or
months back, Shyam admitted two partners into the
distributors of manufacturers) and reselling them to
business to expand the business further. Both the retailers, who then sells them to the ultimate
partners contributed capital of ` 40 lakh each. Fresh consumers. A wholesaler is an intermediary between
funds were used to acquire advanced machines and manufacturer and retailer.
purchase raw materials and other inputs. The Chain of Wholesale Trade
production has increased 5 times but difficulties Manufacturers —— Wholesalers —- Retailers —-
are being faced in marketing of finished products. Consumers
(ii) Retail Trade “….from chemists who in turn ask the The wholesalers purchase in bulk and sell in small
wholesalers to supply them the medicines.” quantities to the retailers. Being able to purchase
Retail trade refers to purchasing relatively small smaller quantities, retailers are in a position to
quantity of goods from wholesalers and selling them avoid the risk of storage, theft, misuse, etc.
to ultimate consumers. A retailer is an intermediary 7. What difficulties would a consumer face if there is
between wholesaler and consumer. no retail shop?
Chain of Retail Trade Ans. A consumer would face following difficulties if there is
Wholesalers —- Retailers —- Consumers no retail shop (any three points)
6. Bhargav Enterprises (BE) is a wholesaler outlet in (i) In the absence of a retail shop, consumer will have
East Delhi. This outlet deals with products from to store the goods.
personal care segment ranging from perfumes to (ii) In the absence of a retail shop, a consumer shall not
talcum powders to shaving creams, so on and so be able to make a good selection.
forth. BE advertises the product through banners and (iii) A retail shop supplies goods in the quantities which
activities in nearby areas to increase the demand of suit the pocket and needs of different consumers. In
the products. the absence of a retail shop, a consumer will have to
approach a wholesaler or a manufacturer and buy
Since the outlet is in operations for many years now, the goods in large quantities.
it has cordial relations with retailers and therefore, (iv) There will be lot of inconvenience to the
the trusted outlets are not billed on immediate cash consumers.
basis which helped them to work with low capital. (v) Consumers will not be able to know about the new
In the process, it not only helps them to avoid products available in the market.
financial burden but also helps them in avoiding the
risk of theft and storage as retailers can demand 8. What are the services offered by retailers to
good in smaller quantities. BE also keeps the wholesalers?
retailers updated with the new products launched in Ans. Retailers render following services to the wholesalers
the market. (i) Help in Distribution of Goods Retailers provide
help in the distribution of goods and making them
Identify and explain the services given by the
available to final consumers.
wholesalers to the retailers by quoting the lines.
(ii) Personal Selling The retailers relieve the producers
Ans. Services given by the wholesalers to retailers in the given
from selling the goods personally and help them in
case are
actualising the sale of the products.
(i) Marketing Support “BE advertises the product
(iii) Enabling Large Scale Operations It enables them
through banners and activities in nearby areas to
to operate on a large scale and fully concentrate on
increase the demand of the products.”
production activities.
The wholesalers perform various marketing functions
(iv) Collecting Market Information Retailers remain in
such as advertisements and other sales promotional
touch with the buyers. They know about the tastes,
activities to induce customers to purchase the goods.
attitudes, preference, etc. Such information is very
This increases the demand of the products which
useful in taking marketing decisions in an
results in increased profits for the retailer.
organisation.
(ii) Grant of Credit “ …..and therefore, the trusted
outlets are not billed on immediate cash basis which 9. Goel and sons is a grocer based in Meerut, UP. It
helped them to work with low capital.” is an outlet retailing daily day to day ration and
The wholesalers generally extend credit facilities to other branded products. They have been in
retailers. This enables them to manage their business business for last 20 years and therefore, have
with relatively small amount of working capital. developed good reputation in the market. They
(iii) Specialised Knowledge “BE also keeps the retailers provide information about the arrival, special
updated with the new products launched in the features, etc of products to the customers and sell
market.” goods in small quantities, according to the
The wholesalers specialise in one line of production. requirements of these customers. They also have a
They inform the retailers about the new products, special scheme where they supply good to the
their uses, quality, prices, etc. home within certain range of area on a purchase of
(iv) Risk Sharing “In the process, it not only helps them some minimum amount of goods. On the basis of
to avoid financial burden but also helps them in loyalty of customers, they sometimes sell goods to
avoiding the risk of theft and storage as retailers can the regular customers on purchase now, pay later
demand good in smaller quantities.” basis.
The above case highlights some of the services Ans. Some of the important features of a departmental store
retailer provides to the consumers. Identify and are
explain these services by quoting the lines. (i) A modern departmental store may provide all
Ans. Services provided by retailers to customers are facilities such as restaurant, restrooms, etc. In this
way, they try to provide maximum service to
(i) New Products Information “They provide information
higher class of customers, for whom price is of
about the arrival, special features, etc of products to
secondary importance.
the customers….”
(ii) These stores are generally located at a central
By arranging effective display of products, retailers
place in the city, which caters to a large number of
provide important information about the arrival,
customers.
special features, etc of products to the customers.
(iii) They are generally formed as a joint stock
(ii) Convenience in Buying “….. sell goods in small
company, managed by a board of directors as the
quantities, according to the requirements of these
size of these stores is very large.
customers.”
(iv) A departmental store combines both the functions
Retailers generally sell goods in small quantities,
of retailing as well as warehousing. They purchase
according to the requirements of their customers. This
directly from manufacturers and operate separate
offers great convenience to the customers.
warehouses, thereby eliminating undesirable
(iii) After Sales Services “They also have a special scheme middlemen between the producers and the
where they supply good to the home within certain customers for their products.
range of area on a purchase of some minimum amount
of goods.” 12. ‘Easy Day’ , ‘Vishal Mega Mart’ and ‘Big Bazaar’ are
the examples of which type of fixed shops? Give any two
Retailers provide important after-sales services in the
merits.
form of home delivery, supply of spare parts etc.
Ans. ‘Easy Day’, ‘Vishal Mega Mart’ and ‘Big Bazaar’ are
(iv) Provide Credit Facilities ‘‘On the basis of loyalty of
the examples of departmental stores.
customers, they sometimes sell goods to the regular
customers on purchase now, pay later basis.” Merits of departmental stores are
The retailers sometimes provide credit facilities to (i) A departmental store keeps very wide variety of
their regular buyers, leading to increased level of goods with different designs, colours, styles, etc.
consumption and better standard of living. (ii) Departmental stores provide various types of
services to customers. They extend liberal credit,
10. Differentiate between retailers and wholesalers on accept telephone order, provide for free home
following basis delivery services, etc.
(i) Purchases and sales (ii) Quantity of goods
(iii) Specialisation (iv) Capital
13. Multiple shops are networks of retail shops that
are owned and operated by manufacturers or
Ans. The differences between wholesalers and retailers are intermediaries. Under this type of arrangement,
a number of shops with similar appearance are
Basis Wholesalers Retailers
established in localities, spread over different
Purchases and They purchase goods They purchase goods parts of the country. These shops normally deal
Sales from manufacturers from wholesalers and in standardised and branded consumer products,
and sell them to sell them to ultimate
retailers. consumers.
which have rapid sales turnover. In the light of
the statement, state any four features of multiple
Quantity of They buy and sell They buy and sell shops.
Goods goods in large goods in small
quantities. quantities. Ans. Features of multiple shops are (any four)
(i) These shops are located in populous localities, so
Specialisation They specialise, They do not that customers can be served at a place near their
generally, in purchase specialise in only one residence.
and sale of one good, but provide all
commodity only. types of goods. (ii) The manufacturing or procurement of
merchandise for all the retail units is centralised.
Capital They require a large They require
(iii) Each retail outlet is under the direct supervision
amount of capital. comparatively less
capital. of a branch manager, who is responsible for its
day-to-day operations.
11. Explain some of the major features of departmental (iv) All branches are controlled by the head office.
The head office formulates policies and gets them
stores.
implemented.
(v) The price of the goods is fixed and sales are made on l
cash basis. Daily sales are deposited in a local bank
account and details to this regard are sent to the 1. Wholesalers play an inevitable role in the success
head office. of the manufacturers of various goods. Comment on
14. Zar is a company who have got stores all around the this statement by stating the services provided by
country. They are famous for quality clothes which the wholesalers to manufacturers.
are supplied at a not so expensive price. The Ans. The services provided by the wholesalers to
clothes are also said to be very fashionable and are manufacturers are (any six)
always in trend in the urban youth and working (i) Facilitating Large Scale Production Wholesalers
class. However, they only sell clothes manufactured collect small orders from a number of retailers and
by them and not of any other company. These pass on the pool of such orders to the manufacturers
and make purchases in bulk quantities. This enables
stores work on the instructions of head office and
the producers to undertake production on a large
have little to no motivation to sell effectively. scale.
The customers usually choose clothes themselves (ii) Bearing Risk The wholesale merchants deal in
and at times, no salesperson is involved leaving the goods in their own name, take delivery of the goods
customers all by themselves. At times, the company and keep the goods purchased in large lots in their
burns its clothes when demand trend changes warehouses. In this process, they bear risk which
rapidly and company’s large stock remains unsold. would have been borne by the manufacturer.
The above case highlights some of the (iii) Financial Assistance They provide financial
disadvantages of chain stores. Identify and explain assistance to the manufacturers as they generally
these by quoting the lines. make cash payment for the goods purchased by
Ans. Disadvantages of chain stores highlighted in the case are them.
(i) Limited Selection of Goods “However, they only (iv) Expert Advice The wholesalers are in direct contact
sell clothes manufactured by them and not of any with the retailers, therefore they can advice the
other company.” manufacturers about various aspects related to
customer’s tastes and preferences, market
Majority of the multiple shops deal only in limited conditions, etc.
range of products. For example, Reebok deals in
sportswear and foot wear. These stores do not sell (v) Help in the Marketing Function The wholesalers
products of other manufacturers. Therefore, distribute goods to a number of retailers. They in
customers visiting these stores have only selected turn, sell to a large number of customers thus,
items to choose from. helping to market the product.
(ii) Lack of Initiative ‘‘These stores work on the (vi) Facilitates Continuity The wholesalers facilitate
instructions of head office and have little to no continuity of production activity throughout the year
motivation to sell effectively.” by purchasing the goods as and when they are
produced.
The employees working in these stores work on the
instructions of the head office. Also, they do not (vii) Storage Wholesalers take delivery of goods when
stand to benefit in any way by the sales made by they are produced and keep them in their
them. So, they do not take initiative on their own. godowns/warehouses, thereby helping in storage of
goods.
(iii) Lack of Personal Touch “The customers usually
choose clothes themselves and at times, no 2. Explain any four advantages of departmental stores.
salesperson is involved leaving the customers all by Ans. The advantages of departmental stores are (any four)
themselves.” (i) Attract Large Number of Customers As these
Due to operating on a large scale and lack of stores are centrally located, therefore they attract a
initiative on the part of employees, their dealings large number of customers.
with customers lack personal touch. (ii) Convenience in Buying These stores offer a large
(iv) Loss Due to Change in Demand “At times, the variety of goods under one roof. Therefore, it is
company burns its clothes when demand trend convenient for customers to purchase goods from
changes rapidly and company’s large stock remains these stores.
unsold.” (iii) Attractive Services These stores provide extra
If the demand for the goods sold by these stores services to the customers, such as, home delivery of
change rapidly, then the management may have to goods, accepting orders through telephone and
sustain heavy losses, because of large stocks lying online, provision of rest rooms, restaurants, etc.
unsold at the central depot.
(iv) Economy of Large-scale Operations These stores are organised and managed on a large scale. Therefore, they are able
to enjoy economies of large scale operations and increase their profits.
(v) Promotion of Sales The departmental stores are in a position to spend considerable amount of money on advertising
and other promotional activities which help in boosting the sales.
3. Akbarally was the first departmental store of India. There were two full line department stores and eight
supermarkets called Mini-Akbarallys across Mumbai. This store was generating phenomenal profits upto 1990s,
but with the onset of the retail boom in 1990s and the subsequent proliferation of speciality stores, malls and
branded stores, the downward slide of Akbarally began. In 2009, not being able to sustain losses, Akbarally
closed down.
(i) What are departmental stores?
(ii) State the limitations of departmental stores which could have been the cause of Akbarally’s failure.
Ans. (i) Departmental store is a large establishment offering a wide variety of products, classified into well-defined departments.
A departmental store aims at satisfying practically all the needs of the consumers under one roof. It has a number of
departments, each one confining its activities to a specific kind of product.
(ii) Following are the limitations of departmental stores which could have been the cause of Akbarally’s failure
(a) Lack of Personal Attention Because of large scale operations, these stores are not able to give personal attention to each
and every customer.
(b) High Operating Costs Since these stores provide a number of additional services to their customers, therefore their
operating costs are also high.
(c) High Possibility of Loss These stores operate on large scale and incur high operating costs. Therefore, their exposure to
risk is also high.
(d) Inconvenient Location These stores are generally located in a central location. Customers encounter traffic problems
while visiting these stores. Also, it is not convenient for the purchase of goods that are needed at short notice.
4. Chain stores have some inherent advantages. Comment.
Ans. Chain stores exhibits following advantages (any six)
(i) Economies of Scale These stores operate on a high scale and procure the goods centrally. Therefore, they are also able
to enjoy economies of scale.
(ii) Elimination of Middlemen Through these stores, the manufacturers sell goods directly to the consumers, thus
eliminating unnecessary middlemen in the sale and purchase of goods.
(iii) No Bad Debts All the sales in these stores are made on cash. Therefore, there is no question of bad debts.
(iv) Transfer of Goods In case of lack of demand, goods from one store can be transferred to another store.
(v) Diffusion of Risk The risk is spread over a number of shops. Loss from one shop can be recovered from the profit of
another shop.
(vi) Low Cost Because of centralised purchasing, elimination of middlemen and centralised promotion of sales, chain stores
have low operational costs.
(vii) Flexibility This system offers the advantage of flexible operations. If a shop is incurring loss, then it can be closed down
or shifted to some other place, without any significant effect on the organisation.
5. Pad Chihan Limited is a large-sized company manufacturing shoes. It has to determine whether it should use
wholesalers or set up its own chain stores for distributing its products. What alternatives would you suggest?
Give reasons in support of your answer.
Ans. In the above case, we find there are two alternatives before the company
(i) To have wholesalers as middlemen. (ii) have its own multiple shops
Both the alternatives have their own merits and demerits. We suggest multiple shops are the better alternative than the
wholesalers due to following reasons
(i) Multiple shops eliminate middlemen. Hence, there is direct contact between the company and consumers. All
advantages of elimination of wholesalers can be enjoyed.
(ii) Since the company is large sized, it means company has sufficient financial resources to have its own shops. Thus, the
company is in a position to eliminate middlemen.
(iii) Company is manufacturing shoes i.e., durable consumer product, therefore, multiple shops are better alternative.
(iv) Company can approach maximum customers through its own shops. Wholesalers may not find it profitable to deal in
shoes of a new company and therefore, wholesalers will not be taking interest.
(v) Multiple shops have a better appeal to consumers. Bata Shoe Company is a good example.
In brief, we can suggest to the company that multiple shops will be the better alternative for distribution of its product-
shoes.
6. Differentiate between departmental stores and chain stores/multiple shops.

