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ASSIGNMENT SOLUTIONS GUIDE (2014-2015)

E.C.O.-1
Business Organisation
Disclaimer/Special Note: These are just the sample of the Answers/Solutions to some of the Questions given in the
Assignments. These Sample Answers/Solutions are prepared by Private Teacher/Tutors/Auhtors for the help and Guidance
of the student to get an idea of how he/she can answer the Questions of the Assignments. We do not claim 100% Accuracy
of these sample Answers as these are based on the knowledge and cabability of Private Teacher/Tutor. Sample answers
may be seen as the Guide/Help Book for the reference to prepare the answers of the Question given in the assignment. As
these solutions and answers are prepared by the private teacher/tutor so the chances of error or mistake cannot be denied.
Any Omission or Error is highly regretted though every care has been taken while preparing these Sample Answers/
Solutions. Please consult your own Teacher/Tutor before you prepare a Particular Answer & for uptodate and exact
information, data and solution. Student should must read and refer the official study material provided by the university.

Answer the following questions.

Q. 1. Describe various Sources to raise long-term capital by a company.
Ans. In order to raise long-term and medium-term capital, various methods are used by companies like:
(a) Issue of shares: Shares are of two types namely, equity shares and preference shares. Investors prefer
shares in order to invest their money because they can be transferred easily and shareholders liability is limited to
face value of shares. In case of equity shares, company doesnt have to bear the fixed burden because dividend
rate on such shares depend on profits available and discretion of directors whereas in case of preference shares
compulsory burden is not there on finances of the company. Dividend has to be paid only if there are profits at a
fixed rate.
(b) Issue of Debentures: Debentures are issued as securities of specified face value. The interest rate to be
paid on debentures is fixed at the time of issue. Debenture holders dont have to bear any kind of risk because they
enjoy lower interest rate. Stable income companies enjoy higher returns on equity capital due to fixed interest on
debentures, by trading on equity. Management is not affected because no voting right is provided by debentures.
Adequate security cannot be provided by trading companies for issue of debentures because they dont have large
fixed assets.
(3) Loans from financial institutions: Financial institutions like IFCI, ICICI, SIDC etc. provide long and
medium-term loans to companies. These institutions provide loans against approved schemes or projects up to a
maximum period of 25 years. Rate of interest in this method is lower as compared to market rate. Before sanctioning
the loan, institutions evaluate the potential profitability of project and ability of company to pay its interest and
repay the principal amount as and when due. A long time is taken by financial institutions to grant a loan.
(4) Loans from Commercial Banks: Banks provide medium term loans against security of properties and
assets to the companies. In order to modernise and renovate the assets, funds can be borrowed from banks. Bank
has no right to interfere with the companys management. No legal formality is required in this method except a
mortgage to be created on the assets. Companies can pay the loan in parts. Companies can even get short-term
loans from banks on personal security of companys directors called clean advances.
(5) Public deposits: Public deposits are the deposits raised from the public for medium or short-term financial
needs. Companies can invite their shareholder employees and general public so that they can deposit their savings
with the company, in order to raise funds. Such deposits can be received for a period up to three years at a time. In
order to raise finance through public deposits, company has to advertise in the newspaper and give all details
about its financial position as prescribed by Companies Act. Companies can offer higher interest rate in order to
invite deposits. Companies cannot raise unlimited amounts of fund by using this method.

