Category: Important Questions

We have given these Business Studies Class 12 Important Questions Chapter 11 Marketing to solve different types of questions in the exam. Go through these Marketing Class 12 Important Questions and Answers & Previous Year Questions to score good marks in the board examination.

Important Questions of Marketing Class 12 Business Studies Chapter 11

Question 1.
Kumar wanted to purchase a fuel efficient car having the latest standards regarding minimisation of pollution. He saw an advertisement offering such a car and visited the showroom of the company wherein the car was displayed. In his discussion, the Marketing Manager told him that the company is providing credit facilities, maintenance services and many other effective services which are helping in bringing repeat sales and developing brands loyalty.
Identify the marketing function which the Marketing Manager was discussing with Kumar. (All India 2019)
Answer:
Marketing Manager was discussing ‘customer support service’ with Kumar.

Question 2.
‘Ultra Televisions Ltd.’ is offering its 90 TV sets at a discount of ₹ 15,000 for a period of one month starting from 1st March, 2019.
Identify the sales promotion activity used by TJltra Televisions Ltd.’ (All India 2019)
Answer:
Sales promotion technique used is rebate.

Question 3.
“Purchase goods worth ₹ 10,000 and get a discount voucher of ₹ 5,000”. Identify the sales promotion activity. (All India 2019)
Answer:
Promotion technique is used in ‘Useable Benefits’.

Question 4.
Beena has been using ‘Klean’, a famous detergent available in the market. On watching numerous advertisements in the television, she decided to try a new brand of detergent. When she went to the near-by store to purchase the same, she saw detergents of other producers making similar claims of whiteness and stain Removing abilities. Hence, she could not make up her mind as which detergent to purchase.
Name the objection of advertising being discussed in this case. (Delhi 2019)
Answer:
The objective highlighted here is ‘Advertising confuses the buyers’.

Question 5.
Give the meaning of ‘Physical Distribution’ as an element of Marketing Mix. (Delhi 2019)
Answer:
Physical distribution covers all the activities required to physically move the goods from manufacturers to consumers. It includes decision regarding channel of distribution and physical movement of goods from the place where it is produced to the place of consumption.

Question 6.
What is meant by ‘Marketing Management’? (Delhi 2019)
Answer:
It is the process of planning, organising, directing and controlling the activities relating to exchange of goods and services.

Question 7.
Why is understanding of ‘marketing philosophies’ important? (CBSE 2018)
Answer:
An understanding of Marketing Philosophies is an important because it helps us to understand how the concept of marketing, has evolved over a period of time.

Question 8.
‘Buy one get one free’ is printed on the label of the package of mosquito repellent. State the labelling function being performed by this statement. (CBSE 2018)
Answer:
The labelling function performed here is ‘it helps in promotion of products.’

Question 9.
Give the meaning of Marketing Mix. (Compartment 2018)
Answer:
It refers to the set of marketing tools that a firm uses to pursue its objectives in a target market

Question 10.
f the company has enough funds and the management also wants to have greater control on the channel members, which channel of distribution should the company adopt? Give reason in support of your answer. Compartment 2018
Answer:
The company should use zero or one level channel as here in, there is very less interference of intermediaries which facilitates easy controlling of members by management.

Question 11.
“My Bakery,’ a biscuit manufacturing company, launched biscuits with different flavours based on quality and features ‘like ‘Crunchy biscuits’, ‘Sweet Potato’, ‘Coffee Jolly’ etc.
The lables on the package of the biscuits are with pictures and different . colours indicating and specifying the
flavours of the biscuits and their contents.
Identify the two functions of labelling discussed above. (Comportment 2018)
Answer:
Function of labelling identified are

• Product identification
• Product information

Question 12.
Mansi took her niece, Ridhima, for shopping to ‘Mega Stores’ to buy her a bag for her birthday. She was delighted when on payment of the bag she got a pencil box along with the bag free of cost.
Identify the technique of sales promotion used by the company. (All India 2017)
Answer:
‘Product combination’ technique of sale promotion is used by the company.

Question 13.
Sunita took her niece, Aishwarya for shopping to ‘Benetton’ to buy her a dress on the occasion of her birthday. She was delighted when on payment for the dress she got a discount voucher to get 20% off for a meal of ₹ 500 or above at a famous eating point.
Identify the technique of sales promotion used by the company in the above situation. (Delhi 2017)
Answer:
‘Usable benefit’ is the technique of sales promotion used by the company in the above situation.

Question 14.
Name the marketing function which is concerned with the important decision of managing inventory. (Foreign 2016)
Answer:
Physical distribution

Question 15.
Name the function of marketing which is concerned with the cost and location of target market. (All India 2016)
Answer:
Transportation

Question 16.
Name the marketing function which is concerned with informing the customers about the firm’s products. (Delhi 2016)
Answer:
Promotion

Question 17.
‘Maruti Vega Ltd. entered into the market with coloured television and have now introduced products like audio system, air-conditioners, washing machines, etc. The company is not only offering the products but also handling complaints and offering after sales services.
Identify the element of marketing mix discussed here. (All India 2015)
Answer:
Product or Product Mix

Question 18.
A consumer products manufacturing company is offering a number of consumer product like toiletries, detergent powder, food products, etc.
Identify the element of marketing mix referred here. (Comportment 2015)
Answer:
Product mix

Question 19.
A TV manufacturing company is spending substantial amount of money to persuade the target customers to buy its T.V. sets through advertisements, personal selling and sales promotion techniques. Identify the element of marketing mix referred here. (Comportment 2015)
Answer:
Promotion

Question 20.
Why is marketing called a social process? (Delhi 2013)
Answer:
Marketing is regarded as a social process, whereby people exchange goods and services for money or something of value to them.

Question 21.
State the meaning of ‘product promotion’ function of packaging. (All India 2013)
Answer:
Product promotion Packaging promotes the sales of the product. Package is the buyer’s first encounter with the product and is capable in turning the buyer on or off. The colourful attractive packing of the product attracts the customers to buy e.g. Ferrero Rocher Chocolates, Calcium sandoz, etc.

Question 22.
Distinguish between selling concept and marketing concept of marketing management philosophies on the basis of main focus. (Delhi 2013)
Answer:

• Selling concept Firms believe that aggressive selling and promotional efforts will convince a customer to buy a product.
• Marketing concept Customers’ needs and customers’ satisfaction are the key to success of an enterprises.

Question 23.
State the meaning of product identification function of packaging. (All India 2013)
Answer:
In recent years, due to increasing competition and growing use of open display and self service of goods, the need of packaging has arisen. It helps in identifying the product by indicating its nature and content, e.g. A customer can easily identify Ponds cream with its unique jar.

Question 24.
What is the advantage of registering trademark? (All India 2013)
Answer:
The firm which has got its brand registered, gets the exclusive right for its use. In that case, no other firm can use such name or mark in the country.

Question 25.
What is meant by selling concept of marketing? (All India 2010; Delhi 2010)
Answer:
Firms believe that aggressive selling and promotional efforts will convince a customer to buy a product.

Question 26.
JTM Ltd. launched ‘Buddyline’, an exercise book and comprehensive stationery brand name comprising of ball pens, gel pens and geometry boxes after identifying the target market and understanding the needs and wants of the consumers of that market. All their products were of good quality and eco-friendly but expensive. They wanted to distinguish their products from that of their competitors. They spent lot of efforts, time and money in creating the brand name, as they knew that without a brand pame, they can only create awareness for the generic products and can never be sure of the sale of their products. The effort paid off and the
demand for the products started growing. The customers liked the brand and became habitual to it. They did not mind paying a higher price. Over a period of time, it became a status symbol to buy ‘Buddyline’ brand because of its quality. The consumers felt pride in using them.
(i) dentify the marketing management philosophy followed by JTM Ltd.
(ii) Explain the advantages of branding to the marketers highlighted in the above case. (All India 2019)
Answer:
(i) Marketing management philosophy followed by JTM Ltd. is’Societal marketing’.

(ii) Advantages of branding to marketers are:

• Enable product differentiation Due to proper branding, products can be easily differentiated which help in increasing the sales.
• Helps in introduction of new product Once brand is established through correct use of branding, new products can be easily introduced.

Question 27.
Hemand, Guddu and Toshita were friends from college days and presently they were doing different kinds of business. They regularly meet and discuss their business ideas, and exchange notes on customer satisfaction, marketing efforts, products designing, selling techniques, social concerns, etc.

In one of such meetings, Hemand drew the attention of Guddu and Toshita towards the exploitation of consumer. He told that most of the sellers were exploiting the consumers in various ways and were not paying attention towards the social, ethical and ecological aspects of marketing, whereas he was not doing so. Guddu told that they were under pressure to satisfy the consumer but stated that the consumers would not buy or not buy enough unless they were adequately convinced and motivated for the same.

Toshita stressed that a company cannot achieve its objectives without satisfying the needs of the customers. It was the duty of the businessmen to keep consumer satisfaction in mind, because business is run by the resources made available by -i the society. She further stated that she herself was taking into consideration the needs of the customers.
Identify the various types of thinking that ‘ guided Hemand, Guddu and Toshita in the marketing efforts of their business. Also, state one more feature each of the various types of thinking identified that is not given in the above paragraph. (All India 2017; Delhi 2017)
Answer:
The various types of marketing concepts followed by Hemand, Guddu and Toshita are specified below:
Hemand emphasised on ‘social marketing, concept of marketing’.
Guddu emphasised on ‘selling concept of marketing.’
Toshita emphasised on ‘marketing concept’

The salient features other than those mentioned the passage are:

• Societal marketing concept Customer satisfaction is supplemented by social welfare.
• Selling concept Product quality and availability does not ensure the survival and growth of business.
• Marketing concept The needs and wants of the target customers should be understood.

Question 28.
There can be three different levels of packaging. Explain any two of them. (Compartment 2015)
Answer:
The three different levels of packaging are primary level packaging, secondary level packaging and transportation level packaging.

• Primary packaging It is the immediate container of the product, e.g. Toothpaste tube, shampoo bottle, etc.
• Secondary packaging It is the additional layer of protection, e.g. Cardboard box for a toothpaste tube.
• Transportation packaging It refers to further packaging which is necessary to ‘protect the products in the process of transportation and storage, e.g. Corrugated box containing 20,50,100 units of toothpaste.

Question 29.
How do the ‘company related factors’ affect the choice of channels of distribution? Explain. (All India 2015)
Answer:
The ‘company-related factors’ affect the choice of channels of distribution in the following way:
(i) Degree of control Manufacturers ambition to control the channel of distribution affects its selection. Consumers should be approached directly by such type of manufacturer, e.g. electronic goods sector with a motive to control the factors service levels provided to the customer at the point of sale are resorting to company owned retail counters.

(ii) Financial strength A company which has strong financial base can evolve its own channels. On the other hand, financially weak companies would have to depend upon middlemen.

Question 30.
Explain how the ‘product related factors’ affect the choice of channels of distribution. (Delhi 2015)
Answer:
Product related factors Before deciding channel of distribution for a product, various product related factors are to be considered. These are:

• Nature of the product Customised products require direct marketing as they involve interactions between the buyer and the seller. Whereas, standardised products are sold through a number of efforts. Similarly, consumer goods require indirect channels while industrial goods require direct distributions.
• Product complexities Technologically complex products are sold directly whereas, to sell simple products, indirect channels may be employed.
• Perishability of the product Zero or one level channels are preferred for perishable products to avoid the delay in delivery as compared to non-perishable products.

Question 31.
‘Sometimes advertising confuses the buyer’. Do you agree with this? Give reasons in support of your answer. Also state the arguments of supporters of advertisements regarding the above statement. (Compartment 2015)
Answer:
The opponents say that so many advertisements make similar claims and the buyer gets confused as to which one is true and can be relied upon. It may create a state of confusion as to which product he should buy in the market.

However, the criticisms are not true as we know that consumers are rational human beings, who can take their decisions considering various aspects of a product. He can use his wisdom along with information provided by advertisements to make the right choice of purchase.

Question 32.
Identify and explain the marketing management philosophy which implies that products and services are bought not merely because of their quality or brand name, but because they satisfy a specific need of a customer. (Compartment 2014)
Answer:
The marketing management philosophy referred here is ‘Marketing concept’. This concept emphasis that in the long-run, profits can be maximised by identifying and satisfying the needs of present and potential customers. Therefore, customer satisfaction becomes the focal point of all business decisions.

Question 33.
“You don’t close a sale, you open a relationship, if you want to build a long-term successful enterprise.’
Identify the communication tool used by the marketer. State any two features of this communication tool. (Comportment 2014)
Answer:
Personal selling is the communication tool used by the marketer in the given statement.
Two main features of personal selling are:

• Personal form It involves a direct face-to-face communication between the seller and the buyer.
• Development of relationship It helps to develop a personal, long-lasting relationship between the salesman and the customer.

Question 34.
Differentiate between marketing concept philosophy and ‘production concept philosophy on the basis of:
(i) Meaning
(ii) Main focus
(iii) Means (Comportment 2013)

Basis	Marketing Concept	Production Concept
Meaning	It emphasises that in the long-run, projects can be maximised by satisfying present and future needs of customers.	It emphasises that profits can be maximised by producing at a large scale, there by minimising cost of production.
Main focus	Customers needs and wants.	Quantity of product.
Means	Integrated marketing.	Availability and affordability of product.

Question 35.
‘Though branding adds to the cost, it provides several advantages to the consumers’. In the light of the statement, state any three advantages of branding to customers. (Delhi 2013)
Answer:
The three advantages of branding to customers are as follows:
(i) Product identification Branding helps the customers in identifying the product, e.g. A customer, who is satisfied with ‘Lux’ soap need not buy any other product. Thus, branding facilitates repetitive purchase and reduces the time and efforts involved therein.

(ii) Ensures quality Branding ensures a specific level of quality to customers. This builds up confidence of customers and increases their level of satisfaction. Branded products are well packed to prevent adulteration.

(iii) Status symbol Some brands become status symbols due to their quality. The consumers of these brands feel proud and enjoy status by using them.

Question 36.
Packaging has acquired great significance in the marketing of goods. In the light of this statement, state any three functions of packaging. (Delhi 2013)
Answer:
Packaging refers to the act of designing and producing the container or wrapper of a product.
The three main functions of packaging are as follows:
(i) Product identification Packaging helps a product to be easily identified by the customer, e.g. Maggi noodles in yellow colour, Lays in blue, green and red colour can be identified easily.
(ii) Product protection Packaging protects the contents of a product from spoilage, breakage, leakage, damage, etc. e.g. Air tight containers and packets are used for biscuits, tea, etc.
(iii) Product promotion Packaging promotes the sales of the product. Package is the buyer’s first encounter with the product and is capable in turning the buyer on or off. The colourful attractive packing of the product attracts the customers to buy e.g. Ferrero Rocher Chocolates, Calcium sandoz, etc.

Question 37.
Nisha, a school bag manufacturer, decided to improve the product for profit maximisation and thus, added a water bottle holder to the existing design.
(i) dentify the marketing management philosophy adopted by Nisha.
(ii) Explain this philosophy on the basis of
(a) Main focus and
(b) Means and ends. (Delhi 2012)
Or
Ayesha is manufacturing lunch-boxes for school-going children. To maximise profit she decided to improve the quality and added a warmer for the lunch-boxes. Due to this improvement in the product, the sale is increasing day-by-day. Identify and explain the marketing philosophy involved. (Compartment 2012)
Answer:
(i) Product concept or philosophy Firms which follow the product concept, propose that the way to realise business goals is by making high quality products. These firms manufacture the products of superior quality. Nisha is trying to bring improvement in quality, by incorporating a new feature, i.e. adding a water bottle holder in the bag.

(ii) (a) Main focus The main focus of this concept is to improve the quality of products. The marketers now believed that potential exchange would be realised when the products are of high quality. Thus, the firm now focused on making superior products and improving them overtime.

(b) Means Product improvement. Ends Profit through improvement in product quality.

Question 38.
Mansi, a shoe manufacturer for school students, decided to maximise her profit by producing and distributing at large scale and thereby reducing the Average Cost of production.
(i) Identify the marketing management philosophy adopted by Mansi.
(ii) Explain this philosophy or concept on the basis of
(a) Main focus
(b) Means and ends (All India 2012)
Answer:
(i) Production concept or philosophy.
(ii)

• Main focus Main focus of this concept is to maximise the quantity of product.
• Means Availability and affordability of product.
  Ends Earning profits through large scale production and distribution.

Question 39.
Explain market planning, product designing and development as functions of marketing. (Delhi 2012; All India 2011)
Or
Explain any three functions of marketing. (Delhi 2012)
Or
Explain any two functions of marketing. (All India 2011)
Or
Explain the following functions of marketing.
(i) Marketing planning
(ii) Product designing and development (All India 2011)
Or
Explain the following functions of marketing.
(i) Gathering and analysing market information
(ii) Customer support services. (Delhi (C) 2011)
Answer:
The main functions of marketing are as follows:
(i) Gathering and analysing market information A marketer has to gather information about the market. Gathering and analysing market information helps in identifying the needs of the customers. It forms the basis for product development. It also help in identifying the opportunities, threats, strengths and weaknesses of the organisation.

(ii) Market planning The marketer develops appropriate marketing plans to capture or enhance the existing market share. It provides the guidelines to achieve the marketing objectives, e.g. A marketer of colour TVs, having 2% of current market share in the country, aims at enhancing his market share to 20% in the next three years.

(iii) Product designing and development Product designing and development are concerned with anticipating customers’ needs, developing new products and improving the existing products so as to meet the expectations of customers, e.g. When we plan to buy any product say a motorbike, we not only see its features like cost, mileage, etc. but also the design, shape, style, etc.

(iv) Customer support services Customer is the king of modem market. So, customer satisfaction is the main motto of every business firm. Hence, a very important function of marketing management relates to developing customer support services such as after sale services, handling customer complaints, providing credit services, maintenance services, technical services, and consumer information, etc. All these services aim at providing maximum satisfaction to the customers, which is the key to success in modem days.

Question 40.
Explain the role of marketing in a firm. (All India 2011)
Answer:
By marketing orientation, the firm tries to focus on needs and wants of the customers. Every firm wants to live longer and develop. If this happens, the purpose of establishing the firm is fulfilled. Marketing helps in survival and growth of the firm.

Question 41.
What is meant by production concept of marketing? (Delhi 2011; All India 2010)
Answer:
Production concept is based on the belief that profits could be maximised by producing at large scale, thereby reducing the Average Cost of production. A large number of firms believe that it is easy to exchange the products if they are widely available at an affordable price. Thus, availability and affordability were considered as the key to success.

Question 42.
Differentiate between marketing and selling on any three basis. (Delhi 2011)
Answer:
The differences between marketing and selling on three basis are:

Basis	Marketing	Selling
Part of the process	It is a wider term and includes selling also. It covers all activities concerned with identifying and satisfying the wants of the customers.	It is only part of marketing process. It is limited to exchange of goods or services for some consideration.
Transfer of title	It focuses on the needs of customers.	It focuses on transfer of title of goods from sellers to buyers.
Profit maximisation	It aims to earn profits through customer satisfaction.	It aims to maximise profit through increase in sales volume.

Question 43.
What is meant by selling concept of marketing? (All India 2010; Delhi 2010)
Answer:
Firms believe that aggressive selling and promotional efforts will convince a customer to buy a product. It was assumed that the customers will not buy enough, unless they are adequately convinced and motivated to do so. Therefore, aggressive selling and promotional efforts are made to persuade the customers. The use of promotional techniques such as advertising, personal selling and sales promotion were considered essential for selling of products.

Question 44.
What is meant by product concept of marketing? (All India 2010; Delhi 2010)
Answer:
Consumers prefer products with superior quality, performance and features. The companies who believe in the philosophy of product concept are of the opinion that if the quality of goods or services is of good standard, the customers can easily be attracted towards it. The basis of this thinking is that the customers get attracted towards the products of good quality. On the basis of this philosophy, companies direct their marketing efforts to increase the quality and features of their product.

Question 45.
Explain any three elements of marketing mix. (Delhi 2010)
Or
Explain the four important elements of marketing mix. (Comportment 2014)
Or
“The elements of marketing mix are popularly known as 4 Ps of marketing.” Explain briefly these elements of marketing mix. (Comportment 2012)
Answer:
Marketing mix refers to the combination of four basic elements known as four P’s-product, price, promotion and physical distribution.
The various components of marketing mix are: (any three)
(i) Prodiuct mix The product mix refers to mportant decisions related to the products. Product mix involves product planning and development. Decisions are to be taken regarding product, range, quality, size, features, packaging, after sale services, branding, warranties etc. Production must satisfy consumer needs and expectations. These decisions play an important role in attracting the customers to the product.

(ii) Price mix It refers to important decisions related to price levels, pricing strategy and price policies of an organisation. Price is the money paid by a buyer (or received by a seller) in consideration of the purchase of a product or a service. It plays an important role In the marketing of goods. It is often used as a regulator of product’s demand and act as effective tool during stiff competition. Price affects the revenue and profits of a firm.

(iii) Place mix (Physical distribution) It includes decisions about channels of distribution. means of transportation, warehousing, inventory control, etc. Place mix is concerned with linking the sellers and buyers. The choice of channels of distribution depends on nature of product, competition, willingness of middlemen and producer’s financial resources.

(iv) Promotion mix It refers to informing the customers about the product and persuading them to purchase these products. This job is done by the company through the medium of advertisement, personal selling, sales promotion and public relations. Decisions with regard to all these factors directly influence the sale of the product.

Question 46.
Explain the three major categories into which the industrial products can be classified. (All India 2010)
Answer:
Industrial products can be classified into the following major categories:
(i) Materials and parts These include goods that enter the manufacture’s products completely. Such goods are of two types:

• Raw materials
• Manufactured materials and parts

(ii) Capital items These are long-lasting goods that facilitate developing or managing the finished products. These include:

• nstallations
• Equipment

(iii) Supplies and business services These are short lasting goods and services that facilitate developing or managing the finished products. These include:

• Maintenance and repair items like paint, etc.
• Operating supplies like lubricant, writing paper, etc.

Question 47.
‘Pushpanjali Ltd.’ is manufacturing chocolates, biscuits, cakes and other similar products. The company is not generating enough profits. Saurabh, the Marketing Manager of the company got a survey conducted to find out the reasons. The findings of the survey revealed that in spite of better quality, the customers were not able to distinguish the products of the company from its competitors. Though the customers wanted to buy the products of ‘Pushpanjali Ltd.’ again and again because of its good quality, but they were not able to identify its products in the market. Because of this, the sales of the company could not pick up resulting in inadequate profits. Saurabh, the Marketing Manager now realised that ‘Pushpanjali Ltd.’ had forgotten to take one of the most important decisions related to the product.
What decision should ‘Pushpanjali Ltd.’ take so that its customers are able to identify its products in the market? Explain the benefits that may result of ‘Pushpanjali Ltd.’ and its customers if the above decision is taken. (Delhi 2019)
Answer:
‘Pushpanjali Ltd.’ should take dedsion relating to ‘Branding of Product’.
Benefits to ‘Pushpanjali Ltd.’ are:

• Enable product differentiation Due to proper branding, products can be easily differentiated which helps in increasing the sales.
• Helps in introduction of new product Once brand is established through correct use of branding, new products can be easily introduced.
• Benefits to customers are: Refer to Ans 10 on page 200.

Question 48.
Differentiate between marketing and selling on any five basis. (Delhi 2019; Compartment 2012; All India 2012)
Answer:
The differences between marketing and selling are: (any five)

Basis	Marketing	Selling
Scope	It is a wider term and includes selling also. It covers all the activities concerned with identifying and satisfying the wants of the customers.	It is only a part of marketing process. It is limited to exchange of goods or services for some consideration.
Focus	It focuses on the needs of customers.	It focuses on transfer of title of goods from sellers to buyers.
Objective	It aims to earn profits through customer satisfaction.	It aims to maximise profit through increase in sales volume.
Start and end	It starts much before production and continues even after sale.	It starts after production and ends with the sale of product.
Strategy used	It involves strategies like product promotion, pricing and distribution.	It involves efforts like promotion and persuasion for selling the product.
Emphasis	It emphasises on development of product according to customers’ needs .	It emphasises on bending the customers according to product.

Question 49.
Differentiate between advertising and personal selling. (Delhi 2019; Compartment 2012; All India 2012)
Answer:
The differences between advertising and personal selling are:

Basis	Advertising	Personal Selling
Form	Advertising is a means of indirect and impersonal communication.	Personal selling is a means of direct or face to face communication.
Message	There is uniformity of message which means that the message is the same for all the customers.	The message has no uniformity which means it can be changed, keeping in view the behaviour of the customers.
Time	It takes a little time in conveying any information to the customers.	It takes more time in conveying information to the customers.
Feedback	This gives no information about the reactions of the customers.	The reaction of the customers becomes immediately known or clear.
Media	TV, radio, newspapers and magazines.	Through salesmen.

Question 50.
Distinguish between ‘Product’ and ‘Production’ concepts of marketing philosophies on the following basis. (Delhi 2019)
(i) Starting point
(ii) Main focus
(iii) Means
(iv) Ends
Answer:

Basis	Product	Production
Starting Point	Factory	Factory
Main focus	Quality performance and features of product	Quality of product
Means	Product improvements	Avalable and affordability of product
Ends	Product through product quality	Profit through volume of production

Question 51.
Explain the following function of marketing.
(i) Product designing and development
(ii) Standardisation and grading (Delhi 2019)
Answer:

• Refer to Ans 14 (iii) on page 202.
• Refer to Ans 3 (ii) on page 214.

Question 52.
Explain the following functions of marketing.
(i) Marketing planning
(ii) Customer support services (Delhi 2019)
Answer:
Refer to Ans 14 (ii), (iv) on page 202.

Question 53.
After acquiring the necessary knowledge and skills on starting an Aloevera Farm, Ashok wanted to be the leading manufacturer of Aloevera products worldwide. He observed that the products were expensive as the demand of the products was more than the supply. He was also keen to promote methods and practices that were economically viable, environmentally sound and at the same time protecting public health.

Ashok’s main consideration was about the amount of money paid by the consumers in consideration of the purchase of Aloevera product. He also thought that competitors prices and their anticipated reactions must also be considered for this.

After gathering and analysing information and doing correct marketing planning, he came to know that the consumers compare the value of a product to the value of money they are required to pay. The consumers will be ready to buy a product when they perceived that the value of the product is at least equal to the value of money which they would pay.

Since, he was entering into a new market, he felt that he may not be able to cover all costs. He knew that in the long run the business will not be able to survive unless all costs are covered in addition to a minimum profit.

He examined the quality and features of the products of the competitors and the anticipated reactions of the consumers. Considering the same he decided to add some unique features to the packaging and also decided to provide free home delivery of the products.
The above case relates to a concept which is considered to be an effective competitive marketing weapon. In conditions of perfect competition most of the firms compete with each other on this concept in the marketing of goods and services.
(a) dentify the concept.
(b) Explain briefly any four factors discussed in the above case related to the concept so identified. (CBSE 2018)
Answer:
(a) Pricing It refers to the process of determining the price of a product. Price of a product refers to the amount of money that the customer has to pay to obtain a product from the market. Pricing is considered as a regulator of demand of a product, because, when the price of the product is increased, demand falls, and vice-versa.

Under Perfect Competition, most firms compete with each other on the basis of this factor. Therefore, firms give great importance to the fixation of price for their goods and services.