Ans. The differences between departmental stores and chain stores are
Basis Departmental Stores Chain Stores

Location A departmental store is located at a central place, where a A chain store is located at a number of places within a
large number of customers can be attracted. approach of a large number of customers. Thus, central
location is not necessary for a chain store.
Range of Departmental stores aim at satisfying all the needs of Chain stores aim to satisfy the requirements of customers
Products customers under one roof. As such, they have to maintain a relating to a specified range of products only.
variety of products of different types.
Services The departmental stores lay great emphasis on providing Chain stores provide very limited service confined to
Offered maximum service to their customers. Some of the services, guarantees and repairs if the sold out goods turn out to be
provided by them include free wi-fi, restaurant and so on. defective.
Pricing The departmental stores, however, do not have uniform Chain stores sell goods at fixed prices and maintain uniform
pricing policy for all the departments; rather they have to pricing policies for all the shops.
occasionally offer discounts on certain products and varieties
to clear their stock.
Class of The departmental stores cater to the needs of relatively high Chain stores cater to different types of customers, including
Customers income group of customers, who care more for the services those belonging to the lower income groups, who are
provided rather than the prices of the product. interested in buying quality goods at reasonable prices.
Credit Departmental stores may provide credit facilities to some of All sales in the chain stores are made strictly on cash basis.
Facilities their regular customers.
Chapter Test
1. Which of the following is not a service offered by wholesaler to manufacturer?
(a) Storage (b) Grant of credit (c) Bearing risk (d) Financial assistance
2. All the branches of chain stores are controlled by
(a) branches themselves (b) head office
(c) city office (d) general manager of each branch
3. In chain store, the …… manager sends daily reports to the head office.
(a) city (b) area (c) branch (d) region
4. Retailer is at the end of the distribution chain. Based on the demand from the consumers, retailers buy goods of
different types from various wholesalers and make them available to final consumers. By doing so retailers create
(a) place utility (b) time utility (c) profit utility (d) price utility
5. Statement I Departmental stores give high level of personal attention to all the customers.
Statement II Departmental stores are generally located in central locations.
Alternatives

1. State any three important features of lnternal trade.
2. Discuss the features of a departmental store which makes it different from other stores.
3. Differentiate between departmental stores and chain stores on following basis.
(i) Services offered (ii) Pricing (iii) Class of customers (iv) Credit facilities
4. Mention the various features of chain stores.
5. Reekob is a shoe brand operating in the world. It has got stores all over the country with wide variety of footwears. The
footwears of Reekob are known to be of premium quality and therefore, attract upper-middle-income and
upper-income segment of the society. The company manufactures these footwears and sells them directly through the
stores. The stores also have the policy that when certain SKUs are not available in one store, they are transferred by the
other store. The company remains fairly with positive cash flow as some or the other stores are generating good profits
for the company. Identify and explain the advantages of the chain stores by quoting the lines.
1. KKK is a departmental store in the city of Mumbai. The store has 5 different sections for five different items Food &
Beverages, books & accessories, personal care, health care and kids’ zone. Because of multiple sections, it experiences a
large footfall during all the working hours. Store has the facility of home delivery and even accepts the orders in the
online mode. But because of all these services and facilities, it has got very high operational cost due to which the
profits are hampered. However, it has always been compensated by good foot fall but recently it has faced decrease in
number of people coming in. Fortunately, the departmental store is in a position to spend considerable amount of
money on advertising and other promotional activities to boost the sales. But this comes with a slight factor that due to
large footfall, the store is not able to give personal attention to each and every customer. So to improve the services,
they decided to take feedback from the customers through a feedback form. In the time, it was reflected by the
customers that they would like a parking facility near the store because the store is located in an area of heavy traffic
which makes it difficult for them to park on the roadside.
The passage above highlights some of the advantages and disadvantages of departmental stores. Identify three
advantages and three disadvantages each by quoting the lines.
2. Wholesalers not only provide services to the retailers but also to the manufacturers. In the light of the statement,
explain the services provided by the wholesalers to the manufacturers.
Answers
Multiple Choice Questions For Detailed Solutions
1. (b) 2. (b) 3. (c) 4. (a) 5. (b) Scan the code
CHAPTER 04
International
Business
In this Chapter...
l Meaning of International Business
l Advantages of International Business
such as labour, capital and raw materials, needed for

Meaning of producing different goods and services.
3. Specialisation of Products Many countries specialise in
International Business the production of certain goods and services for which
Manufacturing and trading beyond the boundaries of one’s they have some advantages such as suitable climatic
own country is known as international business. It can be conditions, technical know how, high labour
defined as those business activities that take place across the productivity, etc.
national frontiers. It involves not only the international 4. Benefits of Cost Cost of production differ in different
movement of goods and services, but also of capital, countries due to different socio-economic, political and
personnel, technology and intellectual property like patents, geographical conditions. Many of the countries are in a
trademarks, copyright, etc. better position to produce some goods more
International trade is the component of international economically than other countries. Thus, companies
business. It comprises of buying and selling of goods and engage in international business so as to import
services beyond the geographical borders of the country. It is available resources from other countries at lower prices
also referred to as ‘foreign trade’ or ‘external trade’. It can and export goods on which they can fetch better prices.
also be understood as exchange of goods and services
between residents of different countries. It involves the use
of foreign exchange to discharge trade obligations. Advantages of
International Business
Reasons for International Business International business is advantageous to both nations as well
Following are the for internatinal business as business firms.
1. Uneven Distribution of Natural Resources All the
countries cannot produce equally or cheaply becauses of Advantages to Nations
uneven distribution of natural resources among them as 1. Earning of Foreign Exchange International business
well as differences in their productivity levels. Thus, helps countries to earn foreign exchange. This helps a
contries exchange their surplus production with goods country to import capital goods, technology, petroleum
that they are in short supply in their country. products and fertilizers, pharmaceutical products and
2. Factors of Production Availability Each country differ other consumer products which otherwise might not be
in terms of availability of various factors of production available domestically.
2. More Efficient Use of Resources Since, countries tend to produce goods in which they have a comparative advantage,
wasteful duplication of resources is prevented and they end up producing more. Thus, countries export surplus
production of such goods to import those goods in which other countries have specialisation. It facilitates more efficient
and optimum use of resources.
3. Improving Growth Prospects and Employment Potential International business improves the growth prospects of
many countries, especially the developing ones as firms can raise their production capacity and export surplus output to
foreign countries. Also, many countries follow the principle ‘export and flourish’ and improve their growth prospects,
thereby, creating employment opportunities for their citizens.
4. Increased Standard of Living International business helps people of a country to have access to a large variety of
goods and services. This helps them to improve their standard of living.
Advantages to Firms
1. Prospects for Higher Profits When prices in the domestic market are low, firms can earn more profits by selling their
products in those countries in which prices are high.
2. Increased Capacity Utilisation Many business and industrial enterprises have unused capacity, that can be efficiently
utilised for further production. Thus, surplus production can be used to generate extra profits from foreign trade.
3. Prospects for Growth When the domestic demand for a firm’s product or service start getting saturated in the
domestic market, then firms can considerably improve prospects of their growth by venturing out in the international
market.
4. Way Out to Intense Competition in Domestic Market Highly competitive domestic market drives many companies to
go international in search of markets for their products.
5. Improved Business Vision Most enterprises have an urge to grow, to become more competitive, to diversify and derive
the benefits of going global through international trade.
Difference between Domestic and International Business
Basis Domestic Business International Business