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(6) Retention of Profits: When a part of annual profits is retained or re-invested in order to meet financial
needs of a company and not distributed as dividend, it is called plouging back of profits. No legal formality is
involved and company with a view to raise capital doesnt have to depend on external investors. It is a sort of selffinancing of business and it can be used as a source of finance by ongoing profitable companies. A company can
retain more than 10% of current profits only after declaring minimum dividend rate consistent with the dividend
distributed in the past.
Q. 2. Company form of organization is the most ideal form for all types of businesses. Discuss.
Ans. Joint stock company is defined as a company limited by shares having a permanent paid up or nominal
share capital of fixed amount divided into shares of fixed amount, held and transferable as stock and formed on the
principles of having in its members only the holders of those shares or stocks and no other persons.
Features:
(1) A company comes into existence after getting registered under the Companies Act.
(2) A company cannot sign the documents but a common seal is used as a substitute of its signatures. Name of
the company is engraved on the seal.
(3) Life of a company is not affected even if the directors die, become insolvent or lunatic and retire.
(4) Company enjoys a limited scope. It cannot take up new business without changing the object clause.
(5) Companys accounts must be audited by a C.A and it has to submit returns to the Government.
(6) Members of a company have limited liability by guarantee or by the shares held by them.
Classification of Companies
(a) On the basis of incorporation: Statutory company, established by a Special Act of parliament or state
legislature; Registered company, formed through registration with Registrar of companies under the Act and Charters
Company, formed through a social royal charter granted by Monarch.
(b) Based on the type of liability: Unlimited companies, where members have unlimited liability, Limited
companies by share, where liability is limited to the amount of shares held by the members and Companies limited
by guarantee, where members give guarantee to pay debts of the company to a certain limit.
(c) On the basis of ownership: Private limited company, where shares cannot be transferred and number of
members can only be fifty, Public limited company, where shares can be transferred and public can be invited to
subscribe its shares and debentures and Government company, where not less than 51% of paid up share capital is
under Central Government or State Government.
(d) On the basis of jurisdiction of functioning: National company, where operations of a company are restricted
with the boundaries of a country and Multinational company, where the operations are extended beyond the boundaries
of a country. It is also called transnational company.
Merits of Company Form
(1) Large capital: Such firms can have a large numbers of share holders and can raise capital by issuing shares
and debentures.
(2) Limited liability: Members have limited liability to the face value of shares held by them or guarantee
given by them.
(3) Scope for expansion: Companies can expand their business by issuing shares and debentures as there is no
limit to the number of shareholders.
(4) Public confidence: Companies can easily gain the confidence of public because their accounts are audited
by CA and published.
(5) Transfer of shares: In such firms, shareholders can sell their shares at any time without taking the consent
of other shareholders.
(6) Risk diffused: Risk of loss is divided among various members of the company and this proves to be of
benefit for small investors.
Q. 3. Differentiate between the following:
(a) Primary market and Secondary market

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Ans. Primary Market: The primary market is where securities are created. Its in this market that firms sell
(float) new stocks and bonds to the public for the first time. For our purposes, you can think of the primary market as
being synonymous with an initial public offering (IPO). Simply put, an IPO occurs when a private company sells
stocks to the public for the first time.
IPOs can be complicated because many different rules and regulations dictate the processes of institutions, but
they all follow a general pattern:
1. A company contacts an underwriting firm to determine the legal and financial details of the public offering.
2. A preliminary registration statement, detailing the companys interests and prospects and the specifics of the
issue, is filed with the appropriate authorities. Known as a preliminary prospectus, or red herring, this document is
neither finalized nor is it a solicitation by the company issuing the new shares. It is simply an information pamphlet
and a letter describing the companys intent.
3. The appropriate governing bodies must approve the finalized statement as well as a final prospectus, which
details the issues price, restrictions and benefits, and is issued to those who purchase the securities. This final
prospectus is legally binding for the company.
The important thing to understand about the primary market is that securities are purchased directly from an
issuing company.
Secondary Market: The secondary market is what people are talking about when they refer to the "stock
market". This includes the New York Stock Exchange (NYSE), Nasdaqand all major exchanges around the world.
The defining characteristic of the secondary market is that investors trade among themselves. That is, in the secondary
market, investors trade previously issued securities without the issuing companies involvement. For example, if you
go to buy Microsoft stock, you are dealing only with another investor who owns shares in Microsoft. Microsoft (the
company) is in no way involved with the transaction.
The secondary market can be further broken down into two specialized categories: auction market and dealer
market.
In the auction market, all individuals and institutions that want to trade securities congregate in one area and
announce the prices at which they are willing to buy and sell. These are referred to as bid and ask prices. The idea is
that an efficient market should prevail by bringing together all parties and having them publicly declare their prices.
Thus, theoretically, the best price of a good need not be sought out because the convergence of buyers and sellers
will cause mutually-agreeable prices to emerge. The best example of an auction market is the New York Stock
Exchange (NYSE).
(b) Wholesaler and Retailer.
Ans. Wholesalers: People who are engaged in wholesale trade are called wholesalers. They buy the goods from
the producers and sell them to the retailers or other merchants on industrial or commercial users. They do not sell
goods to the ultimate customers. Various goods are traded by wholesalers like forest products, minerals etc. They act
as a link between retailers or industrial users on one hand and producers or importers of goods on the other.
Importance of Wholesalers: It is not possible for the producers to contact large number of retailers in order to sell
their goods. It would be very expensive to contact small retailers as they carry on their business in remote areas. Wholesalers
solve the problems of owners and small retailers. After keeping in mind the requirements of a large number of small
retailers in his area, he can place a large order with the producer. Wholesalers have specialised knowledge and skill
which helps them in distributing the goods efficiently. Manufacturers can easily concentrate on efficient production of
goods with a view to earn profit as the distribution department lies in the hands of wholesalers.
Types of Wholesalers:
1. On the basis of goods dealt with by the wholesalers: General merchandise wholesalers, they deal in two or
more unrelated types of products; General-line wholesalers, they carry a number of goods in the same product line;
single-line or speciality wholesalers, they restrict their operation to a narrow range of products or specific products.
2. On the basis of the method of operations: Service wholesalers:They perform variety of functions like
advertising, grading, packaging etc, on behalf of owners and retailers.
Limited function wholesalers: They carry out a few limited functions like packaging or grading.