(b) Four factors discussed in the above case are:
(i) Product cost The total cost of product includes production, selling and distribution costs. In the long run the firm strives to cover all their costs. The cost sets the minimum level or floor price for a product. In addition to that firm aims to earn profit margin over and above the costs.

(ii) The utility and demand It is necessary to anticipate the utility and demand of a product, while fixing the price, as if a product is offering higher utility, one can easily charge high price from the customer.
Whereas, if utility is low, one cannot charge high price for such products. On the other hand, if the demand is elastic, price should be set at a lower level and if the demand is less elastic or inelastic price can be set at a higher level.

(iii) Extent of competition in the market The price of a product can be set upto the higher limit, if* the extent of competition is low in the market, and vice-versa. Competitors’ price, their reactions, their product, quality and features must be considered before fixing the price.

(iv) Government and legal regulations To protect the interest of general public, the government has all the rights to control the prices of various products and services by including the products in the category of essential commodities such as drugs, some food items, LPG, etc. With government intervention, there can be a check on the activity of monopolist as they cannot charge unfairly high price for essential commodities.

Question 54.
Sara was pursuing her graduation. Everyday she saw her mother working tirelessly at home after coming back from her work-place. She decided to start a tiffin service to increase he family income. To begin with she started supplying tiffin only in the neighbourhood. Everyday she detailed out the menu after consulting her mother. For informing the people about her service, she desinged a beautiful informative pamphlet, got it printed and started distributing it through the daily newspapers. She also appointed two delivery boys to deliver tiffins.
The business was slow to begin with but picked-up well afterwards. She was able to earn a’ profit of 20% of the revenue in the first month.
(a) Identify the promotional tool used by Sara to communicate to the customers about her tiffin service.
(b) State any three roles of the promotional tool identified in (a) above in marketing of goods and services. (Compartment 2018)
Answer:
(a) The promotional tool used is ‘Advertising’.

(b) Roles of this promotional tools are:

• Mass reach
• Expressiveness
• Economy

Question 55.
A company was marketing ‘Juicers’ which were very popular due to their quality and after sale services provided to the customers. The company was a leading company in the market and earning huge profits. Because of huge profits, the company ignored the after sales services. As a result its relations with the customers got spoiled and the image of the company in the public was damaged. Top management became concerned when the profits for the current quarter fell steeply. On analysis, it was revealed that ignoring the after sales services was its reason. Therefore, the company took all possible measures to protect and promote its favourable image. As a result the goodwill of the company improved in the society.
(i) Name and state the communication tool used by the marketer in the above case to improve its image.
(ii) Also explain role of the tool as identified in part (i). (All India 2016)
Answer:
(i) The communication tool used by the marketer in the above case is ‘Public Relations.’ Public relation is an important element of marketing. It means maintaining relations with public. By maintaining such relations, companies create goodwill. Public relations evaluate public attitudes, identify the policies and procedures of an organisation with the public interest to earn public understanding and acceptance.

Public does not mean only customers, but it includes shareholders, suppliers, intermediaries, customers, etc. Thus, it helps in maintaining and establishing mutual understanding between an organisation and public.

(ii) Role of public relations The role of public relations can be discussed with respect to functions performed by public relations department. These functions are:

• Smooth functioning of business It helps in analysing trends, predicting their consequences, counselling organisational leaders and implementing planned programme of action and thus helps in smooth functioning of business and achievement of objectives.
• Building corporate image and brand equity Public relations covers a wide range of tactics, tools and programmes to promote and protect company’s image and products. It uses the tools to build corporate image which ultimately affects favourably on its products.
• Launching new products The good image promotion itself lends credibility to new launches of the organisations.
• Press relations The public relations depart-ment is in contact with the media to present true facts and a correct picture about the company, otherwise, news can get distorted if it is taken from some other source.
• Corporate communication The public relations department promotes the image of the company by communicating with the public and the employees of the organisation.
• Lobbying The public relations department is liable to maintain healthy relationships with government officials, ministers of industry and finance, associations of commerce and industry and etc. At the same time, they have to be proactive in promoting or defeating regulations that affect them.
• Counselling The public relations department advises the management on general issues that affect the general public and the goodwill of the company.

Question 56.
Diksha Ltd. was marketing dish washers which were very popular due to their quality and after sale services provided to the customers. The company was a leading company in the market and earning huge profits. Because of huge profits the company ignored its after sale services.

As a result its relations with the customers got spoiled and the image of the company was damaged in the eyes of the public. Top management became concerned when the profits for the current quarter fell steeply. On analysis it was revealed that ignoring after sale services was its reason. Therefore, the company took all possible measures to protect and promote its image. As a result the goodwill of the company improved in the society.
(i) Name and state the communication tool used by the marketer in the above case to improve its images.
(ii) Also explain role of the tool as identified in part (i). (Foreign 2016)
Answer:
The communication tool used by marketer is ‘Public Relations’. For its explanation, refer to Ans 9 on page 206 and 207.

Question 57.
Your company has set up a food processing unit in Kashmir with a production capacity of 10,000 litres of apple juice per day. The company plans to market the apple juice in tetra pack of 100 mililitres. Design a label for the same. (Compartment 2015)
Answer:

Question 58.
State any five functions of labelling. (Compartment 2014)
Or
What is meant by labelling? State any four functions of labelling. (Delhi 2011, 2010; All India 2011)
Answer:
Labelling Label may be a simple tag attached to the product (in case of local unbranded products) to complex graphics that are part of the package (like in branded products). Labels are useful in providing detailed information about the product like its content, method of use, etc. Labelling refers to the process of designing and creating a label for a product.
The functions of labelling are:
1. dentification or product/brand It helps in identifying the product or brand, e.g. The name stamped on a cold drink identifies it as Pepsi, Coke, Fanta, etc.

2. Helps in promotion of products A carefully designed label can attract attention and give reason to purchase. Labels play an important role in sales promotional schemes launched by companies, e.g. The label on the package of a shaving cream mentions ‘40% extra free’ or package of a toothpaste mentioning, free tooth brush inside or save ₹ 15′.

3. Providing information required by law Labelling provides information required by law. e.g. The statutory warning on the package of cigarette ‘Smoking is injurious to health’.

4. Grading of products It also helps in grading the products into different categories. Different types of tea is sold by same brand under the category of yellow, red and green label.

5. Describe the product and specify its contents It enables the manufacturer to give clear instructions to the consumer about the proper use of his product. It specifies and helps to describe the product, its usage, cautions in use, contents, manufacturing and expiry dates, price, quantity, etc.

Question 59.
What is meant by packaging? State any four functions of packaging. (Compartment 2014; All India 2011; Delhi 2011)
Answer:
Packaging refers to the act of designing and producing the container or wrapper of a product. It is concerned with the determination of convenient size in which the product is to be put in the market and the creation of proper packages for different sizes, in order to avoid spoilage, leakage, breakage and pilferage of the product.

Functions of packaging Refer to ans 11 on page 200 and 201.

Question 60.
State any five characteristics of a good brand name. (Compartment 2014)
Or
What is meant by brand name? State any five characteristics of a good brand name. (Delhi 2011)
Answer:
The five characteristics of good brand name are:

• Suggestive A brand name should suggest something about a product’s benefits, its use, quality, product nature, purpose, performance, etc.
• Short and easy The name should be short, simple, easy to pronounce, recognise and remember e.g. Ponds, VIP, Rin, Vim, etc.
• Capable of registration It should be capable of being registered and protected legally under the legislation.
• Distinct A brand name should be unique, attractive and distinctive e.g. Sun Light, Fair and Glow, Gold Flake, etc.
• Adaptable The brand name should be adaptable to packaging or labelling requirements, to different advertising media and different languages.

Question 61.
What is meant by physical distribution? Explain its major components. (Compartment 2014)
Or
What is meant by physical distribution of goods? State any three components of physical distribution of goods. (All India (C) 2011)
Or
“Physical distribution includes some components for physically moving the goods from manufacturers to the customers.” Explain these components. (All India 2012)
Answer:
Physical distribution of goods is concerned with making the goods and services available at the right place, so that people can purchase the same.

Components of physical distribution of goods are: (any three)
1. Order processing A good physical distribution system ensures an accurate and speedy processing of order. Processing of orders involves several steps viz receiving the orders, dispatch of goods, recording it in books, billing, collection of payment, etc.

2. Transportation It is the means of carrying goods from manufacturers to consumers. It is one of the major elements of physical distribution. It is important because unless the goods are physically made available at various places, the sale cannot be completed.

3. Warehousing It refers to the act of storing and assorting products in order to create time utility in them. Need for warehousing arise due to time gap between the production and consumption of goods.

4. Inventory control It is an important decision in physical distribution in respect of deciding the level of inventory. High level of inventory ensures product availability when demand arises but increases the cost of carrying the inventory. Thus, a balance has to be maintained between the cost and consumer satisfaction.
The level of inventory depends upon estimated demand, sales forecasts, cost of inventory etc.

Question 62.
State the factors determining the choice of channels of distribution. (Foreign 2014; Compartment 2014; Delhi 2014)
Answer:
Channel of distribution is the path through which ownership as well as possession of goods passes from producers to consumers.

Factors determining the choice of channels of distribution are as follows:
(i) Market related factors The choice of channels is affected by many market related factors. These are

• Size of market The number of channel constituents depends largely on the customer base for the products. Larger markets require indirect channels, and vice-versa.
• Quantum of trade Direct channels of distribution are used where the quantity of purchase is big. Indirect channels of distribution are used mainly where the size if purchase is small and widely spread.

(ii) Product related factors Before deciding channel of distribution for a product, various product related factors are to be considered. These are:

• Nature of the product Customised products require direct marketing as they involve interactions between the buyer and the seller. Whereas, standardised products are sold through a number of efforts. Similarly, consumer goods require indirect channels while industrial goods require direct distributions.
• Product complexities Technologically complex products are sold directly whereas, to sell simple products, indirect channels may be employed.
• Perishability of the product Zero or one level channels are preferred for perishable products to avoid the delay in delivery as compared to non-perishable products.
• Price of the product High priced products are mostly sold directly whereas, cheap or inexpensive products are sold with the help of a large number of intermediaries.

Question 63.
What is meant by advertising? State the role of advertising in marketing. (Comportment 2014)
Answer:
Advertising is an impersonal form of communication, which is paid for by the marketers (sponsors) to promote some goods or services. Most common modes of advertising are newspaper, television and radio.

Advantages to manufacturers are as follows:

• Provides economies of scale Large and steady demand enables a manufacturer to sell more and to produce goods on large scale. Mass production on regular basis helps to reduce the costs of production and distribution.
• Reduces dependence on middlemen Advertising helps to establish a direct contact between manufacturers and consumers. It is easy to find consumers, as they are made aware of the availability and utility of goods.

Question 64.
Describe the role of public relations in the promotion of products and services. (Comportment 2014, 2013)
Or
Explain the role of ‘public relations’ in marketing management. (All India 2013)
Answer:
Public relations The concept of public relations involves a variety of programmes to promote and protect a company’s image or its products. It is the sustained and planned effort to influence public opinion and to establish and maintain mutual understanding between an organisation and the public.

Role of public relations in marketing management Refer to Ans 9 (ii) on page 207.

Question 65.
“Though advertising is one of the most frequently used media of promotion of goods and services, yet it attracts lot of objections”. Explain any four such objections. (Compartment 2014)
Answer:
Objections of advertising are as follows:
1. Undermines social values Advertisement sometimes compels to use those commodities which we do not require. In this way, our wants are unnecessarily increased. If wants remain unsatisfied, we feel discontented. Desire to have more and more things are multiplying and lifestyle is badly affected. Some advertisements show new lifestyles, which cannot be socially approved.

2. Encourage sale of inferior goods Advertisement generally speaks very high of the products. Sometimes products advertised are defective and adulterated. In this way, consumers are misled and suffer losses with the use of commodities instead of benefits.

3. Adds to cost Advertising adds to the cost of product and the price of the commodity unnecessarily increases. The consumers pay for advertised commodity more than what they would have paid for the same unadvertised commodity.

4. Confuses the buyer There are so many advertisements of certain products such as TV, detergents, etc which confuses the consumer as which products should be purchased and which is better.

Question 66.
Give the meaning of ‘price’ as an element of ‘marketing mix’. State any three factors which affect the price determination of a product. (Delhi (C) 2011)
Answer:
Price may be defined as the amount of money paid by a buyer in consideration of the purchase of a product or a service. Pricing involves determination of price of the product. Pricing plays an important role in the marketing of goods and services. It is often used as a regulatory of product’s demand. Pricing also affects the revenue and profits of a firm.

The four factors which affect the price determination of a product are as follows:

• Objective of pricing Firms may include profit maximisation, obtaining market share leadership, surviving in a competitive market and attaining product quality leadership.
• Cost Price charged must enable the businessman to cover his cost including a reasonable margin of profit.
• Competition It is necessary to take into consideration prices of the products of the competing firms prior to fixing the price. In case of cut-throat competition, it is desirable to keep the price low.
• Demand for product Intensive study of demand for products and services in the market should be undertaken before price fixation. If demand is relatively more than supply, higher price can be fixed.

Question 67.
Give the meaning of channels of distribution. State any three functions of channels of distribution. (Delhi (C) 2011; All India (C) 2011)
Answer:
Channels of distribution It refers to the path through which the ownership as well as possession of goods transfer to the consumers from the producers.

The three main functions of channels of distribution are as follows:

• Sorting Middlemen procure goods of different nature, size and quality from several sources. They sort these goods into homogeneous groups on the basis of size and quality.
• Accumulation Middlemen build up a stock of products for maintaining continuous flow of supply to customers.
• Allocation It involves breaking homogeneous stock into smaller marketable lots.

Question 68.
Define marketing and state any three functions of marketing. (Delhi (C) 2010)
Or
What is meant by marketing? State any three functions of marketing. (All India 2010)
Answer:
Marketing is the sum total of all those activities which move goods and services from the producers to the consumers.
According to Philip Kotler, “Marketing is that social process by which individual and groups obtain what they need and want through creating offerings and freely exchanging products and services of value with others”.

The three main functions of marketing are:
(i) Marketing planning Refer to Ans 14 (ii) on page 202.

(ii) Production designing and development Refer to Ans 14 (iii) on page 202.

(iii) Pricing of products Price refers to the amount of money which the customers have to pay to obtain a product. Price is an important factor affecting the success or failure of a product in the market. The demand for a product or service is related to its price. Generally, lower the price, higher would be the demand for the product and vice-versa. Pricing refers to the process of fixing a legible price for the product in the market.

Question 69.
Define marketing management. State any three objectives of marketing management. (All India 2010)
Answer:
According to Philip Kotler, “Marketing management is an art and science of choosing target markets and getting, keeping and growing customers through creating, delivering and communicating superior customer values of management.” It refers to planning, organising, directing and control of the activities which facilitate exchange of goods and services between producers and consumers of products and services.

The three main objectives of marketing management are as follows:

• Creation of demand The marketing manager always tries to create the demand not by unfair means but by analysing the needs and wants of the customers and then producing the products, which satisfies the customer’s need.
• Market share Every business firm wants to capture a larger share of the market. Therefore, marketing techniques adopted by marketing manager help to get a big share in the market.
• Goodwill and reputation Marketing management helps a firm in building the image for its products through advertising, high quality, caring for customer satisfaction, after sale service, smooth supply, etc.

Question 70.
“An important task in the marketing of goods relates to designing the label as it provides useful and detailed information about the product.” In the light of the above statement, draw a label for a packet of juice and highlight the important information to be provided on it. (All India 2010)
Answer:
A simple looking but important task in the marketing of goods relates to designing the label to be put on the package. The label may vary from a simple tag attached to the product to complex graphics containing essential information such as price, quantity, expiry date, etc.
Label for the Packet of Juice
(i) Describe the Product and Specify its Contents

• Orange Juice with extra calcium and low fat. It gives you extra energy.
• Contains sugar, orange, no added flavour, etc.

(ii) Identification of Product or Brand
(a) Helps to identify from other brand.
(b) Real orange juice.
(c) Real manufacturer-Jaipur or Delhi.
(d) Net weight 150 ml, 250 ml, 500 ml, etc.
(e) Retail price ₹ 15, 20, 30, etc.
(f) Batch no XYZ

(iii) Grading of Product
(a) Real orange juice for women, children and old people.

(iv) Helps in Promotion of Product
(a) Real juice piyo khushiya manao.
(b) 40% extra with 1 liter pack.

(v) Providing information required by law
(a) Best before six months from the date of manufacturing.

Question 71.
“An important task in the marketing of goods relates to designing the label as it provides useful and detailed information about the product.” In the light of the above statement, draw a label for a liquid soap and highlight the important information to be provided on it. (Delhi 2010)
Answer:
A label contains essential information about a product.
Therefore, following are the important information to be be provided on the label of liquid soap

Question 72.
Explain any four factors, which affect the determination of the price of a product. (Delhi 2019, 2013)
Or
There are a number of factors that affect the fixation of price of a product. State any five such factors. (Comportment 2014)
Or
“Pricing of a product is an important and effective competitive weapon in marketing, which depends upon various factors”. Explain any three such factors. (All India 2013)
Or
“Price of a product is influenced by many factors.” Explain any five factors influencing pricing. (Delhi 2010)
Or
“Price occupies an important place in the marketing of goods and its determination is affected by many factors”. Explain any four such factors. (All India 2010)
Or
You are a toothpaste manufacturer and you have introduced a new brand toothpaste in the market. How will you determine the price of your product? Explain by giving any three points. (All India 2010)
Or
Name that element of marketing mix which affects the revenue and profits of a firm. Explain any six factors which help in determining this element. (Delhi 2010; All India 2010)
Answer:
Pricing of a product is influenced by many factors. Some of them are as follows:
(i) Pricing objective Firms objectives may include profit maximisation, obtaining market share leadership, surviving in a competitive market and attaining product quality leadership. While deciding upon the price of a product a firm has to see, which of the above mentioned pricing objective, it would consider and fixes the price of its product accordingly.

(ii) Product cost It includes the cost of procuring, distributing and selling the product. It is important that the price should recover Total Costs (Fixed Costs + Variable Costs) in the long-run including a profit margin over and above the costs.

(iii) Extent of competition in the market Competition is another important consideration while pricing a product. Under monopoly situation, a firm can enjoy complete freedom in fixing the price of its product. But in case of intense competition, a firm should fix lower price of its product to capture a large market share.

(iv) Government and legal regulations In order to protect the interest of public against unfair practices, government fixes the price of essential commodities, e.g. medicines, petrol, sugar, etc. A firm should not charge a higher price, otherwise it would invite government action.

(v) Demand and supply conditions Whether the price of the product should be high or low, depend on the demand and supply conditions.

(vi) Marketing method use The price of the product also gets affected by the methods of marketing used by a firm to promote the products. If a firm is using intensive advertising to promote the sale of a product, then it will charge a higher price for it.

Question 73.
Medi Instruments Ltd. is a company dealing in the distribution of medical instruments. The company recently imported 15000 units of sugar testing machines to test the sugar levels without taking blood samples. For deciding the marketing strategy, the Chief Executive Officer of the company called a meeting of the marketing heads of different zones.

In the meeting, Sanjay, the North Zone Marketing Head, suggested that since the machines were sophisticated they need to visit hospitals personally to explain its working to the hospital staff who would be using the machines. He also suggested that additional trained people may be recruited for the same. Hitesh another Zonal Head, added that since lot of money had been spent on the import of the machines, the company was short of funds to pay the additional staff, as suggested by Sanjay.

Revansh, a newly appointed Zonal Head of South Zone, suggested that since the size of the order was not large a detailed study of the factors determining the choice of channels of distribution was required before making the right choice.
(i) Identify the factors influencing the choice of channels of distribution which were discussed in the meeting.
(ii) Also, explain briefly the other consideration to be taken care of in each factor identified in part. (All India 2017; Delhi 2017)
Answer:
(i) The factors influencing choice of channels of distribution discussed here are:
(a) Product related factor Product complexity Since, the product marketed by the company require technical detailing by the personnel, shorter channels of distribution will be preferred. As against this, non-complex products usually prefer longer channels.

(b) Company related factor Financial strength Since, the company is running short of funds, it may make use of indirect channels of distribution. If the financial position of the company had been strong, direct channels could have been used.

(c) Competitive factor Size of the order In the given case, the size of the order is not very large, therefore the company may prefer longer channels of distribution. If the order would have been large, direct channels could have been used.

(ii) The other consideration related to each of the factor identified above are:
(a) Product related factor Nature of the product While industrial goods are usually technical, made to order and expensive products purchased by few buyers, they require shorter channels. Whereas, consumer goods which are standardised, non-expensive, less bulky and frequently demanded, require longer and indirect distribution channels.

(b) Company related factor Degree of control If the management wants to have greater control over distribution, shorter or direct channels will be preferred, and vice versa.

(c) Market factor Number of buyers When the number of buyers is small and concentrated in a small place, shorter channels may be used. But, if the number of buyers is large and market is widespread, longer channels should be preferred.

Question 74.
Radhika was a student of Business Studies of class XII. Her father was a farmer who grew different varieties of rice and was well-versed about various aspects of rice cultivation. He was also selected by the government for a pilot-project on rice cultivation.

As a project-work in Business Studies she decided to study the feasibility of marketing good quality rice at a reasonable price. Her father suggested her to use internet to gather customers’ views and opinions. She found that there was a huge demand for packaged organic rice. She knew that there were no pre-determined specifications in case of rice because of which it would be difficult to achieve uniformity in the output. To differentiate the product from its competitors, she gave it the name of ‘Malabari Organic Rice’ and classified it into three different varieties namely- popular, classic and supreme, based on the quality. She felt that these names would help her in product differentiation.
Explain the three functions of marketing, with reference to the above paragraph. (All India 2015)
Answer:
Three functions of marketing are:
(i) Gathering and analysing market information/market research To gather market information, the marketer makes a SWOT analysis, i.e. the analysis of strengths and weaknesses of the organisation and the available opportunities and threats. Collection of market information is necessary to identify the views and opinions and needs of customers before taking decisions regarding what opportunity can be best pursued by the firm.
As in this case, Radhika gathered information from internet regarding the customer’s views , and opinions.

(ii) Standardisation and grading Radhika analysed that there are no pre-determined specifications in case of rice so she decided to classify them on the basis of quality. Thus, grading function of marketing was done.

Standardisation The term ‘standardisation’ is derived from the work ‘standard’, which means the presence of certain desirable qualities like durability, safety, purity and other features like design, weight, colour, etc in a product. Standardisation refers to the process of setting certain standards for a commodity on the basis of its desired qualities. It implies that the different units of the commodity are of a specified and uniform quality. It facilitates sale of goods through description and increases the confidence of consumers.

Grading It refers to the process of dividing products into classes made up of units possessing similar characteristics. It involves division of products into classes, lots or groups in accordance with pre-determined grades of quality. Grading helps in fixing and securing remunerative prices for the products.

(iii) Branding To differentiate the product from its competitors she gave a name to the product as ‘Malabari Organic Rice’. Branding refers to the process of giving a name, sign, symbol or a combination of all to a product for creating its identification. It helps to differentiate the product from other products available in the market. It also helps to build customer’s loyalty and promoting its sales.

Question 75.
The choice of an appropriate channel of distribution depends upon a number of factors. Explain any four such factors. (All India 2015)
Or
‘Choice of channels of distribution depends on various factors.’ Explain any four factors which affect the choice of channels of distribution. (All India 2013; Delhi (C) 2012)
Or
‘Choice of an appropriate channel of distribution is a very important marketing decision, which depends on various factors’. Explain any three such factors. (All India 2013)
Answer:
Factors which affects the choice of channel of distribution are as follows:
(i) Market related factors Refer to Ans 16 on page 209.

(ii) Product related factors Refer to Ans 16 on page 209.

(iii) Company characteristics The important company characteristics affecting the choice of channels of distribution include the financial strength of the company and the degree of control, it wants to hold on other channel members.
(a) Degree of control Manufacturers ambition to control the channel of distribution affects its selection. Consumers should be approached directly by such type of manufacturer, e.g. Electronic goods sector with a motive to control the factors service levels provided to the customer at the point of sale are resorting to company owned retail counters.
(b) Financial strength A company which has strong financial base can evolve its own channels. On the other hand, financially weak companies would have to depend upon middlemen. Company desiring control on distribution of goods and services should use short channels.

(iv) Competitive factors The choice of channel is also affected by the channel selected by the competitors in the same industry.

Question 76.
Hayaram is a famous chain selling a large variety of products in the Indian market. Their products include chips, biscuits, sweets and squashes. It charges a comparatively higher price than its competitors as it sells quality products. Besides, it offers regular discounts to its customers and easy credit terms to its retailers. It has five of its own retail shops. It also sells its products through various grocery stores so that the products are made available to customers at the right place, in the right quantity and at the right time.lt regularly uses different communication tools to increase its sales.
The above para describes the combination of variables used by Hayarpm to prepare its market offering. Identify and explain the variables. (Delhi 2015)
Answer:
‘Hayaram’ chain store in using the four variables of marketing mix, viz product, promotion price and place to prepare its market offering.
(i) Product It means goods or services or ‘anything of value’ which is offered to the market for exchange.
‘Hayaram’ is offering variety of products, which include chips, biscuits, sweets and squashes to the Indian consumers under one roof through its chain stores.
From the customer’s point of view, a product is a bundle of utility as it provides three types of benefits to the consumers, viz
(a) Functional benefits.
(b) Psychological benefits.
(c) Social benefits.
It also includes the extended product or what is offered to the customer as after sales services, handling complaints, credit servies, etc. The product mix refers to important decisions related to the product such as quality of product, design of product, packaging, etc.

(ii) Promotion It refers to the process of informing the customers about the product and then persuading them to buy it. Most marketing firms use a combination of advertising, sales promotion, personal selling, and public relations to promote their products.

Therefore, the combination of any of these techniques to attain the marketing objectives is called promotion mix. In our case study, ‘Hayaram’ chain stores is using different communication tools of advertising, sales promotion and public relations. For sales promotion, it is giving regular discounts to its customers and also easy credit terms to its retailers.

(ii) Price It refers to the amount of money that the customer has to pay in the market to obtain the product. The marketers have to take a number of decisions regarding price level, pricing strategy, pricing objectives, discounts, etc, together known a price mix.
‘Hayaram’ has priced its product comparatively higher than its competitors as it sells quality products.

(iv) Place Place or physical distribution covers all the activities required to physically move the goods from manufacturers to customers.
The two major decision areas under this function are:

• Decision regarding channels of distribution
  Physical movement of goods from the place where it is produced to the place of consumption.

Thus, place mix involves a number of decisions relating to inventory control, intermediaries, negotiation, storage, warehousing, transportation, etc.
‘Hayaram’ not only sells through its own retail stores but also distributes its products through various grocery stores so that the products are available to customers at the right place, in right quantity and at the right time.

Question 77.
Explain the following functions of marketing. (All India 2014)
(i) Product designing and development;
(ii) Standardisation and grading;
(iii) Customer Support Services;
(iv) Pricing of Products.
Answer:
(i) Refer to Ans 14 (iii) on page 202.

(ii) Standardisation It refers to the process of setting standards regarding quality, price, packaging, technology, equipment, etc for the production of a product. This ensures uniformity and consistency in output and reduces the need for inspection, testing and evaluation of the products.
Grading It is the process of classifying the products into different groups, on the basis of quality, size, features, etc. It is necessary for such goods which are not produced according to predetermined specifications, such as agricultural goods. Grading ensures that the goods belong to a particular quality and helps the marketer to fix prices easily.