Nationality of Buyers People or organisations from one nation People or organisations of different countries
and Sellers participate in domestic business transactions. participate in international business transactions.
Nationality of Other Various other stakeholders such as suppliers, Various other stakeholders such as suppliers,
Stakeholders employees, middlemen, shareholders and employees, middlemen, shareholders and
partners are usually citizens of the same partners are from different nations.
country.
Mobility of Factors of The degree of mobility of factors of production The degree of mobility of factors of production like
Production like labour and capital is relatively more labour and capital across nations is relatively less.
within a country.
Customer Domestic markets are relatively more International markets lack homogeneity due to
Heterogeneity across homogeneous in nature. differences in language, preferences, customs,
Markets etc., across markets.
Differences in Business Business systems and practices are relatively Business systems and practices vary considerably
Systems and Practices more homogeneous within a country. across countries.
Political System and Domestic business is subject to political Different countries have different forms of political
Risks system and risks of one single country. systems and different degrees of risks which often
become a barrier to international business.
Business Regulations Domestic business is subject to rules, laws and International business transactions are subject to
and Policies policies, taxation system, etc., of a single rules, laws and policies, tariffs and quotas, etc. of
country. multiple countries.
Currency used in Currency of domestic country is used. International business transactions involve use of
Business Transactions currencies of more than one country.
Chapter
Practice
6. Cost of production differ in different countries due
PART 1 to …….. factor.
Objective Questions (a) Socio-economic
(c) Geographical
(b) Political
(d) All of these
Ans. (d) All of these
l
7. Labour, capital and ……. are the factors of
1. The basic problem faced by those engaged in production whose availability differs from country
international trade is ‘different countries have to country.
different currencies’. In order to resolve this issue, (a) Tools (b) Entrepreneurs
which currency is considered as the most popular (c) Raw material (d) All of these
currency in international trade? Ans. (c) Raw material
(a) US Dollars (b) UK Euro
(c) Japanese Yen (d) Indian Rupee
8. Which type of domestic markets drive companies
to go international in search of new markets for
Ans. (a) US Dollars
their products?
2. International trade requires movement of goods (a) Monopolistic markets
across the boundaries of a nation. Which of the (b) Highly competitive markets
following is the cheapest mode of transporting (c) Oligopoly
goods to longer distances? (d) Monopoly
(a) Road (b) Rail Ans. (b) Due to highly competitive domestic market, there is
(c) Ships (d) Air not much of a scope left for growth in the domestic
Ans. (c) Ships market. Therefore, many companies tend to go
international in search of new markets for their products.
3. International business involves ……… degree of
risk. 9. International trade should be done with extreme
(a) low caution as it may lead to …… use of natural
(b) moderate resources, which may make a country poor by
(c) high depleting its natural resources.
(d) Can’t be determined (a) extensive (b) intensive
Ans. (c) high (c) moderate (d) regressive
Ans. (b) International trade may make nations greedy for
4. In case of international business, there is a wide growth and development which may cause them to use
time gap between order and ….. of goods. their natural resources intensively. This makes nations
(a) demand (b) supply poor in the long run by depleting its natural resources.
(c) trade (d) exchange
Ans. (b) supply
10. International trade has its own advantages and
disadvantages. Which of the following is not an
5. The fundamental reason behind international area which puts international trade at
business is that the countries cannot produce all disadvantageous position?
the goods that they need, with respect to (a) Language
(a) quality (b) cost (b) Time involved
(c) Both (a) and (b) (d) None of these (c) Intensive use of natural resources
Ans. (c) Both (a) and (b) (d) Capacity utilisation
Ans. (d) Capacity utilisation
11. International trade is advantageous to l

Assertion–Reasoning MCQs
(a) nations (b) firms Directions (Q.Nos. 1-3) There are two statements marked as
(c) Both (a) and (b) (d) None of these Assertion (A) and Reason (R). Read the statements and choose
Ans. (c) Both (a) and (b) the appropriate option from the options given below.
12. Which of these is an advantage of international (a) Both Assertion (A) and Reason (R) are true and Reason
(R) is the correct explanation of Assertion (A).
business to the nation?
(b) Both Assertion (A) and Reason (R) are true, but Reason
(a) Better Utilisation of Resources (R) is the not the correct explanation of Assertion (A).
(b) Prospects for Higher Profits (c) Assertion (A) is false, but Reason (R) is true.
(c) Way Out to Intense Competition in Domestic Market (d) Assertion (A) is true, but Reason (R) is false.
(d) All of these
Ans. (a) Better Utilisation of Resources
1. Assertion (A) International trade helps in speeding
up the industrialisation of a country.
13. Statement I The degree of mobility of factors of Reason (R) Developing countries export scarce raw
production like labour and capital across nations is materials and capital goods and advanced
relatively less. technology required for rapid industrial
Statement II Domestic markets are relatively less development.
homogeneous in nature as compared to Ans. (d) Developing countries import scarce raw materials and
international markets. capital goods and advanced technology required for rapid
Alternatives industrial development.
(a) Statement I is correct and Statement II is wrong 2. Assertion (A) International trade helps people to
(b) Statement II is correct and Statement I is wrong improve their standard of living.
(d) Both the statements are incorrect Reason (R) International trade helps people of a
country to have access to a large variety of goods
Ans. (a) Domestic markets are relatively more homogeneous
in nature as compared to international markets. and services.
14. Statement I In international business, there is use (R) is the correct explanation of Assertion (A).
of domestic currency.
3. Assertion (A) Imports enable the country to ensure
Statement II Business systems and practices vary its sovereignty and territorial integrity.
considerably across countries. Reason (R) A country can import food grains and
Alternatives other essential commodities to prevent starvation.
(a) Statement I is correct and Statement II is wrong
Ans. (d) Countries import equipment for its armed forces–
(b) Statement II is correct and Statement I is wrong Army, Air Force and Navy which enable them to ensure
(c) Both the statements are correct sovereignty and territorial integrity.
Ans. (b) In international business, there is use of foreign l
Case Based MCQs
currencies.
1. Direction Read the following text and answer
15. Statement I A large number of domestic firms in question no. (i) to (vi) on the basis of the same.
India found it very difficult to compete in the Aman Woollen Ltd. a leading woollen items
world market. manufacturing company established 20 years ago by
Statement II In International business, various Aman, is well-known for its quality goods and
other stakeholders such as suppliers, employees, consumers have high brand loyalty for its products
middlemen, shareholders and partners are from especially shawls. The company was doing very well
different nations. but due to riots, terrorism, unrest in the area for
Alternatives past 10 years their sales are consistently slashing
(a) Statement I is correct and Statement II is wrong down. To solve this problem, the marketing manager
(b) Statement II is correct and Statement I is wrong of the company suggested to explore the possibility
(c) Both the statements are correct of going international and to appoint wholesalers
(d) Both the statements are incorrect country wide. The financial manager supported his
Ans. (c) Both the statements are correct suggestion and informed that government is also
providing subsidies and technical and marketing
support to such export-oriented industries as (vi) Which benefit of international trade to firm is
international trade offers many benefits to the highlighted in the line, “They also believe that in
nation. They also believe that in other countries other countries they would be able to charge more
they would be able to charge more price than they price than they are currently charging. This will
are currently charging. This will lead to better lead to better business strength”?
business strength. (a) Improved Business Vision
(b) Increased Capacity Utilisation
(i) Which of the following is not the benefit of foreign
(c) Prospects for Growth
trade to a nation?
(d) Prospects for Higher Profits
(a) Economic growth
Ans. (d) Prospects for Higher Profits
(b) Earning of foreign exchange
(c) Higher profits 2. Direction Read the following text and answer
(d) Price stability question no. (i) to (vi) on the basis of the same.
Ans. (d) Price stability When the Indian economy opened in 1991, Harsha
(ii) A wholesaler helps a manufacturer to enjoy decided to take advantage of the same and start a
economies of scale by business at an international level. He is very good
(a) providing him market information in making paper crafts and decided to monetise the
(b) providing orders same. He made lot of such crafts and sold them in
(c) bearing risk the foreign countries. He hired few like-minded
(d) providing financial support people and started a small firm.
Ans. (b) providing orders By following the same practice of selling
(iii) International trade offers many benefits to the high-quality paper crafts in international markets,
nation, one such benefit is that it provides a way the firm earned lot of revenue. Firm started to cater
out to intense competition in domestic market, to more clients and at a larger level production,
which implies costs declined.
(a) winding up internal business People in other countries who would like these
(b) doing international business kinds of products but can’t purchase due to
(c) doing technological upgradation unavailability are also helped by this kind of
(d) promotion of goods and services trade.
Ans. (b) doing international business These people will have access to these products
(iv) International business includes which among the and can use for their home décor and even to ease
following? out some of their tasks. This practice of selling in
(a) Merchandise and service exports and imports foreign market further helped the firm to increase
(b) Licensing and franchising the business when the domestic. In the process, the
(c) Foreign investments firm also achieved maximum utilization of the
(d) All of the above human resources and other small machines who
Ans. (d) All of the above
earlier used to be working at below maximum
production levels.
(v) In international trade, when prices in the domestic
market are low, firms cannot earn more profits by (i) Which advantage of international trade (to nation)
selling their products in those countries in which is highlighted in the line, “He hired few
prices are high. like-minded people and started a small firm.”?
(a) True (b) False (a) Earning of foreign exchange
(c) Partially true (d) None of these (b) Better utilisation of resources
Ans. (b) When prices in the domestic market are low, firms (c) Improving growth prospects and employment potential
can earn more profits by selling their products in those (d) Increased standard of living
countries in which prices are high. This is one of the Ans. (c) Improving growth prospects and employment
benefits of international trade to the firms. potential
(ii) Which advantage of international trade (to firms) is

