Category: CBSE Class 12

Here we are providing Class 12 Accountancy Important Extra Questions and Answers Chapter 8 Financial Statements of a Company. Accountancy Class 12 Important Questions and Answers are the best resource for students which helps in class 12 board exams.

Class 12 Accountancy Chapter 8 Important Extra Questions Financial Statements of a Company

Financial Statements of a Company Important Extra Questions Very Short Answer Type

Question 1.
State the importance of financial analysis for labour unions. (CBSE SP 2019-20)
Answer:
Labor unions analyse the financial statements to assess whether an enterprise can increase their pay.

Question 2.
If operating is not given, what is the time for the operating cycle assumed?
Answer:
12 months.

Question 3.
If the operating cycle is given for 12 months and the payment cycle for trade payables is 15 months, how will you classify the liability?
Answer:
Non-current Liability.

Question 4.
Name any one line item that can be shown under the major heading ‘Equity and Liabilities’ in a company’s Balance Sheet.
Answer:
Shareholders’Funds

Question 5.
Name any one item that can be disclosed under ‘Short Term Provisions’.
Answer:
Provision for Doubtful debts.

Question 6.
How would you treat preliminary expenses?
Answer:
Preliminary expenses are written off in the year in which they are incurred.

Question 7.
Give one example of unamortised expenses.
Answer:
Discount on issue of shares / debentures.

Question 8.
State any one component of shareholders’ funds.
Answer:
Reserves & Surplus.

Question 9.
How would you treat share forfeiture account?
Answer:
Added in the subscribed.

Question 10.
Mention one component of Reserves and Surplus.
Answer:
Securities Premium Reserves.

Question 11.
Pratiksha Cartons Limited has given guarantee of ₹ 75,00,000 to a bank for raising loans from the bank by its subsidiary’ company. Where will this be shown in books of the company?
Answer:
This will be mentioned in Notes to Accounts.

Financial Statements of a Company Important Extra Questions Short Answer Type

Question 1.
Explain briefly any four objectives of ‘Analysis of Financial Statements’.
Answer:
Four objective of ‘Analysis of Financial statements are as follows:

• To assess the current profitability and operational efficiency of the firm as a whole as well its different departments so as to judge the financial health of firm.
• To ascertain the financial position of firm.
• To identify the reasons for change in the profitability and financial position of the firm.
• To Judge the ability of the firm to repay its debt and assessing the short-term as well as the long-term liquidity position fo the firm.

Question 2.
State under which major headings and sub-headings will the following items be presented in the Balance
Sheet of a company as per Schedule-Ill, Part-I of the Companies Act, 2013. (CBSE Delhi 2019)
(i) Prepaid Insurance
(ii) Investment in Debentures
(iii) Calls-in-arrears
(iv) Unpaid dividend
(v) Capital Reserve
(vi) Loose Tools
(vii) Capital work-in-progress
(viii) Patents being developed by the company.
Answer:

Items	Major heads	Sub-heads
1. Prepaid insurance	Current Assets	Other curretn Assets
2. Investment in debenture	Non-current Assets	Non-current investment
3. Calls in Arrears	Shareholders Fund	Subscribed capital (less from subscribe but not fully paid)
4. Unpaid dividend	Current liabilities	Other current liabilities
5. Capital Reserve	Shareholder Fund	Reserve and Surplus
6. Loose tools	Current Assets	Inventories
7. Capital work in progress	Non-current Assets	Fixed Assets (Capital work in progress)
8. Patent being developed by the company	Non-current Assets	Fixed Assets (intangible asset under development

Question 3.
Under which major heads and sub-heads will the following items be placed in the Balance Sheet of the company as per Schedule III, Part I of the Companies Act, 2013 ? (CBSE Outside Delhi2019)
(i) Cheques and Bank Drafts in Hand
(ii) Loose tools
(iii) Securities Premium Reserve
(iv) Long-Term Investments with maturity period less than six months
(v) Work-in-Progress
(vi) Mining Rights
(vii) Publishing titles
(viii) Debtors
Answer:

Items	Heads	Sub-heads
Cheques and Bank Drafts in Hand	Current Assets	Cash & Cash Equivalents
Loose Tools	Current Assets	Inventories
Securities Premium Reserve	Shareholders’ Funds	Reserves & Surplus
Long term Investments with maturity period less than six months	Current Assets	Current Investments
Work-in-Progress	Current Assets	Inventories
Mining Right	Non Current Assets	Fixed Assets-Intrangible
Publishing Titles	Non Current Assets	Fixed Assets-Intangible
Debtors	Current Assets	Trade Receivables

Question 4.
From the following details calculate Interest Coverage Ratio:
Net profit after tax – ₹ 7,00,000
6 % debentures of – ₹ 20,00,000
Tax Rate 30%
Answer:

Question 5.
Under which major heads and sub-heads will the following items be placed in the Balance Sheet of the company as per Schedule III, Part I of the Companies Act, 2013? (CBSE SP2019-20)
(i) Debentures with maturity period in current financial year
(ii) Securities Premium Reserve
(iii) Provident Fund
Answer:

S. No.	Item	Major Head	Sub Head
(i)	Debentures with maturity period in current financial year	Current Liabilities	Other Current Liabilities
(ii)	Securities Premium Reserve	Shareholder’s Fund	Reserves and Surplus
(iii)	Provident Fund	Non-Current Liabilities	Long Term Provision

Question 6.
Under which sub-headings will the following items be placed in the Balance Sheet of a company as per Schedule-Ill, Part-I of the Companies Act, 2013? (CBSE Compt.2019)
(i) Prepaid Expenses
(ii) Loose Tools
(iii) Loans Repayable on Demand
(iv) Provision for Employee Benefit
(v) Negative Balance in the Statement of Profit and Loss
(vi) Bank Overdraft
(vii) Bills Receivables
(viii) Trade Marks
Answer:

	Items	Sub-Head
(i)	Prepaid Expenses	Other Current Assets
(ii)	Loose Tools	Inventories
(iii)	Loans repayable on demand	Short Term borrowings
(iv)	Provision for employees benefit	Long term provisions
(v)	Negative balance in Statement of Profit and Loss	Reserves and Surplus
(vi)	Bank Overdraft	Short Term borrowings
(vii)	Bills Receivable	Trade Receivables
(viii)	Trade Marks	Fixed assets Intangible

Question 7.
(a) Classify the following items under Major Head and Sub-Head (if any) in the Balance Sheet of a company as per Schedule III of the Companies Act, 2013.
(i) Capital Work in progress; and
(ii) Provision for warranties.
(b) State any two objectives of ‘Analysis of Financial Statements’. (Compt. Delhi 2017)
Answer:
(i) Classification of items

S.No.	Items	Headings	Sub-headings
(i)	Capital work in progress	Non-current assets	Fixed assets
(ii)	Provision for warranties	Non-current liabilities	Long term provisions

(ii) Objectives of analysis of financial statements

Question 8.
(i) One of the objectives of analysis of financial statement is to ascertain the relative importance of the different components of the financial position of the firm’. State two other objective of this analysis.
(ii) List any four items of ‘reserve’ that are shown under the headings ‘Reserves and Surplus’ in the Balance Sheet of a company as per scheduel III of the Companies Act 2013.
(CBSE Outside Delhi 2016)
Answer:
(i) Objectives of Analysis of Financial Statement:

• Assessing the earning capacity or profitability of the firm as a whole as well as its different departments so as to judge the financial health of the firm.
• Judging the ability of the firm to repay its debts and assessing the short term as well as long term liquidity position of the firm.

(ii) Reserve and Surplus

• Capital Reserve
• Securities Premium Reserve.
• Revaluation Reserve.
• Capital Redemption Reserve.

Question 9.
(i) One of the objectives of ‘financial Statement Analysis, is to identify the reasons for change in the financial position of the enterprise. State two more objectives of this analysis.
(ii) Name any two items that are shown under the head ‘Other Current Liabilities’ and any two items that are shown under the head ‘Other Current Assets’ in the Balance Sheet of a company as per Schedule III of the Companies Act, 2013. (CBSE Outside Delhi 2016)
Answer:
(i) Objectives

• To evaluate the business in Terms of profit in present and future.
• To evaluate the efficiency of various parts or departments of the business.

(ii) Other Current Liability

• Unpaid dividend
• Current maturity of long term debts.

Other Current Assets.

• Discount in issue of debentures (to be written off within 12 months).
• Accrued incomes.

Question 10.
List the major heads under which the ‘Equity and Liabilities’ are presented in the balance sheet of a company as per Schedule III Part I of the Companies Act, 2013. (CBSE Guidance Notes July 2013)
Answer:
The major heads under which ‘Equity and Liabilities’ are presented:

• Share holders Fund
• Share Application Money Pending allotment
• Non-Current liabilities
• Current Liabilities

Question 11.
List the major heads under which the ‘Assets’ are presented in the balance sheet of a company as per Schedule III Part I of the Companies Act, 2013. (CBSE Guidance Notes July 2013)
Answer:
The major heads under which the ‘Assets’ are presented:
(a) Non-current Assets
(b) Current Assets

Question 12.
Name the sub-heads under the head
(a) shareholders Funds’ and
(b) Non-Current Liabilities as per Schedule III Part I of the balance sheet. (CBSE Guidance Notes July 2013)
Answer:
(a) The sub-heads under‘Shareholders Funds’are

• Share Capital
• Reserves and surplus
• Money received against share warrants

(b) The sub-heads under ‘Non-current liabilities’ are

• Long-term Borrowings
• Deferred Tax Liabilities (Net)
• Other Long-term Liabilities
• Long-term Provisions

Question 13.
X Ltd. has an authorized capital of₹ 15,00,000 divided into 1,00,000 equity shares of ₹ 10 each and 50,000, 9% preference shares of ₹ 10 each. The company invited applications for all the preference shares but only 90,000 equity shares. All the preference shares were subscribed, called and paid while subscriptions were received for only 85,000 equity shares.
During the first year ₹ 8 per share were called.
Ram holding 1,000 shares and Shyam holding 2,000 shares did not pay first call of ₹ 2.
Shyam’s shares were forfeited after the first call and later on 1,500 of the forfeited shares were reissued at ₹ 6 per shares ₹ 8 called up.
(a) Show share capital in the Balance Sheet as per revised Schedule VI as at 31st March 2013.
(b) Prepare relevant ‘Notes to Accounts’ (CBSE Guidance Notes July 2013)
Answer:

Question 14.
From the following information extracted from the books of XY Ltd., prepare a Balance sheet of the company as at March 31, 2012 as per Schedule III of the Companies Act, 2013.

Particulars	Amount in ‘000’ (₹)
Long-Term Borrowings	500
Trade Payable	300
Share Capital	400
Reserve and surplus	90
Fixed assets (angible)	800
Inventories	20
Trade receivables	80
Cash and cash equivalents	120

Answer:

Question 15.
JW Ltd was a company manufacturing geysers. As a part of its long term goal for expansions, the company decided to identify the opportunity in rural area. Initial plan was rolled out for Bhiwani village in Haryana. Since, the village did not have regular supply of electricity, the company decided to manufacture solar geysers. The core team consisting of the Regional Managers, Accountant and the Marketing Manager was taken from the Head office and the remaining employee were selected from the village and neighbourhood area. At the time of preparation of financial statement the accountant of the company fell sick and the company deputed a junior accountant temporarily from the village for two months. The Balance Sheet prepared by the junior accountant showed the following items against the Major heads and sub-head mentioned which were not as per Schedule III of the Companies Act 2013. Items Major Head

• Loose Tools Trade Receivable
• Cheque in Hand Current Investment
• Term Loan from Bank Other long Term Liabilities
• Computer Software Tangible Fixed Assets

Present the above items under the correct major head and sub-head as per the Schedule III of Companies Act 2013. (CBSE Delhi 2018)
Answer:

Item	Heads	Sub-heads
Loose Tools	Current assets	Inventories
Cheques in hand	Current assets	Cash and Cash Equivalent
Term loan from Bank	Non-Current Liabilities	Long Term Borrowings
Computer Software	Non-Current assets	Fixed Assets-Intangible Assets

Question 16.
M K Limited is a computer hardware manufacturing company. While preparing its accounting records it takes into consideration the various accounting principles and maintains transparency. At the end of the accounting year, the company follows the ‘Companies Act, 2013 and Rules there under’ for the preparation of its Financial Statements. It also prepares its Income Statement and Balance Sheet as per the format provided in Schedule III to the Act. Its Financial Statements depict its true & fair financial position. For the financial year ending March 31,2017, the accountant of the company is not certain about the presentation of the following items under relevant Major Heads & Sub Heads, if any, in its Balance Sheet:

• Securities Premium Reserve
• Calls in Advance
• Stores & Spares

Advice the accountant of the company under which Major Heads and Sub Heads, if any, he should present the above items in the Balance Sheet of the company, (CBSE Sample Paper 2017-18, Modified)
Answer:

S. No.	Items	Major Head	Sub Head
(i)	Securities Premium Reserve	Shareholders’ Funds	Reserves & Surplus
(ii)	Calls in Advance	Current Liabilities	Other Current Liabilities
(iii)	Stores & Spares	Current Assets	Inventory

Question 17.
M.M. Limited is registered with an Authorised capital of ₹ 200 Crores divided into equity shares of ₹ 100 each. On 1st April 2016 the Subscribed and Called up capital of the company is ₹ 10,00,00,000. The company decided to help the unemployed youth of the naxal affected areas of Andhra Pradesh, Chhattisgarh and Odisha by opening 100 ‘Skill Development Centres’. The company also decided to provide free medical services to the villagers of these states by starting mobile dispensaries. To meet the capital expenditure of these activities the company further issued 1,00,000 equity shares during financial year 2016-17. These shares were fully subscribed and paid.
Present the share capital of the company in its Balance Sheet. (CBSE Sample Paper 2017-18 Modified)
Answer:

Question 18.
Financial statements are prepared following the consistent accounting concepts, principles, procedures and also the legal environment in which the business organizations operate. These statements are the sources of information on the basis of which conclusions are drawn about the profitability and financial position of a company so that their users can easily understand and use them in their economic decisions in a meaningful way.
State under which major headings and sub-headings the following items will be presented in the balance sheet of a company as per Schedule III of the Companies Act 2013.

• General Reserves,
• Short term loans and advances,
• Capital work in progress and
• Design.

Answer:

	Heads	Sub-head
General Reserves	Shareholders’ Funds	Reserves and Surplus
Short term loans and advances	Current assets	–
Capital work in progress	Non current assets	Fixed assets
Design	Non current assets	Fixed assets/intangible assets

Question 19.
Mudra Ltd. is in the process of preparing its Balance Sheet as per Schedule III, Part I of the Companies Act, 2013 and provides its true and fair view of the financial position.
(a) Under which head and sub-head will the company show ‘Stores and Spares’ in its Balance Sheet₹
(b) What is the accounting treatment of ‘Stores and Spares’ when the Company will calculate its Inventory Turnover Ratio?
(c) The management of Mudra Ltd. want to analyse its Financial Statements. State any two objectives of such analysis. (CBSE Sample Paper 2016, 2017, Modified)
Answer:
(a) Head: Current Assets Sub head; Inventories
(b) While calculating Inventory Turnover Ratio it is not included in Inventories
(c) Objectives – Assessing the ability of the enterprise to meet its short term and long term commitments, Assessing the earning capacity of the enterprise

Question 20.
(a) Under which major headings and sub-headings the following items will be shown in the Balance Sheet of a company as per Schedule VI, Part I of the Companies Act, 2013.
(i) Bank Overdraft
(ii) Cheques in Hand
(Hi) Loose Tools
(iv) Long term provisions
(b) State any two limitations of Financial Statement Analysis.
Answer:

S. No.	Items	Headings	Sub Headings
1.	Bank overdraft	Current liabilities	Short term borrowings
2.	Cheques in hand	Current assets	Cash and cash equivalents
3.	Loose Tools	Current assets	Inventories
4.	Long Term Provisions	Non current liabilities	–

Historical Analysis: Financial statements are based on fast figures. So, we cannot predict about the future accurately.
Ignores price level changes: Financial statements are prepared at the end of year. When these are analysed, values of figures tend to change.

Question 21.
Under which major heads and subheads of the Balance Sheet of a company, will the following items be shown:
(i) Loose Tools
(ii) Retirement Benefits Payable to employees
(iii) Patents
(iv) Interest on Calls in Advance (CBSE Sample Paper 2018-19)
Answer:

S. No.	Items	Major Head of Balance Sheet	SubHead of Balance Sheet
(i)	Loose Tools	Current Assets	Inventories
(ii)	Retirement Benefits Payable to employees	Non-Current Liabilities	Long Term Provisions
(iii)	Patents	Non-Current Assets	Fixed Asset (Intangible)
(iv)	Interest on Calls in Advance	Current Liabilities	Other current Liabilities

Question 22.
(a) Name the sub-heads under the head ‘Current Liabilities’ in the Equity and Liabilities part of the Balance Sheet as per Schedule III of the Companies Act 2013.
(b) State any two objectives of Financial Statements Analysis. (CBSE Sample Paper 2015)
Answer:
(a) Current Liabilities:

• Short Term Borrowings
• Trade Payables
• Other Current Liabilities
• Short Term Provisions

(b) Objectives of financial statement analysis

• Helps in assessing financial earning capacity of a company
• Helps in assessing managerial efficiency

Question 23.
Name the sub-heads under the head ‘Non-Current Assets’ in the Balance Sheet under Schedule III of the Indian Companies Act, 2013. (CBSE Guidance Notes July 2013)
Answer:
The sub-heads under ‘Non-current assets’ are

• Fixed Assets
• Non-Current Investments
• Deferred Tax Assets (Net)
• Long-term loans and advances
• Other Non-current Assets

Question 24.
Under which major headings and sub-headings the following items will be shown in the Balance Sheet of a company as per Schedule III, Part I of the Companies Act, 2013.
(i) Bank Overdraft
(ii) Cheque in hand
(iii) Loose tools
(iv) Long term provisions
Answer:

Items	Headings	Sub-headings
Bank Overdraft	Current liabilities	Short term borrowings
Cheques in hand	Current assets	Cash and cash equivalents
Loose Tools	Current assets	Inventories
Long Term Provisions	Non-Current liabilities	–

Question 25.
Under which heads the following items will be placed in the Balance Sheet of a company as per Schedule III Part I of the Companies Act, 2013.
(a) Cash in hand
(b) Mining rights
(c) Short term deposits
(d) Debenture redemption reserve
(e) Income received in advance
(f) Balance in statement of profit and loss
(g) Office equipment
(h) Work in progress (CBSE Delhi 2015)
Answer:

Items	Major Heads
Cash in hand	Current Assets
Mining rights	Non Current Assets
Short term deposits	Current Assets
Debenture redemption reserve	Shareholders’ Funds
Income received in advance	Current Liabilities
Balance in the statement of profit and loss	Shareholders’ Funds
Office equipment	Non Current Assets
Work in progress	Current Assets

Question 26.
Under which headings the following items will be presented in the Balance Sheet of a company as per Schedule III Part I of the Companies Act, 2013₹ [Any four]
(a) Loans provided repayable on demand
(b) Goodwill
(c) Copyrights
(d) Loose tools
(e) Cheques
(f) General reserve
(g) Stock of finished goods and
(h) 9% Debenture repayable after three years
Answer:

Items	Major Heads
Loans provided repayable on demand	Current Liabilities
Goodwill	Non Current Assets
Copyrights	Non Current Assets
Loose tools	Current Assets
Cheques	Current Assets
General reserve	Shareholders’ Funds
Stock of finished goods	Current Assets
9% Debenture repayable after three years	Non current Liabilities

Question 27.
Under which head the following items will appear in case of financial company₹
(i) Interest Received
(ii) Dividend Received
(iii) Profit and sale of securities
(iv) Loss an sale of plot
(y) Wages paid
(vi) Depreciation on building
Answer:

Items	Headings
Interest Received	Revenue from operations
Dividend Received	Revenue from operations
Profit and sale of securities	Revenue from operations
Loss an sale of plot	Other Income
Wages paid	Employee Benefit Expenses
Depreciation on building	Depreciation and Administration Expenses

Question 28.
Under which head the following items will appears in case of non-financial company₹
(i) Sales
(ii) Sale of scrap
(iii) Interest received
(iv) Profit and sale of Investments
(v) Bonus
(vi) Interest paid on loans
(vii) Administration Expenses
(viii) Excess Provision written bank
(ix) Raw Material
(x) Leave encashment
Answer:

Items	Headings
Sales	Revenue from operations
Sale of scrap	Revenue from operations
Interest received	Other Incomes
Profit on sale of Investments	Other Incomes
Bonus	Employee benefit Expenses
Interest paid on loans	.Finance Cost
Administration Expenses	Other Expenses
Exam Provision written bank	Other Incomes
Raw Material	Cost of Material
Leave encashment	Employee benefit Expenses

Question 29.
How would you show ‘Employee Benefit Expenses with the help of Notes to Accounts in the Statement of Profit & Loss₹
(i) Salaries & wages ₹ 5,20,000
(ii) Dividend received ₹ 5000,
(iii) Leave encasement ₹ 400,000
(iv) Salaries to manages ₹ 10,00,000
(v) Depreciation on fixed assets ₹ 200,000
(vi) Contribution to provident fund ₹ 5000.
Answer:

Question 30.
Which of the following items will form the part of Notes to Accounts on Finance Costs₹
(i) Interest paid an overdraft
(ii) Interest paid on debentures
(iii) bank charges
(iv) Discount an issue of debentures
(v) Premium payable an redemption of debentures
(vi) Discount allowed to debtors
(vii) Bad-debts
(viii) Bonus
(ix) Interest Received on fined deposits
(x) Legal processing fee
Answer:

Please note that bank charges are not related to raising finance. So, bank charges, discount allowed to debtors, Bad-debts are the part of finance cost. Interest received is the part of other incomes & bonus is the part of employee benefits expenses.