(iii) Refer to Ans 14 (iv) on page 202.

(iv) Pricing of product Refer to Ans 22 on page 210 and 211.

Question 78.
Explain the following functions of marketing: (Compartment 2014)
(i) Marketing planning
(ii) Product designing and development
(iii) Pricing of products
(iv) Standardisation and grading
Answer:
(i) Marketing planning Refer to Ans 14 (ii) on page 202.
(ii) Product designing and development Refer to Ans 14 (iii) on page 202.
(iii) Pricing of products Refer to Ans 22 on page 210 and 211.
(iv) Standardisation Refer to Ans 7 (ii) on page 216.

Question 79.
Explain the concept of personal selling and any four qualities of a good salesman. (Delhi 2013; Comportment 2013)
Answer:
Personal selling refers to the oral presentation of message in the form of conversation with one or more prospective customers for the purpose of making sales.

Qualities of good salesman are as follows:

• Physical qualities Good looking, healthy.
• Psychological qualities Should be sweet natured, possess good behaviour, should be mentally healthy, intelligent and creative.
• Technical quality Should be fully conversant with technical knowledge of the product.
• Communication skills Should be pleasing, polite and courteous. He should have good oratory skills and he should also be a good listener.

Question 80.
Explain the role of ‘advertising’ in marketing management. (All India 2013)
Answer:
Advertising is an impersonal form of communication, which is paid for by the marketers (sponsors) to promote some goods or services. Most common modes of advertising are newspaper, television and radio.

Advantages to manufacturers are as follows:

• Provides economies of scale Large and steady demand enables a manufacturer to sell more and to produce goods on large scale. Mass production on regular basis helps to reduce the costs of production and distribution.
• Reduces dependence on middlemen Advertising helps to establish a direct contact between manufacturers and consumers. It is easy to find consumers, as they are made aware of the availability and usefulness of goods.

Advantages to consumers are as follows:
(i) Educates consumers Advertising provides useful information to consumers about products and their uses. It helps them to develop better habits and good lifestyle, e.g. Advertisements remind children to regularly brush their teeth, housewives to use better detergents and managers to use personal computers.

(ii) Consumer’s surplus Advertising makes goods available to consumers at lower prices by expanding sales and production. It also helps to eliminate cost of middlemen. In order to support advertising, manufacturers maintain quality of their products. Consumers get surplus in the form of lower prices and better quality.

Advantages to society are as follows:
(i) Generates employment Advertising provides direct employment to a large number of people engaged in designing, writing and issuing advertisements. Indirectly, advertising creates employment opportunities by increasing the volume of sales and production.

(ii) Improves standard of living Advertising helps people in improving their lifestyles. It provides knowledge about new and better things. Such education facilitates progress of civilisation.

Question 81.
What is meant by sales promotion? Explain any five sales promotion techniques with an example of each. (Comportment 2013)
Answer:
Sales promotion Sales promotion refers to all the immediate activities, which are undertaken for the purpose of increasing immediate sales.
Sales promotion refers to short-term incentives to boost sales in a short period and it supplements other promotional efforts such as advertising, personal selling and publicity, aimed at stimulating market demand for products. The commonly used sales promotion techniques are:
(i) Rebate When the products are offered at special, reduced prices, usually to clear off excess inventory, it is called rebate, e.g. ₹ 20,000 off on the purchase of Honda City till 25th December, 2014.
(ii) Discount When products are offered to customers at a price, less than the price, the difference between the list price and the price offered is known as discount, e.g. A shoe company’s offer of ‘discount upto 50%’.
(iii) Refunds It refers to the act of refund of a part of price paid by customer on return of empty wrappers or presenting a proof of purchase of product.
(iv) Product Combinations Offering a product along with another product is called product combination, e.g. Buy a cell phone and get a sim card free, buy Maggie ketchup and get Maggie Noodles free, etc.
(v) Quantity Gift Sellers devise special packages, which gives extra quantity of the product to the buyers at less price or no price, e.g. ‘Buy two get one free’ available offer on Pears soap, 30% extra on Dettol liquid soap, etc.

Question 82.
Consumer products are classified on different basis, ‘durability of the product’ is one of them. Explain any three types of products in this category. (All India 2012)
Answer:
On the basis of durability of products, consumer products are classified as follows
(i) Non-durable products The consumer products which are normally consumed in one or few uses are called non-durable products, e.g. Toothpaste, detergents, bathing soap and stationery products, etc.

(ii) Durable products Those tangible consumer products which normally survive many uses. e.g. TV, radio, refrigerator, bicycle, sewing machine and kitchen gadgets, are referred to as durable products. These products are generally used for a longer period.

(iii) Services Services are intangible in form by services, we mean those activities, benefits or satisfactions that are offered for sale. e.g. dry cleaning, watch repairs, hair cutting, postal services, services offered by a doctor and a lawyer.

Following are the important features of services:

• Services are intangible.
• A service is inseparable from its source.
• Services can not be stored.
• Services are highly variable as their type and quality depend on the person providing them.

Question 83.
Consumer products are classified on different basis. ‘Shopping efforts involved’ is one of them. Explain any three types of products in this category. (Delhi 2012)
Answer:
Consumer products classified on the basis of ‘shopping efforts involved’ are as follows:
(i) Convenience products Those consumer products which are purchased frequently, immediately and with least time and efforts are known as convenience goods, e.g. Cigarettes, ice-creams, medicines, newspaper, etc. These products have, low unit value have a regular demand and are bought in small quantities.

(ii) Shopping products These are those consumer goods in the purchasing of which buyers devote considerable time, to compare the quality, price, style, suitability, etc at several stores before making the final purchase, e.g. clothes, shoes, jewellery, furniture, radio, television etc.

(iii) Speciality products These products are those consumer goods which have certain special features because of which people make special efforts in their purchase.

These products are of high value and manufactured by reputed firms.
For such products, the buyers have brand preference and insistence. Hence, the consumer may wait or suffer inconveniences to get the desired goods, e.g. Art and artifacts, Rolex watches, etc.

Question 84.
Name the element of marketing mix in which a set of firms and individuals creates possession, place and time utility and helps in market offering. Also explain any five important functions performed by this element. (Delhi 2011; All India 2011)
Answer:
The element is ‘Place Mix/Physical Distribution’.

Functions performed by this elements are:
(i) Sorting Middlemen procure supplies of goods from a variety of sources, which is often not of the same quality, nature and size. They sort these goods into homogeneous groups.
(ii) Accumulation This function involves accumulation of goods into larger homogeneous stocks for continuous flow of supply.
(iii) Allocation It involves breaking homogeneous stock into smaller marketable lots. e.g. Once cashew nuts are graded and large quantities are built, these are divided into convenient packs of say 1 kg, 500 gms, to sell them to different types of buyers.
(iv) Assorting Middlemen build assortment of products for resale. There is usually a difference between the product lines made by manufacturer and the assortment or combinations desired by the users, e.g. A cricket player may need a bat, a ball, wickets, gloves, helmet, a t-shirt and a pair of shoes.
(v) Product promotion Mostly advertising and other sales promotion activities are performed by manufacturers. Middlemen also participate in certain activities such as demonstrations, special displays, contests, etc. for increasing the sale of products.

Question 85.
Identify and explain the promotional tool of marketing mix which plays a persuasive, service and informative role and thereby link a business firm to its customers. Also explain by giving any four reasons how this tool helps in increasing the sales of businessmen. (Delhi 2011)
Answer:
Personal selling It refers to the oral presentation of message in the form of conversation with one or more prospective customers for the purpose of making sales.
Companies appoint sales persons to contact prospective buyers and create awareness about the product and develop product preferences with the aim of making sale.

Importance of personal selling to a business Personal selling is an effective tool of promotion mix. Its importance to business is judged by the following factors:

• Flexible tool It is personal in nature and offers the salesperson an advantage of adjusting as per the needs of the customer.
• Link with customers There is a direct contact between the salesman and the prospects, which reduces chances of diffusion and distortion in the desired message.
• Feedback It enables the businesses to obtain the feedback from the customers and accordingly prepare the strategies for the future.
• Role in introduction stage It is an effective tool to launch products in the introductory stage of a product life cycle.

Question 86.
Identify and explain the promotional tool of marketing mix which is an impersonal form of communication and is paid for by the marketer. Also explain any three benefits of this tool. (Delhi (C) 2011; All India 2011)
Answer:
Advertising is an impersonal form of communication, which is paid for, by the marketers (sponsors) to promote some goods or service. The most common modes of advertising are ‘newspapers’, ‘magazines’, ‘television’ and ‘radio’. As it is an impersonal method, it creates monologue and not a dialogue. Advertising can be easily identified by its sponsor.

Benefits of advertising are as follows:
(i) Mass communication Advertising is a medium of mass communication. It reaches a large number of people spread over a large geographical area.
(ii) Helps in building the image of the firm Advertising helps to build the image of the firm and its products in the minds of buyers who begin to patronise the products. It also helps in building confidence among the prospective buyers about the quality of the products.
(iii) Creation of demand Advertising helps in introducing new products and new uses of existing articles or services to create and maintain demand. Demand for the product is created through arising interest and awareness among the prospective , buyers, and thereby increasing sales and profits of the organisation.

Question 87.
Identify and explain the promotional tool of marketing mix which involves oral presentation of message with one or more prospective customers for the purpose of making sales. Also explain any three benefits of this tool in the economic progress of a society. (Delhi (C) 2011)
Answer:
Explanation of personal selling Refer to Ans 18 on page 218 and 219.

Benefits of personal selling in the economic progress of a society are as follows:

• Converts latest demand Personal selling converts latest demand into effective demand, which leads to economic activity in the society, leading to more jobs, more income and higher production. This cycle leads to economic progress of the society.
• Employment opportunities Personal selling offers employment opportunities to the unemployed youth in the society.
• Product standardisation Personal selling increases product standardisation and uniformity in consumption pattern in a diverse society.

Question 88.
Describe any three points of importance of personal selling each to businessmen and society. (All India 2011)
Answer:
Importance of personal selling for businessmen Refer to Ans 18 on page 218 and 219.

Importance of Personal Selling to Society
Personal selling brings following positive effects for society:

• Converts latest demand into effective demand Personal selling creates effective demand, which results in increasing sale and generate more income. There will be more products and services, which in turn bring economic growth.
• Employment opportunities Personal selling offers a wide scope of employment and income generation to unemployed youth.
• Career opportunities Personal selling provides attractive career opportunities to young men and women.
• Mobility of sales people Mobility of sales people promote travel and tourism in the country.
• Product standardisation It ensures product standardisation and uniformity in consumption pattern in a diverse society.

Multiple Choice Questions

Question 1.
Which type of distribution channel is used by Flipkart?
(a) Direct distribution
(b) One level distribution
(c) Two level distribution
(d) Three level distribution
Answer:
(a) Direct distribution

Hint:
Flipkart performs internet selling in which goods are directly made available to the consumers from the manufacturers without use of any intermediary.

Question 2.
Which of the following act as a silent salesman?
(a) Product
(b) Price
(c) Packaging
(d) Promotion
Answer:
(c) Packaging

Hint:
Packaging acts as a silent salesman in self service outlets by providing attractive and colourful packing of the product to attract attention of consumers. Packaging is not limited to facilitating use and protection of the product, but also helps in product identification and promotion of the product.

Question 3.
Which of the following functions is restricted to promotion of goods and services through salesmanship, so that title of the product is transferred from seller to buyer or in other words product is converted into cost?
(a) Marketing
(b) Selling
(c) Promotion
(d) Physical distribution
Answer:
(b) Selling

Question 4.
The total cost of product includes
(a) production costs
(b) selling costs
(c) distribution costs
(d) All of these
Answer:
(d) All of these

Hint:
The total cost of product consists of production cost {costs incurred in the production of a product), selling costs (cost incurred in selling the product) and distribution costs (cost incurred in the distribution of the product).

Question 5.
Identify the process of classification of products into different groups, on the basis of some of its important characteristics.
(a) Standardisation
(b) Grading
(c) Product mix
(d) Grouping
Answer:
(b) Grading

Question 6.
…………. refers to producing goods of predetermined specifications, which helps in achieving uniformity and consistency in the output.
(a) Standardisation
(b) Grading
(c) Assorting
(d) Sorting
Answer:
(a) Standardisation

Question 7.
Which of the following does not come under controllable factors?
(a) Price decisions
(b) Packaging decisions
(c) Physical distribution decisions
(d) Taxation
Answer:
(d) Taxation

Hint:
There axe certain factors which are beyond the control of the firm. These are non-controllable factors or environmental factors e.g. Rate of inflation, credit policy of banks, taxation, competition, etc.

Question 8.
‘Haldiram is selling its product directly to the customers’. State which channel of distribution is used by the company.
(a) Direct channel of distribution
(b) One level channel of distribution
(c) Two level channel of distribution
(d) Three level channel of distribution
Answer:
(a) Direct channel of distribution

Question 9.
Sharvan is very particular to get his hair cut from ABC saloon of South Delhi. Which type of service is it?
(a) Speciality service
(b) General service
(c) Common service
(d) All of these
Answer:
(a) Speciality service

Hint:
Here, in the question, Sharvan is getting hair cut only from ABC saloon because of its some speciality in its service.

Question 10.
XYZ company is adopting a promotional tools, which plays a persuasive, service and informational role thereby link a business firm to its customers. Identify this promotional tool.
(a) Advertising
(b) Personal selling
(c) Sales promotion
(d) Public relations
Answer:
(b) Personal selling

Hint:
Here, the company is adopting personal selling, as personal selling involves oral presentation of message in the form of conversation with one or more prospective customers for the purpose of making sales.

Question 11.
Pepsi offers ? 5 to the customer on return of empty bottle. Identify the technique used by Pepsi.
(a) Discount
(b) Refund
(c) Quantity gift
(d) Usable benefit
Answer:
(b) Refund

Hint:
Refund refers to the act of repay of a part of price paid by customer on return of empty wrappers or presenting a proof of purchase of product. Here, pepsi is using ‘refund’ technique.

Question 12.
Automobiles Ltd. offered to sell their new bike at about ₹ 8,000 less than the usual price. Which of the following techniques has been used here?
(a) Refund
(b) Rebate
(c) Quantity gift
(d) Product combination
Answer:
(b) Rebate

Hint:
Here, the technique ‘rebate’ has been used. In order to clear the excess stock products, it is used in the market. When the products are offered at special, reduced prices, it is called ‘sale at rebate.”

Question 13.
covers all the activities required to physically move the goods from manufacturers to customers.
(a) Place mix
(b) Price mix
(c) Product mix
(d) Promotion mix
Answer:
(a) Place mix

Question 14.
Which type of products can be used again and again?
(a) Durable products
(b) Non-durable products
(c) Perishable
(d) Both (a) and (b)
Answer:
(a) Durable products

Hint:
Durable products are those products which can be used again and again. These goods last for a long period of time and may be used several time. e.g. Furniture, jewellery, electronics, etc.

We have given these Business Studies Class 12 Important Questions Chapter 12 Consumer Protection to solve different types of questions in the exam. Go through these Consumer Protection Class 12 Important Questions and Answers & Previous Year Questions to score good marks in the board examination.

Important Questions of Consumer Protection Class 12 Business Studies Chapter 12

Question 1.
Give the constitution of the District Consumer, Dispute Redressal Forum under the Consumer Protection Act, 1986. (CBSE 2018)
Or
How many members are required to constitute ‘District consumer dispute redressal forum’? (Comportment 2014)
Answer:
The District Fomm consists of a President and two other members, one of whom should be a woman.

Question 2.
Manuj bought a packet of chips from a local shopkeeper and found that the ingredients given on the label were not legible. He complained about it to the company. The company sent a written apology stating that they will make sure that existing packets are withdrawn from the market and new packets with legible labels are soon made available. State the consumer right which Manuj exercised. (Delhi 2016)
Answer:
Right to seek redressal

Question 3.
Suman bought a box of cheese of a reputed brand from a local shopkeeper. On opening the box she found a piece of stone in the cheese. She reported the matter to the shopkeeper who forwarded her complaint to the concerned company. Within a week the representative of the company visited Suman’s residence with an apology and as a replacement offered her a new cheese pack with four other varieties of cheese as compensation for the inconvenience to her state the consumer right which Suman exercised. All India 2016
Answer:
Right to seek redressal

Question 4.
Manvendra always went to a specific shop to buy all consumable and non-consumable goods. In this shop variety of products of different brands were displayed nicely and the sales person available also gave good sales presentation if required. But this shop was quite far off from his residence. His friend Annant always wondered why Manvendra wastes so much time in going to that shop where as there were many big brand shops situated near his residence having consumable and non-consumable goods.
Annant asked Manvendra the reason of going to that particular shop. Manvendra told that he was exercising one of his ‘rights’ which he could not exercise in near-by big brand shops.
State consumer’s right which Manvendra had exercised. (Foreign 2016)
Answer:
Manvendra had exercised ‘Right to choose’.

Question 5.
On the eve of Diwali, Ravi purchased two kilograms of sweets from Nandan Sweets.
On consumption of sweets, his wife fell sick and was to be hospitalised. Ravi wanted to fill a case in the consumer forum but could not do so because he did not have any proof of buying the sweets from Nandan Sweets. Name the document the Ravi could have obtained for filing the complaint in the consumer forum. (Comportment 2015)
Answer:
A cash memo would have helped him file a complaint in the consumer forum.

Question 6.
On Sonika’s birthday her mother gave her a pair of gold earrings. After one month Sonika observed that the earrings are losing their shine. She checked the mark on the earrings and found that it was not a proper Hallmark and her mother had been cheated by the shopkeeper. So, she filed a complaint in the district forum which rejected it. Not satisfied by the decision of the district forum, she was very much disturbed and after two months decided to appeal further.
Can Sonika appeal against the decision of the district forum? Give reason in support of your answer. (Delhi 2015)
Answer:
Yes, Sonika can appeal against the decision in the State Commission, as she is dissatisfied with the decision of District forum.

Question 7.
On which type of products is ISI mark used? (Comportment 2014)
Answer:
ISI is the standardisation mark for electrical appliances and electronic goods.

Question 8.
‘The consumer has a right to acquire knowledge and be a well informed consumer throughout life’. State what type of knowledge is required by the consumer in the above stated right. (Comportment 2014)
Answer:
The consumer has a right to acquire knowledge about his rights, responsibilities and the reliefs available to him in case of a product or service falling short of his expectations.

Question 9.
Besides a ‘consumer’, name any two parties who can file a complaint before the appropriate consumer forum. (Comportment 2014)
Or
Name any two parties who can fill a complaint under the Consumer Protection Act, 1986 on behalf of the consumer. (Delhi 2012)
Answer:
Two parties who can file a complaint under the Consumer Protection Act 1986 on behalf of consumer are:

• Any registered consumer association
• The Central or any State Government

Question 10.
Pragya bought an iron of a reputed brand for ₹ 1,500 but it caused an electric shock while it was being used. Pragya wants to exercise her ‘Right’. Identify the ‘Right’ under which she can be protected. (Delhi 2013)
Answer:
Right to safety

Question 11.
Under three-tier machinery where can a legal heir or representative of a deceased consumer file a complaint when the compensation claimed is ₹ 25 lakh.(Delhi 2013)
Answer:
State Commission (Claim limit ₹ 20 lakh to ₹ 1 crore).

Question 12.
Your mother purchased a washing machine for ₹ 10,000 from an authorised dealser of the manufacturer with an oral guarantee that the machine will be replaced with a new one if any of its parts becomes defective with three months from the date of purchase. The motor of the machine was burnt within 15 days of its purchase. On complaining, the seller refused to replace the machine. Name the redressal agency under the Consumer Protection Act where your mother can file the complaint. (Delhi [C] 2012)
Answer:
She can file a case in District Forum for a claim limit upto ₹ 20 lakh.

Question 13.
Give any one responsibility of a consumer in addition to obtaining a cash receipt while purchasing a washing machine. (All India 2012)
Answer:
Buy only ISI certified washing machine as it provides quality assurance.

Question 14.
How can business associations act as a means of consumer protection? State. (Delhi 2012)
Answer:
Business Associations act as a means of consumer protection as they lay down guidelines for their members in dealings with the customers.

Question 15.
Give any one relief available to a consumer who suffers due to consumption of an expired date medicine. (Delhi 2012)
Answer:
Relief available to consumer is to refund the price paid for the medicine.

Question 16.
State how self regulation by business acts as a means of consumer protection. (All India 2012)
Answer:
Self regulation by business acts as a means of consumer protection by:

• Establishing ethical standards and practices in . dealing with their consumers.
• Setting up their customer service and grievance cells to redress the problems and grievances of their consumers.

Question 17.
State what is to be informed to the consumer under right to be informed. (Delhi [C] 2011)
Answer:
Right to be informed Every consumer has a right to be informed about the ingredients, date of manufacture, expiry date, directions for use, quantity, etc, to be put on the label of product. The right provides complete information to consumer about the product he intends to buy. The legal framework in India requires such information on the package and label of the product.

Question 18.
When can a consumer get more than one relief for a complaint? (All India 2011)
Answer:
If the Consumer Court is satisfied about the genuineness of the complaint, a consumer can get more than one relief for a complaint.

Question 19.
Which Act of Consumer Protection provides for the formation of ‘consumer protection councils’ in every district and the state of the country? (All India 2010; Delhi 2010)
Answer:
Consumer Protection Act, 1986.

Question 20.
Why is consumer protection important for consumers? Give any one reason. (All India 2010; Delhi 2010)
Answer:
Consumer protection is important from the view point of consumers, as it protects them from exploitative and unfair trade practices.

Question 21.
Why is consumer protection important for a businessman? Give any one reason. (All India 2010; Delhi 2010)
Answer:
Consumer protection is important for businessman because of long-term interest of business.

Question 22.
Which Act of Consumer Protection provides safety to consumers against deficient services? (All India 2010)
Answer:
The Consumer Protection Act, 1986 provides safety to consumers against deficient services.

Question 23.
Why should a consumer look for ISI mark on electrical goods? (Delhi 2010)
Answer:
The consumer should look for ISI mark on electrical goods because it gives an assurance that the product meets quality certifications.

Question 24.
As a responsible consumer, how will you ensure about the quality of a juice packet purchased by you? (Delhi (c) 2010)
Answer:
A person can check for FPO mark/standardisation mark which is granted to the processed food products which satisfy the specification and quality control requirements. Secondly, he/she can also check expiry date and storage condition of the juice packet.

Question 25.
Which kind of cases can be filed in the State Commission under the Consumer Protection Act, 1986? (Delhi to 2010)
Answer:
Those cases can be filed in the State Commission under the Consumer Protection Act, 1986 in which compensation claimed exceeds ? 20 lakh but does not exceed ₹ 1 crore.

Question 26.
Which cases can be filed in the National Commission under Consumer Protection Act, 1986. (All India 2010)
Answer:
Those cases can be filed in the National Commission under Consumer Protection Act, 1986 in which the value of the goods or services in question, along with the compensation claimed, exceed 11 crore.

Question 27.
Name any two Non-Governmental Organisations (NGOs) which are working in India to protect and promote the consumer interests. (All India 2010)
Answer:
The two Non-Governmental Organisations (NGOs) working in India to protect and Promote the consumer interests are:

• Consumer Guidance Society of India (CGSI), Mumbai.
• Voluntary Organisation in Interest of Consumer Education (VOICE), Delhi.

Question 28.
State any eight reliefs available to a consumer under the Consumer Protection Act, 1986. (All India 2019, 2014, 2013)
Or
State any three directions which can be issued by the consumer court to the opposite party if it is satisfied about the genuineness of the complaint. (Foreign 2016)
Or
State any eight reliefs available to a consumer under the provision of CPA, 1986. (Compartment 2014)
Answer:
The reliefs available to a consumer under the CPA, 1986 are:

• To remove the defects in goods or deficiency in services.
• To replace the defective product with a new one, free from any defect.
• To refund the price paid for the product.
• To pay punitive damages.
• Not to offer hazardous goods for sale.
• To cease manufacture of hazardous goods.
• To pay adequate costs to appropriate party.
• To Issue coffective advertisement, in place of misleading advertisement.

Question 29.
What is meant by a ‘consumer’ as per the provisions of Consumer Protection Act, 1986? (All India 2019, 2016)
Or
Give the definition of ‘Consumer’ as per CPA, 1986. (Comportment 2014)
Or
Explain any four points of importance of ‘consumer protection’ from the point of view of business. (All India 2015, Delhi 2013)
Or
State with the help of any four points, why is it important for a business to lay emphasis on consumer protection. (Compartment 2014)
Answer:
Under the Consumer Protection Act, 1986, the term ‘consumer’ has been defined as any person who buys goods or hires or avail any service for a consideration which has been paid or promised or partly paid and partly promised or under any system of deferred payment.
It also includes any user of such goods with the approval of the buyer or any beneficiary of services when such goods or services are availed of with the approval of the person concerned but does not include a person who avails such services for any commercial purpose.

Question 30.
State any eight responsibilities that a consumer should keep in mind while purchasing using and consuming goods and services. (All India 2019; Delhi 2014)
Or
State any six responsibilities of a consumer which should be kept in mind while purchasing the goods. (All India 2013)
Answer:
While purchasing, using and consuming goods and services, consumers have following responsibilities:

• Be aware of different goods and services available.
• Buy only standardised goods.
• Learn about the various risks associated with products.
• Read labels carefully.
• Assert yourself to get into a fair deal.
• Be honest in your dealings.
• File complaint in appropriate forum.

Question 31.
What is meant by ‘Consumer Protection’? State any five points of importance of consumer protection from point of view of business. (All India 2019)
Or
Explain any two points of importance of consumer protection from the point of view of business. (Compartment 2018,2014, 2013; All India 2014)
Answer:
Consumer protection It refers to the steps taken to protect and promote the rights of consumers. Since long, consumers have been exploited in various ways. e.g. Adulteration, misleading, etc. In recent years, there has been increasing awareness among consumers about their rights.

A business must lay emphasis on consumer protection because of the following reasons:

• Long-term interest of business It is in the long-term interest of business to satisfy their customers. Satisfied customers not only leads to repeated sales, but also helps in increasing the customer base.
• Social responsibility It is the social responsibility of every business to take care of the interest and protection of its consumers.
• Moral justification It is the moral duty of any business to take care of consumer’s interest and avoid any form of their exploitation.
• Government intervention A business engaged in any form of exploitation would invite government intervention or action.

Question 32.
State any three points which highlight the importance of consumer protection from consumer’s point of view. (Compartment 2018, 2013; Delhi 2012)
Answer:
Importance of consumer protection from consumer’s point of view are:
(i) Consumer ignorance Due to widespread ignorance of consumers about their rights and reliefs available to them, they need to be made aware in this regard. Consumer protection provides information to the ignorant consumers regarding their rights and reliefs available to them.

(ii) Unorganised consumers Consumers need to be organised for safeguarding their interests. In developing countries like India, consumers are not organised. There are very few consumer organisations which are working to protect the interests of consumers. Consumer protection encourages establishment of more consumer organisations.

(iii) Widespread exploitation of consumers Consumers are exploited by unscrupulous, exploitative and unfair trade practices of sellers. They might be exploited by unfair trade practices like defective and unsafe products, ‘adulteration, hoarding, black marketing, etc. Consumers need protection against such unfair trade practices.