highlighted in the line, “By following the same
practice of selling high-quality paper crafts in
PART 2
international markets, the firm earned lot of
revenue.”?
Subjective Questions
(a) Prospects for higher profits
(b) Way out to intense competition in domestic market
l
(c) Increased capacity utilisation 1. What do you mean by international trade? Explain
(d) Improved business vision in brief. Also, how are transactions related to
Ans. (a) Prospects for higher profits international trade settled?
(iii) Which advantage of international trade (to nation) Ans. International trade is the component of international
is highlighted in the line, “People in other business. It comprises of buying and selling of goods and
services beyond the geographical borders of the country.
countries who would like these kinds of products
It involves not only the international movement of goods
but can’t purchase due to unavailability are also and services, but also of capital, personnel, technology
helped by this kind of trade.”? and intellectual property like patents, trademarks,
(a) Speed-up industrialisation copyright, etc. It is also referred to as ‘foreign trade’ or
(b) Meet consumer demand ‘external trade’. It can also be understood as exchange of
(c) Overcome famine goods and services between residents of different
(d) Ensure national defense countries. It involves the use of foreign exchange to
Ans. (b) Meet consumer demand discharge trade obligations and settle the transactions.
(iv) Which advantage of international business (to 2. Patel Ltd. is a reputed company in the field of
nations) is highlighted in the line, “These people garments manufacturing in India. The company
will have access to these products and can use for manufactures superior quality products. But the
their home décor and even to ease out some of management is worried about its future prospects.
their tasks.”? The company is facing certain problems
(a) Earning of foreign exchange (a) The domestic prices of its garments are low.
(b) Better utilisation of resources (b) Under-utilisation of capacity.
(c) Improving growth prospects and employment (c) Demand for garments is saturated in domestic
potential market.
(d) Increased standard of living
A meeting is called by the BoD to discuss the matter.
Ans. (b) Increased standard of living The members arrived at a conclusion that
(v) Which advantage of international business (to firm) internationalisation of business is the final solution to
is highlighted in the line, “This practice of selling the problems faced by the company. Such internation-
in foreign market further helped the firm to alisation will result in the benefits to the company.
increase the business when the domestic.”? The company believes in assuming social
(a) Prospects for higher profits responsibility. Hence, it also favoured
(b) Increased capacity utilisation ‘internationalisation of business’ as it will also lead
(c) Prospects for growth to benefits for the question’s nation. On the basis of
(d) Improved business vision above case, answer the following questions
Ans. (c) Prospects for growth (i) Define international business.
(vi) Which advantage of international business (to firm) (ii) Write any one benefit of international business
is highlighted in the line, “In the process, the firm each to the nation and firm.
also achieved maximum utilisation of the human Ans. (i) Manufacturing and trading beyond the boundaries of
resources and other small machines who earlier one’s own country is known as international or
used to be working at below maximum production external business.
levels.”? (ii) One benefit of international business to the nation is
(a) Prospects for higher profits Earning of Foreign Exchange International
(b) Increased capacity utilisation business helps a country to earn foreign exchange
(c) Prospects for growth which can be used to import capital goods,
(d) Improved business vision technology, petroleum products, etc. which are not
available in the country or are relatively costlier if
Ans. (b) Increased capacity utilisation
produced domestically.
One benefit of international business to the firm is Basis Domestic Business International Business
Higher Profits Generally, international business is
more beneficial than the domestic business. When Political Domestic business is Different countries have
System and subject to political different forms of
the domestic prices are not satisfactory, business
Risks system and risks of political systems and
firms can earn more profits by selling their products one single country. different degrees of risks
in the international markets where prices are higher. which often become a
3. Foreign trade does not only help the barrier to international
business.
macroeconomic variables and national economies
at large but also firms importing and exporting Business Domestic business is International business
goods and services. With reference to the Regulations subject to rules, laws transactions are subject
and Policies and policies, taxation to rules, laws and
statement, explain the benefits of international system, etc., of a policies, tariffs and
trade to the firms. single country. quotas, etc. of multiple
Ans. Following are the benefits of international trade to the firms countries.
(i) Improved Business Vision Most enterprises have an
urge to grow, to become more competitive, to l
diversify and derive the benefits of going global
through international trade. 1. What are the reasons for growing popularity of
(ii) Prospects for Growth When the domestic demand international trade in the modern times?
for a firm’s products or services start getting Ans. The reasons for the growing popularity of international
saturated in the domestic market, then firms can trade are
considerably improve prospects of their growth by (i) Natural Resources are Unevenly Distributed The
venturing out in the international market. natural resources are unevenly distributed
(iii) Way Out to Intense Competition in Domestic throughout the world. Some countries are rich in
Market Highly competitive domestic market drives certain resources while other countries in certain
many companies to go international in search of other resources. The countries produce goods
markets for their products. according to the availability of naturally occurring
(iv) Increased Capacity Utilisation Many business and resources and then sell these to other countries.
industrial enterprises have unused capacity, that can They also buy the goods produced by some other
be efficiently utilised for further production. Thus, country, as per their need.
surplus production can be used to generate extra (ii) Availability of Factors of Production Factors of
profits from foreign trade. production, viz. land, labour and capital differ from
country to country. Because of this, different
4. Differentiate between domestic and international countries produce different goods and then trade
business on the following basis amongst themselves.
(i) Nationality of buyers and sellers (iii) Specialisation Certain countries specialise in the
(ii) Nationality of other shareholders production of certain specific goods. e.g., India
(iii) Political system and risks specialises in the production of handicrafts. So,
(iv) Business regulations and policies handicraft goods are exported from India.
Ans. Difference between Domestic and International Business (iv) Cost Benefits The cost of production of goods and
services differ from country to country due to
Basis Domestic Business International Business difference in geographical, socio-economical and
Nationality People or People or organisations political environment. Some countries can produce
of Buyers organisations from of different countries goods economically as compared to other countries,
and Sellers one nation participate in thus leading to international trade. For example,
participate in international business China can produce electronic goods cheaply.
domestic business transactions. Because of this, other countries import electronic
transactions. goods from China.
Nationality Various other Various other 2. International business has entered into a new era
of other stakeholders such as stakeholders such as of reforms. India too did not remain cut-off from
Stakeholders suppliers, employees, suppliers, employees,
middlemen, middlemen,
these developments. India was under a severe debt
shareholders and shareholders and trap and was facing crippling balance of payment
partners are usually partners are from crisis. In 1991, it approached the International
citizens of the same different nations. Monetary Fund (IMF) for raising funds to tide over
country. its balance of payment deficits. IMF agreed to lend
money to India subject to the condition that India Ans. (i) Globalisation means integration of the economy of
would undergo structural changes to be able to the country with the world economy.
ensure repayment of borrowed funds. India had no Liberalisation means freedom from government
alternative but to agree to the proposal. It was the regulations in a country to allow for private sector
very conditions imposed by IMF which more or companies to operate business transactions with
less forced India to liberalise its economic policies. fewer restrictions.
Since then a fairly large amount of liberalisation at (ii) Yes, I think that encouraging international trade is
the economic front has taken place. Though the beneficial for the country. It provides following
process or reforms have somewhat slowed down, benefits to a nation
India is very much on the path to globalisation and (a) Earning of Foreign Exchange International trade
helps countries to earn foreign exchange. This helps
integrating with the world economy. a country to import those goods and services which
While, on the one hand, many Multinational it cannot produce efficiently.
Corporations (MNCs) have ventured into Indian (b) Better Utilisation of Resources Since, countries tend
market for selling their products and services. to produce goods in which they have a comparative
Many Indian companies too have stepped out of advantage, wasteful duplication of resources is
the country to market their products and services prevented and they end up producing more.
to consumers in foreign countries. (c) Improving Growth Prospects and Employment
Potential Many countries follow the principle
(i) As per the given case, what do you understand ‘export and flourish’ and improve their growth
by ‘globalisation’ and ‘liberalisation’? prospects, thereby, creating employment
(ii) IMF forced India to make structural changes so opportunities for their citizens.
that international trade is encouraged. Do you (d) Increased Standard of Living International trade
helps people of a country to have access to a large
think that encouraging international trade is
variety of goods and services. This helps them to
good for the country? (NCERT) improve their standard of living.
Chapter Test
1. Many countries follow the principle ……. and improve their growth prospects, thereby, creating employment
opportunities for their citizens.
(a) import and earn (b) export and earn (c) import and flourish (d) export and flourish
2. Pick the odd one out
(a) International trade (b) Import trade (c) Foreign trade (d) External trade
3. In International business, the degree of mobility of factors of production like labour and capital across nations is
relatively ….. .
(a) equal (b) less (d) high (d) can’t be determined
4. Statement I Countries exchange their surplus production with goods that they are in excess supply in their country.
Statement II Companies engage in international business so as to import available resources from other countries at
higher prices and export goods on which they can fetch better prices.
Alternatives