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3. On the basis of the geographical coverage of dealings: Local wholesalersThey restrict their operation to
a particular state or town and supply products to retailers in that area. District wholesalers. They deal with retailers
located in a district. Regional or national wholesalers. They specialise in products having a national market and are
nationally advertised.
Functions of Wholesalers: Various functions that must be performed by wholesalers are as follows:
1. Assembling products: Products should be assembled properly and effectively. His duty is to buy the goods
from owners and sell them to the retailers or other merchants.
2. Arranging Storage: It is important to store the goods in order to meet the needs of retailers from time to time.
Goods must be stored in proper warehouses so as to avoid damage and spoilage.
3. Transporting goods: It order to take the goods from the place of production to the warehouse of the wholesaler,
he must make arrangements for proper transportation.
4. Distribution of goods: With a view to reach large number of retailers living in various regions, wholesalers
must go for advertisements or employ salesmen.
5. Risk-bearing: Wholesaler has to bear the risk of loss because of the large stocks that he keeps. If due to low
demand the conditions of the market change, he would not be able to sell off his goods kept in wareshouses.
6. Grading and packaging: Grading means sorting out the products according to their size, quality, price etc.
As wholesalers buy in large quantities, goods must be graded. Packaging of goods help the customer to conveniently
carry it from the shop to his home.
Services to Manufactures: 1. Producers dont have to go for marketing their products is order to reach and
introduce the goods to target audience. Wholesalers buy the goods from owners and sell them to retailers which
further sell them to the ultimate consumers.
2. Wholesalers even help the producers in advertising their products. It proves to be of great help to both producers
and wholesalers.
3. Owners can carry on their production on an even pace because wholesalers can keep an eye on future demand
of products, place orders in advance even if current demand is low.
They maintain a close relationship with retailers. Retailers give them information regarding competing products,
changes in consumers demand for goods etc. With the information, wholesalers place orders with owners and
owners also continue the production of goods, according to changing market conditions.
Service to Retailers: 1. They introduce new brands to retailers with the help of salesmen and by displaying the
goods in showrooms.
2. They even provide credit facility to the retailers. Retailers can pay the amount after sale or customer payment.
On account with the help of this facility.
3. Wholesalers carry the burden of risk and retailers are free from such a risk because they keep the goods in
small quantities.
4. Retailers can easily get small quantities of products from wholesalers, which is not possible to get from
owners.
5. Retailers cannot keep goods in large quantities because they run their business with small capital. Wholesalers
provide them goods on regular basis, as and when their need arises.
Meaning and Importance of Retailing: Retailing means selling goods to the ultimate consumers for personal
consumption. Retailer is any person engaged in retail selling. His duty is to sell the goods to consumers for their personal
consumption and not for resale in business. They form a vital link in the channel of distribution of products. They act as
a link between producers or wholesalers on one hand and customers on the other. With the help of retailers, goods can
even reach people living in distant villages, cities and towns. They are regarded as the most important middlemen in
distribution system.
Services of Retailers:
1. Display of goods: His duty is to inform the consumers about the latest goods by explaining their qualities and
prices. They can introduce new products by displaying them on shelves or in showcases.
2. Advice to consumers: They help the customers in making an appropriate decision to buy certain goods by
advising them on advantages and use of particular varieties of goods.