Question 33.
Himanshu purchased a new car from ‘Galaxy Motors’ for ₹ 25 lakh. He was offered free insurance for the first year and three free servicing to be availed after the car had covered 5,000 km, 10,000 km and 15,000 km respectively. When Himanshu took the car for the first free servicing, he was told that the car was not new and first service had already been availed on this car. He felt cheated and filed a complaint in the State Commission. Being not satisfied with the decision of the State Commission, after two months he decided to file and appeal against it.
Can Himanshu appeal against the decision of the State Commission? Give reason in support of your answer. (All India 2015)
Answer:
No, Himanshu cannot appeal against the decision of State Commission in the National Commission. Under the Consumer Protection Act, 1986 appeals against the order of State Commission can be filed in National Commission, within 30 days of the passing of the order and in this case Himanshu decides to file appeal against the decision of State Commission after 2 months.

Question 34.
Explain the following rights of a consumer as provided under Consumer Protection Act 1986: (Delhi 2015; All India 2014)
(i) Right to choose; and
(ii) Right to consumer education.
Answer:
(i) Right to choose A consumer has a right to choose from a wide variety of products at competitive prices. This implies that the marketers should offer a wide variety of products in terms of quality, brand, prices size, etc and allow the consumer to make a choice amongst them.

(ii) Right to consumer education The consumer has a right to acquire knowledge and to be a well informed consumer throughout life. Many consumer organisations and some business are actively educating consumers. He should be aware about his rights and the reliefs available to him in case of a product or service falls short of his expectations.

Question 35.
Explain the following Rights of Consumers:
(i) Right to safety;
(ii) Right to he heard. (All india 2014)
Answer:
(i) Right to safety A consumer has a right to be protected against goods and services which are hazardous to life and health.
For instance, electrical appliances which are manufactured with sub-standard products do not confirm to the safety norms, might cause serious injury. Thus, consumers are educated that they should use electrical appliances which are ISI marked, as this would be an assurance of such products meeting quality specifications.

(ii) Right to be heard A consumer has a right to file a complaint and to be heard in case of dissatisfaction with regard to a good Of a service. It is because of this reason that many enlightened business firms have set up their own consumer service centres and grievance cells. Many consumer organisations are also working towards this direction and helping consumers in redressal of their grievances.

Question 36.
How are consumer grievances redressed by the three-tier machinery under CPA, 1986? Explain. (Foreign 2014)
Answer:
The three-tier machinery under CPA, 1986 consist of District Forum, State Commission and the National Commission. A consumer can file a case in District Forum if the value of goods and services alongwith the compensation claimed, does not exceed ₹ 20 lakh, in the State Commission if the value of goods and services alongwith the compensation claimed is over ₹ 20 lakh but less than ₹ 1 crore, and in the National commission, if the value of goods and services alongwith the compensation claimed is above ₹ 1 crore.

On receiving the complaint, the District Forum/State Commission/National Commission shall refer the complaint to the party against whom the complaint is filed. If required, the goods or a sample, thereof, shall he sent for testing in a laboratory. The court shall pass an order after considering the test report knd hearing to the party against whom the complaint is filed.

Question 37.
Sumit purchased an ISI marked washing machine of a famous brand ‘MG’ from TG Electronics Ltd. The shopkeeper asked him to wait for two days for installation of the machine. His friend, Vivek, was very fond of experimenting with new electronic products. He told Sumit that there is no need to wait for the company’s representative to install the machine and that he could do it. So, both of them installed the machine without following the manufacturer’s instructions. Initially, the machine worked effectively and the wash was good. But after two days, the machine started stopping in between the wash cycle. Sumit and Vivek tried their best to start the machine but failed in their efforts. Sumit, therefore, approached TG Electronics Ltd., which refused to provide any service on the plea that the installation of the machine was not done by the company.
(a) State the responsibility which Sumit had to fulfil as an aware consumer to get the services of the company.
(b) Explain briefly any two rights which Sumit could have exercised had he fulfilled his responsibility identified in part (a). (CBSE 2018)
Answer:
(a) As an aware consumer, the responsibility that
Sumit should have followed is ‘following the manufacturer’s instructions and user manuals carefully before using the product for safety purposes.

(b) If Sumit had fulfilled his responsibility, then he could have enjoyed the following rights:

1. Right to be heard Under this right, a consumer has the right to file a complaint under appropriate forums established by the government, in case of any grievance or dissatisfaction.

2. Right to seek redressal Under this right, a consumer has the right to seek redressal and compensation in case of any exploitation. The Consumer Protection Act provides for compensation in various forms such as replacement of product, cash compensation and repair/removal of defects, amoung others.

Question 38.
Aditi set-up a company ‘Dantik Ltd.’ to manufacture toothpastes using herbs found in her village instead of chemicals that are harzardous to health. The package of the product was eco-friendly and had details like price, quantity, ingredients, directions for use and other relevant information. It also carries the contact details like address, phone number and email id of ‘Dantik Consumer Services and Grievance Cell’. The toothpaste became very popular and she started getting orders from reputed traders.
Identify and explain any two Rights of Consumers discussed above. (Comportment 2018)
Answer:
Consumer rights discussed above are:

• Right to safety Refer to Ans 8 on page 230.
• Right to be informed Refer to Ans 17 on page 227.
• Right to seek redressal Refer to text on page 223.

Question 39.
State any three functions performed by non-governmental organisation for consumer protection. (Delhi 2011)
Answer:
Consumer organisations and NGO’s perform several functions for the protection and promotion of interest of consumers. These include:

• Educating the general public about consumer rights by organising training programmes, seminars and work shops.
• Publishing periodicals and other publications to impart knowledge about consumer problems, legal reporting, reliefs available and other matters of interest.
• Carrying out comparative testing of products and publish results for consumer welfare.
• Encouraging consumers to strongly protest and take an action against unscrupulous, exploitative and unfair trade practices of sellers.

Question 40.
Explain any two points of importance of ‘Consumer protection’ from the point of view of business and any two points from the point of view of consumers. (All India 2015)
Or
What is meant by consumer protection? Also state how consumer protection is important from the point of view of consumers. (Comportment 2014; Delhi 2013)
Or
What is meant by consumer protection? State any three points of importance of consumer protection from the consumers’ point of view. (All India 2010)
Answer:
Consumer protection is a very wide term. It includes providing information to the consumers about their rights and responsibilities and helps in getting their grievances redressed. Consumer is treated as a king in the market, therefore, producers produce goods as per their needs and wants.
For importance of consumer protection from consumer’s point of view Refer to Ans 5 on page 229.
For importance of consumer protection from business point of view Refer to Ans 4 on page 228 and 229.

Question 41.
Describe the following rights of a consumer: (Comportment 2015)
(i) Right to he informed
(ii) Right to seek redressal
(iii) Right to choose
Answer:
(i) Right to be informed The consumer has a right to have complete information about the product, he intends to buy including its ingredients, date of manufacture, price, quality, quantity, directions for use etc.

(ii) Right to seek redressal The consumer has a right to get relief in case the product or service falls short of his expectations. The consumer protection provides a number of reliefs to the consumers including replacement of the product, removal of defect in the product, compensation paid for any loss or injury suffered by the consumer, etc.

(iii) Right to choose Refer to Ans 7 (i) on page 229.

Question 42.
Explain the following rights of a consumer as provided under Consumer Protection Act 1986:
(i) Right to safety
(ii) Right to be heard (Delhi 2015)
Answer:

• For right to safety Refer to Ans 8 (i) on page 230.
• For right to be heard Refer to Ans 8 (ii) on page’230.

Question 43.
Explain the following rights of consumers:
(i) Right to safety
(ii) Right to consumer education (Delhi (C) 2012)
Answer:

• For right to safety Refer to Ans 8 (i) on page 230.
• For right to consumer education Refer to Ans 7 (ii) on page 229.

Question 44.
Explain the following Rights of Consumers
(i) Right to he informed
(ii) Right to seek redressal (All India 2012; Delhi 2012)
Answer:
For Right to be informed and right to seek redressal Refer to text on page 223.

Question 45.
State how (i) Self regulation by business and (ii) Business association act as the ways of achieving the objectives of consumer protection. (All India (C) 2012)
Answer:
(i) Self-regulation by business Business firms realise that it is,in their long-term interest to serve the customers well. Socially responsible firms follow ethical standards and practices in dealing with their customers. Many firms have set-up their customer service and grievance cells to redress the problems and grievances of their consumers.

(ii) Business associations The associations of trade, commerce and business like Federation of Indian Chambers of Commerce of India (FICCI) and Confederation of Indian Industries (CII) have laid down certain code of conduct, which lay down for their members the guidelines in their dealings with the customers.

Question 46.
State how (i) Government (ii) Consumer Awareness Act as the ways of achieving the objectives of consumer protection.
Answer:
(i) Government The government can protect the interests of the consumers by enacting various legislations. The legal framework in India encompasses various legislations, which provide protection to consumers. The most important of these regulations is the Consumer Protection Act, 1986, which provides three-tier machinery for redressai of consumer grievances.

(ii) Consumer awareness A consumer, who is well informed about his rights and his reliefs available to him, would be in position to raise his voice against unfair trade practices or unscrupulous exploitation. This would enable him to safeguard his interests.

Question 47.
Anita purchased a book from Satish book stores. While reading the book, she found that ten pages were missing. She approached the book seller and complained about the missing pages. The seller promised that if the publisher was ready to change the book, he would change the same. After one week, the seller informed Anita that the publisher had refused to change the book.
Where can Anita file a complaint against the seller of the book? Give reason in support of your answer. Also, explain who is a consumer as per Consumer Protection Act, 1986. (Delhi (C) 2011)
Answer:
Anita can file a complaint against the seller of the book in the District Forum. District Forum is established by the State Government in each district. In District Forum, only such complaints can be filed in which the value of goods or services and the compensation claimed is not more than ₹ 20 lakh.
For explanation of ‘consumer’ as per CPA, 1986 Refer to Ans 2 on page 228.

Question 48.
Harish purchased a medicine from Bhatia Medical Stores for his son, who had high fever. Even after giving the medicine his son’s condition did not improve and he had to be hospitalised. Doctor informed Harish that medicine given to his son was spurious. Harish complained about this to Bhatia Medical Stores. As a result, Bhatia Medical Stores decided to file a complaint against the manufacturer in the consumer court.
Can Bhatia Medical Stores do this? Give reason in support of your answer. Also, explain who is a consumer as per Consumer Protection Act, 1986. (Delhi (C) 2011)
Answer:
‘Bhatia Medical Stores’ cannot file a complaint against the manufacturer in the consumer court because Bhatia Medical Stores is not a consumer in this case. He is not a user but has obtained medicine for resale purpose/commercial purpose.
For meaning of ‘consumer’ as per Consumer Protection Act, 1986 Refer to Ans 2 on page 228.

Question 49.
Explain the following Rights of Consumers
(i) Right to choose
(ii) Right to be heard (Delhi 2010)
Answer:

• Right to choose Refer to Ans 7 (i) on page 229.
• Right to be heard Refer to Ans 8 (ii) on page 230.

Question 50.
‘VOICE’ is an important consumer organisation. It organised workshops in the months of December in Delhi/NCR for consumers. The theme was ‘Organic Food-From Farm to Plate’, to spread awareness on the importance of organic farming and to encourage consumers to switch from conventional food, that contains chemicals and pesticides to organic food. Expert speakers from farmers’ community explained the harmful effects of usage of pesticides in farming and the importance of organic food. People were informed that the organisation regularly tests samples to detect adulteration like presence of heavy metals or pesticides. The results of the tests are published in their monthly magazine ‘Consumer Voice’ to make people aware of quality of different products. It also provides aid and legal advice to the consumers in seeking a remedy.
State the functions performed by the Consumer Voice for the protection and promotion of consumer interest by quoting lines from the above para. (Delhi 2019)
Answer:
Functions performed by VOICE are:
(i) Creating awarenes s about consumer rights:
“It organised ………….. pesticides to organic food.”

(ii) Imparting knowledge :
“Expert speakers ………….. food.”

(iii) Testing of consumer products :
“People were ………….. products.”

(iv) Providing legal assistance to consumers :
“It also provides ………….. a remedy.”

Question 51.
Reena purchased one litre of pure desi ghee from a shopkeeper. After using it, she had a doubt that it is adulterated. She sent it for a laboratory test which confirmed that the ghee is adulterated. State any six reliefs available to Reena, if she complains and the consumer court is satisfied about the genuineness of the complaint. (All India 2011; Delhi 2011)
Am. In case of genuineness of the complaint, the court can issue one or more directions to the opposite party. Six reliefs available to Reena, if she complains are:

• To remove defect in goods or services.
• To refund the price.
• To replace the defective good with a new one.
• To pay a reasonable amount of compensation for any loss or injury suffered.
• To pay punitive damages.
• To discontinue the unfair/restrictive trade practices.

Question 52.
Prakhar purchased an ISI mark electric iron from Bharat Electricals. While using, he found that it was not working properly. He approached the seller and complained for the same. The seller satisfies Prakhar by saying that he will ask the manufacturer to replace this iron. The manufacturer refused to replace and Bharat Electricals decided to file a complaint in the consumer court.
Can Bharat Electricals do this. Why? Also explain who is a consumer as per Consumer Protection Act, 1986. (All India 2011; Delhi 2011)
Answer:
Bharat Electricals cannot file a complaint. This is because Bharat Electricals is not a consumer as per Consumer Protection Act, 1986 because they bought the goods for resale or for commercial purpose.

Under the Consumer Protection Act, a consumer is defined as:
(i) A person who buys goods for consideration which has been paid promised, or partly paid and partly promised or trader any scheme of deferred payment. It includes any user of such goods, when such use is made with the approval of the buyer but does not include a person who obtains goods for resale or any commercial purpose.

(ii) Any person who hires or avails any service for consideration which has been paid or promised or partly paid and partly promised or under any system of deferred payment. It includes . any beneficiary of services when such services are availed of with the approval of the person concerned but does not include a person who avails of such services for any commercial purpose.

Question 53.
Explain the three tier machinery under the Consumer Protection Act for redressal of consumers grievances. (Compartment 2010)
Answer:
Redressal agencies For the redressal of consumer grievances, the Consumer Protection Act, 1986 provides for setting up of a three-tier machinery at the district, state and the national levels. These agencies are

District Forum or District Consumer
Dispute Redressal Forum

• The State Governments are required to establish District Forums in each district.
• Each District Forum consists of a chairman and two members appointed by the State Government, one of whom should be a woman.
• A District Forum can receive consumer complaints, where the value of goods or services and the compensation claimed is not more than ₹ 20 lakh.

State Commission or State Consumers
Disputes Redressal Commission

• State Commission is set-up by the State Government and its jurisdiction is restricted to the boundaries of the state concerned.
• The State Commission shall consist of a President, who is or has been a judge of a High Court and two other members, one of whom is a woman. All the three shall be appointed by the State Government.
• Only those complaints can be filed, where the value of goods or services and compensation claimed is more than 120 lakh but note more than ₹ 100 lakh. The appeals against the orders of any District Forum can also be filed before the State Commission, within 30 days of passing of the order.

National Commission or National
Consumer Disputes Redressal Commission:

• The National Commission is set-up by the Central Government.
• It shall consist of a President, who is or has been a judge of the Supreme Court and four other members appointed by the Central Government one of whom shall be a woman.
• All complaints pertaining to those goods or services and compensation whose value is more than ₹ 100 lakh can be filed. Appeals against the order of any State Commission can also be filed before the National Commission, within 30 days of passing of the order.
• An order passed by the National Commission is appealable before the Supreme Court.

Multiple Choice Questions

Question 1.
Which of the following major activity is performed by the Bureau of Indian Standards?
(a) Formulation of quality standards for goods
(b) Certification of goods through the BIS certification scheme
(c) Handling complaints about quality of goods carrying ISI mark
(d) All of the above
Answer:
(d) All of the above

Hint:
The Bureau of Indian Standards has been set up under the Consumer Protection Act, 1986. The Bureau has two major activities formulation of quality standards for goods and their certification through the BIS certification scheme. The Bureau has also set up a grievance cell where consumers can make a complaint about the quality of products carrying the ISI mark.

Question 2.
Which of the following is the apex body for redressal of consumer grievances in India?
(a) District forum
(b) State Commission
(c) National Commission
(d) Supreme Court
Answer:
(d) Supreme Court

Hint:
Supreme Court is the court of final appeal in India. Any order passed by the National Commission may be challenged in the Supreme Court. Therefore, Supreme Court is the apex body for redressal of consumer grievances in India.

Question 3.
What is PIL?
(a) Public Interest Litigation
(b) Protect Interest Litigation
(c) Protect Individual Litigation
(d) Public Induce Litigation
Answer:
(a) Public Interest Litigation

Hint:
Public Interest Litigation (PIL) is a right given to thp socially conscious member or a public spirited NGO to espouse a public cause by seeking judicial course for redressal of public injury.

Question 4.
In India, on which day National Consumer Day is observed?
(a) 26th December
(b) 24th December
(c) 24th January
(d) 15 th March
Answer:
(b) 24th December

Question 5.
Simran Singh, a pure vegetarian, went to a popular fast food outlet of the city and ordered for a veg cheese burger. Later on she found out that the veg cheese burger was cooked in fish oil. Neither the menu card nor the person, who took her order specified this fact to Miss Simran. Which of the following right of Miss Simran as a consumer is violated here?
(a) Right to choose
(b) Right to be heard
(c) Right to be informed
(d) None of the above
Answer:
(c) Right to be informed

Hint:
Every consumer has a right to get true and complete information about the quality, quantity and ingredients of the product he/she intends to buy. In this case, right of Miss Simran violated here is right to be informed.

Question 6.
From business point of view, consumer protection is important because of
(a) long-term interest of business
(b) social responsibility
(c) less government intervention
(d) All of the above
Answer:
(d) All of the above

Hint:
Enlightened businesses realise that it is in their long-term interest to satisfy their customers. A business has social responsibilities towards various interest groups. Business organisations make money by selling goods and providing services to consumers.

Question 7.
The members of the District Forum are appointed by whom?
(a) District Magistrate
(b) State Government
(c) Central Government
(d) Chief Justice of India
Answer:
(b) State Government

Question 8.
Mark the correct option.
(a) The District Forum consists of a chairman and two other members
(b) Out of the members of District Forum, one should be a woman
(c) A complaint can to be made to the appropriate District Forum when the value of the goods or services in question, alongwith the compensation claimed, does not exceed ₹ 20 lakh
(d) All of the above
Answer:
(d) All of the above

Question 9.
Which of the following statement is not true?
(a) Due to lack of consumer organisations, consumer protection becomes necessary
(b) Self regulation by business is a mean of consumer protection
(c) Central Government is required to establish District Forums in each district
(d) None of the above
Answer:
(c) Central Government is required to establish District Forums in each district

Hint:
As per the provisions of Consumer Protection Act, 1986, Central Government set up the National Commission. It is the duty of State Governments to set up State Commission and District Commissions.

Question 10.
Mr. Mahesh who lives in London, bought a motorbike worth ₹ 56 lakh from Delhi and gifted it to his friend Mr. Ramesh, who also lives in Delhi. Later on Mr. Ramesh observed certain deficiencies in the bike and requested the seller to either remove the defects or to replace the bike with new one, however the manufacturer denied. Comment who among the following can file a complaint against the seller?
(a) Mr. Mahesh
(b) Mr. Ramesh
(c) Mr. Ramesh through a consumer association
(d) All of the above
Answer:
(d) All of the above

Hint:
Mr. Mahesh can file a complaint as he is the one who bought the bike. The term consumer includes any other user of such goods when such use is made with the approval of the buyer, therefore, Mr. Ramesh can also file a complaint as he is also the consumer. Mr. Ramesh can himself file the complaint or through a voluntary consumer association. Therefore, all of these can file a complaint in this case.

Question 11.
Match the following,

List I	List II
I. The Prevention of Food Adulteration Act	(i) 1999
II. The Trade marks Act	(ii) 1986
III. The Bureau of Indian Standards Act	(iii) 1954

Codes

	I	II	III
(a)	(i)	(ii)	(iii)
(b)	(ii)	(i)	(iii)
(c)	(iii)	(i)	(ii)
(d)	(ii)	(iii)	(i)

Answer:
(c) (iii) (i) (ii)

Question 12.
A consumer should follow which responsibility, while purchasing, using and consuming goods and services?
(a) He must ensure that he gets a fair deal
(b) He should be aware about the various goods and services available in the market
(c) He should always ask for a cash memo
(d) All of the above
Answer:
(d) All of the above

Hint:
A consumer has provided many rights under the Consumer Protection Act, 1986. But he should fulfil his responsibilities also while purchasing, using and consuming goods and services like awareness about the products available in the market, ensuring about a fair deal, asking for a cash memo while purchasing the goods etc.

We have given these Business Studies Class 12 Important Questions Chapter 10 Financial Markets to solve different types of questions in the exam. Go through these Planning Class 12 Important Questions and Answers & Previous Year Questions to score good marks in the board examination.

Important Questions of Financial Markets Class 12 Business Studies Chapter 10

Question 1.
This market helps to save time, effort and money that both buyers and sellers of a financial asset would have to otherwise spend to try and find each other. Name the market and identify the function being referred to. (All India 2019)
Answer:
The market highlighted is financial market and the function being referred to as reducing the cost of transaction.

Question 2.
State any two ‘Developmental Functions’ of Securities and Exchange Board of India. (Delhi 2019)
Answer:
Two development functions of SEBI are:
(i) Training of intermediaries of the securities market.
(ii) Conducting research and publishing information useful to all market participants.

Question 3.
What is meant by ‘Allocative Function’ of financial markets? (Delhi 2019)
Answer:
Financial market helps in allocation of funds or savings from savers to investors. Thus, it helps in channelising surplus funds into most productive uses. This is the allocative function of financial market.

Question 4.
How does financial market facilitate ‘Price Discovery’ of financial assets? (Delhi 2019)
Answer:
The interaction between demand of funds by businesses and supply of funds by households helps in the price discovery of financial assets, which is being traded in a particular market.

Question 5.
An investor wanted to invest ₹ 20,000 in Treasury bills for a period of 91 days. When he approached the Reserve Bank of India for this purpose, he came to know that it was not possible.
Identify the reason why the investor could not invest in the Treasury bill. (CBSE 2018)
Answer:
The investor cannot invest in Treasury bills because it is available in the denominations of ₹ 25,000 and its multiples only.

Question 6.
‘Vani Oil Refinery’ is a large company, engaged in processing crude oil and refining it into more useful products like Petroleum, Kerosene, LPG, etc. It has build good reputation over the years. It has been consistently earning profits and paying regular dividend to its shareholders. It needs additional working capital immediately to finance a project. It expects to return this amount after seven to eight months. Ashish Batra, The Finance Manager of the company does not want to get into procedural requirment of securing finance from a Commercial Bank.
Suggest how the company can raise the require finance for meeting its additional working capital requirements. (Comportment 2018)
Answer:
For arranging finance for the purpose of additional working capital, company can use commercial bill.

Question 7.
Sika Ltd., a reputed industrial machines manufacturer, needs rupees twenty crores as additional capital to expand the business. Mr Amit Joshi, the Chief Executive Officer (CEO) of the company wants to raise funds through equity.
The Finance Manager, Mr Narinder Singh, suggested that the shares may be sold to investing public through intermediaries, as the same will be less expensive.
Name the method through which the company decided to raise additional capital. (All India 2017)
Answer:
‘Offer for sale’ is the method through which the company decided to raise additional capital.

Question 8.
Meca Ltd. a reputed automobile manufacturer needs rupees ten crores as additional capital to expand its business.
Atul Jalan, the CEO of the company wanted to raise funds through equity.
On the other hand, the Finance Manager, Nimi Sahdev said that the public issue may be expensive on account of various mandatory and non-mandatory expenses. Therefore, it was decided to allot the securities to institutional investors.
Name the method through which the company decided to raise additional capital. (Delhi 2017)
Answer:
‘Private placement’ is the method through which the company decided to raise additional capital.

Question 9.
State any one consequence of a well performed allocative function of financial market. (Delhi 2013)
Answer:
Providing liquidity to financial assets.

Question 10.
Name the two major alternative mechanisms through which allocation of funds can be done. (All India 2013)
Answer:
The two major alternative mechanisms through which allocation of funds can be done are

• Banks
• Financial markets

Question 11.
Give the meaning of secondary market. (Delhi 2013)
Answer:
Secondary market refers to market for sale and purchase of previously issued securities. It is also known as stock exchange.

Question 12.
Give the meaning of money-market. (Delhi 2013)
Answer:
Money-market refers to market for short-term funds, which deals in monetary assets whose period of maturity is upto one year.

Question 13.
State the essential function of primary market. (All India 2013)
Answer:
The important function of a primary market is to facilitate the transfer of investible funds from savers to entrepreneurs, seeking to establish new enterprises.

Question 14.
What is meant by capital market? (Delhi 2013, 2011; All India 2012)
Answer:
Capital market refers to whole network of organisations and institutions through which medium and long-term funds, both debt and equity are raised and invested.

Question 15.
What is meant by ‘financial intermediation’? (Comportment 2013)
Answer:
It refers to the process of allocations of funds from savers to investors/companies with the help of various financial instruments.

Question 16.
What is meant by ‘allocative function’ performed by financial market’? (Compartment 2013)
Answer:
A financial market helps to mobilise funds between savers and investors. In this way, they perform ‘allocative function’.

Question 17.
State any one regulatory function of Securities and Exchange Board of India (SEBI). (Delhi 2012)
Answer:
SEBI prohibits insider trading and take-over bids by imposing penalties.

Question 18.
State any one protective function of Securities and Exchange Board of India (SEBI). (Delhi 2012; All India 2012)
Answer:
SEBI prohibits fraudulent and unfair trade practices like misleading statements, manipulations, price rigging, etc.

Question 19.
State any one development function of SEBI. (All India 2012)
Answer:
SEBI conducts research and publish information which is useful to all market participants.

Question 20.
State any one function of stock exchange (Delhi 2012)
Answer:
It provides liquidity and marketability to existing securities.

Question 21.
What is meant by ‘primary market’? (All India 2011)
Answer:
Primary market is the market where securities are being issued for the first time. Therefore, it is also known as ‘New Issue Market’ (NIM).

Question 22.
One of the functions of Securities and Exchange Board of India is ‘Promotion of fair practices and code of conduct in securities market’. State the category to which this function belongs and state any two other functions of this category. (All Indio 2019)
Answer:
This function comes under the category of ‘Protective Functions’.

Other functions performed are:

• Controlling insider trading and imposing penalties for the same.
• Undertaking steps for investor protection.

Question 23.
Mr Vikas Mehra was the Chairman of ‘IBM Bank’. The bank was earning good profits. Shareholders were happy as the bank was paying regular dividends. The market price of their shares was also steadily rising. The bank was about to announce the taking , over of ‘UK Bank’. Mr Vikas Mehra knew that the share price of ‘IBM Bank’ would rise on this announcement. Being a part of the Bank, he was not allowed to buy shares of the bank. He called one of his rich friends Mukand and asked him to invest ? 4 crore ill shares of his bank promising him the capital gains.