Here we are providing Class 12 Business Studies Important Extra Questions and Answers Chapter 10 Financial Markets. Business Studies Class 12 Important Questions are the best resource for students which helps in class 12 board exams.

Class 12 Business Studies Chapter 10 Important Extra Questions Financial Markets

Financial Markets Important Extra Questions Short Answer Type

Question 1.
Explain the concept of the Financial Market?
Answer:
Concept of Financial Market: A business is a part of an economic system that consists of two main sectors – households that save funds and business firms which invest these funds. A financial Market helps to link the savers and the investors by mobilizing funds between them. In doing so it performs what is known as allocative functions. It allocates or directs funds available for investment into their most productive investment opportunity. When the allocative function is performed well, two consequences follow

• The rate of return offered to households would be higher.
• Scare resources are allocated to those firms which have the highest productivity for the economy;

There are two major alternative mechanisms through which allocation of funds can be done: via banks or via financial markets. Households can deposit their surplus funds with banks, who in turn could lend these funds to business firms. Alternately, households can buy the shares and debentures offered by a business using financial markets. The Process by which allocation of funds is done is called intermediation. Banks and Financial Markets are competing intermediaries in the financial system, and give households a choice of where they want to place their savings.

A financial market is a market for the creation and exchange of financial assets. Financial markets exist wherever a financial transaction occurs. Financial transactions could be in a fourth of creation of financial assets such as the initial issue of share and debenture by a firm or the purchase and sale of existing financial assets like equity share debenture and bonds.

Question 2.
Explain the term, Capital Market?
Answer:
Capital Market: The term Capital Market refers to facilities and institutional arrangements through which long-term funds, both debt and equity are raised and invested. It consists of a series of channels through which savings of the community are made available for industrial and commercial enterprises and for the public in general. It directs these saving into their most productive use leading to the growth and development of the economy. The capital market consists of development banks, commercial banks, and stock exchanges.

An ideal Capital Market is one where finance is available at a reasonable cost. The process of economic development is facilitated by the existence of a well functioning capital market. In, the fact the development of the financial system is seen as a necessary condition for economic growth. It is essential that financial institutions are sufficiently developed and that market operations are free, fair, competitive, and transparent. The capital market should also be efficient in respect of the information that it delivers, minimize transaction costs and allocate capital to most productivity.

The Capital Market can be divided into two parts:

1. Primary Market
2. Secondary Market.

Question 3.
Mention, in brief, the classification of the financial market?
Answer:
Classification of financial market

Financial Market

Financial Markets are classified on the basis of the maturity of financial instruments traded ‘in them. Instruments with a maturity of less than one year are traded in the money market. Instruments with longer maturity are traded in the capital market.

Question 4.
Give the meaning of various terms used in the stock market in India?
Answer:
Various terms used in the stock market: The following terms in magazines or newspapers when you read about the stock market.

Bourses: Bourses is another word for the Stock Market.

Bulls and Bears: The term does not refer to animals but to the market sentiment of the investors. A bullish phase refers to a period of optimism and a bearish phase to a period of pessimism on the bourses.

Badla: This refers to a carry forward system of settlement, particularly at the BSE. It is a facility that allows the postponement of the delivery or payment of a transaction from one settlement period to another.

ODD lot Trending Trading in multiples of 100 stocks or less.

Penny Stocks These are securities that have no value on the stock exchange but whose trading contributes to speculation.

Question 5.
Explain the meaning of the stock-market Index?
Answer:
Stock Market Index: A stock market index is a barometer of market behavior. It measures overall sentiment through a set of stocks that are representative of the market. It reflects the market direction and indicates day-to-day fluctuations in stock prices. An ideal index must represent a change in the prices of securities and reflect price movements of typical share for better market representation. In the Indian markets, the BSE SENSEX and NSE NIFTY are important indices. Some important global stock market indices are:

• Dow Jones Industrial Average is among the oldest quoted stock market index in the US.
• NASDAQ composite index is the market capitalization weights of prices for a stock listed in the NASDAQ Stock Market.
• S and P 500 index is made up of the 500 biggest publicly traded companies in the US. The S and P 500 is often treated as a proxy for the US stock market.
• FISE 100 consists of the largest 100 companies by full market value listed on the London Stock Exchange. The FISE 100 is the benchmark index of the European market.

Question 6.
Explain the term Listing of securities and mention its advantage.
Answer:
Listing of Securities: A security is said to be ‘listed’ when its name is added to the list of securities in which trading on a particular exchange is permitted. The principal objectives of listing are

1. to provide ready marketability and free negotiability to stocks and shares;
2. to ensure proper supervision and control of dealings therein; and
3. to protect the interests of shareholders and of the general investing public.

Advantages of Listing:
The advantage of listing may be viewed from two angles

1. from the point of view of the management of companies; and
2. from the point of view of the shareholders.

The advantages derived by the management as a result of listing are many. A part of the distinct advertising value, listing enables the management to broaden and diversify shareholding. It is the general, consensus of opinion that a company with broad-based share ownership is better suited for growth and stability than a company with shares concentrated in few hands. Ensuring thus a broadening of share ownership, listing not only brings a company’s shares to the attention of hundreds and thousands of new investors but also encourages institutional investors to be interested in them. It helps the company to gain national importance and widespread recognition.

There is a difference between a listed and non-listed security (particularly from the point of view of the psychological motivation of the investors in applying for subscription to shares) in as much as Section 73 of the Companies Act required that every company intending to offer shares or debentures to the public for subscription through the issue of a prospectus, must seek enlistment with one or more stock exchanges. If such listing is not granted or applied for then the company must return all money to the applicants.

This, in other words, implies that prospective listing prompts the investors to apply for the shares and failure to secure listing entitles the investors to claim a refund of the money. In fact, the listing has tremendous value to a company in regard to the raising of additional capital for expansion or other purposes.

Section 81 of the Companies Act provides that any further issue of the share unless waived by them in a general meeting, must in the first instance be offered to the existing shareholders, the company concerned will be in great difficulty, and will also have to incur great expense in selling them. But in the case of a listed company, there is neither this difficulty nor the additional expenses, for this right can be disposed of by the shareholders through the Stock Exchange.

Further, when a listed company makes such an offer of further shares to the shareholders, the shareholders in their turn get a better estimation of the value of the shares from the price at which the shares of the company are quoted on the stock exchange. Lasting, thus affords a great advantage to the management in ensuring a saving in the cost of raising new capital. This additional business or assets or mergers with the companies because listing enables it to offer its securities in exchange for those of a closely held or of an unlisted company.

The shareholders or investors derive manifold benefits if the shares held or owned by them are listed on the Stock Exchange. The main benefits are
1. It affords liquidity to their holding.

2. It affords them to obtain the best prices for the securities if they want to sell-off.

3. It helps them to avoid the botheration of canvassing from door to door to sell the securities and more telephonic or verbal orders to a stockbroker will help them to buy or sell listed security.

4. Transactions of the Stock Exchange are done by auction bids, so there is no hide or seek about the price at which the investor buys or sells the share.

5. The Stock Exchange quotation helps the investors to keep themselves abreast of the price changes of the securities owned or held by them.

6. The investors get maximum protection in regard to their holding, because the Stock Exchange rules and regulations have been formulated with the end in view.

7. Listing is also advantageous in the matter of income-tax, wealth-tax, estate, duty, and other taxes payable by shareholders in their capacity as assessees. However, from the foregoing discussion, it should not be concluded that the Stock Exchange vouches for the listed securities. In fact, Price determination and value judgments involve constant scrutiny and assessment of each company from business, financial, accounting, legal and technical points of view, and there are primarily the functions of the buyers and sellers in the market.

The Stock Exchange can not and does not stand sponsor for the listed securities or guarantee their investment value, but it does ensure continuing sponsorship and assistance in the establishment arid development of sound and progressively higher standards of corporate practice and procedure. For these reasons, listing carries the hallmark of prestige and confers on the listed company, its securities, and its shareholder a privileged position.

8. Listing gives an added collateral value to the securities held by investors, for the bank in making loans and advances prefer security quoted on the Stock Exchange.

Question 7.
Explain the role of the new issue market in the investment business.
Answer:
Role of the New Issue Market: The analysis of the role of the new issue market in financing
companies can be undertaken by the study of the statistics of the annual volume of the new issues. The data may be broken down in various ways, for example, according to the type of security issued, the kind of organization making the issue, the method of flotation of the issue, and so on.

The Reserve Bank of the organization making the issue, the method, for instance, has been following this method in its regular studies of capital issues in the private corporate sector. However, this approach is partial, and to that extent, an inadequate method of appraisal in that ‘ it does not explain the full significance of the role of the New Issue Market.
1. Its first shortcoming is that the technique to aggregate the amount of all prospectus and right issues, to arrive at the new issues made in a particular year does not reveal die true picture as the entire sum is not necessarily raised by the issuing companies from the investing public in the same year because they are collected through various calls which may be spread over five years. This, of course, is a minor point.

2. The method presents absolute figures, unrelated to the use to which these funds are put.

3. The method leads to the treatment of the New Issue Market in isolation from the rest of the capital market and consequently to a distorted view as to its real functions.

4. Further, it does not disclose as to what kind and size of firms are obtaining funds, nor at what cost they are doing so, and, therefore, gives no clue as to efficiency to explore such questions, obviously, a different approach in necessary.

Another approach that tries to remedy the weaknesses of the first, is the source-and-use-of-funds approach of analysis of company balance sheets. In this connection, two possibilities suggest themselves.
(a) A possible method is to make a direct comparison between new issues and industrial fixed capital formation, but this suffers from a serious limitation to the extent it is based on the simple assumption that long-term source of funds ought roughly to match long-term investment, for it is not virtually impossible for the analysts to relate the sums raised on the market to the uses that are made of those funds by the organization making those, issues, but it is also misleading to link specific sources of funds to a specific use.

True, investment intangible fixed assets in the most important long-term use of funds but is certainly not only important use to which funds are put when a group of companies is expanding output. The expenditure on fixed assets is, therefore not a good yardstick to measure the importance of capital issues. It is particularly misleading when studying different industries in which the relative importance of investment in stock and in fixed assets varies considerably.

What is needed is a much wider and more comprehensive approach in order to get the different sources and uses of funds into perspective. However, since it is not always possible to have the correct data forthcoming, we have to make use of that which is available.

Question 8.
Mention the Organizational Structure and Membership of Secondary Market.
Answer:
Organizational Structure of the Secondary Market: The stock exchanges are the exclusive centers for the trading of securities. At present, there are 23 operative stock exchanges in India. Most of the Stock Exchanges in the country are incorporated as ‘Association of Persons’ of Section 25 companies under the Companies Act. These are organized as ‘mutuals’ and are considered beneficial in terms of tax benefits and matters of compliance. The s trading members, who provide broking services also own, control, and manage the stock exchanges.

They elect their representatives to regulate the functioning of the exchange, including their own activities. Until recently the area of operation/ jurisdiction of exchange was specified at the time of its recognition, which in effect precluded competition among the exchanges. These are called regional exchanges.

In order to provide an opportunity to investors f to invest/trade in the securities of local companies, it is mandatory t for the companies, wishing to list their securities to list on the regional stock exchange nearest to their registered office. If they so wish, they can seek listing on other exchanges as well. The monopoly of the ’ exchanges within their allocated area, regional aspirations of the r people and mandatory listing on the regional stock exchange resulted ‘ in a multiplicity of exchanges. As a result, we have 24 exchanges (The Capital Stock Exchange, the list of the latest, is yet to commence trading) in the country recognized.

Over a period of time to enable investors across the length and – breadth of the country to access the market.

The three newly set up exchanges-over the couples exchange of r India (OTCEI), National Stock Exchange of India (NSE), and Inter-connected Stock Exchange of India (1CSE) were permitted since their inception to have nation-wide trading. Listing on these exchanges was considered adequate compliance with the requirement of listing on the regional exchange. SEBI recently allowed all exchanges to set up trading terminals anywhere in the country. Many of them have already expanded trading operations to different parts of the country.

Membership: The trading platform of a stock exchange is accessible only to brokers. The broker enters into trades in exchanges either on his own account or on behalf of clients. The clients may place their orders with them directly or through a sub-broker indirectly. A broker is admitted to membership of an exchange in terms of the provisions of the security contracts (Regulation) Act, 1956 (SCRA), the Securities and Exchange Board of India (SEBI) Act 1992, the rules, circulars, notifications, guidelines, etc. prescribed thereunder and the bye-laws, rules, and regulations of the concerned exchange.

No stockbroker or sub-broker is allowed to buy, sell or deal in securities unless he or she holds a certificate of registration granted by SEBI, A broker/sub-broker complies with the code of conduct prescribed by SEBI. The stock exchanges are free to stipulate stricter requirements for its membership are in excess of the minimum norms laid down by SEBI. The standards for admission of members laid down by NSE stress factors, such as corporate structure, capital adequacy, track record, education, experience, etc., and reflect a conscious endeavor to ensure quality broking services.

Financial Markets Important Extra Questions Long Answer Type

Question 1.
What is Stock Market? Mention its nature and functions.
Answer:
Stock Markets in India: Stock exchanges are intricately interwoven in the fabric of a nation’s economic life. Without a stock exchange the saving of the community – the sinews of economic progress and productive efficiency – would remain under-utilized. The tasks of mobilization and allocation of savings could be attempted in the old days as a much less specialized institution than the Stock Exchange.

But as business and industry expanded and the economy assured a more complex nature, the need t for “permanent finance”, arose. Entrepreneurs needed money for the long term whereas investors demanded liquidity – the facility to convert their investments into cash at any given time. The answer was a ready market for investments and this was how the Stock Exchange came to being.

Stock Exchange means any body of individuals, whether incorporated 1 or not, constituted for the purpose of regulating or controlling the 5 business of buying, selling, or dealing in securities. These securities include

1. Shares, Scrips, Stock, bonds, debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
2. government securities; and
3. rights or interest in Securities.

Nature and function of Stock Exchange: There is an extraordinary amount of ignorance and of prejudice born out of ignorance with regard to the nature and functions of the stock, exchange. As economic development proceeds, the scope for acquisition and ownership of capital by private individuals also groups.

Along with it, the opportunity for the Stock Exchange to render the service of stimulating private savings and channeling such savings into? productive investment exists on a vastly great scale. These are services which the stock exchange alone can render efficiently, it is no exaggeration to say that in a modern industrialist society, which t recognizes the rights of private ownership of capital, stock exchanges are not simply a convenience, they are essential, In fact, they are the markets which exist to facilitate purchase and sale of securities of companies and the securities or bonds issued by the govt, in the course of its borrowing operation.

As our country moves towards liberalization, this tendency is certain to be strengthened. The task % facing the stock exchanges is to devise the means to reach down to the masses, to draw the savings as the man in the street into productive investment, to create conditions in which many millions of little ‘ investors in cities, towns, and villages will find it possible to make use of the facilities, which have so far been limited to the privileged few. This calls for far-reaching changes, institutional as well as operational.

The Stock Exchanges in India, thus, have an important role to play in the building of a real shareholder’s democracy. The aim of the Stock Exchange authorities is to make it as nearly perfect in the social and ethical sense as it is in the economic. To protect the interests of the investing public, the authorities of the stock exchanges have been increasingly subjecting not only its members to a high degree of discipline but also those who use its facilities – joint-stock companies and other bodies in whose stocks and shares it deals.

There are stringent regulations to ensure that directors of joint Stock companies keep their shareholders fully informed of the affairs of the companies before their shares are listed are more rigorous and wholesome than the statutory provisions such as those contained in the Companies Act.

Apart from providing a market that mobilizes and distributes that nation’s savings, the Stock Exchange ensures that the flow of savings is utilized for the best purpose from the community’s point of view. ‘Free’ markets are not simply a matter of many buyers and sellers. If the prices at which stocks and shares change hands are to be ‘fair’ prices, many important conditions must be satisfied. It is the whole vast company of investors, competing with one another as buyers and sellers, this decides what the level of security prices shall be.

But the public is prone to sudden savings of hope and fear. If left entirely to itself, it could produce needlessly violent and-often quite irrational fluctuations. The professional dealers of the stock of these movements. These are valuable activities. So as to ensure that the investors reap the full benefiting them, they need to be regulated by a recognized code of conduct. Fair prices and free markets require, above all things, clean dealings both by professionals and by the investors – and dealings based upon up-to-date and reliable information, easily accessible to all.

Thus a free and active market in stock and shares has become a pre-requisite for the mobilization and distribution of the nation’s savings on the scale needed to support modem business. The Stock Exchange by a process of prolonged trial and error, which is by no means complete, has been continually streamlining its structure to meet these wide and ever-growing responsibilities to the public. The activities of the Stock Exchange to the public.

The activities of the Stock Exchange are governed by a recognized code of conduct apart from statutory regulations. Investors, both actual and potential, are provided, through the daily stock exchange price quotations, with an up-to-the-minute approval of the present worth of their holdings, in the light of all the influences that affect the position and prospectus of the companies in question. But the Stock Market does not determine the health of the company, it merely reflects it. It is a thermometer, not a fever.

The prices are sometimes distorted by excessive speculation but, by and large, they provide a continuous assessment of the current value of assets, not available to those who invest in houses or land or other assets, not traded on the Stock Exchange. In fact, whether our demand for a stock is motivated by income or profits, so long as it is related to a corporation, the prices of the securities markets will play ‘ a realistic part in determining the corporation’s ability to raise funds.

For those enterprises that must finance externally, the receptivity of the market to their offerings establishes both the volume and cost of capital raised. For those companies that finance the bulk of their requirements through reinvested earnings, the willingness of Stockholders to defer dividends in the expectation of a higher return through capital gains establishes both the volume and cost of the capital raised. If a company’s outlook is very promising and buyers bid up the security’s market value new financing becomes easier whether through? external or internal sources – the earnings prices ratio is reduced, and the cost of capital becomes correspondingly low.

However, the capacity, of a business to raise fresh capital for the approved purposes by selling shares to the public, and the cost of capital to the borrower, do not depend simply or even mainly upon the intrinsic merits of the business. They depend upon the public’s estimate of the investment merits of its share in comparison with those of other comparable securities. But these relative investment merits are measured very largely by the prices at which the new securities are offered and the comparable existing securities quoted in the market.

More precisely, they are determined by the relative’s yields, actual or prospective, that can be obtained in interest or dividends on the capital sum that these market prices represent. The cost of a company or raising new capital is not the price at which the new shares are sold to investors, but the effective rate of interest field that has to be offered in order to secure it. Other things being equal, investors will readily accept a lower interest yield for a progressive and promising company than they will demand from a slow-moving and inefficient one.