1. How does international trade help in stabilising the prices of a product?
2. How does international trade help nations to improve on economic variables such as employment, foreign exchange
and efficient utilisation of resources?
3. Tourism and transportation have emerged as major components of international trade in services. Most of the airlines,
shipping companies, travel agencies and hotels get their major share of revenues from their overseas customers and
operations abroad. Several countries have come to heavily depend on services as an important source of foreign
exchange earnings and employment. India, for example, earns a sizeable amount of foreign exchange from exports of
services related to travel and tourism.
Business services When one country provides services to other country and in the process earns foreign exchange, this
is also treated as a form of international business activity. Fee received for services like banking, insurance, rentals,
engineering and management services form part of country’s foreign exchange earnings. Undertaking of construction
projects in foreign countries is also an example of export of business services. The other examples of such services
include overseas management contracts where arrangements are made by one company of a country which provides
personnel to perform general or specialised management functions for another company in a foreign country in lieu of
the other country. (NCERT)
(i) Is international trade related to only goods?
(ii) Enumerate the different services which are traded internationally.
4. Mention any four points that differentiate domestic business from international business.
1. What do you mean by International trade? How does it help the firms?
2. International trade helps the world at a larger level. For instance, country X produces certain grains more than anywhere
else in the world because of nutrients present in its soil. It produces so much that even after self-consumption in
country, they have some quantity left so they export to countries where there is shortage of those grains. This also
helps in creating harmony and cooperation between the countries. With increasing demand for these high-quality
grains all over the world, the country started to produce at larger level by making utilisation of resources better.
Consequently, lot of people got involved in production and export of such grains leading to overall prosperity levels in
the country.
Identify and state the objectives of international trade highlighted in the passage by quoting the lines.
Answers
Multiple Choice Questions For Detailed Solutions
1. (d) 2. (b) 3. (b) 4. (d) Scan the code
Business Studies
Class 11th ( Term II )
Practice Paper 1 *
(Solved)
Instructions Time : 2 Hours
Max. Marks : 40
1. The question paper contains three sections A, B and C.
2. Section A has Case Based Question, which has 5 MCQs, each question carrying 1 mark. .
3. Section B has 5 Short Answer Type Questions, each question carrying 3 marks.
4. Section C has 4 Long Answer Type Questions, each question carrying 5 marks.
5. There is no overall choice. However, internal choices have been provided in some questions. Student have to attempt
only one of the alternatives in such questions.
* As exact Blue-print and Pattern for CBSE Term II exams is not released yet. So the pattern of this
paper is designed by the author on the basis of trend of past CBSE Papers. Students are advised
not to consider the pattern of this paper as official, it is just for practice purpose.
Section A
This section consists of 5 MCQs based on a case study
Case Based MCQs (1 × 5 = 5 Marks)
PT and Sons is a shop in Chennai, Tamil Nadu. It purchases relatively small quantity of goods from
different wholesalers and sell them to ultimate consumers. PT and Sons remain in direct and constant
touch with the buyers, so they give important market information about the tastes, preferences and
attitudes of customers to the wholesalers. It is also famous for keeping stock of a variety of products.
This enables the consumers to make their choice. Over the time, its sales increased and it has got lot of
capital. So, the owners decided to invest this capital and start trading the products in International
markets as well. They believe that they will procure goods in which they have a comparative advantage,
similarly manufacturers will produce goods in which they have comparative advantage and wasteful
duplication of resources will be prevented. PT and Sons is known to have supreme quality of products
which are not available in International markets. Through this international trade, countries will get
access to a large variety of goods of PT and Sons.
1. In which type of internal trade, PT and Sons is involved in?
(a) Wholesale Trade (b) Retail Trade (c) Both of these (d) None of these
2. Which service of retailers to wholesalers is highlighted in the line, “PT and Sons remain in direct and
constant touch with the buyers, so they give important market information about the tastes, preferences and
attitudes of customers to the wholesalers.”?
(a) Collecting Market Information (b) Help in Distribution of Goods
(c) Help in Promotion (d) Enabling Large-scale Operations
3. Which service of retailers to consumers is highlighted in the line, “It is also famous for keeping stock of a
variety of products. This enables the consumers to make their choice.”?
(a) Wide Selection (b) New Products Information
(c) Regular Availability of Products (d) After Sale Services
4. Which advantage of international trade to nation is highlighted in the line, “They believe that they will
procure goods in which they have a comparative advantage, similarly manufacturers will produce goods in
which they have comparative advantage and wasteful duplication of resources will be prevented.”?
(a) Earning of Foreign Exchange
(b) Better Utilisation of Resources
(c) Improving Growth Prospects and Employment Potential
(d) Increased Standard of Living
5. Which advantage of international trade to nation is highlighted in the line, “Through this international
trade, countries will get access to a large variety of goods of PT and Sons.”?
(a) Earning of Foreign Exchange
(b) Better Utilisation of Resources
(c) Improving Growth Prospects and Employment Potential
(d) Increased Standard of Living
Section B
This section consists of 5 questions of short answer type.
Short Answer Type Questions (3 Marks)
6. Glenn started his firm manufacturing textiles in a small city in Gujarat. It was a small firm which
manufactured gloves and socks. Majority of the work was done by hands. As the demand for his
goods increased, he decided to purchase small machines. However, he found that he was short of
capital. He pondered and approached an organisation which helped him to get supplies of imported
machines on hire-purchase schemes. Identify the institutional support highlighted here and state its
other functions.
7. Mention any three points of difference between American Depository Receipts (ADRs) and Global
Depository Receipts (GDRs).
Or
What is the meaning of trade credit? Also, explain the factors on which trade credit depends upon.
8. How do Small Scale industries help in supply of various goods and involve low cost of production?
9. Retained earnings means that part of trading profits which are not distributed in the form of dividends,
but retained by directors for future expansion of the company. In the light of statement, write any three
merits and three demerits of retained earnings.
Or
The financial needs of the business can be categorised into fixed capital requirements and working capital
requirements. Write the meaning and two features of both fixed capital requirements and working capital
requirements.
10. For a developing economy like India, there is a desperate need of entrepreneurship development. Why?
Or
Intellectual property rights are the intellectuals emerged from the human mind and the legal right on
these human intellects. In the light of the statement, explain the importance of Intellectual rights in
detail.
Section C
This section consists of 4 questions of long answer type.
Long Answer Type Questions (5 Marks)
11. Commercial banks such as State Bank of India (SBI), Canara Bank, etc, advance money to the
business firms for different purposes and different time periods. What are the merits and demerits of
such finance?
Or
The government has established a number of financial institutions all over the country to provide finance
to business organisations. These institutions are established by the Central as well as State Governments.
What are the merits and demerits of such finance?
12. Beauty House is a wholesaler in Meerut district of Uttar Pradesh dealing in Beauty products. It purchases
products from multiple manufacturers and make them available to retailers. Since, the orders are of
big-ticket size, at times, it allows the retailers to take goods on pay later basis. It even takes some
advertising and promotional events to increase the secondary and tertiary sale in the market. It also
inform the retailers about various new products, schemes and qualities of these products.
The given text talks about multiple services offered by wholesalers to retailers. Highlighting the lines,
identify and explain any three those services.
13. AMCD stores try to maximise customer satisfaction by providing additional facilities such as restaurants,
travel and information bureau, free wi-fi zone, kids zone, rest rooms, etc. Identify the type of store and
explain its advantages.
Or
OPQR stores have got many stores in the country. The price of the goods is fixed and sales are made on
cash basis. Daily sales are deposited in a local bank account and details to this regard are sent to the head
office. Identify the type of stores and explain its advantages.
14. Differentiate between domestic business and international business on any five basis.
Or
What do you understand by the term international business. State any three of its advantages to the firm.
Answers
1. (b) Retail Trade
2. (a) Collecting Market Information
3. (a) Wide Selection
4. (b) Better Utilisation of Resources
5. (d) Increased Standard of Living
6. The institutional support highlighted here is National Small Industries Corporation (NSIC).
The functions are
(i) It launches various schemes and extends support to help small scale entrepreneurs.
(ii) It exports the product of small units and help to establish their credit worthiness.
(iii) It helps in upgradation of technology.
(iv) It provides mentoring and advisory services.
(v) It serves as technology business incubator.
(vi) It develops software technology parks and technology transfer centres.
7. The following differences are observed between the two stated instruments
(i) American Depository Receipts (ADR) can be bought and sold only in America, whereas Global Depository
Receipts (GDR) can be bought and sold in many international markets.
(ii) Issue of ADRs require strict disclosure requirements, whereas issue of GDRs do not require strict disclosure
requirements.
(iii) ADRs are more liquid, whereas GDRs are less liquid.
Or
Trade credit facilitates the purchase of supplies and raw material without immediate payment. Such credit appears in
the accounts of the buyer of goods as sundry creditors or accounts payable. It is commonly used by business
organisation as a source of short-term financing.
The amount and period of trade credit depends on the following factors
(i) Goodwill or reputation of the purchasing firm.
(ii) The amount of purchases made.
(iii) Past record of the buyer and his financial position. Also, the terms to trade credit may vary from industry to
industry and person to person.
8. Small scale industries justify the mentioned qualities as follows
(i) Supply Variety of Products Small industries in our country supply enormous variety of products which include
goods of mass consumption such as readymade garments, hosiery goods, stationery items, soaps and detergents,
domestic utensils, etc. Sophisticated goods such as electrical goods, engineering goods, drugs, etc are also
manufactured by these industries.
(ii) Low Cost of Production They also enjoy the advantage of low cost of production. This is because the
establishment and running costs are minimal. Locally available resources are also less expensive. Due to lower
cost of production, they have competitive strength.
9. Merits of Retained Earnings are
(i) Retained earnings are permanent source of funds for an organisation.
(ii) Retained earnings do not involve any explicit cost in the form of interest, dividend or floatation cost.
(iii) This source offers a greater degree of operational freedom and flexibility.
Demerits of Retained Earnings are
(i) Excessive ploughing back may cause dissatisfaction amongst the shareholders, as they would get lower dividends.
(ii) As the profits of business are fluctuating, it is an uncertain source of fund.
(iii) Firms do not recognise the opportunity cost associated with this source, leading to sub-optimal use of funds.
Or
The amount which is required to purchase fixed assets is known as fixed capital requirements of the enterprise.
Features of fixed capital requirements are(any two)
(i) Fixed capital requirements are more for a manufacturing firm as compared to a trading firm.
(ii) Fixed capital requirements are more for a business operating on a large scale.
(iii) Fixed capital requirements should be financed through long-term sources of finance.
The amount required to meet these needs is known as the working capital requirements of the business. Features of
working capital requirements are (any two)
(i) The shorter the operating cycle, the lesser will be the amount of working capital required and vice-versa.
(ii) Working capital requirements are generally met through short-term sources of finance.
(iii) Working capital requirement for a business selling goods on credit or having slow sales turnover is more than
otherwise.
10. Need of entrepreneurship development arises due to the following reasons
(i) More Utilisation of Natural Resources It enables the economy to utilise and explore the abundant of natural
resources.
(ii) Economic Growth and Development It provides the base of industrialisation in economy which is the main
cause of economic growth and economic development
(iii) Capital Formation It encourages the establishment of new industries in economy which increase the capital
formation rate in country.
(iv) Development of Backward and Tribal Areas It leads to scattering of economic activities in all areas of the
country.
Or
Importance of Intellectual Property Rights is
(i) Exclusive right on the use of IP is the biggest motivation behind creation of intellectual property.
(ii) Customers get improved goods and services due to IPR.
(iii) Entrepreneurs are enabled to earn more revenue due to IPR.
(iv) It is cost saving mechanism for society through effectively utilisation of resources.
11. Merits of commercial institutions are
(i) Banks provide timely assistance to business by providing funds as and when needed.
(ii) Secrecy of business can be maintained as the information supplied to the bank by the borrowers is kept
confidential.
(iii) Formalities such as issue of prospectus and underwriting are not required for raising loans from a bank. This,
therefore, is an easier source of funds.
Demerits of commercial institutions are
(i) Funds are generally available for short periods and its extension or renewal is uncertain and difficult.
(ii) Banks make detailed investigation of the company’s affairs, financial structure, etc. This makes the procedure of
obtaining funds slightly difficult.
(iii) In some cases, difficult terms and conditions are imposed by banks for the grant of loan.
Or
Merits of financial institutions are
(i) Financial institutions provide long-term finance that is not provided by the commercial banks.
(ii) These institutes not only provide funds but also extend technical and managerial support to business firms.
(iii) Only a promising and sound business is able to get a loan from these institutions. So, if a firm gets a loan from
these institutes, then this will also help in raising the goodwill of the borrowing company in the capital market.
Demerits of financial institutions are
(i) Too many formalities are required by these institutes to grant a loan.
(ii) Restrictions are imposed by these institutes on companies such as restrictions on the payment of dividends or
restrictions on the autonomy of management.
(iii) Generally, the financial institutions have their nominees in the Board of Directors of the borrowed company. This
restricts their powers and the borrowed companies feel helpless in certain cases.
12. Following services are highlighted in the case (any three)
(i) Availability of Goods The wholesalers make the products of various manufacturers readily available to the
retailers. Because of this, the retailers are able to offer a variety of goods to their customers.
Line “ It purchases products from multiple manufacturers and make them available to retailers.”
(ii) Marketing Support The wholesalers perform various marketing functions such as advertisement and other sales
promotional activities to induce customers to purchase the goods. This increases the demand of the products
which results in increased profits for the retailer.
Line “It even takes some advertising and promotional events to increase the secondary and tertiary sale in the
market.”
(iii) Grant of Credit The wholesalers generally extend credit facilities to retailers. This enables them to manage their
business with relatively small amount of working capital.
Line “Since, the orders are of big-ticket size, at times, it allows the retailers to take goods on pay later basis”
(iv) Specialised Knowledge The wholesalers specialise in one line production. They inform the retailers about the
new products, their uses, quality, prices, etc.
Line “They also inform the retailers about various new products, schemes and qualities of these products.”
13. The type of store mentioned is departmental stores. Its advantages are
(i) Attract Large Number of Customers As these stores are centrally located, therefore they attract a large number
of customers.
(ii) Convenience in Buying These stores offer a large variety of goods under one roof. Therefore, it is convenient for
customers to purchase goods from these stores.
(iii) Attractive Services These stores provide extra services to the customers, such as, home delivery of goods,
accepting orders through telephone and online, provision of rest rooms, restaurants, etc.
(iv) Economy of Large-scale Operations These stores are organised and managed on a large scale. Therefore, they
are able to enjoy economies of large scale operations and increase their profits.
(v) Promotion of Sales The departmental stores are in a position to spend considerable amount of money on
advertising and other promotional activities which help in boosting the sales.
Or
The type of store mentioned is Chain stores. Its advantages are (any five)
(i) Economies of Scale These stores also operate on a high scale and procure the goods centrally. Therefore, they are
also able to enjoy economies of scale.
(ii) Elimination of Middlemen Through these stores, the manufacturers sells goods directly to the consumers, thus
eliminating unnecessary middlemen in the sale and purchase of goods.
(iii) No Bad Debts All the sales in these stores are made in cash. Therefore, there is no question of bad debts.
(iv) Transfer of Goods In case of lack of demand, goods from one store can be transferred to another store.
(v) Diffusion of Risk The risk is spread over a number of shops. Loss from one shop can be recovered from the profit
of another shop.
(vi) Low Cost Because of centralised purchasing, elimination of middlemen and centralised promotion of sales, chain
stores have low operational costs.
14. Difference between domestic business and international business is as follows (Any five)
Basis Domestic Business International Business
Nationality of People or organisations from one nation People or organisations of different countries
Buyers and Sellers participate in domestic business participate in international business
transactions. transactions.
Nationality of Various other stakeholders such as Various other stakeholders such as suppliers,
Other Stakeholders suppliers, employees, middlemen, employees, middlemen, shareholders and
shareholders and partners are usually partners are from different nations.
citizens of the same country.
Mobility of Factors The degree of mobility of factors of The degree of mobility of factors of
of Production production like labour and capital is production like labour and capital across
relatively more within a country. nations is relatively less.
Customer Domestic markets are relatively more International markets lack homogeneity due
Heterogeneity homogeneous in nature. to differences in language, preferences,
across Markets customs, etc., across markets.
Differences in Business systems and practices are Business systems and practices vary
Business Systems relatively more homogeneous within a considerably across countries.
and Practices country.
Political System Domestic business is subject to political Different countries have different forms of
and Risks system and risks of one single country. political systems and different degrees of risks
which often become a barrier to international
business.
Or
Manufacturing and trading beyond the boundaries of one’s own country is known as international business. It can be
defined as those business activities that take place across the national frontiers.
Its advantages to firms are (any three)
(i) Many business and industrial enterprises have unused capacity, that can be efficiently utilised for further
production. Thus, surplus production can be used to generate extra profits from foreign trade.
(ii) Highly competitive domestic market drives many companies to go international in search of markets for their
products.
(iii) When prices in the domestic market are low, firms can earn more profits by selling their products in those
countries in which prices are high.
(iv) When the domestic demand for a firm’s product or services start getting saturated in the domestic market, then
firms can considerably improve prospects of their growth by venturing out in the international market.
Business Studies
Practice Paper 2 *
(Solved)
Max. Marks : 40
Section A
WS limited is a wholesaler situated in Bangalore, Karnataka. It is managed by two brothers- Venky & Kartik.
It serves as an important link between manufacturers and retailers. It takes delivery of the goods and keeps
them in large lots in its warehouse. In this process, it helps the manufacturer a lot. After that it supplies
goods to the retailers. Interestingly, WS limited do not ask for the payment immediately. This enables the
retailers to manage their business with relatively small working capital. These retailers are the last step in
the value chain and create place utility. These retailers make the goods available to the final consumers who
purchase them and use them for their consumption. To further increase their income, the brothers have
decided to open up a new store. The store will be a large establishment offering a wide variety of products
which are dealt by WS limited only. However, the store will have products of multiple brands and not just
one particular brand.
1. Which service of wholesaler to manufacturer is highlighted in the line, “It serves as an important link
between manufacturers and retailers. It takes delivery of the goods and keeps them in large lots in its
warehouse”?
(a) Facilitating Large Scale Production (b) Bearing Risk
(c) Financial Assistance (d) Help in the Marketing Function
2. Which service of wholesaler to retailer is highlighted in the line, “WS limited do not ask for the payment
immediately. This enables the retailers to manage their business with relatively small working capital.”?
(a) Availability of Goods (b) Marketing Support
(c) Grant of Credit (d) Risk Sharing
3. Which service of retailer to manufacturer is highlighted in the line, “These retailers make the goods
available to the final consumers who purchase them and use them for their consumption.”?
(a) Help in Distribution of Goods (b) Personal Selling
(c) Enabling Large-scale Operations (d) Collecting Market Information
4. Which type of stores is highlighted in the line, Or