As expected, after the announcement, the share prices went up by 50% and the market price of Mukand’s shares was now ₹ 6 crore. Mukand earned a profit of ₹ 2 crore. He gave ₹1 crore to Vikas Mehra and kept ₹ 1 crore with him. On regular inspection and by conducting enquiries of the brokers involved, Securities and Exchange Board of India (SEBI) was able to detect irregularity. SEBI imposed a heavy penalty on Vikas Mehra.
Quoting the lines from the above para identify and state any two functions performed by SEBI in the above case. (All India 2016)
Or
Mr Sanjay Nehra was the Chairman of ‘Taran Bank’. The bank was earning good profits. Shareholders were happy as the bank was paying regular dividends. The market price of their shares was also steadily rising. The bank was about to announce taking over of “Vena Bank’.
Mr Sanjay Nehra knew that the share price of ‘Taran Bank’ would rise on this announcement. Being a part of the bank, he was not allowed to buy shares of the bank. He called one of his rich friends Sudhir and asked him to invest ₹ 5 crore in shares of his bank promising him the capital gains.

As expected the share prices went up by 40% and the market price of Sudhir’s shares was now ₹ 7 crore. He earned a profit of ₹ 2 crore. He gave ₹ 1 crore to Mr Sanjay Nehra and kept ₹ 1 crore with himselL On regular inspection and by conducting enquiries of the brokers
involved, Securities and Exchange Board of India (SEBI) was able to detect this irregularity. The SEBI imposed a heavy penalty on Mr Sanjay Nehra. By quoting the lines from the above para identify and state any two functions that were performed by SEBI in the above case. (Delhi 2016)
Answer:
The two functions performed by SEBI in the above case are as follows:
(i) SEBI conducts Inspections, enquiries and audit of stock exchanges. It Is one of the regulatory functions of SEBI. Lines from the above para which indicate that the above function was performed are:
“On regular inspection was …………… able to detect this irregularity.’

(ii) SEBI controls Insider trading and Imposes penalty for such practices. It is one of the protective functions of SEBI. Lines from the above para which Indicate that the above function was performed by SEBI are:
“SEBI imposed on Vikas …………… Mchra.

Question 24.
‘Stock exchange not only contributes to the economic growth, but also performs many other functions’. Explain any three such functions. (All India 2014)
Answer:
A stock exchange provides a platform for disiiwestinent and reinvestment of savings into most productive avenues. Thus. it leads to economic growth. However, stock exchange performs following functions:
(i) Provides liquidity and marketability of existing securities Stock exchange provides a ready and continuous market where securities are bought and sold It gives Investors the chance to disinvest or reinvest. Thus, regular dealing provides both liquidity and marketability to existing securities.

(ii) Pricing of securities The stock exchange helps in determining the prices of various securities that reflect their real worth. It enables correct pricing of securities through the interplay of demand and supply.

(iii) Safety of transaction The stock exchange is well regulated and its dealings are well defined according to the existing legal framework. This ensures that the investing public gets a safe and fair deal in the market.

Question 25.
Give the meaning of the following money market instruments
(i) Treasury bill; and
(ii) Call money (Comportment 2014; Foreign 2014; All India 2012)
Answer:
(i) Treasury bill Also known as zero coupon bond, a T-Bill is issued by RBI on behalf of Central Government to meet its short-term requirement of funds. It is issued in the form of promissory note. They are highly liquid and have negligible risk. They are issued at discount and redeemed at par, e.g. 91 days, treasury bill of face value of ₹ 1,00,000 is purchased at ₹ 96,000 and at the maturity investor gets ₹ 1,00,000, ₹ 4,000 being the interest received by him.

(ii) Call money:
Call money is a short-term finance repayable on demand, with a maturity of 1 to 15 days. It is used for inter bank transactions. Banks have to maintain a minimum cash balance known as Cash Reserve Ratio. RBI changes this ratio from time to time.
Call money is a method by which banks borrow from each other to be able to maintain Cash Reserve Ratio. The interest paid on call money loans is called call rate, which is very volatile and changes even from hour to hour.

Question 26.
Give the meaning of the following money market instruments
(i) Certificate of deposit; and
(ii) Commercial bill (Comportment 2014, 2012; Foreign 2014)
Answer:
(i) Certificate of deposit:
These are short-term, unsecured, negotiable instruments in bearer form. They are issued by commercial banks or development financial institution to individuals, corporations and companies. These are issued generally in times of tight liquidity when the deposit growth of banks is slow but the demand for credit is high, to mobilise large amounts of money for short periods.

(ii) Commercial bill:
A commercial bill is a bill of exchange used to finance the working capital requirements of business firms. It is a short-term negotiable, self liquidating instrument, which is used to finance the credit sale of the firms. When goods are sold on credit, seller draws the bill of exchange on the buyer. On being accepted by the buyer, it becomes a trade bill, which is a marketable instrument. On being discounted from the bank, the trade bill becomes the commercial bill.

Question 27.
Financial market plays an important role in the allocation of scarce resources in an economy by performing various functions. Explain any three functions of financial market. (Delhi 2014)
Or
Explain any three functions of financial market. (All India 2013)
Answer:
Financial market plays an important role in the allocation of scarce resources in an economy by performing these important functions: (any three)

• Mobilisation of savings and channeling them into the most productive uses A financial market facilitates the transfer of savings from savers to investors. Thus, it helps in channelising surplus funds into the most productive uses.
• Facilitating price discovery Interaction between supplier and investor helps to establish a price for the financial asset which is being traded in that market.
• Providing liquidity to financial assets Financial market facilitates easy purchase and sales of financial assets. In doing so, they provide liquidity which means these assets are converted into cash whenever required.
• Reduce the cost of transactions Financial market provides complete information regarding price, availability and cost of various financial securities. So, investors and companies do not have to spend much on getting this information.

Question 28.
Differentiate between the two segments of financial market on any three bases. (Comportment 2013)
Or
Differentiate between capital market and money market on the basis of the following:
(i) Meaning
(ii) Liquidity
(iii) Safety
(iv) Expected return
(v) Duration (Delhi 2014; Foreign 2014)
Or
Differentiate between capital market and money market on the basis of the following:
(i) Participants
(ii) Instruments
(iii) Duration
(iv) Investment outlay
(v) Liquidity (All India (C) 2014)
Or
Distinguish between money market and capital market on the basis of: (All India 2015)
(i) Investment outlay
(ii) Duration
(iii) Liquidity and
(iv) Instruments
Or
Distinguish between money market and capital market on the basis of: (Comportment 2015)
(i) Participants
(ii) Instruments
(iii) Safety and
(iv) Expected return
Or
Distinguish between money market and capital market on the basis of: (Comportment 2015)
(i) Participants
(ii) Instruments
(iii) Duration and
(iv) Safety
Answer:
The two segments of financial market are capital and money market: (any three)

Basis	Capital market	Money market
Meaning	It refers to the whole network of organisations, institutions and instruments that deal in medium and long-term funds.	Money market is a market for short-term funds which deals in monetary assets whose period of maturity is upto one year.
Liquidity	Only actively traded securities have ready market.	In this market, there is a formal arrangement of creating liquidity.
Safety	In this market securities of every company are bought and sold. Hence, there is more risk involved.	The transaction are made in the instruments issued by the financial institutions and financially strong companies.
Expected return	The expected returns are high as there in scope of earning capital gains and long-term prosperity is also shared by the company in form of high dividends and bonus issues.	The expected return is less due to short duration and lower risk.
Duration	Period of maturity is more than one year.	Period of maturity ranges from one day to one year.
Investment outlay	Investment outlay does not necessarily require huge investment outlay. The unit prices is low, i.e. ₹ 10, ₹ 100 and so even the trading lots are small, i.e. 5, 50,100 etc.	Money market transactions entail huge sums of money as instruments are quite expensive.
Participants	Individual investors as well as institutional investors like financial institutions, banks, corporate houses and foreign investors participate in the capital market transactions.	The participants are RBI, Commercial Banks financial institutions, mutual funds and corporate houses. Individual investors do not participate in money market.
Instruments traded	The instruments of capital market include equity shares, preference shares, bonds, debentures, etc.	Some of the main instruments used in money market are commercial paper, treasury bills, trade bills, certificate of deposit, etc.

Question 29.
State any three development functions of Securities and Exchange Board of India (SEBI). (All India 2013; Compartment 2012)
Answer:
The three development functions of SEBI are:
(i) Training of intermediaries of the securities market.
(ii) Conducting research and publishing information useful to all market participants.
(iii) Undertaking measures to develop the capital markets by adapting a flexible approach.

Question 30.
State any three protective functions of Securities and Exchange Board of India (SEBI). (All India (C) 2013)
Answer:
The three protective functions of SEBI are:
(i) Controlling insider trading and imposing penalties for such practices.
(ii) Undertaking steps for investor protection.
(iii) Promotion of fair practices and code of conduct in securities market.

Question 31.
Explain any three objectives of Securities and Exchange Board of India (SEBI). (Delhi 2011)
Or
‘To promote orderly and healthy growth of securities market and protection of investors, SEBI was set up’. With reference to this statement, explain the objectives of SEBI. (All India 2011; Delhi 2011)
Answer:
The basic objective of SEBI is to protect the interests of investors and to promote the development of stock exchange and regulate the securities market.

Following are the objectives of SEBI:

• To regulate stock exchange and securities markets to promote their orderly functioning.
• To protect the rights of investors and ensuring safety to their investment.
• To prevent fraudulent and malpractices by balancing between self regulation of business and its statutory regulations.
• To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers, etc, so that they become competitive and professional.

Note: SEBI came into effect-due to several irregularities and malpractices. To eliminate these problems, SEBI was set-up with certain objectives of protecting the investors and development of securities market.

Question 32.
‘Foods India Ltd.’ is a company engaged in the production of packaged juice since 2010. Over this period, a large number of competitors have entered the market and are putting a tough challenge to ‘Food India Ltd.’ To face this challenge and to increase its market share, the company has decided to replace the old machinery with an estimated cost of ₹ 100 crore. To raise the finance, the company decided to issue 9% debentures. The finance department of the company has estimated that the cost of issuing the 9% debentures will be ₹ 10,00,000. The company wants to meet its flotation cost.

• Explain the instrument that the company may issue for this purpose.
• In which type of financial market, is the instrument explained in (a) above traded? Also explain how safe the instruments are in this market. (All India 2019)

Answer:

• The company can use’commercial paper’. For meaning, refer to Ans 9 (i) on page 184.
• This instrument, i.e. commercial paper is traded in money market. The instruments are safe and secure as this market contains very low risk.

Question 33.
Stock exchange acts as a regulator of the securities market. It creates a continuous market where the securities are bought and sold. It gives investors the chance to disinvest and reinvest. Through this process of disinvestment and reinvestment, savings get channelised into their most productive investment avenues. To ensure that the investing public gets a safe and fair deal in the market, the membership of the stock exchange is well regulated and its dealings are well defined according to the existing legal framework. It also ensures wider share of ownership by regulating new issues, better trading practices and taking effective steps in educating the public about investments.
Various functions performed by the Stock Exchange are discussed in the above para. By quoting lines from the above para, state any four functions of stock exchange. (Delhi 2019)
Answer:
Functions of stock exchange discussed are:
(i) Provides liquidity and marketability to existing securities:
“It creates a continuous ………….. Reinvest”.
(ii) Safety of transactions :
“To ensure that …………… legal framework.”

(iii) Contributes to economic growth :
“Through ……………. this process investment avenues.”

(iv) Spreading equity cult:
“It also ensures …………. about investments.”

Question 34.
State the protective functions of Securities and Exchange Board of India, (CBSE 2018)
Answer:
The protective functions of Securities and Exchange Board of India are:

• Prohibition of fraudulent and unfair trade practices.
• Controlling insider trading and imposing penalties for such practices.
• Undertaking steps for investor protection.
• Promotion of fair practices and code of conduct in securities market.

Question 35.
Explain the functions of financial market. (Comportment 2018, 2015)
Or
Financial market plays an important role in the allocation of scarce resources in an economy by performing many important functions. Explain any four such functions. (Foreign 2014; All India 2011)
Or
Explain any three functions of financial market. (All India 2013; Comportment 2013)
Or
Explain any four functions of financial market. (Delhi 2012)
Or
What is meant by financial market? Explain any two functions of financial market. (All India 2011)
Answer:
Meaning of financial market It is a link between the savers and the borrowers. This market transfers money or capital from those who have surplus money to those who are in need of money.

For the functions of financial market:
(i) The function performed by the market here is mobilisation of savings and channelising them into the most productive use/allocative function.

(ii) The other three functions of financial market are:

• Facilitating price discovery In the financial market, households are suppliers of funds and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.
• Provides liquidity to financial assets The investors can invest their money, wherever they desire, in securities through the medium of financial market and convert them into cash by selling their financial assets through the mechanism of financial market.
• Reduce the cost of transactions Financial market provides complete information regarding price, availability and cost of various financial securities. So, investors and companies do not have to spend much on getting this information.

Question 36.
These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed the most. To give strength to the economy, SEBI is undertaking measures to develop the capital market.
In addition to this, there is another market in which unsecured and short-term debt instruments are actively traded every day. These markets together help the savers and investors in directing the available fund into their most productive investment opportunity.
(i) Name the function being performed by the market in the above case.
(ii) Name the market segment other than the capital market segment in which unsecured and short-term debt instruments are traded. Also, give any three points of difference between the two. (All India 2017)
Answer:

• The function performed by the market in the above case is Mobilisation of savings and channelising them into the most productive use or allocative function.
• Money market is the market segment where unsecured, short-term debt instruments are traded.

The three points difference between money and capital market are:

Basis	Capital market	Money market
Meaning	It refers to the whole network of organisations, institutions and instruments that deal in medium and long-term funds.	Money market is a market for short-term funds which deals in monetary assets whose period of maturity is upto one year
Liquidity	Only actively traded securities have ready market.	In this market, there is a formal arrangement for creating liquidity
Duration	Period of maturity more than one year.	Period of maturity is ranges from one day to one year

Question 37.
These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed most. To give strength to the economy, SEBI is undertaking measures to develop the capital market. In addition to this there is another market in which unsecured and short-term debt instruments are actively traded everyday. These markets together help the savers and investors in directing the available funds into their most productive investment opportunity.
(i) Name the function being performed by the market in the above case.
(ii) Also, explain briefly three other functions performed by this market. (Delhi 2017)
Or
Explain the functions of financial market. (Compartment 2015; Delhi 2012)
Answer:
(i) The function performed by the market here is mobilisation of savings and channelising them into the most productive use/allocative function.

(ii) The other three functions of financial market are:
(a) Facilitating price discovery In the financial market, households are suppliers of funds and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.
(b) Provides liquidity to financial assets The investors can invest their money, wherever they desire, in securities through the medium of financial market and convert them into cash by selling their financial assets through the mechanism of financial market.
(c) Reduce the cost of transactions Financial market provides complete information regarding price, availability and cost of various financial securities. So, investors and companies do not have to spend much on getting this information.

Question 38.
Explain any four methods of floating new issues in the primary market. (All India 2016, 2012; Foreign 2016; Delhi [Cl 2011)
Or
What is meant by ‘primary market’? Explain any two methods of floating new issues in the primary market. (All India 2011; Delhi 2011)
Or
State any five methods of floating new issues in the primary market. (All India 2010)
Or
What is meant by ‘new issue market’? Explain various methods of flotation of new securities issues in this market. (Comportment 2018)
Answer:
Primary market is the market where securities are being issued for the first time. Therefore, it is also known as ‘New Issue Market’ (NIM).

Methods of floatation are as follows:
(i) Offer through prospectus Under this method, the company issues a prospectus to inform and attract general public. In a prospectus, the company provides details about the purpose for which funds are being raised, past financial performance of the company, background and future prospects of the company.

(ii) e-EPOs It is a new method of issuing securities through online system of stock exchange. In this, company has to appoint registered brokers for the purpose of accepting applications and placing orders. The issuer company has to apply for listing of its securities and the leading manager coordinates all the activities of these issues through various intermediaries.

(iii) Offer for sale Under this method, securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses on stock brokers at a fixed price.

(iv) Private placement Under this method, company sells the securities to some selected institutional investors (like UTI, LIC, etc) and some individuals.

(v) Right issue This is a right (or privilege) to existing shareholders to subscribe to a new issue of shares in proportion to the number of shares held by them.

Question 39.
Explain any four functions of stock exchange. (Foreign 2016; Compartment 2013; Delhi 2013; All India 2012, 2011)
Or
Explain any five functions of stock exchange. (Compartment 2014, 2012)
Or
‘In today’s commercial world, the stock exchange performs many vital functions which lead the investors towards positive environment.’ Explain how, by giving any four reasons. (Delhi 2011)
Answer:
Main functions of stock exchange are as follows:
(i) Pricing of securities The stock market helps to value the securities on the basis of demand and supply factors. Higher the demand for such securities, higher is their value. The valuation of securities is useful for investors, government and creditors.

(ii) Contributes to economic growth In stock exchange, securities of various companies are bought and sold. This process of disinvestment and reinvestment helps to invest in most productive investment proposal and this leads to capital formation and economic growth.

(iii) Spreading of equity cult Stock exchange encourages people to invest in ownership securities by regulating new issues, better trading practices and by educating people about investment.

(iv) Liquidity The main function of stock market is to provide ready market for sale and purchase of securities which assures the investors that their investment can be converted into cash whenever they want.

(v) Safety of transaction The stock exchange is well regulated and its dealings are well defined according to the existing legal framework. This ensures that the investing public gets a safe and fair deal in the market.

Question 40.
‘Ganesh Steel Ltd’ is a large and creditworthy company manufacturing steel for the Indian market. It now wants to cater to the Asian market and decides to invest in new hi-tech machines. Since the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost the company decides to tap the money-market.
(i) Name and explain the money market instrument the company can use for the above purpose.
(ii) What is the duration for which the company can get funds through this instrument? (Delhi 2015)
Or
‘Mission Coach Ltd’ is a large and creditworthy company manufacturing coaches for Indian Railways. It now wants to export these coaches to other countries and decides to invest in new hi-tech machines. Since, the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost, the company decides to tap the money market.
(i) Name and explain the money market instrument the company can use for the above purpose.
(ii) What is the duration for which the company can get funds through this instrument? (All India 2015)
Answer:

• Commercial paper It is issued as an unsecured promissory note by large and creditworthy companies for meeting their short-term needs of funds. It is a negotiable instrument, transferable by endorsement and delivery. This instrument is generally used for ‘bridge financing’, i.e. a method of financing used by companies to cover the floatation costs of issuing equity shares, preference shares, etc.
• A firm can get funds for a duration of 15 days to one year.
• Commercial paper can also be used for meeting working capital needs.

Question 41.
Keeping in mind the emerging nature of the securities market in India, Securities and Exchange Board of India (SEBI) was entrusted with the twin task of regulation and development of securities market. Out of this, state the development functions of Securities and Exchange Board of India (SEBI). (Compartment 2015)
Answer
For developmental functions of SEBI:
(a) flaining of intermediaries of the securities market.
(b) Conducting research and publishing information useful to all market participants.
(c) Undertaking measures to develop the capital markets.

Question 42.
What is meant by capital market? Name the two types of capital market and differentiate between the two on any four basis. (Comportment 2014)
Or
Difference between ‘primary market’ and ‘secondary market’ on any five basis. (All India 2014)
Or
Distinguish between primary market and secondary market. (Comportment 2015)
Answer:
Capital market refers to facilities and institutional arrangements through which long-term fund, both debt and equity are raised and invested. The capital market consists of development banks, commercial banks and stock exchanges.

The two types of capital market are:
(i) Primary market or new issue market (NIM)
(ii) Secondary market or stock exchange

The differences between primary market and secondary market are: (any three)

Basis	Primary market	Secondary market
Meaning	It means the market where corporate sector, government and public bodies issue securities to raise funds from the public.	It means the market where listed shares, debentures and other securities are traded for investment and speculative purposes.
Nature of securities dealt in	In primary market, new securities are traded.	In secondary market, second hand securities are traded.
Alternate name	It is also known as ‘new issues market’.	It is also known as ‘stock exchange’.
Capital formation	It promotes capital formation directly as funds flow directly from savers to investors.	It promotes capital formation indirectly.
Pricing	Prices are determined and decided by the management ofjthe company	Prices are determined by demand and supply for the security.

Question 43.
Explain the trading procedure on a stock exchange. (Comportment 2014)
Answer:
The procedure for purchase of and sale of securities in a stock exchange involves the following steps:
(i) Selection of a broker The first step is to select a broker, who will buy/sell securities on behalf of the investor/speculator. Brokers may be individuals, partnership firms or corporate bodies. Selection of broker is compulsory as trading can only be done by SEBI registered brokers, who are members of a stock exchange.

(ii) Opening of a demat account with depository Dematerialised (Demat) account refers to an account which an individual must open with the depository participant (banks, stock brokers) to trade in the listed securities in electronic form.

Depository is an institution/organisation which holds securities in electronic form, in which trading is to be done. At present there are two depositories in India:
(a) NSDL (National Securities Depository Ltd.) and
(b) CDSL (Central Depository Services Ltd.)
Depository Participant (DP) maintain your securities account balance and intimates the account status from time to time.

(iii) Placing the order The next step is to place the order with the broker, which can be done through telephone, cell phone, e-mail, etc.
Instruction regarding which securities and how many securities are to be bought or sold should be clearly given to the broker.

(iv) Executing the order According to the instructions, the broker executes the order and buys or sells the required securities. The broker then issues a contract note. A copy of contract note specifies the name and the price of securities, names of parties, brokerage charges, etc., which is signed by the broker.

(v) Settlement This is the last stage in the trading of securities done by brokers on behalf of their clients. The mode of settlement depends upon the nature of contract. Equity spot markets follow a T + 2 rolling settlement. This means a trade taking place on Monday gets settled by Wednesday. Trading times on stock exchange are between 9:55 am and 3:30 pm 1ST, from Monday to Friday. Each exchange has its own clearing house, which assumes all settlement risk.

Question 44.
What is meant by money market? Explain any two instruments used in money market. (Delhi 2011)
Answer:
Money market is a market for short-term funds which deals in monetary assets whose period of maturity is upto one year.

The two instruments used in money market are:
(i)’ Treasury Bills (T-bills) It is an instrument of short-term borrowing by the RBI on behalf of government of India, maturing in less than one year. They are also known as zero coupon bonds. They are issued in the form of promissory note.

They are highly liquid and provide assured yield. There is no risk of default. They are issued at a discount and repayable at par. They are available for a minimum amount of ₹ 25,000 and in multiples there of.

(ii) Commercial Paper (CP) A commercial paper is an unsecured instrument issued in the form of a promissory note. They are negotiable and transferable by endorsement and delivery. It is issued by large and credit worthy companies for reusing short-term funds at lower rates of interest than market rates. It usually has a maturity period of 15 days to one year. It is sold at a discount and redeemed at par.

Question 45.
Explain the regulatory functions of SEBI. (All India 2010; Delhi 2010)
Answer:
Regulatory functions of SEBI are as follows:
(i) To regulate business in stock exchanges.
(ii) To register and regulate the working of intermediaries.
(iii) To register and regulate the working of mutual funds.
(iv) To conduct inquiries and audit of stock exchange.
(v) Regulation of taken-over bids by companies.

Question 46.
Explain the following money market instruments:
(i) Call money
(ii) Treasury bill
(iii) Commercial paper
(iv) Certificate of deposit (Delhi 2013)
Answer:
(i) Call money:
Call money Call money Is a short-term finance repayable on demand, with a maturity of 1 to 15 days. It is used for inter bank transactions. Banks have to maintain a minimum cash balance known as Cash Reserve Ratio. RBI changes this ratio from time to time.

Call money is a method by which banks borrow from each other to be able to maintain Cash Reserve Ratio. The interest paid on call money loans is called call rate, which is very volatile and changes even from hourtohour.

(ii) Treasury bill:
Treasury bill Also known as zero coupon bond, a T-BIU is issued by RBI on behalf of Central Government to meet its short-term reqùirement of funds. It is issued in the form of promissory note. They are highly liquid and have negligible risk. They are issued at discount and redeemed at par, e.g. 91 days, treasury bill of face value of 1,00,000 is purchased at ? 96,000 and at the maturIty investor gets 1,00,000, 4,000 being the interest received by him.

(iii) Commercial paper:
It is issued as an unsecured promissory note by large and creditworthy companies for meeting their short-term needs of funds. It is a negotiable instrument, transferable by endorsement and delivery. This instrument is generally used for ‘bridge fmancing’, i.e. a method of financing used by companies to cover the floatation costs of issuing equity shares, preference shares, etc.

(iv) Certificate of deposit:
These are short-term. unsecured, negotiable instniments in bearer form. They are issued by commercial banks or development financial institution to individuals, corporations and companies. These are issued generally in times of tight liquidity when the deposit growth of banks is slow but the demand for credit Is high, to mobibse large amounts of money for short periods.

Multiple Choice Questions

Question 1.
Treasury bills are issued by in India.
(a) RBI
(b) SBI
(c) SEBI
(d) Ministry of finance
Answer:
(a) RBI

Hint:
Treasury bill is a short-term borrowing instrument issued by RBI on the behalf of Indian Government.

Question 2.
In primary markets, first time issued shares to be publicly traded in stock markets is considered as
(a) traded offering
(b) public markets
(c) issuance offering
(d) initial public offering
Answer:
(d) initial public offering

Hint:
An Initial Public Offering (IPO), is the very first sale of stock issued by a company to the public.

Question 3.
Primary and secondary markets
(a) compete with each other
(b) complement each other
(c) function independently
(d) control each other
Answer:
(b) complement each other

Hint:
Once the securities are issued in the primary market, they are then traded in the secondary market. It is in this sense that both the markets complement each other.

Question 4.
If a comparison is to be made between the securities traded in money and capital markets, securities traded in capital market are
(a) less liquid and for more duration
(b) highly liquid and for shorter duration
(c) less liquid and for shorter duration
(d) highly liquid and for higher duration
Answer:
(a) less liquid and for more duration

Question 5.
Match the following.

List I	List II
I. Bull	(i) Buys and sells securities on his own behalf
II. Bear	(ii) Expects fall in prices of securities
III. Jobber	(iii) Buys securities of a new issue in the hope of selling them quickly at a higher price
IV. Stag	(iv) Expects rise in prices of securities

Codes

	I	II	III	IV
(a)	(i)	(ii)	(iii)	(iv)
(b)	(ii)	(i)	(iii)	(iii)
(c)	(iv)	(ii)	(i)	(iv)
(d)	(ii)	(iv)	(iii)	(i)

Answer:
(c) (iv) (ii) (i) (iii)

Question 6.
Example of used malpractices at stock exchanges is
(a) price rigging
(b) insider trading
(c) unofficial private placements
(d) All of these
Answer:
(d) All of these

Question 7.
‘An instrument is transferable by endorsement and delivery. It is sold at a discount and redeemed at par’. Identify the instrument.
(a) Commercial bill
(b) Commercial paper
(c) Certificate of deposits
(d) Call money
Answer:
(b) Commercial paper

Hint:
Commercial paper is a money market instrument. It is issued by large creditworthy companies to raise short-term funds at lower rates of interest than the market rate. It is sold at discount and redeemed at par.

Question 8.
Which of the following statements is not true?
(a) SEBI conducts research and publish useful information
(b) Primary market directly promotes capital formation
(c) Private placement involves high floatation costs
(d) None of the above
Answer:
(c) Private placement involves high floatation costs

Hint:
Private placement is beneficial to companies as it helps companies to raise funds quickly and save floatation costs. Therefore, private placement does not involves high floatation costs, but it saves floatation costs.