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3. Personal services: As he has to meet the needs of various customers, he should offer many services to them
like home delivery, credit facility etc.
4. Holding ready stocks: Retailers provide consumers a variety of goods so that they can make their own
choice. Consumers can make their choice of buying the goods of daily use from various goods displayed by the
retailers.
Q. 4. What is stock exchange? Discuss. Also describe in detail its functions.
Ans. It is an association of persons engaged in buying and selling of stocks, bonds and shares for public on
commission and guided by certain rules and usages. It is an organised market and transactions occur between members
or their agents that work on behalf of the investors. Another name given to stock exchange is securities market or
securities exchange.
Functions of Stock Exchange: Primary functions of stock exchanges are given below:
(a) Marketability and price continuity: As there is continuous buying and selling, prices are moderated.
Continuity is maintained in the dealings because transactions occur on a regular basis.
(b) Mobilising surplus savings: With the help of stock exchanges, savings from all over the country are made
available to commercial and industrial undertakings in order to fulfil their financial needs.
(c) Mobility of capital: Stock exchanges help in providing mobility to capital and facilitating sound investment.
Securities in which savings are invested are converted into cash so that they can be re invested in other securities.
(d) Contribution to capital formation: People feel like investing their savings when they get to know about
investment avenues. Investors are educated through stock markets regarding where and how they should invest their
savings to fetch a fair return.
(e) Facilitates resource allocation: Stock exchange provides mobility of funds. It means movement or flow of
funds in the economy as a whole. With the help of stock exchange, economys financial resources can be allocated
easily and reasonably.
(f) Shifting process: Investors after properly examining the securities make a decision of where to invest their
savings. With the help of stock exchange, they can pick and choose from a wide range of securities and make
investment decisions on a sound basis.
Secondary functions of stock exchanges are stated below:
(a) Safety of investment and equity in dealings: Companies are required to fulfil certain conditions if they
wish to trade their securities on the floor of stock exchange. Investors prefer to invest in those securities which deal
in various products, have wide markets and are situated in various parts of the country.
(b) Easy liquidity: Investors normally want easy liquidity of their investment, which means beside adequate
return on their investment, easy conversion into cash. Stock exchange provides assurance regarding liquidity of
investments which in turn serves the needs of the investors.
(c) Full information regarding listed companies: Investors can easily make investment decisions through
stock exchange because organised stock exchange gather the information about companies that are listed with them
and the information is published by stock exchanges in the form of Official Year Book.
(d) Accurate and continuous report regarding sales: Regular record of the securities is maintained by all
stock exchanges every day. In order to inform the investors, this information is published in newspapers, weekly
bulletins and other information media along with prices of important securities.
(e) Safeguards to investors: The interests of investors are safeguarded against dishonesty or malpractices
because members have to carry their business according to the rules and regulations stated by stock exchanges. Only
the members are permitted to deal in securities and make transactions.
Q. 5. Write short notes on the following.
(a) Warehoushing
Ans. Storage of goods on a large scale undertaken as a specialised function is known as warehousing. It helps in
creating both time and place utilities. Warehouse is a place that provides facilities for proper storage of goods at a
large scale. Goods stored in a warehouse can be used as and when the need arises. Warehousing proves to be very
beneficial as it helps in filing up the gap between the time when goods are manufactured and time when goods are