The tremendous important and socially useful service that the stock exchange renders to the industries is with regard to the shifting of the burden of financing from the mgt. to those of the investor. It will be realized more so from the fact that there is always a conflict of motives between the industries and the investors. Industries require long-term finance, with the end in view of looking it up in land, buildings, plants, etc. Investors, on the other hand, have liquidity preference, that is to say, they want to get back the money or and when they would need it.

In other words, while the industries require permanent finance, the investors can tend it only for a while because the money that they led to the industries comes from their savings which are made for future spending over contingencies. It is not merely the individual investors alone who suffer from the ‘liquidity’ preference complex institutional investors to have the same motive.

It is generally thought that a Stock Exchange serves only those who have money to invest and securities to sell. But a stock benefits the whole community in a variety of ways. By enabling producers to raise capital, it indirectly gives employment to millions of people and helps consumers to get the goods needed by them.

Again, all those who save, put their money either in banks or in life insurance, invest in buying shares and securities, are also help by stock exchanges, because the institutions with which they place their savings avail, themselves of the services of the exchange to invest the money collected by them.

It is efficient from the foregoing analysis that the ready liquidity and constant evaluation of assets, together with a range of available investments act as a powerful inducement to save and invest and draw the savings of the community into the channels which are expected to be most productive. It would be difficult to find a more effective method of doing this.

In addition, the overall trend of prices and volume of business on the stock exchange serve as an economic barometer which faithfully registers the changing events and opinion about the investment outlook. Even allowing for the aberrations of speculation, % this mirror of the investment scene is one that neither economists nor businessmen nor the govt, charged with the formulation of economic policy, can afford to ignore.

Question 2.
Explain the various risks attached to investment?
Answer:
There are many risks attached to the investment, which are as follows:
1. Business and Financial Risk: Business risk and financial risk are actually two separate types of risks, but since they are interrelated it would be wise to discuss them f together. Business risks, which is sometimes called operating risk, is ‘ the risk associated with the normal day-to-day operations of the firm.

Financial risk is created by the use of fixed cost securities. Looking at the two categories in sources and uses, Context, business risk represent the chance of loss and the variability of return created by a firm’s uses of funds. Financial risk is the chance of loss and the variability of the owner’s return created by a firm’s sources of funds.

To clarify this imp. distinction between business and financial risk, let us examine the income statement contained in the exhibit. Earnings before interest and taxes can be viewed as the operating profit of the firm, the profit of the firm before deducting financing charges and taxes.

Business risk is concerned with earnings before interest and taxes and financial risk is concerned with earnings available to equity holders. The two components of business risk signify the chance that the firm will fail because of the inability of the assets of the firm to generate a sufficient level of earnings before interest and the variability of such earnings.

The two components of financial risk reflect the chance that the firm will fail because of the inability, to meet interest and principal payments on debt, and the variability of earnings available to equity holders caused by fixed financing charge. Putting it in another way, this second component of financial risks is the extent to which earnings available to equity holders will vary at a greater rate than earnings before interest and taxes. In case the firm does not employ debt, there will be no financial risk.

An imp. aspect of financial risk is the interrelationship between financial risk and business risk. In effect, business risk is basic to the firm, but the firm’s risk can be affected by the amount of debt financing used by the firm. Whatever be the amount of business risk associated with the firm the firm’s risk will be increased by the use of debt financing.

As a result, it follows that the amount of debt financing used by, the firm should be determined by the amount of business without fear of default, or a market impact on the earnings available to the equity shareholders. Conversely, if the firm faces a lot of business risk, then the use of a lot of debt financing may jeopardize the firm’s future operations.

2. Purchasing power Risk: Whenever investors desire to preserve their economic position over time, they utilize investment outlets whose values vary with the price level. They select investments whose market values change with consumer prices which compensates them for the cost of living increase. If they do not, they will find that their total wealth has been diminished. Inflation is an economic crippler that destroys the economic power of investors over, goods and services.

In essence, investors have to be concerned with the command that their invested money has over goods and services on a continuing basis. In fact, we have been living with increasing consumer prices for many years.

3. Market Risks: This hazard arises from the fact that market prices and collateral values of securities and real property may vary substantially, even when their earning power does not change. The causes of these price uncertainties are varied. At times many markets are simply thin-that is, buyers and sellers, appear only intermittently. More commonly, investment prices vary because investors vacillate in their preference for different forms of investment, or simply because they sometimes have money to invest and sometimes do not have it. But once the equity has developed a particular price pattern, it does not change this pattern quickly. The causes of changes in market price are usually beyond the control of the corporation.

An unexpected war or the end of one, an election year, political activity, illness or death of a President, speculative activity in the market, the outflow of bullion – all are tremendous psychological factors in the market. The irrationality in the securities markets may cause by the general tenor of the market any called market risks.

The market risk in equity shares is much greater than it is in bonds. Equity share value and prices are related in some fashion to earning. Current and prospective dividends, which are made possible by earnings, theoretically, should be capitalized at a rate that will provide yields to compensate for the basic risks, on the other hand, bond prices are closely related to changes in interest rates on new debt. Equity prices are affected primarily by financial risk considerations which, in turn, affect earnings and dividends.

However, equity prices may be strongly influenced by mass psychology, by abrupt changes in financial sentiment, and by waves as optimism or presses. Whenever emotions run high, speculators and gamblers crave action. They cannot refrain from entering the market arena as their greed for profits becomes their overpowering motivation. They do not hesitate to analyze the market .environment. They do not base their judgment on an accurate evaluation of the underlying factors. Instead, do not base their judgments on an accurate evaluation of the semblance of value. Greed pushes-price up and fear drives them down.

In short, the crux of the market risk is the likelihood of incurring. Capital losses from price changes engendered by speculative psychology.

4. Interest Rate Risk: A major source of risk to the holders of high-quality bonds changes in interest rates, commonly referred to as interest rate risk. These high-quali|y bonds are not subjected to either substantial-business risk or financial risk. Consequently, they are referred to as high-quality bonds. But since they are high-quality bonds, their prices are determined mainly, by the prevailing level of interest rate in the market. As a result, if interest rates fall, the prices of these bonds will rise, and vice-versa.

Interest rate risk affects all investors in high-quality bonds regardless of whether the investors hold short-term or long term bonds. Changes in interest rate have the greatest impact on the market position of long-term bonds, Since the longer the period before the bond matures, the greater the effect of the change in interest rates. On the other hand, changes in interest rates will not have much of an impact on-the-market price of short-term bonds, but the interest income on a short-term bonds portfolio may fluctuate markedly from period to period, as interest rate changes. Consequently, changes in interest rates affect investors in long-term as well as short-term bonds.

5. Social or Regulatory Risk: The Social or regulatory risk arises where an otherwise profitable investment is impaired as a result of adverse legislation, harsh regulation climate, or in extreme instances nationalization by a socialistic govt. The profits of industrial companies may be reduced by price controls, and rent controls may largely destroy the value of the rental property, hold for income, or as a price-level hedge. The social risk is real political and thus unpredictable, but under a system of representative govt, based on increasing govt, intervention in business affairs, no industry can expect to remain exempt from it.

6. Other Risk: Other types of risk, particularly those associated with an investment in foreign securities, are the monetary value risk and the political environment risk. The investor who buys foreign govt, bonds, or securities of foreign corporations often in an attempt to gain a slightly.

Here we are providing Class 12 Business Studies Important Extra Questions and Answers Chapter 3 Business Environment. Business Studies Class 12 Important Questions are the best resource for students which helps in class 12 board exams.

Class 12 Business Studies Chapter 3 Important Extra Questions Business Environment

Business Environment Important Extra Questions Short Answer Type

Question 1.
Give your views on ‘Economic Environment in India.
Answer:
The economic environment in India consists of various macro-level factors related to the means of production and distribution of wealth which have an impact on business. These are

1. Stage of economic development of the country.
2. The economic structure in the form of a mixed economy.
3. Economic policies of Government including industrial monetary and fiscal policy.
4. Economic planning including five-year plans etc.
5. Infrastructural factors such as financial institutions.

Question 2.
State briefly the influence of the technological environment on business and industries.
Answer:
Positive effects:

1. The efficiency of business increases tremendously to face global competition.
2. The firm is able to produce better quality products at a cheaper price.

Negative effects:

1. Continuous up-gradation as per the changing environment has become a necessity to remain competitive in the market.
2. Small and medium enterprises find it difficult to invest in the new technologies due to limited funds available.

Question 3.
Do you agree with the statement that “Environment offers opportunities as well as threats”? Discuss.
Answer:
Yes, the statement that the business environment offers opportunities, as well as threats, holds true. Threats to the domestic industry can be in the form of increased or cutthroat competition, no availability of a trained workforce.

Shortage of raw materials, a shift in consumer demand to other products, etc. For example, Chinese toy manufacturers have taken over the world toy market. Now they almost have taken monopoly in this sector.

The opportunities can be experienced in the form of easy accessibility to new technology, opening, up of new investment avenues increased orders, world quality products due to competition, etc. For example, there is increased demand for environment-friendly products.

Question 4.
Explain the Environment analysis and its Diagnosis with SWOT analysis.
Answer:
Environment Analysis is the study of various factors of l environment affecting the business, like economic factors, political factors, technological factors, global factors, etc. Environment analysis helps to anticipate opportunities and to plan to take appropriate actions to avail these opportunities. By careful analysis of the environment, the business comes to know the opportunities provided and threats posed by the environment.

However, in general, the manager takes the help of SWOT analysis to analyze the environment. SWOT analysis has have been discussed below:

Swot analysis: Swot Analysis is an analysis of the strengths and weaknesses of the organization and the opportunities and threats in the: environment. SWOT-analysis helps in the formulation of business policy.

Two parts of SWOT analysis are

1. Strengths and Weaknesses: Strengths and weaknesses are related to internal factors such as finance, technology, production facilities, personnel capabilities, etc. of the business organization. The ability of a business organization to exploit the available environmental opportunities depends upon the strength of these internal factors. An organization should concentrate on such business for which it is most competent in case if it does not possess the necessary strength to exploit the opportunities.

2. Opportunities and Threats: Opportunities and threats are related to the external environment. Good opportunities are provided to the business by changes in the external environment. Similarly, the same is responsible for posing threats to the business. Lower rate of interest, development of new market new innovations, etc. are some forms of opportunities. Threats may in the form of increased competition decreasing demand, obsolete technology, etc.

Business Environment Important Extra Questions Long Answer Type

Question 1.
What is Environmental Scanning? Explain the SWOT technique of Environmental scanning.
Answer:
Environmental Scanning: The first and foremost step in corporate planning is environmental scanning. Every organization functions within a specific environment and the various elements of the environment have a significant influence – on its functioning.

SWOT stands for
S – Strengths,
W – Weakness,
O – Opportunities, and
T – Threats.

Strength: Strength is an inherent capacity that an organization can use to gain a strategic advantage over its competitors. For example, superior research and development facilities enable a firm to develop new products and there by gain a competitive advantage:

Some of the examples of a company’s strength are:

1. Management
2. Marketing
3. Finance
4. Production
5. Personal

Weakness: Weakness is an inherent limitation or constraint which creates a strategic disadvantage. For example, over-dependence on a single product is potentially very risky.

Some of the examples of the weakness of a company are:

1. Management
2. Marketing
3. Finance
4. Production
5. Personnel

Opportunity: Opportunity is a favorable condition in the environment. It enables an enterprise to consolidate its position. For exam growth of the demand is an opportunity for the company to grab.

Threat: Threat is an unfavorable condition in the environment. It creates a risk to the business. For example, growing competition is a threat to the business.

Thus we can see that SWOT Analysis helps an enterprise in matching its strengths and weakness with the opportunities and threats operating in the environment.

Question 2.
Explain in detail the External Environment and affecting factors.
Answer:
External Environment: External Environment consists of all the forces, institutions, and events that are relevant to an organization’s operations but which are absolutely beyond the control of the enterprise. It includes all the outside factors that provide opportunities and pose threats to the organization. The main components of the external environment are:

• Micro Environment includes competitors, suppliers, consumers, the public at large, and marketing intermediaries.
• Macro Environment includes economic environment, socio-cultural environment, political environment, legal environment, and technological environment.
• Micro Environment Micro environment includes all those factors which are closely related to the business. These factors have a different effect on various types of enterprises. Every enterprise has its unique dealing with all these factors. The various factors included in the microenvironment are

1. Competitors Every business enterprise and its policies are affected by the competitors to a great extent. The policies of the competitors can affect the pricing of the product, quality, and quantity of the product, the advertising pattern and budget, etc.

2. Suppliers Business enterprise is very much affected by its relationship with its suppliers. It is in the hands of the suppliers to make the uninterrupted supply of raw materials at a reasonable price.

3. Consumers: The satisfaction of the consumers is one of the main aims of a business enterprise. Different types of consumers are of different importance to the enterprise. The business enterprise must be able to provide goods according to the tastes and preferences of different types of consumers.

4. Public at Large The attitude and behavior of different constituents of the public at large like the local public, trade unions, press, etc. affect the business enterprises.

5. Marketing Intermediaries The marketing intermediaries like agents, whole-sellers, retailers, etc. also affect the business enterprises to a great extent. They act as a link between the manufacturer and the ultimate consumer and can be an important factor in the business.

Here we are providing Class 12 Business Studies Important Extra Questions and Answers Chapter 2 Principles of Management. Business Studies Class 12 Important Questions are the best resource for students which helps in class 12 board exams.

Class 12 Business Studies Chapter 2 Important Extra Questions Principles of Management

Principles of Management Important Extra Questions Short Answer Type

Question 1.
Explain the term Principles of Management?
Answer:
Principles of Management:
A Principle is a fundamental statement of truth that provides a guideline to thought and action. It is a universal truth that establishes a cause and effect relationship between two or more variables. These fundamental truths are applicable in specific circumstances and are capable of predicting the result of any Managerial action. Principles are both ‘descriptive’ and Prescriptive’ in nature.

A principle is descriptive if it simply describes the relationship between the variables. It is prescriptive if it indicates what should be done in a given situation. The principle of management lays down guidelines for improving management practice. These principles are the result of the long experience of managers in different fields of organized effort. Most of these principles are applicable in all kinds of managerial situations, be it a government organization, a business enterprise, a religious foundation, or an educational institution.

Question 2.
Why the principles of Management needed?
Answer:
According to Terry, “Principles of management are to a manager as a table of the strength of materials is to a civil engineer,” The utility of principles lies in the foundation they provide for its efficient conduct, by making out the basic features that must characterize the practice of management, irrespective of where it is occurring. By means of the principle of Management, a manager can avoid the fundamental mistakes in his job and foretell the results of his action with confidence.

Question 3.
Explain in brief the major criticisms of scientific management.
Answer:
Demerits or Criticisms of Scientific Management:- Although there are many advantages of Taylor’s scientific management yet it has also been severely criticized. Following are the main points of criticism.

Criticisms by Employers:

1. Costly/Expensive System: In this scientific management system, much cost is required. More capital has to be invested to implement scientific management. It is a very expensive system.
2. Time-Consuming: This system is very time-consuming. It takes too much time to implement scientific management.
3. The fault of Specialisation: The excess specialization creates faults. The problem of certification also arises. It is not suitable for small industrial units.
4. Lack of Freedom: With the appointment of specialists, the producers cannot take decisions freely as most of the responsibilities fall on specialists. So, they feel hesitant in adopting the scientific technique.
5. Unsuitable for Small Scale Business: As the technique of scientific management is much expensive, only large scale enterprises can implement it. It is impossible for small-scale businesses to adopt these techniques.

Criticisms by Employees:

1. Fear of Unemployment
2. Indifference of Work
3. Exploitation
4. End of Initiative
5. Criticism by Labour Unions
6. Bad effect on health
7. Excessive work land

Question 4.
What is the differential piece wage system advocated by F.W. Taylor and also gives an illustration?
Answer:
Differential piece wage system Taylor was a strong advocate of the piece wage system. He wanted to differentiate between efficient and inefficient workers. The standard time and other parameters should be determined on the basis of the work-study discussed above. The workers can then be classified a$ efficient or inefficient on the basis of these standards. He wanted to reward efficient workers.

So he introduced the different rates of wage payment for those who performed above standard and for those who performed below standard. For example, it is determined that standard output per worker per day is unit, and those who made standard or more than standard or more than standard will get Rs 60 per unit and those below will get Rs 30 per unit. Now an efficient worker making 10 units will get 10×60 = Rs 600/- per day whereas a worker who makes 6 units will get 6 × 30 = Rs 180 per day.

According to Taylor, the difference of Rs 420 should be enough for the inefficient worker to be motivated to perform better. It is important to have a re-look at the techniques of scientific management as comprising a unified whole of Taylorian prescription of efficiency. Therefore, the sum and substance of Taylorism lie not in the disjointed description of principles and techniques of scientific management, but in the change in the mindest, which he referred to as mental revolution.

Principles of Management Important Extra Questions Long Answer Type

Question 1.
Name the main principles of Management propounded by Henri Fayol and explain any two?
Answer:
Development of Management Principles: It was Henri Fayol a French mining engineer and chief executive who for the first time stated a set of 14 principles of management. Fayol wrote these principles on the basis of his practical experience as a manager. According to him, these principles can be applied in all types, functions, levels, and sizes of organizations. This had earned him the title universalist’. For a long time, Fayol’s list was accepted as ‘Complete and Comprehensive. A description of these principles follows.

1. Division of Work
2. Authority and Responsibility
3. Discipline
4. Unity of command
5. Unity of direction
6. Subordination of individual interests to the general interests
7. Remuneration
8. Centralization
9. Scalar chain hierarchy
10. Order
11. Equity
12. Stability of personnel
13. Initiative
14. Esprit de corps

1. Division of Work – This is the principle of specialization which applies to all kinds of work. The more people specialize, the more efficiently they can perform their work. Specialization increases output by making employees more efficient.

2. Authority and Responsibility – Authority is the right to give orders and the power to exact obedience. Managers need authority to get things done. According to Fayol, responsibility is a corollary and a natural consequence of authority. Responsibilities an obligation to perform the tasks in a satisfactory manner.

Question 2.
Give reasons for or against the Universality of the principle of Management?
Answer:
University of Management principles Universality of management suggests that the manager uses the same managerial skills and principles in each managerial position held in various organizations. Accordingly, an industrial manager could manage a philanthropic organization, a retired army general could manage a university, a civil servant could manage an industrial organization, and so on.

Universality implies transferability of Managerial skills across industries, countries, countries. It means that management is generic in content and applicable to all types of organizations. Lawrence A. Appley declared that ‘He who can manage, can manage anything.’ Let us examine the factors that have contributed to the universal application of management in every level of organization and at every level of organizations.

Arguments for Universality:
1. Managers perform the same functions irrespective of their level in the organization, industry, or country. The functions performed by the company president and the office supervisors .are the same Regardless of the label-all managers plan, organize, lead and control. The difference lies in such things as the breadth of the objectives, the magnitude of the decision taken, the organization’s relationships affected, and so on.

2. Classical writers like Fayol, Urwick, and others believed that there are certain principles in management that are universally applicable.

3. The fundamentals governing the management of a business, a Church, or a university are the same, the differences lie in the techniques employed and practices followed. All managers accountable for the performance of other people, they plan, make decisions, organize work, motivate people and implements control, and so forth. In order to achieve the results the techniques employed might differ depending on situational factors like culture, tradition, attitudes, etc.

4. The very fact that managers regularly move from public to private sector organizations bears ample testimony to the fact that management concepts are universal across organizational types.

Arguments against the Universality This is –
1. The universal thesis implies complete substitutability of managerial skills which is rarely found in actual practice. It seems improbable that the captain of a hockey team would excel equally as the president of the charitable agency or as the vice-chancellor of a university. It is true that the manager’s job becomes almost universal in content at the upper levels of organizations. At a lower level of organization, however, transferability of managerial skills may not be possible.

2. Universality thesis presupposes the existence of predictability regarding the outcomes of management actions. A manager working in firm A must be able to predict the likely consequences of his actions in firm B where he is likely to join. And he may have to face serious problems in case the underlying philosophies of these organizations were to differ.