Question 9.
Mr X bought certain shares of Reliance Ltd from Mr Y and lodged them with the depository in form of a book entry. However, as per the register of members of Reliance Ltd, Mr Y is still the owner of those shares. In such a situation, Mr X would be known as
(a) registered owner
(b) holder of shares
(c) beneficial owner
(d) None of these
Answer:
(c) beneficial owner

Hint:
In this instant case, Mr Y is the registered owner of securities. However, Mr X is the real owner also known as beneficial owner of such securities, as he has bought those securities, from Mr Y and lodged them with the depository.

Question 10.
Suresh bought certain securities from a new issue of shares as he speculated that the price of the stock will rise immediately when the trading will start. His sole aim is to sell the shares soon after allotment and to earn quick profits. Operators like Mr Suresh are known as
(a) broker
(b) bulls
(c) bears
(d) stags
Answer:
(d) stags

Hint:
Stags are operators in stock exchanges, who are basically speculators. They aim at earning quick profits by subscribing shares at an IPO of companies. They buy shares prior to commencement of public trading.

Question 11.
If in a stock exchange, any trade taking place on Monday and gets settled by Wednesday, it comes under which rolling settlement?
(a) T+ 2
(b) T+ 3
(c) T + 4
(d) T + 5
Answer:
(a) T + 2

Hint:
T+2 is a description used to explain the settlement period of a trade. The date of the trade is referred to as (T) and (+2) refers to the number of settlement days following the trade date. Equity spot markets follow a T+2 rolling settlement, if any trade taking place on Monday gets settled by Wednesday.

Question 12.
Match the following with the most appropriate option.

List I	List II
I. Commercial papers	(i) assumes all settlement risks
II. Clearing houses	(ii) also called as bookrunner
III. SENSEX	(iii) unsecured promissory notes
IV. Lead manager of an e-IPO	(iv) reflects day-to-day fluctuations in share prices

Codes

	I	II	III	IV
(a)	(i)	(iv)	(ii)	(iii)
(b)	(iii)	(ii)	(iv)	(i)
(c)	(iii)	(i)	(iv)	(ii)
(d)	(iv)	(iii)	(ii)	(i)

Answer:
(c) (iii) (i) (iv) (ii)

Question 13.
Mr X has some securities which he has purchased from stock market. His friend asks him the proof of ownership of his securities. What kind of proof Mr X will have to show to his friend?
(a) Share certificate
(b) Warrant
(c) Deed
(d) Agreement
Answer:
(a) Share certificate

We have given these Business Studies Class 12 Important Questions Chapter 9 Financial Management to solve different types of questions in the exam. Go through these Planning Class 12 Important Questions and Answers & Previous Year Questions to score good marks in the board examination.

Important Questions of Financial Management Class 12 Business Studies Chapter 9

Question 1.
In the paint industry, various raw materials are mixed in different proportions with petroleum for manufacturing different kinds of paints. One specific raw material is not readily and regularly available to the paint manufacturing companies. Bonier Paints Company is also facing this problem and because of this there is a time lag between placing the order and the actual receipt of the material. But, once it receives the raw materials, it takes less time in converting it into finished goods. Identify the factor affecting the working capital requirements of this industry. (CBSE 2018)
Answer:
The factor highlighted here is ‘Availability of raw material’.

Question 2.
VXL Ltd. is a company dealing in dairy products. It procures these products from Rajasthan and sells them to various parts of Delhi. A month before ‘Marico Ltd., a Haryana based company entered Delhi market with a similar range of products. State the impact of entry of Haryana based “Marico Ltd.’ on the working capital rquirements of VXL Ltd. Also, name the factor affecting the working capital requirements of VXL Ltd. (Compartment 2018)
Answer:
With entry ‘Marico Ltd.’, VXL Ltd. needs to increase its working capital. The factor is ‘level of competition’.

Question 3.
What is meant by ‘capital structure’? (All India 2017)
Answer:
Capital structure can be defined as the mix between the owners’ funds and borrowed funds.

Question 4.
What is meant by ‘financial management’? (Delhi 2017)
Answer:
Financial management is an area of financial decision-making harmonising individual motives and enterprise’s goals.

Question 5.
Name and state the aspect of financial management that enables to foresee the fund requirements both in terms of ‘the quantum’ and ‘the timings’. (All India 2016)
Or
Name and state the aspect of financial management that provides a link between investment and financing decisions. Foreign 2016
Answer:
Financial planning

Question 6.
The size of assets, the profitability and competitiveness are affected by one of the financial decisions. Name and state the decision. (Delhi 2016)
Answer:
Capital budgeting decision It relates to as how the funds of a firm are to be invested into different assets, so that the firm is able to earn highest possible return for the investors.

Question 7.
Radhika and Vani who are young fashion designers left their job with a famous fashion designer chain to set-up a company ‘Fashionate Pvt Ltd. ‘They decided to run a boutique during the day and coaching classes for entrance examination of National Institute of Fashion Designing in the evening. For the coaching centre they hired the first floor of a nearby building. Their major expense was money spent on photocopying of notes for their students. They thought of buying a photocopier knowing fully that their scale of operations was not sufficient to make full use of the photocopier.

In the basement of the building of ‘Fashionate Pvt Ltd’. Praveen and Ramesh were carrying on a printing and stationery business in the name of ‘Neo Prints Pvt Ltd’ Radhika approached Praveen with the proposal to buy a photocopier jointly which could be used by both of them without making separate investment, Praveen agreed to this.
Identify the factor affecting fixed capital requirements of‘Fashionate Pvt. Ltd.’ (Delhi 2016)
Answer:
Level of collaboration

Question 8.
‘Best Bulbs Pvt Ltd was manufacturing good quality LED bulbs and catering to local market. The current production of the company is 800 bulbs a day. Sumit, the marketing manager of the company surveyed the market and decided to supply the bulbs to five-star-hotels also. He anticipated the higher demand in future and decided to buy a sophisticated machine to further improve the quality and quantity of the bulbs produced.
Identify the factor affecting fixed capital requirements of the company. (Foreign 2016)
Answer:
Technology upgradation

Question 9.
Rizul Bhattacharya after leaving his job wanted to start a Private Limited Company with his son. His son was keen that the company may start manufacturing of mobile phones with some unique features. Rizul Bhattacharya felt that the mobile phones are prone to quick obsolescence and a heavy fixed capital investment would be required regularly in this business. Therefore, he convinced his son to start a furniture business.
Identify the factor affecting fixed capital requirements which made Rizul Bhattacharya to choose furniture business over mobile phones. (All India 2016)
Answer:
Technology upgradation

Question 10.
Besides the dividend decision the finance function is concerned with two other broad decisions. Name these decisions. (Compartment 2015)
Answer:
Besides dividend decision, the two broad decisions concerned with finance are:

• Investment decision
• Financing decision

Question 11.
How does cost of debt affect the capital structure of a company? State. (All India 2015; Delhi 2015; Foreign 2014)
Answer:
When a firm is able to borrow at a lower rate, it increases the capacity to employ higher debt and can increase the debt component in the capital structure.

Question 12.
‘Bharat Express’ specialises in courier services. Its ‘wide range of express package and parcel service’ help business firms to make sure that the goods are made available to the customers at the right place and at the right time.
State with reason, whether the working capital requirements of ‘Bharat Express’ will be high or low. (All India 2015)
Answer:
Working capital requirement for Bharat Express will be low, as it is engaged in providing services.

Question 13.
A textile company is diversifying and starting a steel manufacturing plant.
State with reason the effect of diversification on the fixed capital requirements of the company. (Compartment 2015)
Answer:
The fixed capital requirements of the company will increase with diversification of business activity.

Question 14.
‘Indian Logistics’ has its own warehousing arrangements at key locations across the country. Its warehousing services help business firms to reduce their overheads, increase efficiency and cut down distribution time.
State with reason whether the working capital requirements of ‘Indian Logistics’ will be high or low. (Delhi 2015)
Answer:
Since, ‘Indian Logistics’ provides warehousing services which forms part of service industry therefore, working capital requirement would be low.

Question 15.
A steel manufacturing company is diversifying and starting a thermal power plant. State with reason the effect of diversification on the fixed capital requirements of the company. (Compartment 2015)
Answer:
Diversification of business activity would increase the fixed capital requirement of the company.

Question 16.
Define financial management. (Foreign 2014; All India 2011)
Answer:
According to Weston and Brighan, “Financial management is an area of financial decision-making harmonising individual motives and enterprise’s goals”.

Question 17.
What is the primary objective of financial management? (All India 2014; Delhi 2013)
Answer:
The primary aim of financial management is to maximise shareholders’ wealth.

Question 18.
Define capital structure. (Delhi 2014)
Answer:
Capital structure can be defined as the mix between the owners’ funds and borrowed funds.

Question 19.
What is meant by financial risk? (All Indio 2014)
Answer:
Financial risk refers to a position when a company is not able to meet its fixed financial charges namely interest, preference dividend payment and repayment obligations.

Question 20.
How does inflation affect the working capital requirements of a company? State. (Delhi 2014; Comportment 2013)
Answer:
With rising prices, larger amounts are required even to maintain a constant volume of production and sales. The working capital requirement of a business thus, become higher with higher rate of inflation.

Question 21.
How do ‘growing opportunities’ as a factor affect dividend decision? State. (Compartment 2013)
Answer:
A firm having higher growth opportunities may decide to retain more earnings and declare less dividends.

Question 22.
State how growth prospects affect the working capital requirement of a company? (Delhi 2013)
Answer:
If the growth potential of a concern is perceived to be higher, it will require large amount of working capital, so that it will be able to meet higher production and sales target whenever required.

Question 23.
Name the major determinant of dividend decision. (All India 2011)
Answer:
Dividends are paid out of current and past earnings. Therefore, earning is the most important determinant of dividend decision.

Question 24.
Which type of companies can declare higher.dividend? (Delhi (C) 2011)
Answer:
A company having stable earnings is in a position to declare higher dividends.

Question 25.
Name the financial decision which will help a businessman in opening a new branch of its business. (Delhl 2010)
Answer:
Investment decision helps a businessman in opening a new branch of its business.

Question 26.
Cost of debt is lower than the cost of equity share capital. Give reason why even then a company cannot work only with the debt? (All India 2010; Delhi 2010)
Answer:
A company cannot work only with debt because a company cannot be formed or be in existence without equity.

Question 27.
Name any two essential ingredients of sound working capital management. (All India 2010)
Answer:

• Inventory management
• Receivable management

Question 28.
Define fixed capital. (All India 2010; Delhi 2010)
Answer:
The amount by capital investment in fixed assets is called fixed capital, e.g. plant and machinery, land and building, etc.

Question 29.
What is working capital? (Delhi 2010)
Answer:
Working capital is that part of total capital which is required for holding current assets. It may also be defined as an excess of current assets over current liabilities.

Question 30.
What is meant by ‘financial management’? State primary objective of financial management’. (Delhi 2019,2012; All India 2012)
Or
Wealth maximisation is the primary objective of financial management. Explain with the help of diagram. (Compartment 2014)
Or
Explain the meaning and objective of financial management. (Delhi 2010)
Or
Explain the concept and the objective of financial management. (All India 2013)
Answer:
Financial management is concerned with optimal procurement as well as the usage of finance. For optimal procurement, different available sources of finance are identified and compared in terms of their costs and associated risks.

The primary objective of financial management is to maximise shareholders’ wealth. This means maximisation of the market value of equity shares. Increase in market value of shares depends on the financial decisions taken by the firm. Market price of the shares is the index of the capital invested. If the market price of the shares increases, it can be said that capital invested by the shareholders has been appreciating. On the contrary, fall in the market price of the shares has an adverse effect on their wealth.

The other main objectives of financial management are:
(i) Ensuring availability of funds at reasonable cost
(ii) Ensuring effective utilisation of funds.
(iii) Ensuring safety of funds by creating reserves and reinvestment of profits.

Question 31.
Explain the objectives of financial planning. Delhi 2019
Or Somnath Ltd. is engaged in the business of export of garments. In the past, the performance of the company had been upto the expectations. In line with the latest technology, the company decided to upgrade its machinery. For this, the Finance Manager, Dalmia estimated the amount of funds required and the timings. This will help the company in linking the investment and the financing decisions on a continuous basis. Dalmia therefore, began with the preparation of a sales forecast for the next four years. He also collected the relevant data about the profit estimates in the coming years. By doing this, he wanted to be sure about the availability of funds from the internal sources of the business. For the remaining funds he is trying to find out alternative sources from outside.
Justify the financial concept discussed in the above paragraph. Also state the objectives to be achieved by the use of financial concept, so identified. (Delhi 2017)
The concept discussed in the above paragraph is ‘financial planning’.
The objectives to be achieved by the use of this concept are:
(i) To ensure availability of funds whenever these are required This includes a proper estimation of the funds required for different purpose such as for the purchase of long-term assets or to meet day-to-day expenses of business, etc. Apart from this, there is a need to estimate the time at which these funds are to be made available. Financial planning also tries to specify possible sources of these funds.

(ii) TO ensure unneccessary finance is not raised Excess funding is almost as bad as inadequate funding. Even if there is some surplus money, good financial planning would put it to the best possible use so that the financial resources are not left idle and don’t unnecessarily add to the cost.

Question 32.
State any three points of importance of Financial planning. (Delhi 2019; Comportment 2013)
Or
What is meant by financial planning? State any two points of importance of financial planning. (Compartment 2011; All India 2012; Delhi 2012)
Or
‘Financial planning tries to link the present with the future’. Explain the importance of financial planning in the light of this statement. (Delhi (c) 2010)
Or Explain the meaning of financial planning. Why is it important? Give any two reasons. (All India 2010)
Answer:
Financial planning is the preparation of financial Am. blueprint, which foresees entire fund requirement in respect to quantum as well as the timing. It is the process of estimating the fund requirements of business and specifying the sources of funds. It involves the preparation of a financial blueprint of an organisation’s future operations. The objective of financial planning is to ensure that enough funds are available at right time.

Financial planning is essential in financial management because:
(i) Helps in avoiding business shocks and surprises Proper provision regarding shortage or surplus of funds is made by anticipating future receipts and payments.
Hence, it helps in avoiding business shocks and surprises.
(ii) Helps in coordination It helps in coordinating various business activities, such as sales, purchase, production, finance, etc.
(iii) Helps in avoiding wastage of finance In the absence of financial planning, wastage of financial resources may take place. This arises due to the complex nature of business operations such as, excessively over or under estimation of finance for a particular business operation. Such type of wastages can be avoided through financial planning.

Question 33.
‘G Motors’ is the manufacturer of sophisticated cranes. The Production Manager of the company, reported to the Chief Executive Officer, Ashish Jain that one of the machines used in manufacturing sophisticated cranes had to be replaced to compete in the market, as other competitors were using automatic machines for manufacturing cranes. After a detailed analysis, it was decided to purchase a new automatic machine having the latest technology. It was also decided to finance this machine through long-term sources of finance. Ashish Jain compared various machines and decided to invest in the machine which would yield the maximum returns to its investors. (All India 2019)
(a) Identify the financial decision taken by Ashish Jain.
(b) Explain any three factors affecting the decision identified in (a) above.
Answer:
(a) Financial decision taken by Ashish Jain is investment (Long-term/Capital budgeting) decision.

(b) For factors affecting financial decisions:
The concept discussed in the above paragraph is ‘financial planning’.
(i) Helps in avoiding business shocks and surprises Proper provision regarding shortage or surplus of funds is made by antidpating future receipts and payments. Hence, it helps in avoiding business shocks and surprises.
(ii) Helps In coordination it helps in coordinating various business activities, such as sales, purchase, production, finance, etc. investment (Long-term/Capital budgeting) decision.

Question 34.
The Return on Investment (Rol) of a company ranges between 10-12% for the past three years. To finance its future fixed capital needs, it has the following options for borrowing debt.
Option ‘A’: Rate of interest 9%
Option ‘B’: Rate of interest 13%
Which source of debt, ‘Option A’ or ‘Option B’, is better? Give reason in support of your answer. Also state the concept being used in taking the decision. (CBSE 2018)
Answer:
The company should use ‘Option A’ as in this case the Return on Investment (10-12%) will be more Than the Cost of Debt (9%).

The concept being used in the above case is ‘trading on equity’.

The use of debt alongwith equity increases Earnings Per Share (EPS). This use of fixed financial charge, i.e. interest, increases the profit earned by shareholders. This concept is known as trading on equity.

If the company opts for Option A, it will lead to favourable trading on equity as in this case
RoI > CoD, Where
RoI – Return on Investment (10-12%)
CoD – Cost of Debt (9%) j

Question 35.
Neelabh Sarin, the Finance Manager and Atul Chopra, the Managing Director of Ghokerns Ltd. were discussing regarding the source of finance to be raised for modernisation of their existing plant. Quoting that ‘sensex has soared by 5078 points’ in the last three years, Neelabh Sarin suggests that equity should be preferred while Atul Chopra wanted to opt for debt.

Keeping in mind the high operating costs of the company, suggest the source of finance that should be used for moderninsation of existing plant. Also, explain the two factors highlighted above which should be kept in mind for taking this decision. (Compartment 2018)
Answer:
The company should opt for equity as the source of finance to modernise the existing plant. Following factors were taken into consideration from the decision:

• Stock market condition In boom and favourable stock market conditions, equity should be preferred as the investors are ready to risk.
• Cash flow positions It the costs are high and therefore cash flow position is weak, company should opt equity as there is permanent payment of interest on debt.

Question 36.
Ramnath Ltd. is dealing in import of organic food items in bulk. The company sells the items in smaller quantities in attractive packages. Performance of the company has been up to the expectations in the past. Keeping up with the latest packaging technology, the company decided to upgrade its machinery. For this, the Finance Manager of the company, Mr. Vikrant Dhull, estimated the amount of funds required and the timings. This will help the company in linking the investment and the financing decisions on a continuous basis. Therefore, Mr Vikrant Dhull began with the preparation of a sales forecast for the next four years. He also collected the relevant data about the profit estimates in the coming years. By doing this, he wanted to be sure about the availability of funds from the internal sources. For the remaining funds he is trying to find out alternative sources.

Identify the financial concept discussed in the above paragraph. Also state any two points of importance of the financial concept, so identified. (All India 2017)
Answer:
The concept discussed in the above paragraph is ‘financial planning’.
The two points of importance of this concept are:
(i) Helps in avoiding business shocks and surprises Proper provision regarding shortage or surplus of funds is made by anticipating future receipts and payments. Hence, it helps in avoiding business shocks and surprises.

(ii) Helps in coordination it helps in coordinating various business activities, such as sales, purchase, production, finance, etc.

Question 37.
Explain the factors that affect capital budgeting decision. (Compartment 2014)
Answer:
Factors affecting capital budgeting/long-term investment decisions are:
(i) Cash flow of the project Whenever a company is investing huge funds in an investment proposal, it expects some regular amount of cash to meet its day-to-day requirements. The amount of cash flow of an investment proposal will be assessed properly before investing in the proposal.

(ii) Return on investment The most important criteria to decide the investment proposal is rate of return it will bring back for company, e.g. if project A is bringing 10% return and project B is bringing 15% return then, a businessman would prefer project B.

(iii) Risk involved With every investment proposal, some degree of risk is also involved. The company must try to calculate the risk involved in every proposal and should prefer the investment proposal with moderate degree of risk only.

Question 38.
Give the meaning of ‘Investment decision’ and ‘Dividend decision’. (Comportment 2014)
Answer:
(i) Investment decision It relates to as how the funds of a firm are to be invested into different assets, so that the firm is able to earn highest possible return for the investors. Investment decision can be long-term, also known as capital budgeting where the funds are commited into long-term basis.
Short-term investment decision also known as working capital decision and it is concerned with the levels of cash, inventories and debtors.

(ii) Dividend decision It relates to decision regarding distribution of dividend. The decision taken is as to how much dividend is to be retained in business and how much should be distributed to shareholders, after taking into account various factors affecting it.

Question 39
What is meant by an investment decision? Give two examples of investment decision. (Comportment 2012)
Or
Give the meaning of investment and dividend decisions of financial management. Foreign 2014
Answer:
Investment decision relates to as how the funds of a firm are to be invested in fixed as well as current assets, in order to earn highest possible return on the investment. Investment in long-term assets is called capital budgeting decision, while in short-term assets is called working capital decision.

Two examples of investment decision are:

• A company wants to establish a new unit and purchases machinery worth 120 lakh.
• Sun Ltd. wants to open a new branch of their retail outlet.

Question 40.
What is meant by ‘Capital structure’? State any two factors which affect the capital, structure of a company. (Delhi 2012)
Answer:
Capital structure can be defined as the mix between the owners’ funds and borrowed funds.

Following are the factors determining the relative proportion of various types of funds, or the capital structure:
(i) Position of cash flow Size of projected cash flow must be considered before issuing debt. Cash flow must not only cover fixed cash payment obligations but there must be sufficient cash for smooth working of the business.

(ii) Return on Investment (Rol) It refers to the earning expected from the investment. If Rol of a company is high, it can opt for trading on equity to increase the earning per share. Thus, it is an important determinant of the extent of trading on equity.

Question 41.
Explain the following factors which affect the choice of capital structure of a company
(i) cash flow position
(ii) tax rate (Comportment 2012)
Answer:
(i) Cash flow position Dividend involves an outflow of cash. Availability of enough cash is necessary for payment of declaration of dividends.

(ii) Tax rate The decision is affected by tax treatment of dividends and capital gains. For a company, it is better to pay less by dividends when the tax rate on dividend is higher and pay more as dividends when tax rate is lower. This is because however dividends are taxable in the hands of shareholders, dividends distribution tax is levied on the company.

Question 42.
‘Financial planning is a financial blue print of an organisation’s future operations’. Explain the twin objectives of financial planning in the light of this statement. (All India 2010)
Answer:
Financial planning strives to achieve the following two objectives:
(i) To ensure availability of funds whenever these are required This includes a proper estimation of the funds required for different purpose such as for the purchase of long-term assets or to meet day-to-day expenses of business, etc. Apart from this, there is a need to estimate the time at which these funds are to be made available. Financial planning also tries to specify possible sources of these funds.

(ii) To ensure unnecessary finance is not raised Excess funding is almost as bad as inadequate funding. Even if there is some surplus money, good financial planning would put it to the best possible use so that the financial resources are not left idle and don’t unnecessarily add to the cost.

Question 43.
Explain how the:
(i) cost of debt and
(ii) cost of equity, affect the choice of capital structure. (Delhi (C) 2010)0
Answer:
(i) Cost of debt A firm’s ability to borrow at a lower rate of interest increases its capacity to employ higher debt. Thus, more debt can be used if debt can be raised at lower rate.

(ii) Cost of equity Equity shareholders expect a return on their investment, i.e. Earning Per Share (EPS). When a company increases debt, the financial risk faced by the equity shareholders increases and then EPS starts decreasing with inclusion of debt, beyond a certain point. Thus, with the increase in risk, cost of equity may go up sharply and share prices may decrease.

Question 44.
Explain how the:
(i) risk consideration and
(ii) tax rate affect the choice of capital structure. (All India 2010)
Answer:
(i) Risk of consideration While deriding the capital structure, risk must be analysed and considered. Total risk consists of two types of risks
(a) Financial risk It refers to a position when a company is unable to meet its fixed financial charges namely, interest payment, preference dividend and payment obligations. It arises when a company borrows. Use of debt increases the financial risk of a business.

(b) Business risk It depends upon fixed operating costs. Higher fixed operating coshmeans higher business risk and vice-versa. If a firm’s operating risk is lower, its capacity to use debt is higher and vice-versa.

(ii) Tax rate Interest is a deductible expense. Cost of debt is affected by the tax rate. A higher tax rate makes debt relatively cheaper and increases its attraction in relation to equity.

Question 45.
‘Smart Stationery Ltd.’ wants to raise funds of ₹ 40,00,000 for its new project. The management is considering the following mix of debt and equity to raise this amount:

Capital Structure	Alternative
	I (₹)	II (₹)	III (₹)
Equlity	40,00,000	30,00,000	10,00,000
Debt	0	10,00,000	30,00,000

Other details are as follows:

Interest Rate on Debt	9%
Face Value of Equity Shares	₹ 100 each
Tax Rate	30%
Earning Before Interest and Tax (EBIT)	₹ 8,00,000

(a) Under which of the three alternatives will the company be able to take advantage of Trading on Equity?
(b) Does Earning Per Share always rise with increase in debt? (All India 2019)
Answer:
(a) The company will be available to take advantage of Trading on Equity in Alternative (III).
This is because of higher earning per share in Alternative III.

Calculation of Earning Per Share (EPS):
Alternative

(b) No, earning per shares only rises with increase in debt when the rate of interest on debt is lower then the return on investment.

Question 46.
State any four factors which affects the requirements of working capital of a company. (Compartment 2015)
Or
Explain any four factors which affect the working capital requirements of a company. (Compartment 2013; All India 2013)
Or
What is meant by ‘working capital’? State any four factors which affect the working capital requirement of a company. (Compartment 2013)
Answer:
Working capital is that part of total capital which is required for holding current assets. It may also be defined as an excess of current assets over current liabilities. The four main factors affecting working capital requirements are as follows:
(i) Production cycle It is the time span between the receipt of raw materials and their conversion into finished goods. Length of production cycle affects the working capital requirement. If the duration of production cycle is longer, the working capital requirements to meet day-to-day expenses would be higher and vice-versa.

(ii) Business cycle At times of boom period in the market, e.g. Diwali, Guru Parv, etc, the production as well as sales are likely to be higher. Whereas, the working capital requirement would be lower in times of depression in the market.

(iii) Nature of business A trading business needs less amount of working capital because there is no processing of goods. On the other hand, the working capital requirement would be more in case of manufacturing business where raw materials are converted into finished goods.

(iv) Scale of operations A large scale organisation requires large amount of working capital as compared to a small scale organisation because the quantum of inventory, debtors and cash required is generally high.

Question 47.
Give the meaning of investment and financing decisions of financial management. (All India 2014)
Or
Investment decision can be long-term and short-term. Explain long-term investment decision and state any two factors affecting this decision. (All India 2012)
Or
What is meant by long-term investment? State any three factors which affect the long-term investment decision. (Delhi 2013; All India 2013)
Answer:
Investment decisions:
It involves careful selection of assets in which funds are to be invested. Decisions, relating to investment in fixed assets are known as capital budgeting, whereas those concerning investment in current assets are called working capital decisions. A business needs to invest funds for setting up new business, for expansion and modernisation. Investment decision is taken after careful scrutiny of available alternatives in terms of costs involved and expected return.

For factors affecting this decision
(i) Helps in avoiding business shocks and surprises Proper provision regarding shortage or surplus of funds is made by anticipating future receipts and payments. Hence, ft helps in avoiding business shocks and surprises.

(ii) Helps in coordination it helps in coordinating various business activities, such as sales, purchase, production,, finance, etc.

Financing decisions:
It is concerned with the decisions of how much funds are to be raised from which long-term source, i.e. by means of shareholders’ funds or borrowed funds. Shareholders’ funds include share capital, reserves and surplus and retained earnings, whereas borrowed funds include debentures, long-term loans and public deposits.