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demanded by customers. Some products are produced throughout the year but have seasonal demand. For example
woollen clothes are used in winter but woollen mills have to store wool until the winter season. Warehousing helps
in stabilising the prices. Wholesaler can buy the goods from owners and store them in their warehouses. They should
store the goods so that they can sell them in small quantities to retailers.
There are three types of warehouses that help in storing the goods. They are:
1. Bonded Warehouses: It is a warehouse for storage of imported goods on which custom duty is yet to be paid.
One can get the goods as and when he pays the customs duty. Goods that are stored are called in a bond. Such
warehouses are owned by government and can be privately owned but under supervision and control of government.
Buyers cannot inspect their goods. If the importer pays a proportionate amount of duty, he can take the delivery of a
part of the goods.
2. Public Warehouses: Public warehouses provide storage facilities to manufacturers, wholesales and traders
on payment of prescribed rent or charges. Such warehouses are either operated by private parties or by government.
One can find these warehousers located at favourable places on railways routes and highways. Small scale traders
and owners cannot build their own warehouses, so they have to depend upon public warehouses located in various
regions. These warehouses also help in loading and unloading of goods and arrange delivery according to owners
direction.
3. Private Warehouses: Wholesalers and manufacturers own and run such warehouses is order to store their
own goods. Owners are responsible to maintain these warehouses. Such warehouses have limited usefulness as
producers and traders cannot use such warehouses. They have to depend upon public warehouses.
(b) Departmental Organization
Ans. It is an organisational form where a public enterprise is organised, financed and controlled in the same way
as the government department. It is subject to budget accounting and audit controls and it is the minister who
controls the overall working of such organisation. Employees are civil servants and legislature is the ultimate authority
to whom minister is answerable for its efficient operations.
Features of Departmental Organisation:
1. This organisational form is subject to budget, accounting and audit controls.
2. Without the consent of the government, this organisation form cannot be sued. It enjoys sovereign immunity
of the state.
3. As employees are civil servants, their terms and conditions of service are similar as compared to other
government employees.
4. This form has to depend upon government for the finances. They can take the finances from the treasury of
the government through annual budget and have to pay back the revenue into the treasury.
5. The duty of the minister is to delegate the authority to various organisational levels because the
overall control lies in his hands.
(c) Factors influencing choice of channel
Ans. Factors that influence the choice of channel are given below:
1. Characteristics of target customers: One can go for long and multiple channels, if number of customers is
large and geographical area is extensive. If customers make frequent purchases of small quantities at irregular
intervals, long channels should be adopted. Small channels should be used, if customers live in small areas and
purchase large quantities at regular intervals.
2. Supply Characteristics: Long channels solve the purpose, if large number of producers live in various
regions and produce goods. If small number of producers produce goods in one region, then short channels should be
used.
3. Potential volume of sales: Target volume of business should be considered while selecting a suitable channel.
Different channels have different sales volume and ability to reach the target audience.
4. Long run effect on profit: If products demand is high, more than one channel can be used. But it is not
economical to use many channels if demand falls in course of time. Future market implications should be kept in
mind.

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5. Types of Middlemen: Businessmen prefer that channel in which middlemen are efficient and dependable. It
is so because he performs various functions like grading, storage, branding etc. Distribution efficiency is calculated
according to the size, location and financial position of middlemen.
6. Characteristics of the product: Direct and short channels should be used if the products are of perishable
nature like eggs, milk, cheese etc. Short channels should be used to distribute heavy and bulky products such as
cement, steel etc. Long channels prove to be better if light weighted and small sized goods are to be distributed like
stationery, dress material etc.
7. Cost of distribution: Businessmen prefer a less expensive channel. Sometimes, one has to accept, an expensive
channel because of the customers preference. So, while selecting a suitable channel, cost of distribution of each channel
should be considered.
8. Channel Competition: While selecting a suitable channel of distribution, competition prevailing in distribution
system should be considered. Producers often adopt that channel which is used by their competing producers. Other
producers copy that producer who make arrangements for exclusive distribution through wholesalers.
(d) Advertisement
Ans. It means any paid form of non-personal communication of ideas, goods or services by an identified sponsor.
It includes four expressions. They are:
(1) Paid form: Businessmen have to pay some amount to media in order to advertise their product. For example
for printing and space used, one has to pay a certain amount, if the message is published in that magazine.
(2) Non-personal presentation: If businessmen communicate the message through radio, TV, newspaper, direct
mail etc, it is called non-personal presentation. Face-to-face interaction or communication is done only by salesmen
this is called personal presentation. But the message is conveyed through non-personal media in case of advertising.
(3) Ideas, goods and services: Advertising helps is selling goods, ideas and services. For example banks
advertise their services and ideas by informing the usefulness of savings. Similarly, insurance companies advertise
their services and ideas by informing the usefulness of travelling.
(4) Identified sponsor: Advertiser is said to be the sponsor of the advertisement. The person who receives the
message should be able to identify both of source and purpose of the advertisement.

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