Here we are providing Class 12 Business Studies Important Extra Questions and Answers Chapter 1 Nature and Significance of Management. Business Studies Class 12 Important Questions are the best resource for students which helps in class 12 board exams.

Class 12 Business Studies Chapter 1 Important Extra Questions Nature and Significance of Management

Nature and Significance of Management Important Extra Questions Short Answer Type

Question 1.
Distinguish between coordination and cooperation.
Answer:

Co-ordination	Cooperation
1. It is an orderly arrangement of a group effort to provide for unity of action.	1. It is a voluntary desire to help each other
2. Co-ordination includes cooperation, hence it is a wider term.	2. Co-operation is a narrow term as it is a part of co-ordination.
3. It is a deliberate effort made by the management to balance interrelated activities.	3. It is the voluntary effort made by a group of people depending on their mental needs or liking
4. It is a technique.	4. It is an attitude.

Question 2.
Write the characteristics of management and explain any two.
Answer:
Characteristics The key features of management are –

1. Goal-oriented process,
2. all-pervasive,
3. multidimensional,
4. Continuous process,
5. group activity
6. dynamic function,
7. tangible force.

1. Management is a goal-oriented process:  An organization has a set of basic goals which are the basic reason for its existence. These should be simple and clearly stated.

2. Management is all-pervasive: The activities involved in managing an enterprise are common to all organizations whether economic, social, or political Thus it is all-pervasive.

Question 3.
“Lack of proper management results in wastage of time money and efforts.” Do you agree with this statement? Give reasons in support of your answer. (2003)
Answer:
Yes, the above-mentioned statement holds true as the reasons are as follows.

1. Means to accomplishing goals:  Management is important because it helps in achieving group goals, increases efficiency, and creates a dynamic organization.
2. Unified direction: Management motivates and directs the workforce by unifying goals with the group goals.
3. Establishes sound industrial relations: The success of any organization depends upon its workforce. It is the only factor of production which is movable in nature. Effective management tries to build a feeling of team and loyalty towards the organization.
4. It looks after for future uncertainties: An effective management prepares the organization for future contingencies and paved the way for its survival and growth. In the ‘ absence of this foresightedness, an organization may be forced to wind up its operations resulting in wastage of time, efforts, and resources.

Question 4.
State two objectives of management. (1993, 1996, 1998)
Answer:
The main two objectives of management are –

1. Maximization of profits at minimum cost.
2. Optimum utilization of the given resources by the organization.

Question 5.
What is meant by Administration? (1992, 1999)
Answer:
Administration means a determination of overall policies, the setting of major objectives, the identification of general-purpose, the laying out of broad programs, etc. It is determinative in nature.

Question 6.
Name any two activities undertaken at the top-level management. (1995, 2001, 2004)
Answer:
The two main functions or activities of top-level management are.

1. It does long-term planning and formulating suitable policies, organizing (determination of organization structure), and controlling.
2. It maintains cordial relations with all outside parties like the shareholders, the government, etc.

Question 7.
State two functions of lower-level management. (1992-1994)
Answer:
The main functions are as follows –

1. It translates the intermediate plan of middle-level management into day to day operating plan.
2. It gives directions to operating employees by assigning jobs, evaluating and correcting their performance and sends information and progress reports to higher management.

Nature and Significance of Management Important Extra Questions Long Answer Type

Question 1.
Do you think proper Management is an important part of an organization?
or
Explain the importance of management.
Answer:
Yes, management is a universal activity that is integral to any organization. We now examine some of the reasons that have made management so important.

1. Management helps in achieving group goals: Management is required not for itself but for achieving the goals of the organization, the task of a manager is to give a common direction to all.

2. Management increases efficiency:  The aim of a manager is to reduce costs and increase productivity ” through better planning, organizing directing, staffing, and controlling the activities of the organization.

3. Management creates a dynamic organization: All organizations have to function in an environment that is constantly changing.

4. Management helps in achieving personal objectives: A manager motivates and leads his team in such a manner that individual members are able to achieve personal goals while contributing to the overall organizational objective.

5. Management helps in the development of society: An organization has multiple objectives to serve the purpose of the different groups that constitute it. In the process of fulfilling all these management helps in the development of the organization and through that it helps in the development of society. It helps to provide good ‘ quality products and services, creates employment opportunities, and leads the path towards growth and development.

Question 2.
Explain the level of management and their main functions.
Answer:
Level of Management.

Generally speaking, there are three levels in the hierarchy of an organization.

1. Top Management:
They consist of the senior-most executives of the organization by whatever name they are called. They are usually referred to as the chairman, the chief executive officer, chief operating officer, president, and vice-president. Top management is a team consisting of managers from different functional levels. Their basic task is to integrate diverse elements and coordinate the activities of different departments according to the overall objectives of the organization. They are responsible for the welfare and survival of the organization. Their job is complex and stressful.

2. Middle Management:
It is the link between top and lower-level management. They are subordinate to top managers and superior to the first-line managers. They are usually known as division heads, operation managers, or plant superintendent. They are responsible for implementing and controlling plans developed by top management. At the same time, they are responsible for all the activities of first-line management. Their main task is to carry out the plans formulated by the top management and at the same time, they are responsible for all the activities of first-line managers.

3. Operational Management:
Foreman and supervisors comprise the lower level in the organization. Supervisors directly oversee the efforts of the workforce. Their authority and responsibility are limited according to the plans drawn by the top management. They play a very important role in the organization since they interact with the actual workforce and pass on instructions of the middle management to the Workers. Through the quality of their efforts of output is maintained. Wastage of materials is minimized and safety standards are maintained.

Here we are providing Class 12 Accountancy Important Extra Questions and Answers Chapter 3 Reconstitution of Partnership Firm: Admission of a Partner. Accountancy Class 12 Important Questions and Answers are the best resource for students which helps in class 12 board exams.

Class 12 Accountancy Chapter 3 Important Extra Questions Reconstitution of Partnership Firm: Admission of a Partner

Reconstitution of Partnership Firm: Admission of a Partner Important Extra Questions Very Short Answer Type

Question 1.
What is meant by Issued Capital ? (CBSE Delhi 2019)
Answer:
Issued capital means such capital as the company issues from time to time for subscription-section 2(50) of the companies Act 2013.

Question 2.
What is meant by ‘ Employees Stock Option Plan? (CBSE Delhi 2019)
Answer:
FSOP means an option granted by the company to its employees & employee directors to subscribe the share at a price that lower than the market price i.e., fair value. It is an option granted by the company but it is not an obligation on the employee to subscribe it.

Question 3.
A and B were partners in a firm sharing profits in the ratio of 3 : 2. C and D were admitted as new partners.
A sacrificed ith of his share in favour of C and B sacrificed 50% of his share in favour of D. Calculate the 4 new profit sharing ratio of A, B, C and D.(CBSE Outside Delhi 2019)
Answer:
Old ratio = 3:2
A’s Sacrifice (in favour of C) = 1/4 x 3/5 = 3/20
B’s Sacrifice (in favour of D) = 1/2 x 2/5 = 2/10
A’s New Share = 3/5 – 3/20 = 9/20
B’s New Share = 2/5 – 2/10 = 2/10

Question 4.
Ankit, Unnati and Aryan are partners sharing profits in the ratio of 5:3:2. They decided to share future profits in the ratio of 2:3:5 with effect from 1st April, 2018. They had the following balance in their balance sheet, passing necessary Journal Entry:

Answer:

Question 5.
A and B are partners in a firm. They admit C as a partner with l/5th share in the profits of the firm. C brings ₹ 4,00,000 as his share of capital. Calculate the value of C’s share of Goodwill on the basis of his capital, given that the combined capital of A and B after all adjustments is ₹ 10,00,000. (CBSE Sample Paper 2019-20)
Answer:

Question 6.
A and B are partners in a firm sharing profits and losses in the ratio of 3:2.On 1st April, 2019 they decided to admit C their new ratio is decided to be equal. Pass the necessary journal entry to distribute Investment Fluctuation Reserve of ₹ 60,000 at the time of C’s admission, when Investment appear in the books at ₹ 2,10,000 and its market value is ₹1,90,000.
Answer:

Question 7.
A and B are in partnership sharing profits and losses in the ratio of 3:2. They admit C into partnership with 1/5th share which he acquires equally from A and B. Accountant has calculated new profit sharing ratio as 5:3:2. Is accountant correct:
Answer:

New Profit Sharing ratio of A: B: C ¡s 5:3: 2
Yes, new profit sharing ratio is 5:3:2

Question 8.
A, B and C were partners sharing profits in the ratio of 5 : 4 : 3. They decided to change their profit sharing ratio to 2:2:1 w.e.f. 1st April, 2019. On that date, there was a balance of ₹ 3,00,000 in General Reserve and a debit balance of ₹ 4,80,000 in the Profit and Loss Account.
Pass necessary journal entries for the above on account of change in the profit sharing ratio.
Answer:

Question 9.
At the time of admission of a partner, who decides the share of profit of the new partner out of the firm’s profit? (CBSE Compartment 2019)
Answer:
It is decided mutually among the old partners and the new partner.

Question 10.
Hari and Krishan were partners sharing profits and losses in the ratio of 2 : 1. They admitted Shyam as a partner for 1/5th share in the profit. For this purpose the Goodwill of the firm was to be value on the basis of three years’s purchase of last five years average profits. The profits for the last five years were:

Calculate Goodwill of the firm after adjusting the following:
The profit of 2014-15 was calculated after charging ₹ 10,000 for abnormal loss of goods by fire.
Answer:

Question 11.
Amit and Beena were partners in a firm sharing profits and losses in the ratio of 3 : 1. Chaman was admitted as a new partner for 1/6th share in the profits. Chaman acquired 2/5th of his share from Amit. How much share did Chaman acquired from Beena? (CBSE 2018-19)
Answer:
Chaman acquired 1/6 – (1/6 x 2/5) = 3/30 from Beena.

Question 12.
Ritesh and Hitesh are childhood friends. Ritesh is a consultant whereas Hitesh is an architect. They contributed equal amount and purchased a building for ₹2 crore. After 10 years they sold it for ₹3 crore and shared the profit equally. Are they doing the business in partnership.
Answer:
No.

Question 13.
Pawan and Jayshree are partners. Bindu is admitted for l/4th share. State the ratio in which Pawan and Jayshree will sacrifice their share in favour of Bindu? (CBSE Sample Paper 2014)
Answer:
Old ratio i.e. 1 : 1

Question 14.
X and Y are partners. Y wants to admit his son K into business. Can K become the partner of the firm?
Answer:
Yes, if X agrees to it otherwise not.

Question 15.
Name any one factor responsible which affect the value of goodwill.
Answer:
Location of a business.

Question 16.
Vishal & Co. is involved in developing computer software which is a high value added product and Tiny & Co. is involved in manufacturing sugar which is a low value item. If capital employed of both the firms is same, value of goodwill of which firm will be higher?
Answer:
Vishal & Co.

Question 17.
State a reason for the preparation of ‘Revaluation Account’ at time of admission of a partner.
Answer:
To record the effect of revaluation of assets and liabilities.

Question 18.
In which ratio is the profit or loss due to revaluation of assets and liabilities transferred to capital accounts?
Answer:
Old Ratio of existing partners.

Question 19.
Change in Profit Sharing Ratio amounts to dissolution of partnership or partnership firm?
Answer:
Dissolution of partnership.

Question 20.
State one occasion on which a firm can be reconstituted. (CBSE 2012, Delhi)
Answer:
Change of profit sharing ratio among the existing partners.

Question 21.
What is the formula of calculating sacrificing ratio? (CBSE 2011, Outside Delhi)
Answer:
Sacrificing Ratio = Old Ratio-New Ratio.

Question 22.
By which name the profit sharing ratio in which all partners, including the new partner, will share fixture profits?
Answer:
New profit sharing ratio.

Question 23.
If the new partner acquires his share in profits from all the old partners in their old profit sharing ratio, by which ratio will the old partners sacrifice their profit sharing ratio?
Answer:
Old profit sharing ratio.

Question 24.
Name the accounting standard, issued by the Institute of Chartered Accountants of India, which deals with treatment good will.
Answer:
AS 26.

Question 25.
When the new partner brings amount of premium for goodwill, by which ratio is this amount credited to old partners’ Capital Accounts?
Answer:
Sacrificing ratio.

Question 26.
What is the formula for calculating inferred goodwill?
Answer:
Net worth of business on the basis of new partner’s capital minus net worth of business in new firm.

Reconstitution of Partnership Firm: Admission of a Partner Important Extra Questions Short Answer Type

Question 1.
Atul and Neera were partners in a firm sharing profits in the ratio of 3 : 2. They admitted Mitali as a new partner. Goodwill of the firm was valued at ₹ 2,00,000. Mitali brings her share of goodwill premium of ₹ 20,000 in cash, which is entirely credited to Atul’s Capital Accoum. Calculate the new profit sharing ratio.
Answer:

Question 2.
The capital of the firm of Anuj and Benu is ₹ 10,00,000 and the market rate of interest is 15%. Annual salary to the partners is ₹ 60,000 each. The profit for the last three years were ₹ 3,00,000,13,60,000 and ₹ 4,20,000. Goodwill of the firm is to be valued on the basis of two years purchase of last three years average super profits. Calculate the goodwill of the firm.
Answer:

Question 3.
Radhika, Bani and Chitra were partners in a firm sharing profits and losses in the ratio of 2:3 :1. With effect from 1 st April, 2018 they decided to share future profits and losses in the ratio of 3 : 2 : 1. On that date their Balance Sheet showed a debit balance of ₹ 24,000 in Profit and Loss Account and a balance of ₹ 1,44,000 in General Reserve. It was also agreed that:
(a) The goodwill of the firm be valued at ₹ 1,80,000.
(b) The Land (having book value of ₹ 3,00,000) will be valued at ₹ 4,80,000.
Pass the necessary journal entries for the above changes.
Answer:

Question 4.
A firm earned average profit of ₹3,00,000 during the last few years. The normal rate of return of the industry is 15%. The assets of the business were ₹ 17,00,000 and its liabilities were ₹2,00,000. Calculate the goodwill of the firm by capitalisation of average profits. (CBSE Delhi 2019)
Answer:
Actual profits = ₹3,00,000
Net Tangible Assets = Assets – Liabilities
= ₹ 17,00,000 -₹ 2, oo, ooo
= ₹ 15,00,000
Capitalised value of the firm = (Average Profits x 100)/Normal rate of return
= (₹3,00,000 x 100)/15
= ₹20,00,000
Goodwill = Capitalised value of the firm – Net Tangible Assets
= ₹20,00,000-₹15,00,000
= ₹5,00,000

Question 5.
P, Q and R were partners in a firm sharing profits in the ratio of 1 : 1 : 2. On 31st March, 2018, their balance sheet showed a credit balance of ₹9,000 in the profit and loss account and a Workmen Compensation Fund of ₹64,000. From 1st April, 2018 they decided to share profits in the ratio of 2:2: 1. For this purpose it was agreed that:
(a) Goodwill of the firm was valued at ₹4,00,000.
(b) A claim on account of workmen compensation of ₹30,000 was admitted.
Pass necessary journal entries on reconstitution of the firm. (CBSE Delhi 2019)
Answer:

Question 6.
L, M and N were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. On 1st April, 2018 they admitted S as a new partner in the firm for 1/5th share in the profits. On. S’ admission the goodwill of the firm was valued at 3 years purchase of last five years average profits. The profits during the last five years were:

Calculate the value of the goodwill of the firm. Pass necessary journal entry for the treatment of goodwill on S’s admission.
Answer:
Average profits = ₹ 1 ,80,000
Goodwill = Average profits x Number of years purchase
= 1,80,000 x 3
= ₹ 5,40,000
S’s share of Goodwill = 5,40,000/5
= 1,08,000

Question 7.
A man, Bobby and Chandani were partners in a firm sharing profits and losses in the ratio of 5 : 4 : 1. From 1st April, 2018 they decided to share profits equally. The revaluation of assets and re-assessment of liabilities resulted in a loss of ₹5,000. The goodwill of the firm on its reconstitution was valued at ₹ 1,20,000. The firm had a balance of ₹ 20,000 in General Reserve. (CBSE Delhi 2019)
Answer:
Showing your workings clearly pass necessary journal entries on the reconstition of the firm.

Question 8.
A firm earned average profit of₹ 3,00,000 during the last few years. The normal rate of return of the industry is 15%. The assets of the business were ₹ 17,00,000 and its liabilities were ₹ 2,00,000. Calculate the goodwill of the firm by capitalisation of average profits. (CBSE Outside Delhi 2019)
Answer:
Actual profits = ₹3,00,000
Net Tangible Assets = Assets – Liabilities
= ₹ 17,00,000 – ₹2,00,000
= ₹ 15,00,000
Capitalised value of the firm = (Average Profits x 100)/ Normal rate of return
= (₹3,00,000 x 100)/15
= ₹20,00,000
Goodwill = Capitalised value of the firm – Net Tangible Assets = ₹20,00,000 – ₹ 15,00,000
= ₹5,00,000

Question 9.
L, M andN were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. On 1st April, 2018 they admitted S as a new partner in the firm for 1/5th share in the profits. On. S’ admission the goodwill of the firm was valued at 3 years purchase of last five years average profits. The profits during the last five years were :

Calculate the value of the goodwill of the firm. Pass necessary journal entry for the treatment of goodwill on S’s admission. (CBSE Outside Delhi 2019)
Answer:
Average profits = ₹ 1,80,000
Goodwill = Average profits x Number of years purchase
= 1,80,000 x 3
= ₹ 5,40, 000
S’s share of Goodwill = 5,40,000/5 = ₹ 1,08,000

Question 10.
A man, Bobby and Chandani were partners in a firm sharing profits and losses in the ratio of 5 : 4 : 1. From 1 st April, 2018 they decided to share profits equally. The revaluation of assets and re-assessment of liabilities resulted in a loss of ₹5,000. The goodwill of the firm on its reconstitution was valued at ₹1,20,000. The firm had a balance of ₹20,000 in General Reserve.
Showing your workings clearly pass necessary journal entries on the reconstitution of the firm. (CBSE Outside Delhi 2019)
Answer:

Question 11.
A, B and C were partners in a firm sharing profits in the ratio of 3 : 2 : 1. D was admitted into the firm with 1/4th share in profit, which he got 3/16th from A and 1/16th from B. The total capital of the firm as agreed upon was ₹ 1,20,000 and D brought in cash equivalent to 1/4th of this amount as his capital. The capital of other partners also had to be adjusted in the ratio of their respective share in profits by bringing in or paying cash. The capitals of A, B and C after all adjustments related to revaluation of assets and reassessment of liabilities were ₹ 40,000; ₹ 35,000 and ₹ 30,000 respectively.
Calculate the new capitals of A, B and C and record the necessary journal entries for the above transactions.
Answer:

Question 12.
P, Q and R were partners in a firm sharing profits and losses equally. S was admitted as a new partner for 1/4th share in the profits. The total capital of the new firm as agreed between P, Q, R and S was ₹ 2,00,000 and S brought in cash equivalent to 1/4th of this amount as his capital. The capitals of P, Q and R were also to be adjusted in their profit sharing ratio by bringing in or paying off cash as the case may be. The capitals of P, Q and R after doing adjustments related to revolution of assets and reassessment of liabilities were ₹ 40,000; ₹ 50,000 and ₹ 60,000 respectively.
Calculate the new capital of P, Q and R pass necessary journal entries for the above transactions in the books of the firm.
Answer:

Question 13.
Anita, Geeta, Sunita and Lata were partners in a firm. They admitted Kavita as a new partner for 1/5th share in the profits. Kavita acquired her share equally from Anita, Geeta, Sunita and Lata. The total capital of the new firm was agreed at ₹ 4,00,000. Kavita brought cash equal to 1/5th of the total capital as her capital and the capital of Anita, Geeta, Sunita and Lata were to be adjusted according to the new profit sharing ratio. For this necessary cash was to be brought by or paid to Anita, Geeta, Sunita and Lata as the case may be. After doing necessary adjustments related to revaluation of assets and reassessment of liabilities the balances in the capital accounts of Anita, Geeta, Sunita and Lata were Anita ₹ 80,000; Geeta ₹ 85,000; Sunita ₹ 75,000 and Lata ₹ 80,000.
Calculate the new capitals of Anita, Geeta, Sunita and Lata and pass necessary journal entries for the above transactions in the books of the firm.
Answer:

Question 14.
A business earned average profits of ₹ 6,00,000 during the last few years. The normal rate of profits in the similar type of business is 10%. The total value of assets and liabilities of the business were ₹ 22,00,000 and ₹ 5,60,000 respectively. Calculate the value of goodwill of the firm by super profit method if the good will is
valued at 2 1/2 years’ purchase of super profits. (CBSE Outside Delhi 2014)
Answer:

Question 15.
Geeta, Sunita and Anita were partners in a firm sharing profits in the ratio of 5 : 3 : 2. On 1.1.2015 they admitted Yogita as a new partner for 1/10 th share in the profits. On Yogita’s admission, the Profit and Loss Account of the firm was showing a debit balance of ₹ 20,000 which was credited by the accountant of the firm to the capital accounts of Geeta, Sunita and Anita in their profit sharing ratio. Did the accountant give correct treatment₹ Give reason in support of your answer. (CBSE Outside Delhi 2015)
Answer:
No, the accountant didn’t give correct treatment as capital account of the partners are to be debited.