Question 48.
Explain any four points that highlight the importance of financial planning. (Delhi 2014)
Or
What is meant by financial planning? State any three points of its importance. (All India 2013)
Or
‘Sound financial planning is essential for the success of any business enterprise’. Explain this statement by giving any six reasons. (Delhi 2019,2011; All India 2011)
Or
What is meant by ‘Financial planning’? Explain any five points which highlight its importance. (Delhi 2013)
Or
Explain the term ‘Financial planning’ and any four points of its importance in financial management. (Delhi (C) 2011)
Answer:
Financial planning helps in determining the objectives, policies, procedures, programmes and budgets to deal with the financial activities of an enterprise. Various importance of financial of planning (any three):
(i) Helps to face the eventualities It forecasts the future business situations which helps in preparing alternative financial plans to face the eventual situations.

(ii) Helps in avoiding business shocks and surprises Proper provision regarding shortage or surplus of funds is made by anticipating future receipts and payments. Hence, it helps in avoiding business shocks and surprises.

(iii) Helps in coordination It helps in coordinating various business activities, such as sales, purchase, production, finance, etc.

(iv) Helps in avoiding wastage of finance In the absence of financial planning, wastage of financial resources may take place. This arises due to the complex nature of business operations such as, excessively over or under estimation of finance for a particular business operation. Such type of wastages can be avoided through financial planning.

(v) Helps to link the present with the future It makes efforts to link the present with the future. By doing so, it helps to minimise the risks of future uncertainties.

(vi) Helps in creating link between investment and financing decisions It helps in deciding where to invest and from where the required funds will be made available. Under it, the mix of share capital and debt capital is made in such a manner that cost of capital is reduced to minimum

Question 49.
Define ‘capital structure’. Explain briefly any four factors which affect the capital structure of a company. (Compartment 2013)
Or
Determining the overall cost of capital and the financial risk of the enterprise depends upon various factors. Explain any five factors. (All India 2011)
Or
Determining the relative proportion of various types of funds depends upon various factors. Explain any five such factors. (Delhi 2011)
Or
Determining the relative proportion of various types of funds depends upon various factors. Explain any six factors.(Delhi 2019)
Or
Explain briefly any four factors that affect the choice of capital structure of a company. (All India 2017; Delhi 2017)
Or
Explain any four factors which determine the choice of the capital structure of a company. (Compartment 2014; All India 2012, 2011; Delhi 2011, 2008)
Or
Explain the following as factors affecting the choice of capital structure.
(i) Return on Investment (RoI)
(ii) Flexibility
(iii) Risk consideration
(iv) Control (Foreign 2014)
Or
Explain the following factors affecting the choice of capital structure.
(i) Cash flow position
(ii) Cost of equity
(iii) Floatation tests
(iv) Stock market condition (Foreign 2014)
Answer:
Capital structure:
Capital structure refers to the mix between owners’ fund (equity) and borrowed funds (debt I.
Capital structure of a business affects both the profitability and financial risk of business. Since, use of equity and debt In the capital structure has both its merits and demerits, a judicious mix of both are used in the capital structure.

Optimal Capital Structure:
A capital structure is said to be optimal when the proportion of debt and equity Is suds that It results in the increase of shareholders’ wealth.

Factors Affecting Capital Structure:

1. Cash flow position
2. Interest coverage ratio
3. Debt service coverage ratio
4. Return un investment (RoI)
5. Cost of debt
6. Tax rate
7. Cost of equity
8. Floatation costs
9. Risk considerations
10. Flexibility
11. Control
12. Regulatory framework
13. Stock market conditions
14. Capital structure of other companies

NOTE: Factors affecting capital structure Not In syllabus Answer given from prelous years will be shown to this effect.

Following are the factors determining the relative proportion of various types of funds, or the capital structure:
(i) Position of cash flow Size of projected cash flow must be considered before issuing debt. Cash flow must not only cover fixed cash payment obligations but there must be sufficient cash for smooth working of the business.

(ii) Return on Investment (RoI) It refers to the earning expected from the investment. If Rol of a company is high, it can opt for trading on equity to increase the earning per share. Thus, it is an important determinant of the extent of trading on equity.

(iii) Cost of capital It may be defined as the payment made by company to obtain capital. Thus, interest is the cost of debentures or loan and dividend paid by the company is the cost of equity and preference share capital. The rate of dividend on preference shares is fixed which is generally lower than that of equity shares. The cost of debentures is generally lower and tax deductible.

(iv) Risk of consideration While deciding the capital structure, risk must be analysed and considered. Total risk consists of two types of risks:
(a) Financial risk: It refers to a position when a company is unable to meet its fixed financial charges namely, interest payment, preference dividend and ‘ payment obligations. It arises when a company borrows. Use of debt increases the financial risk of a business.

(b) Business risk: It depends upon fixed operating costs. Higher fixed operating cost means higher business risk and vice-versa. If a firm’s operating risk is lower, its capacity to use debt is higher and vice-versa.

(v) Flexibility To maintain flexibility, a firm should not use its debt potential in full, so that it can borrow in unforeseen circumstances.

Question 50.
What is meant by ‘dividend decision’? State any four factors which affect the dividend decision of a company. (All India 2013; Compartment 2013)
Or
Name the decision which financial manager will take, keeping in view the overall objective of maximising shareholders’ wealth. Explain any two factors which affect this decision. (All India 2011)
Or
Explain any four factors which affect the ‘dividend decision’ of a company. (Comportment 2014; All India 2013)
Or
What is meant by ‘dividend decision’? Explain any four factors which affect the dividend decision of a company. (Delhi 2013)
Or
What is meant by ‘dividend decision’? State any four factors affecting the dividend decision. (Delhi 2010)
Answer:
Dividend decision A financial manager takes decision in three broad areas, viz investment, financing and dividend, for maximising shareholders’ wealth. Wealth maximisation is possible with increase in price of shares. A good dividend policy will enhance the market value of shares thus, meeting the objective of wealth maximisation. It also influences the financing decision of the firm, since the firm will not require funds to the extent of re-invested retained earnings.
So, it should be taken keeping in view the overall objective of maximising shareholders’ wealth.

The four factors which affect dividend decisions cure:
(i) Earnings Dividends are paid to the shareholders either from the past earnings or from the current earnings or from both. Therefore, ‘earnings’ is a major factor which affects dividend decision.

(ii) Stability of earnings It also affects the dividend decision. A company having stable earnings can declare higher dividend whereas, a company having unstable earnings is likely to pay smaller dividend.

(iii) Stability of dividend Companies generally have a policy of stabilising dividends, i.e. increase in dividend is only done when the earning potential of the company has gone up and not just the current year’s earnings. Thus, dividend per share is not altered when the change is small or temporary in nature.

Shareholders’ preference While dedaring Or dividends, management must keep in mind the preferences of the shareholders in this regard. If the shareholders in general desire that at least a certain amount is paid as dividend, the companies are likely to declare the same. There are always some shareholders who depend upon a regular income from their investments.

Question 51.
Explain any four factors which affect the ‘Fixed capital’ requirements of a company. (All India 2013)
Or
What is meant by ‘fixed capital’? Explain any four factors which affect the fixed capital requirements of a company. (Compartment 2013)
Or
Explain briefly any four factors that affect the fixed capital requirements of a company. (Delhi 2018, 2017; All India 2017)
Or
Explain the following as factors affecting the requirements of fixed capital. (All India 2014; Delhi 2014)
(i) Scale of operations
(ii) Choice of technique
(iii) Technology upgradation
(iv) Financing alternatives
Or
Explain any four factors affecting fixed capital requirement of a company. (Compartment 2014)
Or
Explain in brief any six factors which affect the fixed capital requirements of a company. (Compartment 2013)
Answer:
The amount of capital investment in fixed assets is called fixed capital, e.g. plant and machinery, land and building, .etc.
The four factors which affect the fixed capital requirement of a company are:
(i) Nature of business While deciding the fixed capital requirement of a business enterprise, its nature should be considered, e.g. trading concern needs lower investment in fixed assets as compared with a manufacturing organisation; since it does not 11. require to purchase plant and machinery, etc.

(ii) Scale of operations A large organisation operating at a higher scale needs higher investment in fixed assets as compared to a small organisation.

(iii) Choice of technique A capital intensive organisation requires higher investment in Ans. plant and machinery. So, requirement of fixed capital would be higher. On the other hand, labour intensive organisation requires less investment in fixed assets.

(iv) Technology upgradation These days upgradation with the latest technologies is essential and there is a need to replace old technology with new. Thus, in this case, higher investment is required and vice-versa.

Question 52.
Pranav is engaged in transport business.
Identify the working capital requirements of Pranav stating the reason in support of your answer. Pranav wants to expand and diversify his transport business. Explain any tw6 factors that will affect his fixed capital requirements. (Compartment 2013; All Indio 2012)
Or
Neelabh is engaged in transport business and transports fruits and vegetables to different states. Stating the reason in support of your answer, identify the working capital requirements of Neelabh. Neelabh also wants to expand and diversify his transport business, explain any two factors that will affect his fixed capital requirements. (Delhi 2012)
Answer:
In the transportation business, lesser amount of working capital is required as Neelabh and Pranav are engaged in service industry. A firm engaged in service industry needs less working capital.
(i) Lower investment is required to carry out the day-to-day operations.
(ii) Lower investment require to maintain inventory, if any.

Factors affecting the fixed capital requirement are:
(i) Growth prospects: Businessman wants to expand his business, in such a situation, company requires higher investment to meet the anticipated demand in future. Thus the requirement of fixed capital will be higher.
(ii) Diversification: If the businessman diversify his business, this mean larger amount of fixed capital is required.

Question 53.
Explain the following as factors affecting financing decision:
(i) Cost
(ii) Cash flow position of business
(iii) Control considerations
(iv) Floatation cost (Delhi 2012)
Answer:
(i) Cost The cost of raising funds through different sources are different. A prudent financial manager would normally opt for a source which is the cheapest. Debt is considered the cheapest of all sources, tax deductibility makes it still cheaper.

(ii) Cash flow position of business A stronger cash flow position may make debt financing more viable than funding through equity. Therefore, in order to take advantage of cheap finance, companies prefer debt to equity.

(iii) Control considerations The ultimate control of the company is that of the equity shareholders. Greater the number of equity shareholders, the greater will be the control in the hands of more people. This is not a good situation. Therefore, from this point of view the equity share capital should be avoided.

(iv) Floatation cost From the point of view of floatation costs, higher the floatation cost, less attractive the source becomes.

Question 54.
How are the shareholders likely to gain with loan components in capital employed? Explain with suitable example. (All India 2011)
Answer:
With a debt component in the total capital, shareholders are likely to have the benefit of a higher rate of return on the share capital. This is because debt/loan carry a fixed charge and the amount of interest paid is deductible from the earnings before tax payment. The benefit to the shareholders will be realised only if the average rate of return on total capital invested is more than the rate of interest payable on loan/debt.

For example, Let us consider two public companies X Ltd and Y Ltd.
The following calculation will show how trading on equity increases the return on equity shares:
(i)

(ii)

Thus, it can be concluded that Y Ltd using fixed cost sources, i.e. debentures,- earn a relatively high rate of return on equity capital.

Question 54.
Name the decision taken by a financial manager which determines the overall cost of capital and the financial risk of the enterprise. Explain any two factors which affect this decision. (All India 2011)
Answer:
Financing decision determines the overall cost of capital and the financial risk of the enterprise.
For two main factors which affect financing decisions Refer to Ans 14 on page 158.

Question 55.
Explain briefly any four factors that affect the working capital requirements of a company. (All India 2017; Delhi 2017)
Ans.
The four factors that affect the working capital requirements are:
(i) Nature of business A trading business needs less amount of working capital because there is no processing of goods. On the other hand, the working capital requirement would be more in case of manufacturing business where raw materials are converted into finished goods.

(ii) Scale of operation A large scale organisation requires large amount of working capital as compared to small scale organisation because the quantum of inventory, debtors and cash required is generally high.

(iii) Seasonal factors Business operations are affected by the seasonal changes. As during peak season, higher is the demand for the product and higher is the requirements of working capital. On the other hand, during lean season requirements of working capital will be lower.

(iv) Production cycle It is the time span between the receipt of raw materials and their conversion into finished goods. Length of production cycle affects the working capital requirement. If the duration of production cycle is longer, the working capital requirements to meet day-to-day expenses would be higher and vice-versa.

Question 56.
‘Viyo Ltd. is a company manufacturing textiles. It has a share capital of ₹ 60 lakh.
The earning per share in the previous year was ₹ 0.50. For diversification, the company requires additional capital of ₹ 40 lakh. The company raised funds by issuing 10% debentures for the same. During the current year the company earned a profit of ₹ 8 lakh on capital employed. It paid tax 40%.
(i) State whether the shareholders gained or lost, in respect of earning per share on diversification, show your calculations clearly.
(ii) Also, state any three factors that favour the issue of debentures by the company as part of its capital structure. (Delhi 2016)
Or
Sakshi Ltd is a company manufacturing electronic goods. It has a share capital of ₹ 120 lakh. The earning per share in the previous year was ₹ 0.5. For diversification, the company requires additional capital of ₹ 80 lakh. The company raised funds by issuing 10% debentures for the same.
During the current year the company earned profit of ₹ 16 lakh on capital employed. It paid tax @ 40%.
(i) State whether the shareholders gained or lost in respect of earning per share on diversification, show your calculations clearly.
(ii) Also state any three factors that favour the issue of debentures by the company as part of its capital structure. (Foreign 2016)
Or
Kay Ltd., is a company manufacturing textiles. It has a share capital of ₹ 60 lakh. In the previous year, its earning per share was ₹ 0.50. For diversification, the company requires, additional capital of ₹ 40 lakh. The company raised funds by issuing 10% debentures for the same. During the year the company earned profit of ₹ 8 lakh on capital employed. It paid tax @ 40%.
(a) State whether the shareholders gained or lost, in respect of earning per share on diversification. Show your calculations clearly.
(b) Also, state any three factors that favour the issue of debentures by the company as sort of its capital structure. (All India 2016)
Answer:
(i)

Since, Earning Per Share has fallen from 0.50 to 0.40, therefore the shareholders stand to lose on diversification.
NOTE: In the absence of any information, shares are assumed to be of ₹ 10 each.

(ii) Three factors that favour issue of debentures by the company as part of its capital structure are:
(a) Debenture interest payable is a charge to the profits. Hence a company stands to gain in terms of tax-benefits.
(b) Issue of debentures help the shareholders of the company to gain through ‘Trading on Equity’.
(c) Debenture is a cheaper source of finance as compared to equity.

Question 57.
‘Sarah Ltd.’ is a company manufacturing cotton yarn. It has been consistently earning good profits for many years. This year too, it has been able to generate enough profits. There is availability of enough cash in the company and good prospects for growth in furure. It is a well managed organisation and believes in quality, equal employment opportunities and good remuneration practices. It has many shareholders who prefer to receive a regular income from their investments.
It has taken loan of 40 lakh from IDBI and is bound by certain restrictions on the payment of dividend according to the terms of loan agreement.
The above discussion about the company leads to various factors which decide how much of the profits should be retained and how much has to be distributed by the company.
Quoting the lines from the above discussion identify and explain any four such factors. (Delhi 2015)
Answer:
The factors identified in the above lines are given below:
(i) The line ‘It has been consistently earning goods profits for many years’ indicated ‘Stability of earnings’. Stability of earnings of a business unit also affects the dividend decision. A company having stable earnings can declare higher dividend whereas a company having unstable earnings is likely to pay smaller dividend.

(ii) The line ‘This year too, it has been able to generate enough profits indicates ‘Earnings’ as a factor affecting dividend decision. Companies generally have a policy of stabilising dividends, i.e. increase in dividend is only done when the earning potential of the company has gone up and not just the current year’s earnings. Thus, dividend per share is not altered when the change is small or temporary in nature.

(iii) The line ‘There is availability of enough cash in the company and good prospects for growth in future’ indicates ‘Growth opportunities’.
Companies which are intended to grow, generally pay less dividend and retain more money out of profits to invest in profitable projects. On the contrary, companies which are not intended to grow and have enough earnings and cash, can pay higher dividends.

(iv) The line ‘It has many shareholders who prefer to receive a regular income from their, investments’ indicates ‘Shareholders’ Preference’.
While declaring dividends, management must keep in mind the preferences of the shareholders in this regard. If the shareholders in general desire that at least a certain amount is paid as dividend, the companies are likely to declare the same. There are always some shareholders who depend upon a regular income from their investments.

Question 58.
‘Abhishek Ltd.’ is manufacturing cotton clothes. It has been consistently earning good profits for many years. This year too, it has been able to generate enough profits. There is availability of enough cash in the company and good prospects for growth in future. It is a well managed organisation and believes in quality, equal employment opportunities and good remuneration practices. It has many shareholders who prefer to receive a regular income form their investments.

It has taken a loan of ₹50 lakh from ICICI Bank and is bound by certain restrictions on the payment of dividend according to the terms of the loan agreement. The above discussion about the company leads to various factors which decide how much of the profits should be retained and how much has to be distributed by the company. Quoting the lines from the above discussion, identify and explain any four such factors. (All India 2015)
Answer:
The factors identified in the above lines are given below:
(i) The line ‘It has been consistently earning goods profits for many years’ indicated ‘Stability of earnings’. Stability of earnings of a business unit also affects the dividend decision. A company having stable earnings can declare higher dividend whereas a company having unstable earnings is likely to pay smaller dividend.

(ii) The line ‘This year too, it has been able to generate enough profits indicates ‘Earnings’ as a factor affecting dividend decision. Companies generally have a policy of stabilising dividends, i.e. increase in dividend is only done when the earning potential of the company has gone up and not just the current year’s earnings. Thus, dividend per share is not altered when the change is small or temporary in nature.

(iii) The line ‘There is availability of enough cash in the company and good prospects for growth in future’ indicates ‘Growth opportunities’. Companies which are intended to grow, generally pay less dividend and retain more money out of profits to invest in profitable projects. On the contrary, companies which are not intended to grow and have enough earnings and cash, can pay higher dividends.

(iv) The line ‘It has many shareholders who prefer to receive a regular income from their, investments’ indicates ‘Shareholders’ Preference’.
While declaring dividends, management must keep in mind the preferences of the shareholders in this regard. If the shareholders in general desire that at least a certain amount is paid as dividend, the companies are likely to declare the same. There are always some shareholders who depend upon a regular income from their investments.

Question 59.
Explain the following as factors affecting dividend decision. All Indio 2014; Delhi 2014
(i) Stability of earnings
(ii) Growth opportunities
(iii) Cash flow position
(iv) Taxation policy
Answer:
Dividend decision relates to how much of the company’s net profit is to be distributed to the shareholders and how much of it is to be retained in the business.

Factors affecting dividend decision are:
(i) Stability of earnings: Stability of earnings of a business unit also affects the dividend decision. A company having stable earnings can declare higher dividend whereas a company having unstable earnings is likely to pay smaller dividend.

(ii) Growth opportunity: Companies which are intended to grow, generally pay less dividend and retain more money out of profits to invest in profitable projects. On the contrary, companies which are not intended to grow and have enough earnings and cash, can pay higher dividends.

(iii) Cash flow position: Dividend involves an outflow of cash. Availability of enough cash is necessary for payment of declaration of dividends.

(iv) Taxation policy: The decision is affected by tax treatment of dividends and capital gains. For a company, it is better to pay less by dividends when the tax rate on dividend is higher and pay more as dividends when tax rate is lower. This is because however dividends are taxable in the hands of shareholders, dividends distribution tax is levied on the company.

Question 60.
Explain any six factors affecting the decision that determines the amount of profit earned to he distributed and to be retained in the business. (Delhi 2019)
Or
Explain the following as factors affecting ‘dividend decision’.
(i) Stability of dividend
(ii) Shareholders’ preference
(iii) Legal constraints
(iv) Access to capital market (Delhi 2014)
Or
Explain any six factors affecting the decision that determines the amount of profit earned to he distributed and to be retained in the business. (Delhi 2019)
Answer:
Dividend decisions relate to how much of the company’s after tax profit is to be distributed to the share holders and how much of it should be retained in the business for future requirements. Factors affecting dividend decisions are:
(i) Stability of dividend Companies generally have a policy of stabilising dividends, i.e. increase in dividend is only done when the earning potential of the company has gone up and not just the current year’s earnings. Thus, dividend per share is not altered when the change is small or temporary in nature.

(ii) Shareholders preference While declaring dividends, management must keep in mind the preferences of the shareholders in this regard. If the shareholders in general desire that at least a certain amount is paid as dividend, the companies are likely to declare the same. There are always some shareholders who depend upon a regular income from their investments.

(iii) Legal constraints Certain provisions of The Companies Act place restrictions on payouts as dividend. Such provisions must be adhered while declaring the dividend.

(iv) Access to capital market Large and reputed companies generally have easy access to the capital market and, therefore, may depend less on retained earning to finance their growth. These companies tend to pay higher dividends than the smaller companies.

Question 61.
Explain the following as factors affecting the requirements of working capital (Delhi 2014)
(i) Business cycle
(ii) Operating efficiency
(iii) Availability of raw material
(iv) Level of competition
Answer:
Working capital is the capital invested in current assets which facilitates day-to-day operations of the business. The amount of working capital required depends on various factors. Factors affecting working capital requirement are:
(i) Business cycle:
Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as well as production are likely to be larger and, therefore, larger amount of working capital is required. As against this, the requirement for working capital will be lower during the period of depression as the sales as well as production will be small.

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

(iii) Availability of raw material:
If raw material required in freely available, lower stock levels may be sufficient and vice-versa. Lead time, i.e. time lag between placing the order and actual receipt of material is also a major determinant. A larger lead time will require larger amount of raw material to be stored, thus larger amount of working capital is required.

(iv) Level of competition:
Higher level of competitiveness may necessitate larger stocks of finished goods to meet urgent orders from customers. This increases the working capital requirement.

Question 62.
Explain how the following factors affect the working capital requirements of business. (Compartment 2014)
(i) Inflation
(ii) Business cycle
(iii) Level of competition
(iv) Nature of business
Answer:
Factors affecting working capital requirement are:
(i) Inflation Inflation leads to increase in prices of raw materials, thus more working capital is required.
(ii) Business cycle:
Business cycle At times of boom period in the market, e.g. Diwali, Guru Pam’, etc, the production as well as sales are likely to be higher. Whereas, the working capital requirement would be lower in times of depression in the market.

(iii) Level of competition:
Level of competition Higher level of competitiveness may necessitate larger stocks of finished goods to meet urgent orders from customers. This increases the working capital requirement.

(iv) Nature of business:
Nature of business A trading business needs less amount of working capital because there is no processing of goods. On the other hand, the working capital requirement would be more in case of manufacturing business where raw materials are converted into finished goods.

Question 64.
Explain the following as factors affecting the requirements of working capital. (All India 2014; Foreign 2014)
(i) Nature of business
(ii) Scale of operations
(iii) Seasonal factors
(iv) Production cycle
Answer:
Factors affecting working capital requirements are:
(i) Nature of business A trading business needs less amount of working capital because there is no processing of goods. On the other hand, the working capital requirement would be more in case of manufacturing business where raw materials are converted into finished goods.

(ii) Scale of operations A large scale organisation requires large amount of working capital as compared to small scale organisation because the quantum of inventory, debtors and cash required is generally high.

(iii) Seasonal factors Business operations are affected by the seasonal changes. As dining peak season higher are the level of activities and higher the requirements of working capital, on the other hand, during lean season requirements of working capital will be lower.

(iv) Production cycle It is the time span between the receipt of raw materials and their conversion into finished goods. Length of production cycle affects the working capital requirement. If the duration of production cycle is longer, the working capital requirements to meet day to day expenses would be higher and vice-versa.

Question 65.
Explain the following as factors affecting the requirements of fixed capital.
(i) Nature of business
(ii) Growth prospects
(iii) Diversification
(iv) Level of collaboration (Delhi 2014)
Or
You are a finance manager of a newly established company. The directors have asked you to determine the amount of fixed capital requirement for the company. Explain any four factors that you will consider while determining the fixed capital requirement of the company. (All India 2011, 2010; Delhi(C) 2011)
Answer:
(i) Nature of business The type of business has a bearing upon the fixed capital requirements, e.g. a trading concern needs lower investment in fixed assets compared with a manufacturing organisation, since it does not require to purchase plant and machinery, etc.

(ii) Growth prospects Higher growth of an organisation generally requires higher investment in fixed assets. Even when such growth is expected, a company may choose to create higher capacity in order to meet the anticipated higher demand quicker. This entails larger investment in fixed assets and consequently larger fixed capital.

(iii) Diversification If a firm diversify its operations, its fixed capital requirements increases.

(iv) Level of collaboration Usually organisations use each other’s facilities as it is feasible and reduces the level of investment in fixed assets, e.g. PNB bank may use ATM of Andhra Bank.

Question 66.
Amar is doing his transport-business in Delhi. His buses are generally used for the tourists going to Jaipur and Agra. Identify the working capital requirements of Amar giving reason in support of your answer. Further Amar wants to expand and diversify his transport-business. Explain any two factors that will affect his fixed capital requirements. (Compartment 2012)
Or
Harish is engaged in warehousing business and his warehouses are generally used by the businessmen to store fruits. Identify the working capital requirements of Harish giving reason in support of your answer. Further Harish wants to expand and diversify his warehousing business. Explain any two factors that will affect his fixed capital requirements. (Comportment 2012)
Answer:
Working capital requirements of Amar would be less as transport compary is a service industry. Working capital requirements of Amar would include payment of salaries to staff, fuel charges, maintenance and upkeep of buses etc.

Two factors which will affect his fixed capital requirements
(i) Scale of operations The larger the size of a business, the greater is the amount of fixed capital required in terms of purchase of new and better luxury buses.
(ii) Diversification A diversified firm needs more fixed capital to meet its requirement of fixed assets of various divisions, which could be in terms of more offices and also servicing centres for buses etc.

Question 67.
You are the financial manager of a newly established company. The directors have asked you to determine the amount of working capital requirement for the company. Explain any four factors that you will consider while determining the working capital requirement of the company. (Delhi 2011)
Or
Explain any four factors which determine the working capital requirement of an organisation. (Delhi 2011)
Answer:
Working capital is the capital invested in current assets which facilitates day-to-day operations of the business. The amount of working capital required depends on various factors. Factors affecting working capital requirement are:
(i) Business cycle Different phases of business cydes affect the requirement of working capital by a firm. In case of a boom, the sales as well as production are likely to be larger and, therefore, larger amount of working capital is required. As against this, the requirement for working capital will be lower during the period of depression as the sales as wefl as production will be small.

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

(iii) Availability of raw material If raw material required in freely available, lower stock levels may be sufficient and vice-versa. Lead time, i.e. time lag between placing the order and actual receipt of material is also a major determinant. A larger lead time will require larger amount of raw material to be stored, thus larger amount of working capital is required.

(iv) Level of competition Higher level of competitiveness may necessitate larger stocks of finished goods to meet urgent orders from customers. This increases the working capital requirement.

Factors affecting working capital requirement are:
(i) Inflation Inflation leads to increase in prices of raw materials, thus more working capital is required.
(ii) Business cycle: Business cycle At times of boom penod in the market, e.g. Diwali, Guru Pam’, etc, the production as well as sales are likely to be higher. Whereas, the working capital requirement would be lower in ümes of depression in the market.

(iii) Level of competition:
Level of competition Higher level of competitiveness may necessitate larger stocks of finished goods to meet urgent orders from customers. This increases the working capital requirement.