“The store will be a large establishment offering Do you agree with the statement that
a wide variety of products which are dealt by “international business not only involve
WS limited only. However, the store will have international movement of goods, but movement
products of multiple brands and not just one of few other things, too”? Also, explain how
particular brand”? international trade helps firms in making way
(a) Departmental stores (b) Chain stores out to intense competition and improving the
(c) Both of these (d) None of these business vision?
5. Which type of trade is highlighted in the 9. Yash and Yashi were arguing whether
paragraph? international trade is actually necessary between
(a) Internal trade (b) International trade the nations or is it just a fancy way to do
(c) Both of these (d) None of these business that gives no results. Help them in
coming to a conclusion.
Section B 10. Explain the concept of trade. Also, explain the
This section consists of 5 questions of short answer classification of trade.
type. Or
Short Answer Type Questions (3 Marks) Explain the concept of international business.
Also, define and explain the meaning of
6. Departmental stores are large establishments international trade as a part of international
offering a wide variety of products, classified business.
into well-defined departments. In reference to
the statement, state the features of departmental
stores. Section C
Or This section consists of 4 questions of long answer
One of the disadvantages of chain stores is that type.
majority of the multiple shops deal only in Long Answer Type Questions (5 Marks)
limited range of products. For example, Reebok 11. Write five points elaborating the role of
deals in sports-wear and foot wear. These stores small-scale industries in India.
do not sell products of other manufacturers.
Therefore, customers visiting these stores have Or
only selected items to choose from. There are Mention about the following problems of small
more such disadvantages, explain any three of scale industries in India.
the same. (i) Quality
7. Jeetu is a retailer store owner dealing in (ii) Capacity Utilisation
stationery products. He has lot of experience in (iii) Technology
this particular industry now. He makes sure that (iv) Sickness
all the products of different types and brands (v) Global Competition
are available to customers. He is known for
keeping a large variety of SKUs. He also 12. Chetan Ltd is a public listed company in India
educates the customers about the new product listed on the stock exchanges in 2002. The
arrival and their uses. He even assists them in company has maintained good Debt to Equity
supplying them the refills of some of the ratio till now. It has planned for expansion now
products or even the repair of some medium to and requires capital for the same. The company
large items. is considering the option which would help to
maintain the ratio further and therefore, decides
The above text talks about retailers’ services to to raise funding through issue of shares. The
customers. By quoting the lines, explain three company allotted shares in the following ways
such services.
(i) 20,00,000 shares were allotted to share-
8. What do you mean by international trade? holders who were ready to take more risks
Explain how international trade helps nations in from the company and to assume the voting
earning foreign exchange and increase the rights.
standard of living?
(ii) 10,00,00 shares were allotted to 13. Ishan is an inspirational boy who has always
shareholders who wanted to to receive thought of solving the problems of this country. In
dividend at a predetermined rate his quest, he built a start-up which provided
Identify the types of shares highlighted and solutions for water pollution of the country. For a
write merits of case (i) and demerits of case very long span of period, he worked on the model
(ii). by using up his own savings. However, they soon
Or reduced to almost nil making it difficult for him to
continue. Fortunately, his model was highly
Ravi is a learning enthusiast person who loves
appreciated by a leading CEO who decided to
to explore new applications and software.
invest in the same from his own savings. Ishan
Seeing the upsurge of working dashboards to
started to refine his model and sell the same to
present data in an attractive manner, he learnt
some large authorities for mass implementation.
Power BI to the depth. He soon became a
To further expand, he decided to get funding from
master in this tool and started an online
bank which involved the usual process of sharing
business of teaching Power BI courses to the
the business plan and the valuation details. He
students and professionals. His teaching style
still required some capital and therefore, reached
was liked by many and word of mouth spread
to a professionally managed fund agencies who
like wildfire. He started earning good and
invest in companies that have huge potential in
generated good revenues. He then decided to
future.
launch similar courses on tableau, Excel &
PowerPoint. However, he felt that rather than Identify any four methods of start-up funding
using a third-party site which cuts a huge highlighted here by quoting the lines. Also,
commission on his revenue, he should collate explain any two other methods available too.
all the courses and launch on his own website. 14. What do you mean by public deposits? Mention
The cost of creation of his dynamic website its merits and demerits.
was ` 1,00,000 plus the cost of hosting which Or
is ` 20,000. Rather than seeking help from
anyone else, he decided to invest all his Preference shares resemble debentures as they
revenue in the same and launched his bear a fixed rate of return. Also, as the dividend is
website. payable only at the discretion of the directors and
only out of profit after tax, to that extent, they
Identify the source of finance highlighted in resemble equity shares. In the light of the
the passage and write its merits and demerits. statement, explain the merits and demerits of
preference shares.
Answers
1. (b) Bearing Risk (ii) New Products Information By arranging effective
2. (c) Grant of Credit display of products, retailers provide important
3. (a) Help in Distribution of Goods information about the arrival, special features, etc
of products to the customers.
4. (a) Departmental stores
Line “He also educates the customers about the
5. (a) Internal trade
new product arrival and their uses.”
6. The following are the distinct features of
(iii) Wide Selection Retailers generally keep stock of a
departmental stores
variety of products. This enables the consumers to
(i) These stores are centrally located so that they make their choice.
can cater to large number of customers.
Line “He is known for keeping a large variety of
(ii) These stores try to maximise customer SKUs.”
satisfaction by providing additional facilities such
(iv) After Sales Services Retailers provide important
as restaurants, travel and information bureau,
after-sales services in the form of home delivery,
free wi-fi zone, kids zone, rest rooms, etc.
supply of spare parts etc.
(iii) These stores cater to that segment of customers
Line “He even assists them in supplying them the
for whom price is secondary.
refills of some of the products or even the repair of
(iv) The form of organisation for such stores is joint some medium to large items.”
stock companies managed by Board of Directors.
8. International trade comprises of buying and selling of
(v) These stores purchase goods directly from the
goods and services beyond the geographical borders of
manufacturers and maintain their own
the country. It is also referred to as ‘foreign trade’ or
warehouses where goods are stored. Thus, these
‘external trade’. It helps the nations in the following
stores combine the functions of retailing and
ways
selling.
(i) Earning of Foreign Exchange International trade
(vi) These stores have a centralised purchasing
helps countries to earn foreign exchange. This
department, whereas sales are decentralised in
helps a country to import those goods and services
different departments.
which it cannot produce efficiently.
Or
(ii) Increased Standard of Living International trade
Disadvantages of chain stores are helps people of a country to have access to a large
(i) Lack of Initiative The employees working in variety of goods and services. This helps them to
these stores work on the instructions of the head improve their standard of living.
office. Also, they do not stand to benefit in any Or
way by the sales made by them. So, they do not
Yes, I agree with the given statement. International
take initiative on their own.
business involves not only the international movement
(ii) Lack of Personal Touch Due to operating on a of goods and services, but also of capital, personnel,
large scale and lack of initiative on the part of technology and intellectual property.
employees, their dealings with customers lack
International trade helps the nations in the following
personal touch.
ways
(iii) Loss Due to Change in Demand If the demand
(i) Way Out to Intense Competition in Domestic
for the goods sold by these stores change rapidly,
Market Highly competitive domestic market
then the management may have to sustain heavy
drives many companies to go international in
losses, because of large stocks lying unsold at the
search of markets for their products.
central depot.
(ii) Improved Business Vision Most enterprises have
7. Services of retailers to customers highlighted in the
an urge to grow, to become more competitive, to
case are (any three)
diversify and derive the benefits of going global
(i) Regular Availability of Products The most through international trade.
important service of a retailer to consumers is to
9. Yash and Yashi can be brought to a conclusion that
maintain regular availability of various products
international trade is actually necessary between the
produced by different manufacturers.
nations because of the following reasons
Line “He makes sure that all the products of
(i) Uneven Distribution of Natural Resources All
different types and brands are available to
the countries cannot produce equally or cheaply
customers.”
becauses of uneven distribution of natural
resources among them as well as differences in
their productivity levels. Thus, contries exchange country. They contribute almost 40% of the gross
their surplus production with goods that they are industrial value added and 45% of the total
in short supply in their country. exports (direct and indirect) from India.
(ii) Factors of Production Availability Each country (ii) Employment Generation In India, small
differ in terms of availability of various factors of industries are the second largest employers of
production such as labour, capital and raw human resources, after agriculture. They generate
materials, needed for producing different goods more employment opportunities per unit of
and services. capital invested as compared to large industries.
(iii) Specialisation of Products Many countries Thus, they are considered good for countries like
specialise in the production of certain goods and India, that have surplus labour and less capital.
services for which they have some advantages (iii) Supply Variety of Products Small industries in
such as suitable climatic conditions, technical our country supply enormous variety of products
know how, high labour productivity, etc. which include goods of mass consumption such as
(iv) Benefits of Cost Cost of production differ in readymade garments, hosiery goods, stationery
different countries due to different items, soaps and detergents, domestic utensils,
socio-economic, political and geographical etc. Sophisticated goods such as electrical goods,
conditions. Many of the countries are in a better engineering goods, drugs, etc are also
position to produce some goods more manufactured by these industries.
economically than other countries. Thus, (iv) Balanced Regional Development As these
companies engage in international business so as industries produce products using simple
to import available resources from other countries technologies and depend on locally available
at lower prices and export goods on which they resources in terms of both material and labour,
can fetch better prices. thus, they can be opened anywhere in the
10. Trade refers to buying and selling of goods and country, without any locational constraints and
services with the objective of earning profit. It the benefits of industrialisation can be reaped by
bridges the gap between the producer and the every region.
consumer. The importance of trade in modern times (v) Provide Business Opportunities They provide
has increased, as new products are being developed ample opportunity for entrepreneurship. The
every day and are being made available for latent skills and talents of people can be
consumption throughout the world. channelled into business ideas, which can be
Trade can broadly be classified into two categories converted into reality with little or nil capital
(i) Internal Trade Trade which takes place within a investment.
country is called internal trade. (vi) Low Cost of Production They also enjoy the
(ii) External Trade Trade which takes place between advantage of low cost of production. This is
two or more countries is called external trade. because the establishment and running cost are
minimal. Locally available resources are less
Or expensive. Due to lower cost of production, they
International business can be defined as have competitive strength.
manufacturing and trading beyond the boundaries of
Or
one’s own country. It involves business activities that
take place across the national frontiers. It involves not (i) Quality Many small business organisations do not
only the international movement of goods and adhere to desired standards of quality. Instead,
services, but also of capital, personnel, technology they concentrate on cutting the cost and keeping
and intellectual property like patents, trademarks, the prices low. As they do not maintain quality,
copyright, etc. they are not able to compete in global markets.
International trade is the component of International (ii) Capacity Utilisation Due to lack of marketing
business. It comprises of buying and selling of goods skills leading to lack of demand, many small
and services beyond the geographical borders of the business firms have to operate below full capacity
country. It is also referred to as ‘foreign trade’ or due to which their operating costs tend to
‘external trade’. It can also be understood as exchange increase. This leads to sickness and closure of the
of goods and services between residents of different business.
countries. It involves the use of foreign exchange to (iii) Technology Use of outdated technology is often
discharge trade obligations. stated as a serious problem of such enterprises.
11. Role of small scale industries in India can be This results in low productivity and uneconomical
understood with the help of following points (any five) production.
(i) Contribution in GDP Small industries in India (iv) Sickness Prevalence of sickness in small
account for 95% of the industrial units of the industries has become a point of worry for both
the policy-makers and the entrepreneurs. The (iii) The company has to pay higher rates of dividends
causes of sickness are both internal and external. to the preference shareholders as compared to
(a) Internal problems include lack of skilled and interest on debentures.
trained labour, managerial and marketing (iv) The dividend on these shares is to be paid only
skills. when the company earns profit. Thus, the returns
(b) External problems include delayed payment, are not assured and they are unable to attract the
shortage of working capital, inadequate loans investors.
and lack of demand for their products. Or
(v) Global Competition In the present context of The source of finance highlighted here is retained
Liberalisation, Privatisation and Globalisation earnings.
(LPG) policies being followed by several countries Merits of retained earnings are (any three)
across the world. Small businesses feel threatened (i) Retained earnings is a permanent source of funds
from the global entrepreneurs in the following for an organisation.
areas
(ii) Retained earnings do not involve any explicit cost
(a) Competitions from medium and large in the form of interest, dividend or floatation cost.
industries as well as multinational companies.
(iii) This source offers a greater degree of operational
(b) High quality standards, technological skills, freedom and flexibility.
financial credit worthiness, managerial and
marketing capabilities of large industries. (iv) It enhances the capacity of business to absorb
unexpected losses.
(c) Due to strict requirements of quality
certification like ISO 9000, small industries (v) It might lead to an increase in the market price of
have limited access to markets of developed equity shares issued by the company.
countries. Demerits of retained earnings are
12. Case (i) 20,00,000 shares were allotted to (i) Excessive ploughing back may cause
shareholders who were ready to take more risks from dissatisfaction amongst the shareholders, as they
the company and to assume the voting rights would get lower dividends.
Shares highlighted in this case are equity shares. (ii) As the profits of business are fluctuating, it is an
uncertain source of fund.
Merits of equity shares are (any three)
(iii) Firms do not recognise the opportunity cost
(i) Equity shares are suitable for those investors who
associated with this source, leading to sub-optimal
are willing to assume risk for higher returns.
use of funds.
(ii) Payment of dividend to the equity shareholders is
13. The methods of start-ups funding highlighted in the
not compulsory. Therefore, there is no burden on
passage are (any three)
the company.
(iii) It is considered as a good source of long-term (i) Bootstrapping Start-up Business It is known as
finance. A company is not required to pay back self-funding. Entrepreneur can invest from their
the equity capital during its lifetime. It is repaid past saving or can get from family or friends. It is
only at the time of liquidation of company. Also, suitable only if the initial requirement is small.
since it is paid last, even on liquidation, therefore Line “For a very long span of period, he worked
it provides a cushion for creditors. Thus, it is a on the model by using up his own savings.”
permanent source of capital. (ii) Bank Loan Funding from bank will involve the
(iv) Equity capital provides credit worthiness to the usual process of sharing the business plan and the
company and confidence to prospective loan valuation details, along with project report based
providers. on which the loan is sanctioned.
Case (ii) 10,00,00 shares were allotted to shareholders Line “To further expand, he decided to get
who wanted to to receive dividend at a predetermined funding from bank which involved the usual
rate. process of sharing the business plan and the
Shares highlighted in this case are preference shares. valuation details.”
Demerits of Preference shares are (any three) (iii) Angel Funding Angel investors take very
early-stage business under their wing while
(i) Preference shares are not suitable for those venture capital or equity investors do not like to
investors who are willing to take risk and are commit capital to tiny business.
interested in higher returns.
Line “Fortunately, his model was highly
(ii) These shares dilute the claim of equity appreciated by a leading CEO who decided to
shareholders over the assets of the company. invest in the same from his own savings.”
(iv) Venture Capital Venture capitals are Demerits of public deposits are
professionally managed funds who invest in (i) New companies generally find it difficult to raise
companies that have huge potential in future. funds through public deposits.
They focus on sale rather than profit of ventures. (ii) It is an unreliable source of finance as the public
This type of funding is often obtained in exchange may not respond when the company needs
for an equity stake in business. money.
Line “….therefore, reached to a professionally (iii) Collection of public deposits may prove difficult,
managed funds who invest in companies that have when the size of deposits required is large.
huge potential in future.”
Or
Other ways to funding (any two)
Merits of preference shares are (any three)
(i) Incubators They provide professional services
(i) The dividends to be paid to the preference