Question 16.
On 1-4-2010 Sahil and Charu entered into partnership for sharing profits in the ratio of 4 : 3. They admitted Tanu as a new partner on 1-4-2012 for 1/5 th share which she acquired equally from Sahil and Charu. Sahil,
Charu and Tanu earned profits at a higher rate than normal rate of return for the year ended 31-3-2013. Therefore, they decided to expand their business. To meet the requirements of additional capital they admitted Puneet as a new partner on 1-4-2013 for 1/7 th share in profits which he acquired from Sahil and Charu in 7 : 3 ratio.
Calculate:
(i) New profit sharing ratio of Sahil, Cham and Tanu for the year 2012-13.
(ii) New profit sharing ratio of Sahil, Cham, Tanu and Puneet on Puneet’s admission. (CBSE Delhi 2015)
Answer:

Question 17.
A and B were partners in a firm. They admitted C as anewpartnerfor20% share in theprofits. Afterall adjustments regarding general reserve, goodwill, gain or loss on revaluation, the balances in capital accounts of A and B were ₹ 3,85,000 and ₹ 4,15,000 respectively. C brought proportionate capital so as to give him 20% share in the profits. Calculate the amount of capital to be brought by C. (CBSE Sample paper 2016)
Answer:

Question 18.
Tvisha and Divya were partners in a firm carrying on a tiffin service in Hyderabad. Divya noticed that a lot of food is left at the end of the day. To avoid wastage, she suggested that the same may be distributed among the needy. Tvisha wanted it to be mixed with the food to be served the next day.
Tvisha then gave a proposal that if her share in the profit is increased, she will not mind free distribution of left over food. Divya happily agreed. So, they decided to change their profit sharing ratio to 3 : 2 with immediate effect. On the date of change in the profit-sharing ratio, the goodwill of the firm was valued at ₹ 50,000. Pass the necessary adjustment entry for the treatment of goodwill. (Compt. Delhi 2017)
Answer:

Question 19.
A, B and C are the partners sharing profits and losses in the ratio of 5:3:2. C retired and his capital balance after adjustments regarding Reserves, Accumulated profits/losses and gain/loss on revaluation was 2,50,000. C was paid 3,00,000 in full settlement. Afterwards D was admitted for 1/4xshare. Calculate the amount of goodwill premium brought by D. (CBSE Sample Paper 2016-17)
Answer:
Goodwill share of C = 3,00,000 – 2,50,000 = 50,000 Firm’s Goodwill = 50,000 x 10/2 = 2,50,000 D’s share in Goodwill = 2,50,000 x 1/4 = 62,500

Question 20.
A firm’s profits for the last three years are ₹ 5,00,000, ₹ 4,00,000 and ₹ 6,00,000. Calculate value of firm’s goodwill on the basis of four years purchase of the average profits for the last three years.
Answer:

Question 21.
A firm’s profits for the last five years were ₹ 20,000, ₹ 30,000, ₹ 40,000, ₹ 50,000 and ₹ 60,000. Calculate the value of firm’s goodwill on the basis of three years’ purchase of weighted average profits after using weight of 1,2,3,4 and 5 respectively
Answer:

Question 22.
Based on the data given in the above question, calculate goodwill by capitalisation of super profits method. Will the amount of goodwill be different if it is computed by capitalisation of average profits₹ Confirm your answer by numerical verification.
Answer:

Question 23.
Giri and Shanta are partners in a firm sharing profits equally. They admit Ram into partnership who, in addition to capital, brings ₹ 20,000 as goodwill for 1/5 th share of profits in the firm. What shall be journal entries if
(a) no goodwill appears in the books of the firm.
(b) goodwill appears in the books of the firm at ₹ 40,000₹
Answer:
(a) No goodwill appears In the hooks of the tirm.

(b) Goodwill appears in the books of the firm at 40,000.

Question 24.
Ashoo and Rahul are partners sharing profits in the ratio of 5 : 3. Gaurav was admitted for 1/5 share and was asked to contribute proportionate capital and ₹ 4,000 for premium (goodwill). The capitals of Ashoo and Rahul, after all adjustments relating to revaluation, goodwill etc., worked out to be ₹ 45,000 and ₹ 35,000 respectively.
Calculate new profit sharing ratio, capital to be brought in by Gaurav and record necessary journal entries for the same.
Answer:

Question 25.
X and Y are partners sharing profits in the ratio of 5 : 3. They admitted Z for 1/10 share which he acquired equally for X and Y. Calculate new profit sharing ratio.
Answer:

Question 26.
P and Q are partners sharing profits in 2 :1 ratio. They admitted R into partnership giving him 1/5 share which he acquired from P and Q in the ratio of 1 : 2. Calculate new profit sharing ratio.
Answer:
Old ratio of old partners of P and Q = 2 : 1
R acquire 1/5 from old partners (P and Q) in the ratio 1 : 2

Question 27.
Compute the value of goodwill on the basis of four years’ purchase of the average profits based on the last five years. The profits for the last five years were as follows:

Answer:

Question 28.
Rajan and Rajani are partners in a firm. Their capitals were Rajan ₹ 3,00,000; Rajani ₹ 2,00,000. During the year 2014 the firm earned a profit of₹ 1,50,000. Calculate the value of goodwill of the firm assuming that the normal rate of return is 20%.
Answer:

Question 29.
Amar and Samar were partners in a firm sharing profits and losses in 3 : 1 ratio. They admitted Kanwar for 1/4 share of profits. Kanwar could not bring his share of goodwill/premium in cash. The goodwill of the firm was valued at ₹ 80,000 on Kanwar’s admission. Record necessary journal entries for goodwill on Kanwar’s admission.
Answer:

Question 30.
Amar and Akbar are equal partners in a firm. They admitted Anthony as a new partner and the new profit sharing ratio is 4 : 3 : 2. Anthony could not bring his share of goodwill ₹ 45,000 in cash. It is decided to do adjustment for goodwill without opening goodwill account. Pass the necessary journal entry for the treatment of goodwill.
Answer:
Old ratio of old partners: Amar and Akbar =1:1
New ratio of all partners: Amar, Akbar and Anthony = 4:3:2

Question 31.(a)
Rckha, Sunita and Teena are partners in a firm sharing profits in the ratio of 3 : 2 : 1. Samiksha joins the firm. Rekha surrenders l/4th of her share; Sunita surrenders 1/3rd of her share and Teena 1/5th of her share in favour of Samiksha. Find the new Profit sharing ratio.
Answer:

Question 31. (b)
Kabir and Fand are partners sharing profits and losses in the ratio of 7 : 3. Kabir surrenders 2/10th from his share and Farid surrenders 1/10th from his share in favour of Jyoti, a new partner. Calculate new profit sharing ratio and sacrificing ratio. (CBSE Sample Paper 2015)
Answer:

Question 32.
New Profit Sharing ratio = 5:2:3 .Sacrificing ratio = 2:1 .On April 1, 2018, a firm had assets of₹ 1,00,000 excluding stock of ₹ 20,000. The current liabilities were ₹ 10,000 and the balance constituted Partners’ Capital Accounts. If the normal rate of return is 8%, the Goodwill of the firm is valued at ₹ 60,000 at four years purchase of super profit, find the actual profits of the firm.
Answer:
Total Assets ₹ 1,20,000
Capital Employed Total Assets — Current Liabilities
= 1,20,000 – 10,000 =₹ 1,10,000
Normal Profits 8% of 1,10,000 ₹ 8,800
Goodwill = Super Profits x No. of Years Purchase
Super Profits = Actual Average Profits — Normal Profits
Given Goodwill = ₹ 60,000
60,000 4 (Average Actual Profits – Normal Profits)
15000 = Average Actual Profits — 8,800
Average Actual Profits = 15,000 + 8,800 = ₹ 23,800

Question 33.
X, Y and Z are partners in a firm sharing profits and losses in 2 : 2 : 1 ratio. On April 1, 2013, they admitted A as a partner for 1/5th share in profits. On that date, the firm has general reserve of ₹ 35,000, Workmen Compensation Fund of ₹ 20,000, Investments Fluctuation Fund of ₹ 15,000 and accumulated losses of ₹ 10,000. The partners decided to transfer reserves and accumulated losses in their Current Accounts. Pass necessary adjustment entry.
Answer:

Question 34.
John, Brown and Smith are partners in a firm sharing profit and losses in 3 : 2 : 1 ratio. On April 1, 2013, they changed their profit sharing ratio as 4 : 3 : 2. On that date, the firm has general reserve of ₹ 50,000 and accumulated profits of ₹ 40,000. The partners decided to show reserves and accumulated profits in the existing manner. Pass necessary adjustment entry and show your working.
Answer:

Question 35.
Benu and Sunil are partners sharing profits and losses in the ratio of 3 :2. On April 1,2013, Ina was admitted for 1/4 share who paid ₹ 2,00,000 as capital and ₹ 1,00,000 for premium in cash. At the time of admission, general reserve amounting to ₹ 1,20,000 and profit and loss account amounting to ₹ 60,000 appeared on the asset side of the balance sheet.Record necessary journal entries to record the above transactions.
Answer:

Question 36.
A and B are partners sharing profits and losses in the ratio of 3 : 1. On 1st Jan. 2014 they admitted C as a new partner for 1/4 share in the profits of the firm. C brings ₹ 20,000 as for his 1/4 share in the profits of the firm. The capitals of A and B after all adjustments in respect of goodwill, revaluation of assets and liabilities, etc. has been worked out at ₹ 50,000 for A and ₹ 12,000 for B. It is agreed that partner’s capitals will be according to new profit sharing ratio. Calculate the new capitals of A and B and pass the necessary journal entries assuming that A and B brought in or withdrew the necessary cash as the case may be for making their capitals in proportion to their profits sharing ratio.
Answer:

Question 37.
Bhavya and Sakshi are partners in a firm, sharing profits and losses in the ratio of 3 : 2. On 31 st March, 2018 their Balance Sheet was as under:


The partners have decided to change their profit sharing ratio to 1: 1 with immediate effect. For the purpose,
they decided that:

• Investments to be valued at 20.000
• Goodwill of the firm valued at 24,000
• General Reserve not to be distributed between the partners.

You are required to pass necessary journal entries in the books of the firm. Show workings.
(CBSE Sample Paper 2018-19)
Answer:

Question 38.
A and B are partners in a firm having 2 : 1 profit sharing ratio. OnApril 1, 2013, they agreed to share profits and losses equally. On this date, they decided to revalue assets as follows:

Partners also decided to record net effect of the revaluation of assets and reassessment of liabilities without affecting their book value by passing a single adjustment entry. Pass the adjustment entry.
Answer:

Reconstitution of Partnership Firm: Admission of a Partner Important Extra Questions Long Answer Type

Question 1.
Sanjana and Alok were partners in a firm sharing profits and losses in the ratio 3 : 2. On 31st March, 2018 their Balance Sheet was as follows:

On 1st April, 2018, they admitted Nidhi as a new partner for l/4th share in the profits on the following terms:
(a) Goodwill of the firm was valued at ₹4,00,000 and Nidhi brought the necessary amount in cash for her share of goodwill premium, half of which was withdrawn by the old partners.
(b) Stock was to be increased by 20% and furniture was to be reduced to 90%.
(c) Investments were to be valued at ₹3,00,000. Alok took over investments at this value.
Nidhi brought ₹3,00,000 as her capital and the capitals of Sanjana and Alok were adjusted in the new profit sharing ratio.
Prepare Revaluation Account, Partners Capital Accounts and the Balance Sheet of the reconstituted firm on Nidhi’s admission. (CBSE Delhi 2019)

Question 2.
A and B were partners sharing profits and losses in the ratio of 3 : 2. Their Balance Sheet as at 31st March, 2018, was as follows :

C was admitted as a new partner and brought ₹ 64,000 as capital and ₹ 15,000 for his share of goodwill premium. The new profit sharing ratio was 5:3:2.
On C’s admission the following was agreed upon :
(i) Stock was to be depreciated by 5%.
(ii) Provision for doubtful debts was to be made at ₹ 2,000.
(iii) Furniture was to be depreciated by 10%.
(iv) Building was valued at ₹ 1,60,000.
(v) Capitals of A and B were to be adjusted on the basis of C’s capital by bringing or paying of cash as the case may be.
Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of reconstituted firm. (CBSE Outside Delhi 2019)
Answer:

Question 3.
Gautam and Yashica are partners in a firm, sharing profits and losses in 3:1 respectively. The balance sheet of the firm as on 31st March 2018 was as follows:

Asma is admitted as a partner for 3/8th share in the profits with a capital of ₹2,10,000 and ₹50,000 for her share of goodwill. It was decided that:

• New profit sharing ratio will be 3:2:3
• Machinery will depreciated by 10% and Furniture by ₹5,000.
• Stock was re-valued at ₹ 2,10,000.
• Provision for doubtful debts is to be created at 10% of debtors.
• The capitals of all the partners were to be in the new profit sharing ratio on basis of capital of new partner any adjustment to be done through current accounts.

Prepare Revaluation Account, Partners Capital Account and the Balance Sheet of the new firm. (CBSE Sample Paper 2019-20)
Answer:

Question 4.
On 31st March, 2019 the Balance Sheet of Madan and Mohan who share profits and losses in the ratio of 3 : 2 was as follows:

They decided to admit Gopal on 1st April, 2019 for l/5th share which Gopal acquired wholly from Mohan on the following terms:

• Gopal shall bring ₹ 10,000 as his share of premium for Goodwill.
• A debtor whose dues of₹ 3,000 were written off as bad debt paid ₹ 2,000 in full settlement.
• A claim of₹ 5,000 on account of workmen’s compensation was to be provided for.
• Patents were undervalued by ₹ 2,000. Stock in the books was valued 10% more than its market value.
• Gopal was to bring in capital equal to 20% of the combined capitals of Madan and Mohan after all adjustments.

Prepare Revaluation Account, Capital Accounts ®f the Partners and the Balance Sheet of the new firm. (CBSE Compt. 2019)
Answer:

Question 5.
Karan and Varan were partners in a firm sharing profits and losses in the ratio of 1:2. Their fixed capitals were ₹ 2,00,000 and ₹ 3,00,000 respectively. On 1st April, 2016 Kishore was admitted as a new partner for 14th share in the profits. Kishore brought ₹ 2,00,000 for his capital which was to be kept fixed like the capitals of Karan and Varan. Kishore acquired his share of profit from Varan.
Calculate goodwill of the firm on Kishore’s admission and the new profit sharing ratio of Karan, Varan and Kishore. Also, pass necessary Journal Entry for the treatment of Goodwill on Kishore’s admission considering that Kishore did not bring his share of goodwill premium in Cash. [CBSE Delhi 2017]
Answer:
(a) Calculation of Hidden Goodwill:
Kishore’s share = 1/4 Kishore’s Capital = ₹2,00,000
(a) Total capital of the new firm = ₹2,00,000 x 4 = ₹8,00,000
(b) Existing total capital of Karan, Varan and Kishore = ₹2,00,000 + ₹ 3,00,000 + ₹ 2,00,000 = ₹ 7,00,000
(c) Goodwill of the firm = ₹8,00,000 – ₹7,00,000 = ₹ 1,00,000 Thus, Kishore’s share of goodwill = 1/4 x ₹ 1,00,000 = ₹25,000

(b) Calculation of New Profit Sharing ratio:
Karan’s new share = 1/3 i.e. 4/12, Varun’s new share = 2/3 – 1/4 = 5/12 Kishore’s share = 1/4 x 3/3 = 2/12 New Ratio = 4:5:3

(c)

Question 6.
Chander and Damini were partners in a firm sharing profits and losses equally. On 31st March, 2017 their Balance Sheet was as follows:

On 1.4.2017, they admitted Elina as a new partner for l/3rd share in the profits on the following conditions :

(i) Elina will bring ₹3,00,000 as her capital and ₹ 50,000 as her share of goodwill premium, half of which will be withdrawn by Chander and Damini.
(ii) Debtors to the extent of ₹5,000 were unrecorded.
(iii) Furniture will be reduced by 10% and 5% provision for bad and doubtful debts will be created on bills receivables and debtors.
(iv) Value of land and building will be appreciated by 20%.
(v) There being a claim against the firm for damages, a liability to the extent of ₹8,000 will be created for the same. Prepare Revaluation Account and Partners’ Capital Accounts. (CBSE 2018-19)
Answer:

Question 7.
P & K were partners in a firm. On March 31, 2017 their Balance Sheet was as follows: Balance Sheet as at March 31, 2017.