(iv) Nature of business:
Nature of business A trading business needs less amount of working capital because there is no processing of goods. On the other hand, the working capital requirement would be more in case of manufacturing business where raw materials are converted into finished goods.

Question 68.
What is meant by financing decision? State any four factors affecting the financing decision. (All India 2010; Delhi 2010)
Answer:
Financial decision deals with quantum of finance to be raised from long-term sources, viz debt equity. In other words, it refers to the determination as how the total funds required by the business will be obtained from various long-term sources. There should be a proper balance between debt and share capital as it influences the market price of the shares and cost of capital.

Factors affecting financing decisions:
(i) Cost The cost of raising funds through different sources are different. A prudent financial manager would normally opt for a source which is the cheapest. Debt is cons idcrcd the cheapest of ail sources, tax deductibility makes il still cheaper.

(ii) Cash flow position of business A stronger cash flow position may make debt financing more viable than funding through equity. Therefore, in order to take advantage of cheap finance, companies prefer debt to equity.

(iii) Control considerations The ultimate control of the company is that of the equity shareholders, Greater the number of equity shareholders, the greater will be the control in the hands of more people. This is not a good situation. Therefore, from this point of view the equity share capital should be avoided.

(iv) Floatatlon cost From the point of view of floatation costs, higher the floatation cost, less attractive the source becomes.

Multiple Choice Questions

Question 1.
Which of the following is the factor affecting the requirement of fixed capital?
(a) Nature of business
(b) Choice of technique
(c) Scale of operations
(d) All of the above
Answer:
(d) All of the above

Question 2.
Capital budgeting decisions are important because of
(a) long-term growth
(b) large amount of funds involved
(c) risk involved
(d) All of the above
Answer:
(d) All of the above

Hint:
Capital budgeting decisions have bearing on the long-term growth because the funds invested in long-term assets are likely to yield return in the future. Investment decisions involving fixed capital influence the overall business risk complexion of the firm as fixed capital involves investment of huge amounts.

Question 3.
An asset is considered more liquid if
(a) it can be converted into cash quicker
(b) it is converted into cash without reduction in value
(c) Both (a) and (b)
(d) it cannot be converted into cash
Answer:
(c) Both (a) and (b)

Question 4.
Which of the following factor affects the requirement of working capital?
(a) Business cycle
(b) Seasonal factors
(c) Availability of raw materials
(d) All of the above
Answer:
(d) All of the above

Question 5.
The fund raising exercise also costs something. This cost is called
(a) fixed cost
(b) floatation cost
(c) bearing cost
(d) variable cost
Answer:
(b) floatation cost

Hint:
When a company raises the funds it included some costs like brokerage, commission, etc which is known as floatation costs.

Question 6.
Identify the concept which increases the return on equity shares with a change in the capital structure of a company.
(a) Trading on equity
(b) Capital structure
(c) Debt financing
(d) Equity financing
Answer:
(a) Trading on equity

Question 7.
What happens when financial leverage increases?
(a) Cost of funds decreases
(b) Risk increases
(c) Both (a) and (b)
(d) Cost of funds increases
Answer:
(c) Both (a) and (b)

Hint:
The amount of total debt in the overall capital is called financial leverage. It is debt/equity or debt/ debt + equity. When financial leverage (i.e. debt) increases, the cost of funds decline but risk increases.

Question 8.
The impact of financial leverage on the profitability of a business can be seen through which analysis?
(a) EBIT – EBT
(b) EBIT – EPS
(c) EBT – EPS
(d) EAT – EPS
Answer:
(b) EBIT – EPS

Question 9.
Which of the following statement is not correct?
(a) Debt is considered as cheaper to equity
(b) Interest on debt is deductible for tax purpose
(c) Issue of more equity may dilute shareholders’ control over the business
(d) If RoI is more than the cost of debt, the company should prefer equity to debt
Answer:
(d) If RoI is more than the cost of debt, the company should prefer equity to debt

Question 10.
Choose the correct option regarding the arrangement of current assets in order of liquidity from highest to lowest.
(a) Cash, marketable securities, bills receivables, debtors
(b) Marketable securities, cash, debtors, bills receivable
(c) Prepaid expenses, cash, marketable securities, bills receivables
(d) Bills receivables, cash, marketable securities, debtors
Answer:
(a) Cash, marketable securities, bills receivables, debtors

Question 11.
A company has earnings before interest and tax is ₹ 3,00,000 and its total investments are ₹ 10,00,000. Find out return on investments.
(a) 20%
(b) 30%
(c) 10%
(d) 40%
Answer:
(b) 30%

Hint:
Return on Investment = (Earnings before Interest and Tax/Total Investments) × 100 In this question,
RoI = (3,00,000/10,00,000) × 100 = 30%

Question 12.
Which of the following statement is not true?
(a) Maintaining adequate liquidity is a secondary objective of financial planning
(b) Stock market reactions is an important factor while making dividend decisons
(c) Compaines with lower ICR can borrow more funds
(d) None of the above
Answer:
(c) Compaines with lower ICR can borrow more funds

Hint:
ICR refers to interest coverage ratio, i.e. the number of times EBIT covers interest obligations. Therefore, compaines with lower ICR should not borrow more funds.

Question 13.
A company has Net Working Capital = ₹ 20,000. If current assets are; Stock = ₹ 10,000, Debtors = ₹ 12,000, Cash = ₹ 6,000, Bills Receivable = ₹ 22,000. Calculate Current Liabilities.
(a) ₹ 50,000
(b) ₹ 1,20,000
(c) ₹ 20,000
(d) ₹ 30,000
Answer:
(d) ₹ 30,000

Hint: Net Working Capital = Current Assets – Current liabilities
In this question, total of current assets = 10,000 + 12,000 + 6,000 + 22,000 = ₹ 50,000.
Therefore, Current Liabilities = Current Assets – Net Working Capital = ₹ 30,000

Question 14.
Favourable financial leverage is a condition when
(a) Rate of return > Cost of debt
(b) Rate of return < Cost of debt
(c) Rate of return = Cost of debt
(d) None of the above
Answer:
(a) Rate of return > Cost of debt

We have given these Business Studies Class 12 Important Questions Chapter 8 Controlling to solve different types of questions in the exam. Go through these Planning Class 12 Important Questions and Answers & Previous Year Questions to score good marks in the board examination.

Important Questions of Controlling Class 12 Business Studies Chapter 8

Question 1.
Give the meaning of ‘management by exception’. (All India 2019)
Or
What is meant by ‘management by exception’ in the process of controlling? (Compartment 2014)
Answer:
‘Management by exception’ is an important principle of control, which propagates that only significant deviations which goes beyond the permissible limit should be brought to the notice of management, as an attempt to control everything, results in controlling nothing.

Question 2.
Isha Machines was a renowned name for quality sewing machines since 1960. Mr Suresh, the owner of Isha Machines, was worried as the production had declined during the last three months. He directed the Production Manager to find out the reason. The Production Manager ordered the different supervisors to prepare a performance report of the workers working under them.
Identify the step taken by the production manager in the controlling function of management. (All India 2017)
Answer:
The step taken by the production manager is ‘measurement of actual performance’ in the controlling function of management.

Question 3.
Hina Sweets is a renowned name for quality sweets since 1935. Harsh the owner of Hina Sweets was worried as the sales had declined during the last three months. When he enquired from the Sales Manager, the Sales Manager reported that there were some complaints about the quality of sweets. Therefore, Harsh ordered for sample checking of sweets.
Identify the step taken by Harsh that is related to one of the functions of management. (Delhi 2017)
Answer:
The step indicated here is ‘Measurement of actual performance’ under controlling.

Question 4.
Give the meaning of ‘critical point control’. (Comportment 2014; Foreign 2014)
Answer:
Control should focus on Key Result Areas (KRAs), which are critical to the success of an organisation. Therefore, each and every activity should not be controlled and focus should be on critical points only.

Question 5.
How is controlling a forward-looking function? State. (Compartment 2013)
Answer:
Controlling is forward looking as it must focus attention on two things checking current performance and providing early information to achieve results in confirmity with set standards.

Question 6.
Why is it said that controlling is looking back? (Comportment 2013; All India 2011)
Answer:
Controlling is called a process of looking back as under it, actual results are compared with the set standards, decided in the past. After that, a corrective action is initiated.

Question 7.
What should be done while ‘taking corrective actions’ in the process of controlling when especially in the important areas, deviations go beyond the acceptable range? (Delhi 2013)
Answer:
Immediate managerial attention is required if the deviations go beyond the acceptable range in important areas. After the analysis of deviations and their causes, the task is to remove the hurdles from the actual work plan. The purpose of this step is to bring the actual performance upto the level of expectations by opting corrective measures.

Question 8.
Standards are set in quantitative as well as in qualitative terms. Identify the type of standards when it is set in terms of ‘cost to be incurred’. (Comportment 2012)
Answer:
Quantitative standards

Question 9.
Standards are set in quantitative as well as in qualitative terms. Identify the type of standards when it is set in terms of ‘time to he spent’. (Comportment 2012)
Answer:
Quantitative standards

Question 10.
Why it is said that controlling is a continuous activity? (Delhi 2011)
Answer:
Controlling is a continuous activity as the progress has to be assessed continuously as per the pre-determined standards.

Question 11.
What is important while analysing deviations in controlling? (Delhi 2011)
Answer:
While analysing deviations, it is important to determine the acceptable range of deviations/ KRA (Key Result Areas).

Question 12.
What should be the focus point for a manager while controlling, as controlling at each and every step is not possible? (All India 2011)
Answer:
Focus on Key Result Areas (KRAs), which are critical to the success of an organisation.

Question 13.
Why is actual performance compared with standards in the process of controlling? (Delhi 2010; All India 2010)
Answer:
While performing the function of controlling, a manager compares the actual work performance with the standards. He tries to find out whether the actual performance is more or less than the standards and find out the deviations, if any.

Question 14.
‘AS Ltd.’ a large company engaged in assembly of air-conditioners. Recently the company had conducted the “Time’ and “Motion’ study and concluded that on an average a worker can assemble ten air-conditioners in a day. The target volume of the company in a day is assembling of 1,000 units of air-conditioners. The company is providing attractive allowances to reduce labour turnover and absenteeism. All the workers are happy. Even then the assembly of air-conditioners per day is 800 units only. To find out the reason the company compared actual performance of each worker and observed through CCTV that some of the workers were busy in gossiping. (All India 2015)
(i) Identify the function of management discussed above.
(ii) State those steps in the process of the function identified which are discussed in the above paragraph.
Ans.
(i) Controlling function

(ii) Steps in the process of control are:
Step 1: Setting performance standards Through ‘time’ and ‘motion’ study, an average worker can assemble 10 air-conditioners in a day. On this basis, target volume of 1000 units per day is set.

Step II: Measurement of actual performance Assembly per day is 800 units.

Step III: Comparison of actual performance with standards The company compared actual performance of each worker.

Step IV: Analysing deviations Observed through CCTV that some of the workers were busy in gossiping.

Question 15.
After setting the performance standards the next step in the controlling process is the ‘measurement of actual performance’. Explain this step in the process of controlling. (All India 2013)
Answer:
After the establishment of standards, the next step is measuring the actual performance with the set standards. This can be done by opting several methods like personal observation, sample checking, performance reports, etc.

Question 16.
Explain how ‘management by exception’ helps in the controlling process. (All India 2013)
Answer:
It is an important principle of management control, based on the belief that an attempt to control everything results in controlling nothing. This is known as ‘control by exception’. Thus, only significant deviations which go beyond the permissible limit should be brought to the notice of management. An attempt to go through all deviations tend to increase unnecessary efforts and to decrease attention on important problems.

Question 17.
Explain how ‘critical point control’ helps in controlling process. (All India 2013)
Answer:
Small deviations in certain areas may have greater significance than larger in other areas. According to this principle, control should focus on Key Result Areas (KRAs), which are critical to the success of the organisation. When anything goes wrong in these areas, the entire organisation suffers, e.g. A 2% increase in labour cost is much more harmful than a 5% increase in postal charges.

Question 18.
Explain how controlling helps in
(i) Accomplishing organisational goals; and
(ii) Judging accuracy of standards (All India 2013)
Answer:
(i) Accomplishing organisational goals The controlling function measures the performance against the pre-determined standards and corrects deviations. This helps in ensuring that organisation is moving on right track to achieve the organisational goals. In other words, by controlling, the manager ensures that resources are obtained and used economically and efficiently for the achievement of organisational objectives.

(ii) Judging accuracy of standards A sound controlling system helps the management to verify whether the standards set are accurate and objective. It keeps a careful check on the changes, which are taking place in the organisation and helps in revising standards as and when required.

Question 19.
Explain how controlling helps in
(i) Making efficient use of resources; and
(ii) Improving employee’s motivation (All India 2013)
Answer:
(i) Making efficient use of resources By exercising control, a manager seeks to reduce wastage and spoilage of resources. Bach activity is performed in accordance with pre-determined standards and norms. This ensures that resources are used in the most effective and efficient manner.

(ii) Improving employees motivation A good control system ensures that employees knows well in advance what they are expected to do and what are the standards of performance on the basis of which they will be appraised. Thus, it motivates them and helps them to give better performance.

Question 20.
Vikas was the Chief Operation Officer of Valet Ltd.’, a company providing advanced software solutions of Indian Defence Services. They had been carrying on business successfully for the last twelve years and earning enough profits. But from the last one year, they realised that though the business is getting big orders which are being fulfilled in time, even then the revenues kept on decreasing. Vikas was not able to find out where the problem was. He started keeping a close check on the progress of activities as he could sense that something was wrong. He wanted to take some action before any major damage could be done to the business. Vikas appointed a cyber security expert who monitored the company’s processes and found out that the computer operator was deleting the entries from the computers and pocketing the revenues. He was caught and handed over to the police.
This created an atmosphere of order and discipline in the organisation and helped in minimising dishonest behaviour on the part of the employees.
(a) Identify the function of management highlighted in the above paragraph.
(b) Explain any four other ways in which
this function of management may help the organisation. (All India 2019)
Or
State any five points that highlight the importance of controlling. (CBSE 2018; All Indio 2017; Delhi 2017)
Or
State any five points that highlight the importance of controlling. (All India 2016; Delhi 2014, 2013; Foreign 2016)
Or
Explain any five points which highlight the importance of controlling function of management. (Delhi 2016; Compartment 2012)
Or
‘Controlling is an indispensable function of management.’ Explain the statement with the help of any five points. (Compartment 2014,2013)
Or
Explain the concept of controlling and any four points of its importance. (Comportment 2012)
Answer:
(a) The function highlighted is ‘controlling’.

(b) The five points that highlight the importance of controlling are as follows:
(i) Accomplishing organisational goals The controlling function measures the performance against the predetermined standards and corrects deviations. This helps in ensuring that organisation is moving on right track to achieve the organisational goals. In other words, by controlling, the manager ensures that resources are obtained and used economically and efficiently for the achievement of organisational objectives.

(ii) Judging accuracy of standards A sound controlling system helps the management to verily whether the standards set are accurate and objective. It keeps a careful check on the changes, which are taking place in the organisation and helps in revising standards as and when required.

(iii) Making efficient use of resources By exercising control, a manager seeks to reduce wastage and spoilage of resources. Each activity is performed in accordance with pre-determined standards and nqrms. This ensures that resources are used in the most effective and efficient manner.

(iv) It improves employees’ morale The implementation of controlling makes all the employees to work with complete dedication because they are aware that their performance will be evaluated and they will have a chance to build their reputation in the organisation. The employees who show good performance are rewarded by giving them promotions, cash prizes, etc.

(v) It helps in better performance Planning and controlling are closely inter-related as the real test of planning is controlling. Control reveals deficiencies and deviations, suggests corrective actions
for prevention of deviations and deficiencies through modified planning.

Question 21.
Vinber Ltd. set up a manufacturing unit at Bhiwadi in Himachal Pradesh to manufacture electric geysers and supply them to dealers all over the country.
Their production target was 500 geysers per week. It was decided by the management that variation in production upto 10 units would be acceptable.
At the end of the first week, the production was 450 geysers. The next week, production increased of 470 geysers. A week later, production was 460 geysers. On investigation, it was found that fluctuation in production was due to irregular supply of electricity.
(a) The above para discusses some of the steps in the process of one of the functions of management. Explain these steps.
(b) Also, state the step(s) that have not been discussed in the above para. (Delhi 2019)
Answer:
(a) The function performed is controlling and the steps discussed are:

• Setting performance standards
• Measurement of actual performance
• Comparing actual performance with standards

(b) The step not discussed is ‘Taking corrective action’.

Question 22.
Explain steps to be followed in process of controlling after ‘setting standards’. (Comportment 2018)
Or
Describe briefly the steps in the process of controlling. (All India 2017; Delhi 2017)
Or
Controlling is a systematic process involving a series of steps. State the steps involved in the process. (Foreign 2016: All India 2016, 2014, 2011; Compartment 2014, 2013, 2012)
Or
Explain the various steps involved in the process of controlling. Delhi 2014,2013,201HC)
Or
Explain the process of controlling. (Delhi 2010)
Answer:
Controlling is measuring and correcting the activities of subordinates to ensure that events confirm to plans. It is a systematic process involving a series of steps, which are as follows:

(i) Setting performance standards The first step in the controlling process is to set the performance standards. Standards are those criteria, on which the actual performances are measured. These standards serve as a benchmark towards which an organisation strives to work.

(ii) Measurement of actual performance After the establishment of standards, the next step is measuring the actual performance with the set standards. This can be done by opting several methods like personal observation, sample checking, performance reports, etc.

(iii) Comparison of actual performance with standards In this step, the actual performances are compared with the established standards. Such comparisons reveal the deviation between planned and actual results.

(iv) Analysing deviations At this stage, acceptable and non-acceptable deviations are analysed. Two methods are generally used:

1. Critical point control It means keeping focus on key result areas where deviations are not acceptable and they should be attended on priority basis.
2. Management by exception It means that if a manager tries to control everything, he may end up in controlling nothing. Thus, he should first handle the significant deviations, which require his priority.

(v) Taking corrective action The most important step in the controlling process is taking corrective actions. After the deviations and their causes are analysed, the task is to remove the hurdles from the actual work plan. The purpose of this step is to bring the actual performance up to the level of expectations by taking corrective measures.

Question 23.
Explain briefly the relationship between controlling and planning. (All India 2017; Delhi 2017)
Or
Explain the relationship between planning and controlling. (Foreign 2016; All India 2014; Comportment 2014; Delhi 2016, 2012)
Or
‘Planning and controlling are inseparable twins of management’, how? (Delhi 2013; Comportment 2013, 2012)
Answer:
The relationship between planning and controlling is stated in the points below:

• Planning provides the basis for controlling activities.
• Controlling ensures that planned goals are achieved efficiently and effectively. It measures the performance with the pre-determined standards and finds out the deviations, if any.
• The causes of deviations as identified by controlling are the basis of effective future planning.
• Planning and controlling both are forward looking as well as backward looking.
• Both are integral parts of an organisation and are necessary for the smooth functioning of an enterprise.

Question 24.
‘There is a close and reciprocal relationship between planning and controlling’. Explain this statement. (All India 2011; Delhi 2011)
Answer:
Planning is the basis for control in the sense that it provides the entire spectrum on which control function is based. In fact, these two terms are often used together in the designation of the department which carries production, planning and scheduling. Control measures the behaviour and activities in the organisation and suggests measures to remove deviations, if any.

Control is the result of particular plans, goals or policies. Thus, planning offers and affects control. Also, planning is affected by control in the sense that much of the information provided by control is used for planning. Thus, there is a reciprocal relationship between planning and controlling.

Question 25.
Seeta, Geeta and Babita Ltd is engaged in manufacturing machine components. The target of production is 250 units per day per worker. The company had been successfully attaining this target until two months ago. Over the last two months, it has been observed that daily production varies between 200-210 units per worker.
(i) Name the function of management and identify the step in the process of this function which helped in finding out that the actual production of a worker is less than the set target.
(ii) To complete the process of the function identified in and to ensure the performance as per set targets, explain what further steps a manager has to take. (All India 2010)
Or
Kapil and Kamal Company is a large manufacturing unit. Recently, the company had conducted time and motion studies and concluded that on an average, a worker could produce 300 units per day. However, it has been noticed that the average daily production of a worker is in the range of 200-225 units.
(i) Name the function of management and identify the step in the process of this function which helped in finding out that the actual production of a worker is less than the set target.
(ii) To complete the process of the function identified in and to ensure the performance as per time and motion studies, explain what further steps a manager has to take. (Delhi (C) 2010)
Answer:
(i) The management function which helps in finding out that the actual production of a worker is less than the set target is known as controlling. Here, comparing actual performance with standards or appraisal of performance is the step involved in the process of controlling.

(ii) A manager has to take following steps to complete the process of controlling:
(a) Analysing deviations: Deviations can be due to multiple reasons like unrealistic standards, defective process, inadequacy of resources, environmental factors, etc.

(b) Taking corrective actions:
The final step in the control process is taking appropriate actions so that deviations may not occur again and the objectives of the organisation are achieved. It may also necessitate reforming the process of selection and training of workers. Thus, controlling may require changes in all other managerial functions.

Question 26.
Explain any four points that highlight the importance of controlling. (Delhi 2014; Foreign 2014)
Or
Briefly explain the importance of controlling. (All India 2012; Delhi (C) 2011)
Or
What is meant by controlling? State any five points of the importance of controlling. (All India 2012)
Or
‘Controlling is an indispensable function of management’. Do you agree? Give four reasons in support of your answer. (Comportment 2014)
Answer:
Importance of controlling are as follows:
(i) Accomplishing organisational goals The controlling function measures the performance against the pre-determined standards and corrects deviations. This helps in ensuring that organisation is moving on right track to achieve the organisational goals.
In other words, by controlling, the manager ensures that resources are obtained and used economically and efficiently for the achievement of organisational objectives.

(ii) Judging accuracy of standards A sound controlling system helps the management to verify whether the standards set are accurate and objective. It keeps a careful check on the changes, which are taking place in the organisation and helps in revising standards as and when required.

(iii) Making efficient use of resources By exercising control, a manager seeks to reduce wastage and spoilage of resources. Each activity is performed in accordance with pre-determined standards and norms. This ensures that resources are used in the most effective and efficient manner.

(iv) It Improves employees”morale The implementation of controlling makes all the employees to work with complete dedication because they are aware that their performance will be evaluated and they will have a chance to build their reputation in the organisation. The employees who show good performance are rewarded by giving them promotions, cash prizes, etc.

(v) It helps in better performance Planning and controlling are closely inter-related as the real test of planning is controlling. Control reveals deficiencies and deviations, suggests corrective actions for prevention of deviations and deficiencies through modified planning.

(vi) Facilitates coordination Control keeps all activities and efforts within their fixed boundaries and makes them move towards the set goals. Thus, control facilities coordination. It provides unity of direction.

Question 27.
Describe the relationship between planning and controlling. (All Indin 2014; Delhi 2014; Foreign 2014)
Or
Explain controlling as a function of management. How are controlling and planning related? (All India 2011)
Answer:
Controlling as a function of management can be defined as the process through which managers assure that the activities and results are in conformity with the planned activities and results. It involves verifying whether activities are performed according to the adopted plans. Relationship between planning and controlling Planning involves selecting enterprise objectives and deciding ways to achieve them.

Controlling is the process of assuring that actions are in line with the plans. Planning sets the course and control makes event to conform the chosen course or initiates action to appropriately change the plan. All controls imply existence of goals and plans. No manager can ascertain whether his subordinates are operating in the desired way unless he has a plan. Control will be much better, if the plans are clear and well coordinated.

Without planning, there is no basis for controlling activities. In the absence of plans, it is not possible to evaluate. In the absence of plans, it is not possible to evaluate performance. Similarly, without controlling, planned activities cannot be properly implemented and there cannot be improvement in future plans. Pre-determined goals can be achieved only through controlling. Planning without control is useless and control without planning is meaningless. Planning, based on facts, makes controlling easier. Thus, planning and controlling are mutually inter-related and interdependent.

Multiple Choice Questions

Question 1.
What is/are the characteristic(s) of controlling?
(a) Objectivity
(b) Timeliness
(c) Accuracy
(d) All of these
Answer:
(d) All of these

Hint:
Effective control generate accurate data and information for managerial decision-making. For this, information must be provided on a timely basis. The objective of controlling is to improve efficiency of an organisation.

Question 2.
Controlling function of an organisation is
(a) forward looking
(b) backward looking
(c) forward as well as backward looking
(d) vertical looking
Answer:
(c) forward as well as backward looking

Hint:
Controlling is backward looking process because it is like a postmortem of past activities to find out deviations from standard plans and it is also a forward looking process, as it seeks to improve future results by taking corrective action.

Question 3 .
………….. is clearly a pre-requisite for controlling.
(a) Planning
(b) Organising
(c) Leadership
(d) Motivation
Answer:
(a) Planning

Hint:
A system of control presupposes the existence of certain standards. These standards of perfor¬mance, which serve as the basis of controlling, are provided by planning. When there is no plan, there is no basis of controlling. Hence, planning is clearly a pre-requisite for controlling.

Question 4.
…………….. and ………… are inseparable twins of management.
(a) Planning, controlling
(b) Directing, controlling
(c) Organising, staffing
(d) Organising, directing
Answer:
(a) Planning, controlling

Hint:
Planning and controlling are interrelated and interdependent functions of management. Without planning, there lies no basis for controlling and vice-versa.

Question 5.
The first stage in the process of controlling is …………
(a) setting performance standards
(b) measurement of actual performance
(c) comparing actual performance with standards
(d) None of the above
Answer:
(a) setting performance standards

Question 6.
Liquidity ratios are calculated to measure the performance of …………….
(a) production department
(b) finance department
(c) HR department
(d) marketing department
Answer:
(b) finance department

Question 7.
Which of the following statement(s) is/are not correct?
(a) Planning originates controlling
(b) Planning and controlling are inter-dependent
(c) Planning is practical whereas controlling is theoretical
(d) Planning and controlling both are forward looking
Answer:
(c) Planning is practical whereas controlling is theoretical

Hint:
Planning is theoretical because it involves thinking, articulation and analysis to discover and prescribe an appropriate course of action for achieving objectives whereas controlling is practical because whatever the decisions have been taken in planning, controlling ensures whether these decisions have been translated into desired action or not.

Question 8.
“The process of control necessarily involves analysing deviations and taking corrective actions, which aims at improving future performance and achievement of pre-determined goals.” This statement describes controlling as
(a) backward looking function
(b) forward looking function
(c) pervasive function
(d) None of the above
Answer:
(b) forward looking function

Question 9.
Controlling is done by ………….
(a) lower level managers
(b) middle level managers
(c) top level managers
(d) all level managers
Answer:
(d) all level managers

Question 10.
An efficient control system helps to ………………
(a) boost employee morale
(b) judge accuracy of standards
(c) accomplish organisational objectives
(d) All of the above
Answer:
(d) All of the above

Question 11.
KRA stands for ………………
(a) Key Review Areas
(b) Key Results Area
(c) Key Review Aspects
(d) None of these
Answer:
(b) Key Results Area

Question 12.
Managers should try to set standards in …………. terms, which can be measured and compared later on.
(a) qualitative
(b) quantitative
(c) absolute
(d) None of these
Answer:
(b) quantitative

Hint:
Standards can be set in both qualitative and quantitative terms. But qualitative standards may or may not be used for future comparison, due to changes in internal and external environment. Therefore, managers should try to set standards in quantitative terms.