that facilitates the development of new business
shareholders are fixed. This ensures the investors
by providing resources, support and advice. In
the security of fixed returns.
India, more than 50% of the incubators are
located in universities indicating role of (ii) These shares are suitable for those investors who
universities in supporting new start-ups. e.g. want fixed income with comparatively low risk.
(a) Innovation and Entrepreneurship (SINE), (iii) It does not affect the control of equity
IIT Mumbai shareholders. as these shares do not carry voting
rights.
(b) Technology Business Incubator IIT Delhi
(iv) Payment of fixed dividends to preference
(ii) Accelerators Accelerators are organisations that
shareholders enable a company to declare higher
offer a range of support service and funding
dividends for equity shareholders.
opportunities for startups. They provide capital
and investment in return for start-up equity. They (v) The holders of these shares have a preferential
target set action to boost the development and right of repayment over equity shareholders,
growth of a startups. e.g. when the company liquidates.
(a) Amity Innovation Incubator (vi) Assets are not required to be mortgaged for
raising preference share capital. Thus, the assets
(b) IAN Business Incubator, Kyron
of the company are free from any charge and can
(iii) Crowd Funding Crowd sourced funding is a be used to raise debt capital.
means of raising money for a creative project (i.e,
Demerits of preference shares are (any three)
music, film book). It is a collection of funds from
multiple investors through social networking sites (i) Preference shares are not suitable for those
for a specific project. investors who are willing to take risk and are
interested in higher returns.
14. Public deposits refer to the deposits that are raised by
business organisations directly from the public. (ii) These shares dilute the claim of equity
Under it, a company directly raises loans from the shareholders over the assets of the company.
public, in the form of deposits for a fixed period of (iii) The company has to pay higher rates of dividends
time at a fixed rate of interest. to the preference shareholders as compared to
Merits of public deposits are interest on debentures.
(i) The procedure of obtaining deposits is simple and (iv) The dividend on these shares is to be paid only
does not contain restrictive conditions. when the company earns profit. Thus, the returns
are not assured and they are unable to attract the
(ii) Cost of public deposits is generally lower than the
investors.
cost of borrowings from banks and other
institutions. (v) The dividend paid on preference shares is not
deductible from profits as expense. Thus, there is
(iii) Public deposits do not usually create any charge
no tax savings, as in the case of interest on loans.
on the assets of the company.
Business Studies
Practice Paper 3 *
(Solved)
Max. Marks : 40
Section A
Pragyan is a teenager with lot of entrepreneurial spirit. He has recently thought of an idea which can help
people to detect the alcohol levels in the drinks accurately with the pocket size device. To further initiate
the process he decided to register as a startup on the portal online. To do the research, he decided to use his
own savings and complete the research. He could realise that his product was going to be a very bright
product in the coming future therefore he decided to protect it with the help of an intellectual property
right through the property right which gave him the exclusive right on that particular device that he
invented. Now he wanted to purchase some machinery to get devices produced on a mass level. Since the
amount was very big and he could not afford it by himself, he decided to take some money from commercial
banks which were ready to provide him assistance because of his excellent idea.
1. Which Start up India Action point is highlighted in the line, “To further initiate the process he decided to
register as a startup on the portal online.”?
(a) Simplification & handholding (b) Startup India Hub
(c) Easy Exit (d) Tax Exemption
2. Which method of startup funding is highlighted in the line, “To do the research, he decided to use his own
savings and complete the research.”?
(a) Angel Investment (b) Venture Capital
(c) Bootstrapping (d) Microfinance
3. Which IPR gave him the exclusive right on the product?
(a) Copyright (b) Trademark (c) Trade Secrets (d) Patent
4. Which type of working capital requirement is highlighted in the line, “Now he wanted to purchase some
machinery to get devices produced on a mass level.”?
(a) Fixed Capital (b) Working capital
(c) Both of these (d) None of these
5. Which type of funds are highlighted in the line, “he decided to take some money from commercial banks
which were ready to provide him assistance because of his excellent idea.”?
(a) Owner’s Fund (b) Borrowed Funds
(c) Both of these (d) None of these
Section B
This section consists of 5 questions of short answer type.
Short Answer Type Questions (3 Marks)
6. State any three needs of finance for a business enterprise.
Or
Differentiate between internal and external source of business finance on the basis of
(i) Purpose
(ii) Cost
(iii) Security required
7. Small scale industries are quintessential for providing employment in Rural India. Defend or refute the
statement by giving two substantial arguments.
Or
Small scale industries are quintessential for industrialisation in Rural India and alleviating poverty
thereof. Defend or refute the statement by giving two substantial arguments.
8. Identify and define the type of IPRs highlighted in the following examples
(i) Telephone, radio, optical fibre, ipod and ballpoint pens.
(ii) Original literary, dramatic, musical or artistic works, sound recording, films and broadcasts.
(iii) MC Donald’s double arches, apple Computer’s, Apple sign of Android.
9. After the pandemic, India saw an upsurge in the number of start-ups that have come up the ranks and
became unicorns. This clearly shows the entrepreneurial spirit in our country is enhancing with the
passing time. How will entrepreneurship development help a developing economy like India? Explain any
three ways in brief.
10. Some companies prefer to raise the money through the issue of debentures and not through the issue of
equity shares. What could be the reasons for the same?
Or
Differentiate between equity shares and preference shares on the basis of
(i) Participation in management
(ii) Sequence of Dividend
(iii) Sequence of Refund of capital
Section C
This section consists of 4 questions of long answer type.
Long Answer Type Questions (5 Marks)
11. Meena stores is a line of stores with multiple stores in west side of the country. These stores have similar
arrangement and deal in standardised and branded consumer products, which have rapid sales turnover.
Identify the type of fixed-shop large retailers and state its features.
Or
365*12 is a company with a big store in Kolkata, West Bengal. It aims at satisfying practically every
customer’s need under one roof. It has a number of departments, each one confining its activities to a
specific kind of product. Identify the store highlighted here and state its disadvantages.
12. On an individual firm level, the international trade opens many new opportunities and prospects. In the
light of the statement, explain any five advantages of international trade to the firms.
13. BPR is an outlet in MG Road area of Gurugram. It deals with FMCG products and keeps high quantity of
the stocks of the same. It also maintains good number of varieties of the same. While purchasing the
goods, it pays the manufacturers in cash and assists them in the marketing of the goods. It supplies goods
to Ahuja Bros which is another outlet in the outskirts of Gurugram. It makes the goods available to the
final consumer.
The text highlights two types of different internal trade. Identify and explain them. Also, mention which
outlet falls in which type.
Or
Max enterprises is a wholesaler dealing in packed food products. It collects small orders from a number of
retailers and passes on the pool of such orders to the manufacturers and makes purchases in bulk
quantities and pays for the same in cash. Moreover, it stores a large quantity of stock in its warehouse to
ensure supply as and when required. It also advises the manufacturers to produce different products
according to the customer’s tastes and preferences. With all these operations, it has been fairly successful
in its operations.
Highlight the lines which reflect the services of wholesalers to manufacturers. Also, name those services
and explain them.
14. Retail trade is performed by retailers. A retailer is engaged in the sale of goods and services directly to the
ultimate consumers. Explain how consumers are benefitted by the consumers.
Or
Retailar performs a function of retail trade. He is engaged in the sale of goods and services directly to the
ultimate consumers. Retailer represent the final stage in the distribution process. Explain how
wholesalers/Manufacturers are benefitted by the retailers.
Answers
1. (a) Simplification & handholding
2. (c) Bootstrapping
3. (d) Patent
4. (a) Fixed Capital
5. (b) Borrowed Funds
6. Business enterprises require finance for the following reasons
(i) For financing fixed capital requirements, i.e., purchase of land, building, plant and machinery, etc.
(ii) For financing working capital requirements, i.e., purchase of raw material, payment of wages/salaries, for meeting
certain expenditures, etc.
(iii) For growth and expansion of business enterprise.
Or
Difference between internal and external sources are
Basis Internal Sources External Sources
Purpose The internal sources of funds can fulfil Large amount of money can be raised through external
only limited needs of the business. sources.
Cost Cost of internal funds is low. External funds are more costly.
Security Business is not required to provide Business is required to mortgage its assets as security while
Required security while obtaining funds from obtaining funds from external sources.
internal sources.
7. I agree with the statement that small scale industries are quintessential for providing employment in Rural India. The
role of small business in rural India is explained in the following points
(i) Non-farm Employment Traditionally, rural households in India were exclusively engaged in agriculture. But now,
rural households have varied and multiple sources of income, and participate in a wide range of non-agricultural
activities alongwith the traditional rural activities of farming and agricultural labour. This can be largely attributed
to the setting up of agro-based rural small industries.
(ii) Employment for Artisans Cottage and rural industries play an important role in providing employment
opportunities in the rural areas, especially to the traditional artisans and the weaker sections of society.
Or
Yes, I agree with the statement that small scale industries are quintessential for industrialisation in Rural India and
alleviating poverty thereof. The role of small business in rural India is explained in the following points
(i) Poverty Alleviation Village and small industries are significant as producers of consumer goods and absorbers of
surplus labour, thereby addressing the problems of supply, poverty and unemployment.
(ii) Promoting SSI and Rural Industrialisation Promotion of small scale industries and rural industrialisation has
been considered by the Government of India as a powerful instrument for realising the twin objectives of
“accelerated industrial growth and creating additional productive employment potential in rural and backward
areas.”
8. (i) Patent as an exclusive right is granted in respect of an invention which may be product or process that provides a
new and inventive way of doing something, or offers a new and inventive technical solution to a problem.
(ii) Copyright is a legal right created by the law that grant the creator of an original work’s exclusive rights for its use
and distribution.
(iii) Trademark provides recognisable sign, design or expression which identifies products or services of a particular
source from those of others.
9. Entrepreneurship development helps a developing economy like India in the following ways (any three)
(i) Employment Opportunities It enables entrepreneurs to create more/additional employment opportunities for
youth.
(ii) Economic Independence Entrepreneurs develop and produce substituted products of imported goods and
prevent the over-dependence on the other countries.
(iii) Capital Formation It encourages the establishment of new industries in economy which increase the capital
formation rate in country.
(iv) Development of Backward and Tribal Areas It leads to scattering of economic activities in all areas of the
country.
10. Following are the advantages or reasons of issuing debentures instead of equity shares
(i) Debentures are fixed charge funds and do not participate in the profits of the company.
(ii) Financing through debentures does not dilute control of shareholders on management as debentures do not carry
voting rights.
(iii) Financing through debentures is less costly as compared to cost of equity capital as the interest payment on
debentures is tax deductible.
Or
The differences between equity shares and preference shares are
Basis Equity Shares Preference Shares
Participation in Full right to participate.
No right to participate.
Management
Sequence of Dividend is paid last of all. Preference is given in payment of dividend.
Dividend
Sequence of On winding up of the company, capital is Preference is given in refunding the capital.
Refund of Capital refunded after preference shares.
11. The fixed-shop larger retailer highlighted in the given case is Chain Stores or Multiple shops.
The features of chain stores or multiple shops are
(i) These shops are located in populous localities, so that customers can be served at a place near their residence.
(ii) The manufacturing or procurement of merchandise for all the retail units is centralised.
(iii) Each retail outlet is under the direct supervision of a Branch Manager, who is responsible for its day-to-day
operations.
(iv) All branches are controlled by the head office. The head office formulates policies and gets them implemented.
(v) The prices of the goods is fixed and sales are made on cash basis. Daily sales are deposited in a local bank account
and details to this regard are sent to the head office.
(vi) The head office appoints inspectors, who supervise the day-to-day operations of the store in respect of quality of
customer service provided, adherence to rules and regulations, etc.
Or
The store highlighted here is departmental store.
Disadvantages of departmental stores are
(i) Lack of Personal Attention Because of large scale operations, these stores are not able to give personal attention
to each and every customer.
(ii) High Operating Costs Since these stores provide a number of additional services to their customers, therefore
their operating costs are also high.
(iii) High Possibility of Loss These stores operate on large scale and incur high operating costs. Therefore, their
exposure to risk is also high.
(iv) Inconvenient Location These stores are generally located in a central location. Customers encounter traffic
problems while visiting these stores. Also, it is not convenient for the purchase of goods that are needed at short
notice.
12. Advantages of international trade to the firms are
(i) Prospects for Higher Profits When prices in the domestic market are low, firms can earn more profits by selling
their products in those countries in which prices are high.
(ii) Prospects for Growth When the domestic demand for a firm’s product or services start getting saturated in the
domestic market, then firms can considerably improve prospects of their growth by venturing out in the
international market.
(iii) Way Out to Intense Competition in Domestic Market Highly competitive domestic market drives many
companies to go international in search of markets for their products.
(iv) Increased Capacity Utilisation Many business and industrial enterprises have unused capacity, that can be
efficiently utilised for further production. Thus, surplus production can be used to generate extra profits from
foreign trade.
(v) Improved Business Vision Most enterprises have an urge to grow, to become more competitive, to diversify and
derive the benefits of going global through international trade.
13. The two types of trades highlighted are
(i) Wholesale Trade It refers to purchasing goods and services in large quantity from manufacturers and reselling
them to retailers, who then sells them to the ultimate consumers.
Chain of Wholesale Trade
Manufacturers —- Wholesalers —- Retailers —- Consumers
A wholesaler is an intermediary between manufacturer and retailer. Example: BPR
(ii) Retail Trade It refers to purchasing relatively small quantity of goods from wholesalers and selling them to
ultimate consumers.
Chain of Retail Trade
Wholesalers —- Retailers —- Consumers
A retailer is an intermediary between wholesaler and consumer. Example: Ahuja Bros
Or
(i) Facilitating Large Scale Production Wholesalers collect small orders from a number of retailers and pass on the
pool of such orders to the manufacturers and make purchases in bulk quantities. This enables the producers to
undertake production on a large scale.
Line “It collects small orders from a number of retailers and passes on the pool of such orders to the
manufacturers and makes purchases in bulk quantities….”
(ii) Financial Assistance They provide financial assistance to the manufacturers as they generally make cash payment
for the goods purchased by them.
Line “….. and pays for the same in cash.”
(iii) Expert Advice The wholesalers are in direct contact with the retailers, therefore they can advice the
manufacturers about various aspects related to customer’s tastes and preferences, market conditions, etc.
Line “It also advises the manufacturers to produce different products according to the customer’s tastes and
preferences.”
(iv) Storage Wholesalers take delivery of goods when they are produced and keep them in their godowns/warehouses,
thereby helping in storage of goods.
Line “Moreover, it stores a large quantity of stock in its warehouse to ensure supply as and when required.”
14. Following are the services of retailers to the consumers (any five)
(i) Regular Availability of Products The most important service of a retailer to consumers is to maintain regular
availability of various products produced by different manufacturers.
(ii) New Products Information By arranging effective display of products, retailers provide important information
about the arrival, special features, etc of products to the customers.
(iii) Convenience in Buying Retailers generally sell goods in small quantities, according to the requirements of their
customers. This offers great convenience to the customers.
(iv) Wide Selection Retailers generally keep stock of a variety of products. This enables the consumers to make their
choice.
(v) After Sales Services Retailers provide important after-sales services in the form of home delivery, supply of spare
parts etc.
(vi) Provide Credit Facilities The retailers sometimes provide credit facilities to their regular buyers, leading to
increased level of consumption and better standard of living.
Or
Following are the services of retailers to the wholesaler/manufacturer
(i) Help in Distribution of Goods Retailers help in the distribution of products by making them available to the final
consumers, thus, creating place utility.
(ii) Personal Selling By undertaking personal selling efforts, the retailers relieve the producers from this activity and
greatly help them in the process of actualising the sale of the products.
(iii) Enabling Large-scale Operations On account of retailer’s services, the manufacturers/wholesalers are freed from
the botheration of making individual sales to consumers in small quantities.
(iv) Collecting Market Information As retailers remain in direct and constant touch with the buyers, they serve as an
important source of collecting market information about the tastes, preferences and attitudes of customers.
(v) Help in Promotion Manufacturers and distributors carry on various promotional activities in order to increase the
sale of their products. Retailers participate in these activities and help to promote the sale of the good.
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CBSE Term II