On April 1,2017, they decided to admit C as a new partner for 1/4th share in profits on the following terms:

(i) C’s Loan will be converted into his capital.
(ii) C will bring his share of goodwill premium by cheque. Goodwill of the firm will be calculated on the basis of Average Profits of previous three years. Profits for the year ended March 31, 2015 and March 31, 2016 were ₹ 55,000 and ₹ 1,00,000 respectively.
(iii) 10% depreciation will be charged on Plant & Machinery and Land & Building will be appreciated by 5%.
(iv) Capitals of P & K will be adjusted on the basis C’s capital. Adjustments be done through bank and in case required overdraft facility be availed.
Pass necessary Journal entries on C’s admission. (CBSE Sample Paper 2017-18)
Answer:

Question 8.
Ashish and Dutta were partners in a firm sharing profits in 3 : 2 ratio. On Jan. 01,2014 they admitted Vimal for 1/5 share in the profits. The Balance Sheet of Ashish and Dutta as on Dec. 31, 2013 was as follows:


It was agreed that:
(i) The value of Land and Building be increased by ₹ 15,000.
(ii) The value of plant be increased by ₹ 10,000.
(iii) Goodwill of the firm be valued at ₹ 20,000.
(iv) Vimal to bring in capital to the extent of l/5th of the total capital of the new firm. Record the necessary journal entries and prepare Balance Sheet after Vimal’s admission.
Answer:

Question 9.
Divya, Yasmin and Fatima are partners in a firm, sharing profits and losses in 11 : 7 : 2 respectively. The balance sheet of the firm as on 31st March 2018 was as follows:

On 1.4.2018, Aditya is admitted as a partner for one-fifth share in the profits with a capital of ₹4,50,000 and necessary amount for his share of goodwill on the following terms:
(i) Furniture of ₹2,40,000 were to be taken over Divya, Yasmin and Fatima equally.
(ii) A creditor of ₹ 7,000 not recorded in books to be taken into account.
(iii) Goodwill of the firm is to be valued at 2.5 years purchase of average profits of last two years. The profit of the last three years were:
2015-16 ₹6,00,000; 2016-17 ₹2,00,000; 2017-18 ₹6,00,000
(iv) At time of Aditya’s admission Yasmin also brought in 50,000 as fresh capital
(v) Plant and Machinery is re-valued to ₹ 2,00,000 and expenses outstanding were brought down to ₹ 9,000. Prepare Revaluation Account, Partners Capital Account and the balance sheet of the reconstituted firm. (CBSE Sample Paper 2018-19)
Answer:

Question 10.
P and Q were partners in a firm sharing profits in 3 : 2 ratio. R was admitted as a new partner for 1/4x share in the profits on April 1, 2015. The Balance Sheet of the firm on March 31, 2015 was as follows:

The terms of agreement on R’s admission were as follows:
(a) R brought in cash 60,000 for his capital and 30,000 for his share of goodwill.
(b) Building was valued at 1,00,000 and Machinery at 36,000.
(c) The capital accounts of P and Q were to be adjusted in the new profit-sharing ratio. Necessary cash was to be brought in or paid off to them as the case may be.
Prepare Revaluation Account, Partner’s Capital Account and the Balance Sheet of P, Q and R. (CBSE Sample Paper 2016)
Answer:

Question 11.
Mohan and Mahesh were partners in a firm sharing profits in the ratio of 3 : 2. On 1st April, 2012 they admitted Nusrat as a partner in the firm. The Balance Sheet of Mohan and Mahesh on that date was as under:

It was agreed that:
(i) The value of Building and Stock be appreciated to ₹ 3,80,000 and ₹ 1.60,000 respectively.
(ii) The liabilities of workmen’s compensation fund was determined at ₹ 2,30,000.
(iii) Nusrat brought in her share of goodwill ₹ 1,00,000 in cash.
(iv) Nusrat was to bring further cash as would make her capital equal to 20% of the combined capital of Mohan and Mahesh after above revaluation and adjustments are carried out.
(v) The future profit sharing ratio will be Mohan 2/5th. Mahesh 2 ‘5th. Nusrat 1/5th.
Prepare Revaluation Account, Partner’s Capital Accounts and Balance Sheet of the new firm. Also show clearly the calculation of Capital brought by Nusrat. (CBSE Delhi 2014, Set I, II)
Answer:


Working Notes: Capital Adjustment
Nusrat’s Capital (Mohan’s capital + Mahesh’s capital) 20/100
= ( ₹ 3,92,000 + ₹ 2,08,000) x ₹ 20/100
= ₹ 6,00,000 x 20/100 = ₹ 1,20.000

Question 12.
S, T, U and V were partners in a firm sharing profits in the ratio of 4: 3 : 2 : 1. On 1.04.2016 their Balance Sheet was as follows:

From the above date partners decided to share the future profits in 3 : 1 : 2 : 4 ratio. For this purpose the goodwill of the firm was valued at ₹ 90,000. The partners also agreed for the following:
(i) The claim for workmen compensation has been estimated at ₹ 70,000.
(ii) To adjust the capitals of the partners according to new profit sharing ratio by opening partners current accounts.
Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of the reconstituted firm. [Delhi 2017]
(CBSE Sample Paper 2017-18)
Answer:

Here we are providing Class 12 Accountancy Important Extra Questions and Answers Chapter 6 Accounting for Share Capital. Accountancy Class 12 Important Questions and Answers are the best resource for students which helps in class 12 board exams.

Class 12 Accountancy Chapter 6 Important Extra Questions Accounting for Share Capital

Accounting for Share Capital Important Extra Questions Very Short Answer Type

Question 1.
What is meant by over subscription of shares? (CBSE Compt. 2019)
Answer:
Oversubscription of shares means that the company receives applications for more than the number of shares offered to the public for subscription.

Question 2.
What is meant by ‘par value’ of a share? (CBSE Compt. 2019)
Answer:
Par value is the nominal value or the face value of the share.

Question 3.
Is Reserve Capital a part of Unsubscribed Capital or Uncalled Capital? (CBSE Delhi 2018)
Answer:
Yes.

Question 4.
A company issued 25,000 equity shares of ₹ 10 each but received applications for.30,000 shares. Name the case of subscription.
Answer:
Over subscription

Question 5.
Neelam Limited has the following balances appearing in the balance sheet:

The company decided to redeem its 9% debentures at a premium of 10%. You are required to state how much securities premium amount can be used for redemption of debentures.
Answer:
₹ 12,00,000.

Question 6.
On 1.1.2016 the first call of ₹ 3 per share became due on 1,00,000 equity shares issued by Kamini Ltd. Karan a holder of 500 shares did not pay the first call money. Arjun a shareholder holding 1000 shares paid the second and final call of ₹ 5 per share along with the first call.
Pass the necessary journal entry for the amount received by opening ‘Calls-in-arrears’ and ‘Calls-in- advance’ account in the books of the company. (CBSE Outside Delhi 2016)
Answer:

Question 7.
Where will you show call in arrears in the balance sheet?
Answer:
As deduction from the subscribed but not fully paid share capital.

Question 8.
Where will you show call in advance in the balance sheet?
Answer:
It is shown under other current liabilities.

Question 9.
At what rate of interest, interest on call in arrears, is charged? .
Answer:
10%p.a.

Question 10.
At what rate interest on calls-in-advance is paid by the company according to Table F of Companies Act, 2013? ’ (CBSE Delhi Compt.2014)
Answer:
As per Table F, company is required to pay interest on the amount of calls in advance @ 12% p.a.

Question 11.
How would you deal in a situation where the value of purchase considerations is more than the value of net assets while acquiring a business? .
Answer:
It would refer to loss.

Question 12.
How will you deal in a situation where the value of net assets is more than the value of purchase consideration while acquiring a business?
Answer:
It would refer to gain .

Question 13.
Which account will you debit while issuing the shares to the promoters of a company against their services?
Answer:
Goodwill Account or Incorporation Expenses Account.

Question 14.
When can shares held by a shareholder be forfeited?. (CBSE Delhi 2017)
Answer:
On the non-payment of call money due.

Question 15.
A Ltd forfeited a share of 100 issued at a premium of 20% for non-payment of first call of 30 per share and’ final call of 10 per share. State the minimum price at which this share can be reissued. (CBSE Sample Paper 2016)
Answer:
₹ 40 per share!

Question 16.
Give the meaning of forfeiture of share.
Answer:
Cancellation of shares.

Question 17.
At the time of forfeiture of shares, what amount is credited to share forfeiture account?
Answer:
The amount already received.

Question 18.
Where will you show the share forfeited account in the balance sheet of a company?
Answer:
As an addition in the subscribed capital.

Question 19.
What amount of share capital is debited when the shares are forfeited?
Answer:
Called up money.

Question 20.
What amount of share capital is credited when the forfeited shares are reissued?
Answer:
Paid up capital of shares at the time of reissue.

Question 21.
Y Ltd. forfeited 100 equity shares of ₹ 10 each for the non-payment of first call of ₹ 2 per share. The final call of ₹ 2 per share was yet to be made.
Calculate the maximum amount of discount at which these shares can be re-issued. (CBSE Delhi 2017)
Answer:
₹ 6 per share or ₹ 600.

Question 22.
If a question is silent on the question of excess money received with application, how would you treat it?
Answer:
In the absence of any information, excess money over the amount due on allotment shall be refunded.

Accounting for Share Capital Important Extra Questions Short Answer Type

Question 1.
What is meant by ‘over-subscription’ of shares ? With the help of an example, briefly explain the alternatives available for allotment of shares in case of over-subscription. (CBSE Outside Delhi 2019)
Answer:
When the no. of shares applied is more than the no. of shares offered by the co., it is said to be case of over-subscription.
For Example: A company invited applications for 1,00,000 shares and received applications for 4,00,000 shares. Three alternatives are available for allotment of shares:

• To allot 1,00,000 shares in full to selected applicants and the remaining 3,00,000 applications were rejected outright.
• To make pro-rata allotment to all applicants.
• Totally reject applications for 2,00,000 shares, accept full applications for 80,000 shares and make pro-rata allotment for 20,000 shares to remaining 1,20,000 applicants.

Question 2.
What is meant by ‘Forfeiture of shares’ ₹ When does ‘gain on forfeited shares’ arise and when is it transferred to capital reserve ? (CBSE Outside Delhi 2019)
Answer:
Cancellation of shares for the non payment of called up amount is termed as Forfeiture of shares.
Gain on Forfeited shares arises on reissue.
It is transferred immediately on the reissue of forfeited shares.

Question 3.
Bliss Products Ltd. registered with capital of ₹ 90,00,000 divided into 90,000 equity shares of₹ 100 each. The company issued prospectus inviting applications for 50,000 equity shares of ₹ 100 each payable as ₹ 20 on application, ₹ 30 on allotment, ₹ 20 on first call and balance on second call.
Applications were received for ₹ 40,000 shares. Raman to whom 1600 shares were allotted failed to pay final call money and these shares were forfeited. Of the forfeited shares, 600 shares were reissued to Sukhman, credited as fully paid for ₹ 90 per share.
Present the Share Capital as per Schedule III of Companies Act, 2013. (CBSE Sample Paper 2019-20)
Answer:

Question 4.
To provide employment to the youth and to develop the Naxal affected backward areas of Chattisgarh. X Ltd. decided to set-up a power plant. For raising funds the company decided to issue 7,50,000 equity shares of ₹ 10 each at a premium of 50%. The whole amount was payable on application. Application for 20,00,000 shares were received. Applications for 50,000 shares were rejected and shares were allotted to the remaining application on pro-rata basis.
Pass necessary journal entries for the above transactions in the books of the company.
(CBSE Outside Delhi 2016, Modified)
Answer:

Question 5.
Janta Ltd. had an authorized capital of ₹ 2,00,000 divided into equity shares of ₹ 10 each. The company offered for subscription of ₹ 10,000 shares. The issue was fully subscribed. The amount payable on application was ₹ 2 per share. ₹ 4 per share were payable each on allotment and first and final call. A share holder holding 100 shares failed to pay the allotment money. His shares were forfeited. The company did not make the final call. How the ‘share capital’ will be presented in the company’s balance-sheet?
Also prepare Notes to Accounts for the same. (CBSE Sample paper 2014 Modified)
Answer:

Question 6.
Drumbeats Ltd. had a prosperous shoe business. They were manufacturing shoes in India and exporting to Italy. Being a socially aware organization, they wanted to pay back to the society. They decided to not on supply free shoes to 50 orphanages in various parts of the country but also give employment to children from those orphanages who were above 18 years of age. In order to meet the fund requirements, they decided to raise 50,000 equity shares of ₹ 50 each and 40,000. 9% debentures of ₹ 40 each. Pass the necessary journe entries for issue to shares and debentures. (CBSE Sample Paper 2015, Modified)
Answer:

Question 7.
Nishit Automobiles Co. is an manufacture of low cost cars in India. It has a strong sales and distribution network spread across the country. It follows high standards in environmental safety in various processes of car manufacturing. It runs a school to provide quality education to the children of employees of the company and an ‘Adult Education Centre’ to help adults learn reading and writing and to acquire basis literacy. The company is doing well and anticipates a higher demand for its products in the future. For the same, it decides to set up a new manufacturing unit in a backward area of Orissa creating livelihood for people, especially those from disadvantaged sections of society in rural India. In order to raise fund requirements they decided to issue 70,000 equity shares of ₹ 100 each at par and 60,000. 9% Debentures of ₹ 40 each. Pass necessary Journal Entries for the issue of shares and 9% debentures in the books of the company and also identify.
Answer:

Question 8.
A Company forfeited 800 equity shares of ₹ 10 each issued at a discount of 10% for non-payment of two calls of ₹ 2 each. Calculate the amount forfeited by the company-and pass the journal entry for forfeiture of the shares.
Answer:

Question 9.
King Ltd took over Assets of 25,00,000 and liabilities of 6,00,000 of Queen Ltd. King Ltd paid the purchase consideration by issuing 10,000 equity shares of 100 each at a premium of 10% and 11,00,000 by Bank Draft.
Calculate Purchase consideration and pass necessary Journal entries in the books of King Ltd. (CBSE Sample Paper 2016, 2017)
Answer:
Calculation of Purchase Consideration:
Nominal Value of Shares issued = 10000 x ₹ 100 = ₹ 10,00,000
Securities Premium Reserve = ₹ 1,00,000
Bank draft = ₹ 11,00,000
Purchase consideration = ₹ 22,00,000

Question 10.
Samachar India Ltd. took over the assets of ₹ 14,00,000 and liabilities of ₹ 4,00,000 from News Ltd. for a purchase consideration of ₹ 9,19,000. Samachar India Ltd. issued a promissory note of ₹ 17,000 payable after 60 days in favour of News Ltd. and the balance amount was paid by issue of equity shares of ₹ 100 each at a premium of ₹ 25 per share.
Pas necessary Journal entries for the above transactions in the book of Samachar India Ltd. (CBSE Outside Delhi 2016)

Question 11.
A Ltd. purchased a running business from B Ltd. for a sum of ₹ 1,50,000 payable by issue of 10,000 equity shares of ₹ 10 each at a premium of ₹ 2 per share and balance in cash. The assets and liabilities taken over were:
Plant – ₹ 40,000;
Building – ₹ 40,000;
Debtors – ₹ 30,000;
Stock – ₹ 50,000;
Furniture – ₹ 20,000;
Creditors – ₹ 20,000
You are required to pass necessary journal entries for the above transactions in the book of A Ltd.
(CBSE Delhi Compartment 2014)
Answer:

Question 12.
Prayuj Ltd. forfeited 2,000 shares of ₹ 10 each, fully called up, on which they had received only ₹ 14,000.50 of the forfeited shares were reissued for ₹ 9 per share fully paid up.
Pass necessary journal entries for forfeiture and re-issue of shares. Also prepare share forfeited account.
(Compt. Delhi 2017)

Question 13.
Software Solution India Ltd. inviting application for 20,000 equity share of ₹ 100 each, payable ₹ 40 on application. ₹ 30 on allotment and ₹ 30 on call. The company received applications for 32,000 shares. Applications for 2,000 shares were rejected and money returned to applicants. Applications for 10,000 shares were accepted in full and applicants for 20,000 share allotted half of the number of shares applied and excess application money adjusted into allotment. All money received due on allotment & call. Prepare journal and cash book.
Answer:

Accounting for Share Capital Important Extra Questions Long Answer Type

Question 1.
EF Ltd. invited applications for issuing 80,000 equity shares of ₹50 each at a premium of 20%. The amount was payable as follows:
On Application : ₹ 20 per share (including premium ₹ 5)
On Allotment : ₹ 15 per share (including premium ₹ 5)
On First Call : ₹ 15 per share
On Second and Final call : Balance amount
Applications for 1,20,000 shares were received. Applications for 20,000 shares were rejected and pro-rata allotment was made to the remaining applicants.
Seema, holding 4,000 shares failed to pay the allotment money. Afterwards the first call was made. Seema paid allotment money along with the first call. Sahaj who had applied for 2,500 shares failed to pay the first call money. Sahaj’s shares were forfeited and subsequently reissued to Geeta for ₹ 60 per share, ₹ 50 per share paid up. Final call was not made.
Pass necessary journal entries for the above transactions in the books of EF Ltd. by opening calls-in-arrears account. (CBSE Delhi 2019)
Answer:

Question 2.
S Ltd. invited applications for issuing 1,00,000 equity shares of ₹ 10 each. The shares were issued at a premium of ₹ 5 per share. The amount was payable as follows :
On Application and Allotment – ₹ 8 per share (including premium ₹ 3)
On the First and Final call – Balance including premium
Applications for 1,50,000 shares were received. Applications for 10,000 shares were rejected and pro-rata allotment was made to the remaining applicants on the following basis :
(I) Applicants for 80,000 shares were allotted 60,000 shares, and
(II) Applicants for 60,000 shares were allotted 40,000 shares.
Excess amount received on application and allotment was to be adjusted against sums due on call. X, who belonged to the first category and was allotted 300 shares, failed to pay the first and final call money. Y, who belonged to the second category and was allotted 200 shares, also failed to pay the first and final call money. Their shares were forfeited. The forfeited shares were reissued @ ₹ 12 per share as fully paid-up.
Pass necessary cash book and journal entries for the above transactions in the books of the company. (CBSE Outside Delhi 2019)
Answer:

Question 3.
Saregama Ltd invited applications for issuing 80,000 equity shares of ₹ 100 each at a premium of ₹ 10. The amount was payable as follows On Application – ₹ 30
On allotment – ₹ 30 (including a premium of ₹ 10)
On 1st call – ₹ 30
On Final Call Balance
Applications of 1,20,000 shares were received. Allotment was made on pro rata basis to all applicants. Excess money received on application was adjusted on sums due on allotment. Dhwani, who was allotted 1,600 shares, failed to pay allotment money and Sargam who applied of 6,000 shares did not pay 1st call money. These shares were forfeited immediately after 1st call. 2,000 of these shares (including all shares of Dhwani were issued to Tarang for ₹ 95 per share as 80 paid up. Pass necessary journal entries in books of Saregama Ltd. by opening call in arrear, call in advance account, if final call has not been made. (CBSE Sample Paper 2019-20)
Answer:

Question 4.
(a) X Ltd. forfeited 10 shares of ₹ 10 each, ₹ 7 called up on which the shareholder had paid application and allotment money of ₹ 5 per share. Out of these, 8 shares were re-issued to Y for ₹ 8 per share at ₹ 8 per paid up per share. Record the journal entries for forfeiture and reissue of shares by opening call in arrear, call in advance account.

(b) L ltd forfeited Mr M’s shares who has applied for 600 shares and was allotted 400 shares failed to pay allotment money of ₹ 4 per share including premium of ₹ 2 on which he had paid application money of ₹ 2 only. Pass necessary journal entries for forfeiture of shares by opening call in arrear, call in advance account.

(c) Crown Ltd forfeited 50 shares of ₹ 10 each, for non-payment of final call money of ₹ 3 per share. Out of these 20 shares were reissued to Taj at ₹ 8 per share. Record the journal entries for forfeiture and reissue of shares assuming that the company maintains call in arrear, call in advance account. (CBSE Sample Paper 2019-20)
Answer:

Question 5.
Venus Ltd’ was registered with an authorised capital of ₹ 40,00,000 divided into 4,00,000 equity shares of 10 each. 70,000 of these shares were issued as fully paid to ‘M/s. Star Ltd.’ for building purchased from them. 2,00,000 shares were issued to the public and the amounts were payable as follows:
On Application – ₹ 3 per share
On Allotment – ₹ 2 per share
On First Call – ₹ 2 per share
On Second and Final Call – ₹ 3 per share
The amounts received on these shares were as follows:
On 1,00,000 shares – Full amount called
On 60,000 shares – ₹ 1 per share
On 30,000 shares – ₹ 5 per share
On 10,000 shares – ₹ 3 per share
The directions forfeited 10,000 shares on which only ₹ 3 per share were received. These shares were reissued at ₹ 12 per share fully paid. Pass necessary journal entries for the above transactions in the books of ‘Venus Ltd’. (CBSE Compt. 2019)
Answer:

Question 6.
(a) AX Limited forfeited 6,000 shares of ₹ 10 each for non-payment of First call of ₹ 2 per share. The Final call of ₹ 3 per share was yet to be made. The Final call was made after Forfeited of these shares.. Of the forfeited shares, 4,000 shares were reissued at ₹ 9 per share as fully paid up. Assuming that the company maintains ‘Calls in Advance Account’ and ‘Calls in Arrears Account’, prepare “Share Forfeited Account” in the books of AX Limited.

(b) BG Limited issued 2,00,000 equity shares of₹ 20 each at a premium of ₹ 5 per share. The shares were allotted in the proportion of 5 : 4 of shares applied and allotted to all the applicants. Deepak, who had applied for 900 shares, failed to pay Allotment money of ₹ 7 per share (including premium) and on his failure to pay ‘First & Final Call’ of ₹ 2 per share, his shares were forfeited. 400 of the forfeited shares were reissued at ₹ 15 per share as fully paid up. Showing your working clearly, pass necessary Journal entries for the Forfeited and reissue of Deepak’s shares in the books of BG Limited. The company maintains‘Calls in Arrears’Account’.

(c) ML Limited forfeited 1,200 shares of₹ 10 each allotted to Ravi for Non-payment of‘Second & Final Call’ of ₹ 5 per share (including premium of ₹ 2 per share). The forfeited shares were reissued for ₹ 10,800 as fully paid up. Pass necessary Journal entries for reissue of shares in the books of ML Limited. (CBSE Sample Paper 2017-18)
Answer:

Question 7.
Rolga Ltd. is having an authorized capital of ₹ 50,00,000 divided into equity shares of ₹ 100 each. The company offered 42,000 shares to the public. The amount payable was as follows:
On Application – ₹ 30 per share
On Allotment –  ₹ 40 per share (including premium)
On First and Final Call  – ₹ 50 per share
Application were received for 40,000 shares.
All sums were duly received except the following:
Lai, a holder of 100 shares did not pay allotment and call money.
Pal, a holder of 200 shares did not pay call money.
The company forfeited the shares of Lai and Pal. Subsequently the forfeited shares were reissued for ₹ 70 per share as fully paid-up. Show the entries for the above transactions in the cash book and journal of the company. (CBSE Delhi Compartment 2015)
Answer:

Question 8.
X Ltd. invited application for issuing ₹ 50,000 equity shares of ₹ 10 each. The amount was payable as follows: On Application ₹ 2 per share on Allotment ₹ 2 per share on First Call ₹ 3 per share on Second Call Balance Amount.
Applications for 70,000 shares were received. Applications for 10,000 shares were rejected and the application money was refunded. Shares were allotted to the remaining applicants on pro-rata basis and the excess money received on applications was transferred towards the sum due on allotment and calls (If any). Gopal who applied for 600 shares paid his entire share money with applications. Ghosh, who had applied for 6,000 shares failed to pay the allotment money and his shares were immediately forfeited. These forfeited shares were re-issued to Sultan for ₹ 20,000 ₹ 4 per share paid up. The first call money and the second call money was called and duly received. Pass the journal entry for the above transactions in the books of accounts of X Ltd. Open Calls in Arrear and Calls in Advance wherever necessary. (CBSE 2018)
Answer:

Question 9.
Khyati Ltd. issued a prospectus inviting applications for 80,000 equity shares of ₹ 10 each payable as follows:
₹2 on application
₹ 3 on allotment
₹ 2 on first call
₹ 3 on final call
Applications were received for 1,20,000 equity shares. It was decided to adjust the excess amount received on account of over subscription till allotment only. Hence allotment was made as under:
(i) To applicants for 20,000 shares – in full
(ii) To applicants for 40,000 shares – 10,000 shares
(iii) To applicants for 60,000 shares – 50,000 shares
Allotment was made and all shareholders except Tammana, who had applied for 2,400 shares out of the group (iii), could not pay allotment money. Her shares were forfeited immediately, after allotment. Another shareholder Chaya, who was allotted 500 shares out of group (ii), failed to pay first call. 50% of Tamanna’s shares were reissued to Satnaam as ₹ 7 paid up for payment of ₹ 9 per share.
Pass necessary journal entries in the books of Khyati Ltd. for the above transactions by opening calls in arrears and calls in advance account wherever necessary. (CBSE Sample Paper 2018-19)
Answer:

Here we are providing Class 12 Accountancy Important Extra Questions and Answers Chapter 10 Accounting Ratios. Accountancy Class 12 Important Questions and Answers are the best resource for students which helps in class 12 board exams.

Class 12 Accountancy Chapter 10 Important Extra Questions Accounting Ratios

Accounting Ratios Important Extra Questions Very Short Answer Type

Question 1.
What will be the effect on current ratio if a bills payable is discharged on maturity? (CBSE SP 2019-20)
Answer:
The current ratio will increase

Question 2.
Debt Equity Ratio of a company is 1:2. Purchase of a Fixed asset for ₹ 5,00,000 on long term deferred payment basis will increase, decrease or not change the ratio?
Answer:
Increased

Question 3.
It is a simple arithmetical expression of relationship between two figures. Name the term.
Answer:
Ratio

Question 4.
The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they become due. Name a ratio used for this purpose.
Answer:
Current Ratio.

Question 5.
X Ltd. has a Debt-Equity Ratio at 3 : 1. According to the management it should be maintained at 1 : 1. What is the choice to do so?
Answer:
To increase the equity or reduce the debt.

Question 6.
How the solvency of a business is assessed by Financial Statement Analysis? (CBSE Delhi 2012)
Answer:
With the help of solvency ratios.

Question 7.
Assuming that the debt to equity ratio is 1 : 2, state giving reason, whether the ratio will improve, decline or will have no change in case equity shares are issued for cash. (CBSE Foreign 2006)
Answer:
Decrease.

Question 8.
Debt to equity ratio of a company is 08 : 1. State whether long term loan obtained by the company will increase, decrease or not change the ratio. (CBSE Outside Delhi 2008)
Answer:
Increase.

Question 9.
Inventory Turnover ratio of a company is 3 times. State, giving reason, whether the ratio improve, decline or do not change because of increase in the value of closing stock by ₹ 5,000. (CBSE Outside Delhi 2008)
Answer:
Decrease.

Question 10.
Trade Receivables Turnover Ratio of a company is 6 times. State with reason whether the ratio will improve, decrease or not change due to increase in the value of closing inventory by ₹ 50,000. (CBSE Foreign 2008)
Answer:
No change. .

Question 11.
If a company has earned ₹ 10,00,000 as profit before interest and tax, ROI is 20%. State the capital employed in the company.
Answer:
₹ 5,00,000

Question 12.
What will be operating profit if operating ratio is 88.94? (CBSE Delhi 2009)
Answer:
Operating Profit = 100 – 88.94 = 11.06

Question 13.
State with reason whether repayment of long-term loan will result in increase, decrease or no change of debt- equity ratio. (CBSE Outside Delhi 2010 Compt.)
Answer:
Decrease.

Question 14.
A company has Share Capital of ₹ 5,00,000, Reserves and Surplus of ₹ 2,00,000 and Debt Equity Ratio of 1.8 : 1. It has issued additional Share Capital of ₹ 2,00,000 for cash and bonus shares of₹ 1,00,000. What will be new Debt Equity Ratio?
Answer:
1.4 : 1

Accounting Ratios Important Extra Questions Short Answer Type

Question 1.
(a) Calculate Revenue from operations of BN Ltd. From the following information:

Goods were sold at a profit of 25% on cost.
(b) The Operating ratio of a company is 60%. State whether ‘Purchase of goods costing ₹20,000’ will increase, decrease or not change the operating ratio. (CBSE Delhi 2019)
Answer:
(a) Current Assets ₹8,00,000


(b) The operating ratio will not change, as there will be equal increase in purchases and closing inventory and hence cost of revenue from operation will remain unchanged.

Question 2.
(a) Calculate ‘Total Assets to Debt ratio’ from the following information:

(b) The Debt Equity ratio of a company is 1:2. State whether ‘Issue of bonus shares’ will increase, decrease or not change the Debt Equity Ratio.
Answer:
a)

Where Total Assets = Total liabilities
= Share capital + long-term borrowings + surplus + General Reserve + Current Liabilities +Long-term provisions
₹ 4,00,000 + ₹ 1 ,80,000 + ₹ 1,00,000+ ₹ 70,000 + ₹ 30,000 + ₹ 1,20,000
= ₹ 9,00,000
Debt = Long-term borrowings + long-term provision
= ₹ 1,80,000 + ₹ 1,20,000
₹ 3,00,000
b) Debt equity ratio of a company will not change due to issue of bonus shares, as neither the debt not equity is effected because R & S is converting into share capital.

Question 3.
The operating ratio of a company is 80%. State whether the following transactions will increase, decrease or not change the ratio :
(i) Purchased goes in íedit ₹ 20,000
(ii) Paid wae ₹ 5000
(iii) Redeemed ₹ 8000. 9% debentures
(iv) Sold goods ₹ 50,000 for cash
Answer:

S.No.	Transactions	Effect
1.	Purchase goods on credit ₹ 20,000	No change
2.	Paid wages ₹ 5,000	No change
3.	Redeemed ₹ 8,000,9% Debentures	No change
4.	Sold goods ₹ 50,000 for cash	No change

Question 4.
From the following information of Shiva Ltd., calculate total assets to debt ratio : (CBSE Outside Delhi 2019)

Answer:
Total Assets to Debts Ratio = \(\frac { Total Assets }{ Long Term Debt }\)
= 15,40,000/3,00,000 = 5.13
Total Assets = Fixed Assets + Non Current investments + Currents Assets
= ₹ 15,40,000
Debt = Total Liabilities – Equity Share Capital – Preference Share Capital – Reserves & Surplus – Current Liabilities = 3,00.000

Question 5.
From the given information, calculate the following ratios
(i) Operating Ratio
(ii) Inventory Turnover Ratio Information:

Answer:

Question 6.
(a) Net profit after interest and tax of M Ltd. was ₹ 1,00,000. Its Current Assets were ₹ 4,00,000 and Current Liabilities were ₹ 2,00,000. Tax rate was 50%. Its Total Assets were ₹ 10,00,000 and 10% Long term debt was ₹ 4,00,000.
Calculate Return of Investment.

(b) Rate of Gross profit on Revenue from operations of a company is 25%. Its Gross profit is ₹ 5,00,000. Its Shareholders’ Funds are ₹ 25,00,000; Non-current Liabilities are ₹ 8,00,000 and Non-current Assets are ₹ 23,00,000.
Calculate its Working Capital Turnover Ratio.
Answer:
(a) Return on Investment = \(\frac { Profit before interest and tax }{ Capital employed }\) x 100
Profit before interest and tax = ₹1,00,000 + ₹1,00,000 + ₹40,000
= ₹240,000
Capital employed = ₹8,00,000
Therefore, Return on Investment = ₹2,40,000/₹ 80,00,000 x 100
= 30%

(b) Working Capital Turnover ratio = Revenue from operations/Working Capital
Gross Profit = ₹5,00,000
So, Revenue from operations = ₹20,00,000
Working Capital = Shareholders Funds + Non Current liabilities – Non Current Assets
= ₹25,00,000 + ₹80,00,000 – ₹2300,000
= 10,00,000
Working Capital Turnover ratio = ₹20,00,000/₹ 10,00,000 = 2 times

Question 7.
(a) From the following details, calculate opening inventory: Closing inventory ₹ 60,000; Total Revenue from operations ₹ 5,00,000 (including cash revenue from operations ₹ 1,00,000); Total purchases ₹ 3,00,000 (including credit purchases ₹ 60,000). Goods are sold at a profit of 25% on cost.
(b) Current Assets of a company are 17,00.000. Its current ratio is 2.5 and Liquid ratio is 0.95. Calculate Current Liabilities and Inventory.
Answer:
(a)


(b)

Question 8.
Find the value of current liabilities and current assets, if current Ratio is 2.5 : 1, liquid ratio is 1.2 : 1 and the value of inventory of the firm is ₹ 78,000.
Answer:

₹ 60,000 = Current Liabilities
Current Assets = 2.5 x ₹ 60,000
=₹ 1,50,000

Question 9.
From the following compute (a) Current Ratio (b) Quick Ratio

Answer:
(a)

(b)

Question 10.
From the following compute Current Ratio

Answer:

Question 11.
(i) What is meant by solvency of business?
(ii) From the following details obtained from the financial statements of Jeev Ltd., calculate interest coverage ratio:
Net Profit after tax ₹ 1,20,000,
12% Long-term Debt ₹ 20,00,000,
Tax Rate 40%
Answer:
(i) Solvency is the ability of a company to meet its long term financial obligations and. the interest on due
dates.

Question 12.
Akshara Ltd. has 8% Debentures of ₹ Interest Coverage Ratio.
Answer:

Question 13.
From the following information related toNaveen Ltd. calculate
(a) Return on Investment and
(b) Total Assets to Debt Ratio.
Information: Fixed Assets 75,00,000; Current Assets ₹ 40,00,000; Current Liabilities ₹27,00,000; 12% Debentures ₹80,00,000 and Net Profit before Interest, Tax and Dividend ₹ 14,50,000. (Delhi 2015)
Answer:

Question 14.
From the following compute:
(a) Debt to Equity Ratio
(b) Total Assets to Debt Ratio
(c) Proprietary Ratio

Answer:
(a)

Question 15.
Assuming that the Debt-Equity Ratio is 2:1, state giving reasons which of the following transactions would . (i) Increase; (ii) Decrease; Not alter the Debt-Equity Ratio:
(i) Issue of new shares for cash
(ii) Conversion of debentures into equity shares.
(iii) Sale of a fixed asset at profit.
(iv) Purchase of a fixed asset on long-term deferred payment basis.
(v) Payment to creditors (CBSE Guidance Notes 2014)
Answer:
Statement showing the effect of various transactions on Debt-Equity Ratio.

Question 16.
Calculate amount of Opening Trade Receivables and Closing Trade Receivables from the following figures:

Answer:

Question 17.
(i) What is meant by ‘Activity Ratios’?
(ii) From the following information calculate inventory turnover ratio; Revcnuc from operations 16,00,000; Average Inventory 2,20,000; Gross Loss Ratio 5%. (CBSE Outside Delhi 2016)
Answer:
(i) Activity Ratio: It refers to the ratio that are calculated for measuring the efficiency of operations of business based on effective utilisation of the resourcess.
Objective of its ratio is to pinpoint the efficiency with which assets are used for generating revenues.
Inventory Turnover Ratio \(\frac { Cost of revenue from operation }{ Average inventory}\)
Cost of revenue from operation = Revenue from operation + Gross loss.
= ₹ 16,00,000 + ₹ 80,000
= ₹ 16,80,000
Average Inventory = ₹ 2,20,000
Inventory Turnover Ratio = \(\frac { ₹ 16,80,000 }{ 2,20,000 }\)
= 7.64 Times.

Question 18.
Calculate Working Capital Turnover Ratio from the following

Answer:

Question 19.
Cost of Revenue from Operations = 3,00,000
Inventory Turnover Ratio = 6 Times
Find out the value of Opening Inventory, if opening inventory is 10,000 less than the closing inventory. (CBSE Guidance Notes 2014)
Answer:

Question 20.
(i) What is meant by ‘Profitability Ratios’?
(ii) From the following information calculate inventory turnover ratio; Revenue from operations ₹16,0,000; Average Inventory ₹ 2,20,000; Gross Loss Ratio 5%. (CBSE Outside Delhi 2016)
Answer:
(i) Profitability Ratio: Profitability ratio are calculated to assess the performance and efficiency of an enterprise. It is to analyse the earning capacity of the firm.

(ii) Inventory Turnover Ratio = \(\frac { Cost of Revenue from operation }{ Average inventory }\)
Cost of Revenue from operation = Revenue from operation + Gross loss.
= 16,00,000 + 80,000 ‘16,80,000
Average Inventory = ‘ 2,20,000
Inventory Turnover Ratio = \(\frac { 18,60,000 }{ 2,20,000 }\)
= 7.64 times.

Question 21.
(i) What is meant by ‘Liquidity of Business’?
(ii) From the following information calculate operating ratio.
Revenue from operations ₹ 6,80,000; Rate of Gross Profit on cost 25%; Selling expenses ₹ 1,44,000; Administrative expenses ₹ 73,000. (CBSE Outside Delhi 2016)
Answer:
(i) Liqudky of Business: A measure of the extent to which a business has cash to make immediate and short term obligation.
(ii)

Question 22.
(a) X Ltd. has a current ratio of 3.5: 1 and quick ratio of 2: 1. If excess of current assets over quick assets represented by Inventory is 24,000 calculate current assets and current liabilities.

(b) From the following information calculate Inventory Turnover Ratio. Revenue from Operations: 4,00,000 Average Inventory : ‘ 55,000. The rate of Gross Loss on revenue
from Operations was 10%. (CBSE Sample paper Delhi 2016, 2017)
Answer:
(a)

(b)

Question 23.
From the following caLculate the cross Profit Ratio and Working Capital Turnover Ratio:

Answer:
(a) Gross Profit Ratio = Gross Profit / Net revenue from operations + 100
Gross Profit = Revenue from Operations – Cost of revenue from Operations
= 30,00,000 – 20,00,000 ₹ 10,000
Net Revenue from operations = ₹ 30,00,000
Gross Profit Ratio = 10,00,000 / 30,00,000 x 100 = 33.3%

(b) Working Capital turnover ratio = Net revenue from operations/Working Capital
Net revenue from operations = ₹ 30,00,000
Working Capital = Current Assets – Current Liabilities = 6,00,000 – 2,00,000
= ₹ 4,00,000
Working capital turnover ratio = 30,00,000/4,00,000 = 7.5 times

Question 24.
(a) From the following information, compute ‘Debt-Equity Ratio’:

(b) The current ratio of X. Ltd is 2: 1. State with reason which of the following transaction would
(i) increase;
(ii) decrease or
(iii) not change the ratio:
(1) Included in the trade payable was a bills payable of 9,000 which was met on maturity.
(2) Company issued 1,00,000 equity shares of 10 each to the Vendors of machinery purchased. (CBSE Delhi 2014)
Answer:

Question 25.
From the following calculation:
(a) Net Profit Ratio
(b) Operating Profit Ratio

Answer:

(b)

Question 26.
The motto of Yash Ltd., an advertising company is ‘Service With Dignity’. Its management and work force is hard-working, honest and motivated. The net profit of the company doubled during the year ended 31.03.2014. Encouraged by its performance company decided to give one month extra salary to all its employees. Following is the Comparative Statement of Profit and Loss of the company for the years ended 31st March 2013 and 2014.

Answer:
Net Profit Ratio = Net Profit after taxi Revenue from operations x 100
As on 31.03.2013 = 3,00,000/10,00,000 x 100
As on 31.03.2014 = 6,00,000/15,00,000 x 100
= 40%

Question 27.
Assume that the Debt-Equity Ratio is 2 : 1. State giving reasons whether this ratio would increase, decrease or remain unchanged in the following cases (Any two):
(a) Purchase of fixed asset on a credit for 2 months.
(b) Purchase of fixed asset on a long-term deferred payment basis.
(c) Issue of new shares for cash.
(d) Issue of bonus shares.
(e) Stile of fixed asset at a loss of ₹3,000. (CBSE 2010 Delhi)
Answer:
(a) Purchase of fixed asset on a credit for 2 months will not change debt-equity ratio because there is no change in shareholders’ funds.

(b) Purchase of fixed asset on a long-term deferred payment basis will increase debt equity ratio because of increased long-term debts. (Calculated on the basis of liabilities side approach)

(c) Issue of new shares for cash will decrease debt-equity ratio because of increased shareholders’ funds.

(d) Issue of bonus shares will not change debt-equity ratio because of not change because one item of shareholders’ funds has been replaced by another item.

(e) Sale of fixed assets at a loss will increase debt-equity ratio because of reduced shareholders’ funds due to sale of fixed assets at loss.

Question 28.
The gross profit ratio of a company is 50%. State with reason whether the decrease in rent received by ₹ 15,000 will increase, decrease or not change the ratio. (CBSE 2009 Compartment Delhi)
Answer:
Gross profit ratio will not change because decrease in rent received does not affect gross profit.

Question 29.
The debt equity ratio of Ratan Ltd. is 3 : 1. Giving reasons, state whether the ratio will increase, decrease or not change because of the following transactions:

(i) Issued equity shares of ₹ 1,00,000.
(ii) Discounting a bill of exchange of₹ 50,000 at a discount of 10%.
(iii) Redemption of debentures of₹ 70,000. (CBSE 2013 Compartment OD)
Answer:
(i) Issue of equity shares will decrease debt-equity ratio because of increased shareholders’ funds.
(ii) Discounting a bill of exchange will increase debt-equity ratio because of lower shareholders’ funds.
(iii) Redemption of debentures will increase debt-equity ratio because proportion of decrease in total debts is lower than proportion of decrease in shareholders’ funds.

Question 30.
The quick ratio of a company is 2 : 1. State giving reasons (for any four), which of the following would improve, reduce or not change the ratio:
(a) Purchase of machinery for cash,
(b) Purchase of goods on credit,
(c) Sale of furniture at cost,
(d) Sale of goods at a profit,
(e) Cash received from debtors. (CBSE 2011 Compartment Delhi)
Answer:
(a) Purchase of machinery for cash will decrease quick ratio because of lower amount of quick assets.
(b) Purchase of goods on credit will reduce quick ratio because there is no change in quick assets while current liabilities have increased.
(c) Sale of furniture at cost will.improve quick ratio because of increase in quick assets.
(d) Sale of goods at a profit will improve quick ratio because of increase of quick assets.
(e) Cash received from debtors will not change quick ratio because one type of quick asset has been converted into another type of quick asset.