Case Based Questions

Short/Long Answer Type Questions

3 Practice Papers with Explanations

ARIHANT PRAKASHAN (School Division Series)

ARIHANT PRAKASHAN (School Division Series)

Administrative & Production Offices

Watch Free Learning Videos

þ Video Solutions of CBSE Sample Papers

Theory - Marks Duration - hrs

PART B FINANCE AND TRADE

Unit : Small Business and Entrepreneurship Development

Small scale enterprise Deﬁnition Understand the deﬁnition of small

Unit : Internal Trade

Large scale retailers-Departmental stores, chain Highlight the distinctive features of

Unit : International Trade

PROJECT WORK IN BUSINESS STUDIES ONLY ONE PROJECT : GUIDELINES AS

Exam Scheme Term I & II

Hkkjr CENTRAL BOARD OF SECONDARY EDUCATION

Hkkjr CENTRAL BOARD OF SECONDARY EDUCATION

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Classification of Sources of Finance

The broad classification of these sources have been discussed ahead.

Classification on the Basis of Period

Classification on the Basis of Ownership

Classification on the Basis of Source of Generation

Payment of fixed rate of dividend to preference shares may

enable a company to declare higher rates of dividend for

creditors have been settled, at the time of liquidation.

Difference between Owners’ Funds and Borrowed Funds

of the company was asked by the management to do

Short Answer (SA) Type Questions

Small Business and

2. Lawful and Purposeful Activity The object of

Need of Entrepreneurship Development Startup India Initiative Action Points

be renewed for further 5 years after expiration of this

quality or have to pay high price to get good quality

8. Write short note on (ii) Small Enterprise In small enterprise, the

(iv) Organisation of Production Entrepreneur, in (d) Defuses Social Tension Entrepreneurship

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Short Answer (SA) Type Questions

Answers For Detailed Solutions

2. Retail Trade It refers to purchasing relatively small

PART 2 The new partners want appointment of wholesalers

6. Differentiate between departmental stores and chain stores/multiple shops.

Basis Departmental Stores Chain Stores

Short Answer (SA) Type Questions

such as labour, capital and raw materials, needed for

Basis Domestic Business International Business

11. International trade is advantageous to l

(ii) Which advantage of international trade (to firms) is

Short Answer (SA) Type Questions

4. Which type of stores is highlighted in the line, Or

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