Question 31.
The Quick ratio of a company is 0.8 : 1. State with reason whether the following transactions will increase, decrease or not change the quick ratio :
(1) Purchase of loose tools ₹ 2,000.
(2) Insurance premium paid in advance ₹ 500.
(3) Sale of goods on credit t 3,000.
(4) Honoured a bills payable ₹ 5,000 on maturity. (Delhi 2017)
Answer:

Transaction	Effect on Quick Ratio	Reasons
(i)	Decrease	Quick assets have decreased but current liabilities have not changed
(ii)	Decrease	Quick assets have decreased but current liabilities have not changed
(iii)	Increase	Quick assets have decreased but current liabilities have not changed
(iv)	Decrease	Both Quick assets and Current Liabilities have decreased by the same amount

Question 32.
The proprietary ratio of M. Ltd. is 0.80 : 1. State with reasons whether the following transactions will increase, decrease or not change the proprietary ratio :
(i) Obtained a loan from bank ₹ 2,00,000 payable after five years.
(ii) Purchased machinery for cash ₹ 75,000.
(iii) Redeemed 5% redeemable preference shares ₹ 1,00,000.
(iv) Issued equity shares to the vendors of machinery purchased for ₹ 4,00,000. (Outside Delhi 2017)
Answer:

Transaction	Effect on Quick Ratio	Reasons
(i)	Decrease	No change in Shareholders’ funds but total assets will increase by ₹ 2,00,000
(ii)	No Change	No change in total assets and Shareholders’ funds
(iii)	Decrease	Both Shareholders’ funds and total assets are decreased by same amount
(iv)	Increase	Shareholders’ funds and total assets both are increased

Question 33.
The Current Ratio of a company is 2 : 1. State giving reasons which of the following would improve, reduce or not change the ratio:
(a) Cash paid to trade payables
(b) Sale of fixed tangible assets for cash
(c) Issue of new shares for cash
(d) Payment of final dividend already declared.
Answer:

S. No.	Effect on Current Ratio	Reason
{a)	Improve	Both Current Assets and Current Liabilities have decreased by the same amount
(b)	Improve	Current Liabilities remain unchanged but Current Assets have increased.
(c)	Improve	Current Liabilities remain unchanged but Current Assets have increased.
(d)	Improve	Both Current Assets and Current Liabilities have decreased by the same amount.

Question 34.
The Current Ratio of A Ltd. is 4.5 : 1 and Liquid Ratio is 3: 1. Inventories are 3,00,000. Calculate Current Liabilities. (CBSE Guidance Notes 20M)
Answer:

Question 35.
From the following information, compute Debt-Equity Ratio:

Answer:
Debt-Equity Ratio = \(\frac { Long-term Debts }{ Shareholders Funds }\)
Long-term Debts = Long-term Borrowings + Long-term Provisions
= ₹ 2,00,000 + ₹ 1,00,000 = ₹ 3,00,000
Shareholders’ Funds = Non-current Assets + Current Assets – Long-termBorrowings – Longterm Provisions – Current Liabilities
₹3,60,000 + ₹90,000 – ₹2,00,000 – ₹ 1,00,000 – ₹50,000
= ₹4,50,000 – ₹ 3,50,000 = ₹ 1,00,000

Debt-Equity Ratio = \(\frac { ₹ 3,00,000 }{ ₹ 1,00,000 }\)
= 3:1

Question 36.
From the following information, compute ‘Proprietary Ratio’:

Answer:
Proprietary Ratio = \(\frac { Shareholders’ Funds }{ Total Assets }\)
Shareholders’ Funds = Non-current Assets + Current Assets – Long-term Borrowings – Long-term Provisions – Current Liabilities
= ₹ 3,60,000+₹ 90,000 – ₹ 2,00,000 – ₹ 1,00,000 – ₹ 50,000= ₹ 1,00,000
Total Assets = Non-current Assets + Current Assets
= ₹ 3,60,000 + ₹ 90,000 = ₹ 4,50,000
Proprietary Ratio = \(\frac { ₹ 1,00,000 }{ ₹ 4,50,000 }\)
= 22.22%

Question 37.
Calculate Working Capital Turnover Ratio from the following:

Answer:

Question 38.
For the year ended March 31,2017, Net Profit after tax of K X Limited was ₹ 6,00,000. The company has ₹ 40,00,000 12% Debentures of ₹ 100 each.
(a) Calculate Interest Coverage Ratio assuming 40% tax rate.
Answer:
(a) Interest Coverage Ratio= Net Profit before Interest and Tax/ Interest on Long-Term Debts
Net Profit after Tax = 6,00,000 Tax Rate = 40%
Net Profit before tax 100/(100 – Tax) x Net Profit after tax
= 100/60 x 6,00,000= 10,00,000
Net Profit before Interest & Tax – Net Profit before tax + Interest on Long-Term Debts
= 10,00,000 + 4,80,000 = 14,80,000
Interest Coverage Ratio = Net Profit before Interest and Tax Interest on Long-Term Debts
= 14,80,000 / 4,80,000 = 3.08 Times

Question 39.
(a) Net profit after interest and tax ₹ 1,00,000; Current assets ₹ 4,00,000; Current liabilities ₹ 2,00,000; Tax rate 20%; Fixed assets ₹ 6,00,000; 10% Long term debt ₹ 4,00,000. Calculate Return on Investment.

(b) Rate of Gross profit on cost of a company is 25%. Its Gross profit is ₹ 5,00,000. Its shareholders’ Funds are ₹ 12,00,000; Current liabilities are ₹ 3,00,000 and Current Assets are ₹ 10,00,000. Calculate its Working Capital Turnover ratio. (Compt. Delhi 2017)
Answer:

Question 40.
With the help of the following information, calculate Return on Investment. Net profit after interest and tax ₹6,00,000; 10% Debentures ₹ 10,00,000; Tax @ 40%; Capital Employed ₹ 80,00,000. (CBSE Compartment Delhi 2015)
Answer:
Return on Investment = Net Profit before Interest, tax and Dividend/Capital Employed x 100
Net Profit before Tax = 6,00,000 x 100/60 = 10,00,000
Net Profit before Interest, tax and Dividend 10,00,000 + 1 ,00,000 = 11,00,000
Capital Employed = 80,00,000
Return on Investment = 11,00.000/80,00,000 x 100
= 13.45%

Question 41.
Calculate Gross Profit Ratio from the following:

Answer:
Gross Profit Ratio = \(\frac { Gross Profit }{ Revenue from Operations }\) x 100
Gross Profit = Revenue from Operations – Cost of Revenue from Operations
Cost of Revenue from Operations Opening Inventories + Purchases – Returns outwards + Wages – Closing Inventories
= 50,000 + 1,50,000 – 20,000 + 1,00,000 – 40,000
= 1,50,000
Gross Profit = 2,50,000 – 1,50,000
= 1,00,000

Gross Profit Ratio = \(\frac { 1,00,000 }{ 2,50,000 }\) x 100 = 40%

Question 42.
From the following Calculate Operating Ratio

Answer:

Question 43.
From the following calculate Return on Investment (or Return on Capital Employed)

Answer:

Here we are providing Class 12 Business Studies Important Extra Questions and Answers Chapter 5 Organising. Business Studies Class 12 Important Questions are the best resource for students which helps in class 12 board exams.

Class 12 Business Studies Chapter 5 Important Extra Questions Organising

Organising Important Extra Questions Short Answer Type

Question 1.
Explain the term organization structure in brief.
Answer:
Organization structure: The organization structure can be defined as the framework within which managerial and operating tasks are performed. It specifies the relationships between people, work, and resources. It allows coordination among human, physical and financial resource to accomplish the desired goals.

An organization structure provides the framework which enables the enterprise to function as an integrated unit by regulating and coordinating the responsibilities of individuals and departments.

According to Peter Drucker, the Organization structure is an indispensable means, and the wrong structure wins seriously impair business performance and even destroy it.

The organization structure can be categorized as –

1. Functional structure
2. Divisional structure.

Question 2.
Explain the terms authority, responsibility, and accountability?
Answer:
Meaning and definition of Authority: Management is getting work done through others. This is not possible unless the managers get the adequate authority to get work done through others. No manager can get work successfully executed through his subordinates in the absence of suitable authority. Authority refers to the right to make decisions and to get the decisions carried out. It is the right to act.

In the field of management, authority means the right to give orders to the subordinates and the power to get them executed for the attainment of organizational goals. Various scholars have defined authority in the following different ways

According to Henry Fayol, “Authority is the right to give orders and the power the exact obedience.”

According to George R. Terry, “Authority is the power to exact other to take actions considered appropriate for the achievement of predetermined objectives.”

According to Herbert A. Simon, “Authority may be defined as the power to make decisions which guide the actions of another. It is a relationship between two individuals, one superior; the other subordinate. The superior frames and transmits decisions with the expectation that these will be accepted by the subordinate. The subordinate executes such decisions and his conduct is determined by them.”

Responsibility: According to Theo Hamman, “Responsibility is the obligation of the subordinate to perform the duty as required by his superior.”

According to Davis, “Responsibility is an obligation of the individuals to perform assigned duties to the best of his ability under the direction of his executive.”

Thus, responsibility is the obligation of an individual to perform a particular work that arises from the formal relationship of a superior and a subordinate in an organization.

Accountability: When an individual works under some other person, he also becomes answerable to such officer for the proper discharge of his responsibilities. A superior can requisite an account of results from his subordinate of the duties assigned to him. The subordinate has a responsibility to give information and render a report of the task performed by him. Such responsibility is known as accountability.

According to Davis and Filley, “Each member in the organization is obliged to report to his superior how well he has exercised responsibility and made use of authority delegated to him.”

Thus, it is clear that accountability arises out of responsibility and goes hand in hand with it.

Question 3.
Explain in brief the principles of delegation of authority?
Answer:
Delegation is an important instrument in the process of organization and management, requires a few precautions and principles to be followed on the part of the delegator and the delegatee. Some principles are as follows

1. Principle of Parity of Authority and Responsibility:
When somebody is assigned any task, he must also be given adequate authority to perform such a task. For example, if a sales manager is assigned the task of doubling the sales, he must also be given the authority of advertising, appointing salesmen, selecting the channel of distribution, deciding the discount on sales, and incurring selling expenses. The parity of authority and responsibility does not mean that if sales are to be doubled, the selling expenses should be commensurate with the responsibility. If the authority is more than responsible, it shall lead to its misuse.

2. Responsibilities cannot be delegated:
No superior can evade his responsibilities simply by delegating his authority to subordinates. The ultimate responsibility lies with the superior who delegates the authority. The flow of responsibility is from bottom to top, thus after delegating authority superior remains accountable for the activities of his subordinates towards his own superiors. Similarly, the subordinates remain accountable to their superiors for the performance of assigned duties.

3. Principle of Clarity of Authority and Responsibilities:
It is a very important concept in the area of delegation. The subordinates should be well clear about their rights and responsibilities. It will help them in knowing their area of operation and the extent of freedom of action. So, that there shall arise no conflict between different persons.

4. Principle of the standard of performance:
A subordinate can be self-responsible for failure only when certain standards are established for measuring his performance and such standards are made clear to the subordinates while assigning the work. The subordinate should be well aware of what is expected of him and what type of results should be shown. A delegation without control is like a wild horse without reins. Determination of the standards of performance helps the subordinate in being alert and prudent towards his responsibilities.

5. Principle of Unity of Command:
According to Earnest Dale, every individual should receive orders from only one individual and he should be responsible only towards him. If an employee receives orders from many individuals then he shall get confused about whose orders to obey and whom to report to. A person with more than one boss is like a pawn in a game of chess.

6. Authority level principle:
This principle implies that a subordinate should have complete authority to make decisions at his level or position. If the subordinate has to take the approval of his superior even for small matters then his performance shall be hampered. This is also known as the exception principle.

7. Scalar principle:
According to this principle, authority and responsibility should; move in a straight line from the superior to the subordinate. This principle should be well considered while resorting to the delegation. For example, if there are four persons A, B, C, and D in a straight line and ‘ if A wants to delegate to C or D, he cannot do so. As per the principle of Scalar chain, A will first have to delegate to B, who in turn will delegate to C and then C will delegate to D. If a superior delegates some work to the subordinate next to the most immediate one then the immediate subordinates shall have an inferiority complex and will not cooperate fully.

8. Principle of completeness of Delegation:
Once a decision is taken as to which tasks are to be assigned, it is important that an individual should be assigned an entire task. There should be ho splits i.e., the responsibility for the same task should not be assigned to more than one individual. Otherwise, there will be confusion of authority and responsibility.

Question 4.
Differentiate between Formal organization and Informal organization?
Answer:

Basis	Delegation of authority	Decentralization
1. Nature	It is the first step towards decentralization	Decentralization is the last step in the process of delegation. It includes delegation.
2. Freedom to make decisions	Under delegation, subordinates have to follow the directions given by their superiors while making decisions.	Under decentralization, subordinates are free to take decisions
3. Scope	Its scope is limited since it refers to entrusting some part of the authority by the superior to his nearest subordinate on a personal basis.	Its scope is wide since it refers to the wide dispersal of authority to all levels in the entire organization.
4. Routine or important	It is considered to be the routine task of managers.	It is considered to be the very important decision of organizational arrangement.
5. Transfer of Responsibility	Under it, only the authority is transferred and not the responsibility. The ultimate responsibility lies with the delegator.	Under it, authority, as well as responsibility, is transferred. Subordinates are independently responsible for their performance.
6. Power to Control	In it superior has the power to exercise control over his subordinates.	In it superior losses the power to control his subordinates.
7. Temporary or permanent	It is a temporary arrangement where the authority is taken back after the assigned task is completed.	It is a permanent feature where the authority is granted for the future also.
8. Essential or optional	It is essential for all types of organizations because no superior can get the things done from his’ subordinates without delegating sufficient authority to them.	It is optional because it is not necessary’ that the superior must disperse his authority in a systematic manner throughout the entire organization.
9. Dependence	Decentralization is not essential for delegation i.e. delegation does not depend on decentralization	Delegation is essential for decentralization, i.e. it depends on delegation.

Question 5.
Differentiate between a delegation of authority and Decentralization?
Answer:
The distinction between Decentralisation and Delegation of authority. Though decentralization is the expanded form of delegation, there is a considerable difference in them. Decentralization is much more than delegation. Louis A. Allen says, when a person hands over his work to others it is known as delegation but it will be known as decentralization only when the authority to complete the entire work is handed over to them.

For example, when the chief executive of a company hands over the responsibility to make appointments in h:s department to a particular manager, it is known as delegation. But when all the departmental managers are given authority to make appointments in their respective departments, it is known as decentralization. The extent of decentralization increases when the departmental managers extend this authority to the executives below them:

The distinction between Delegation of authority and Decentralisation. Delegation of authority

Basis	Formal organization	Informal organizations
(1) Formation	It is formed by the top management in a thoughtful and organized way.	It is formed automatically due to the social relationship.
(2) Purpose	Its main purpose is the achievement of the objectives of the organization eff’içieñtly.	Its main purpose is the fulfillment of individual needs and to protect their mutual interests.
(3) Nature or Structure	The activities, rights, and responsibilities are clearly defined in suçh organizations.	The rules are neither written nor clearly defined.
(4) Authority	In such an organization authority ¡s derived from assigned positions and from above.	In this authority is derived from the acceptance and capabilities of an individual.
(5) Flow of authority or Communication	This authority flows from top to bottom.	This authority flows from top to bottom or horizontally.
(6) Behaviour of Members	In this organization, the relation among employees is according to the position and functions. Thus, the behavior is highly formal.	In this organization, there exists a personal relationship among members. Thus the behavior among them is informal.
(7) Tenure	Due to the establishment of the organization on some logical planning, the tenure is relatively	Since it is based on personal and mutual relationships it is highly flexible and temporary.
(8) Use of organization charts	In this, an organization chart is prepared to present the position of authority and responsibility.	No organization chat is prepared
(9) Size	They can be huge in size.	They are mainly small in size.

Question 6.
Explain in brief the matrix or Grid organization? Also, mention its merits and demerits.
Answer:
Matrix or Grid organization:
When the size and operational field of any organization are too wide and the number of products produced by it and its number of customers is large, it cannot be divided on any of the bases mentioned above. In such a situation, a matrix organization is established. Such organizations are divided on the basis of functions like the production department, purchase department, sales department, finance department, personnel department, etc. Besides this, a separate Project Manager is appointed for different projects.

This is explained through the diagram given below –

From the above diagram, it is clear that a separate Project Manager is appointed to complete the project quickly like Project A, Project B, Project C, etc. The project manager is given full responsibility for that particular project and all the other departmental; officers are instructed to co-operate with him. Project Managers make plans for the project and undertake all the functions of organizing, control, direction, etc. The project manager is responsible for the success or failure of the project. The middle level and lower level officers work under the control of the project manager until the completion. of the project and get involved in their normal activities after the completion of the project.

Thus in a matrix organization, two types of organizational structures work together – Functional and Project. Project managers do not wholly use the services of middle level and lower level officers but make use of their services temporarily according to their needs.

Advantages of Matrix Organisation:

1. Quick Completion of the Project: The project manager makes plans for all the activities of the project like giving orders, direction, etc. Thus the project gets completed quickly.
2. Advantages of Functional as well as project departmentation: Advantages of two types of organization-functional and project, can be availed of Project managers are the experts in their own field and they have the full co-operation of other officers.
3. Flexibility: Such type of organization is flexible as it can be easily implemented without bringing many changes in the existing organizational structure.
4. The economy in costs: There is no need of appointing special staff for each project. Services of departmental officers can be utilized as and when needed by the project manager which leads to economy in costs.

Disadvantages of Matrix organization:

1. Violation of the Principle of Unity of Command: The principle of unity of command is not followed because the officers are responsible to their superior as well as to the project manager. Thus they have to follow more than one boss.
2. The problem of coordination: There is a problem of coordination between the functions of departmental officers and project managers. There arises a conflict between the functions of the two because departmental officers give priority to the activities of their own department whereas project managers give priority to their project work.
3. Lack of Fixation of Responsibility: On non-completion of the project, in time, the project managers normally complain of non-cooperation of the departmental officers.
4. The problem of communication: The problem of internal communication arises.

Organising Important Extra Questions Long Answer Type

Question 1.
Explain the term Decentralization and mention its importance in business activities?
Answer:
Decentralization:
Decentralisation of authority means systematic dispersal of authority in all departments and at all levels of management. According to Louis Allen decentralization is “the systematic effort to delegate to the lowest levels all authority, except that which can be exercised at central points”. An organization is said to be decentralized when managers at middle and lower levels are given the authority to make decisions and actions on matters relating to their respective areas of work. The top management retains the authority for taking major decisions and formulating policies for the organization as a whole. Top management also retains authority for overall coordination and control of the organization.

For example, let us take the case of a large steel manufacturing company. The board of directors and managing director of the company lay down the overall objectives and policies of the enterprise. Major decisions on product lines, capital investment, marketing methods are taken by the respective heads of departments. The marketing manager, for instance, is authorized to decide the quality and prices of products, channels of distribution, advertising methods, and organizing sales campaigns. The top management of the company does not interfere with his authority. However, departmental managers are required to keep in view the overall policies of the company while making decisions on matters within their authority. This is how a decentralized organization works.

Centralization and decentralization are opposite terms. They should not be confused with the location of work. An organization having ‘ branches in different cities may be centralized. Similarly, a company; maybe decentralized even though all its offices are located in one budding. Centralization and decentralization are relative terms. No organization can be completely centralized or completely decentralized. They exist together.

For example, even in a decentralized organization, the top management retains the authority for-overall policy decisions to ensure coordination and control. The degree of centralization and decentralization differs from one organization to another. According to Henri Fayol, “Everything which goes to increase the subordinates. the role is decentralization; everything which goes to decrease it is centralization.”

Importance of Decentralisation:
The main benefits of decentralization are as follows –
1. Reduction in Burden of Top Executives: Decentralisation helps to reduce the workload of top executives.
They can devote greater time and attention to important policy matters by decentralizing authority for routine operational decisions.

2. Motivation of subordinates: Decentralisation helps to improve the job satisfaction and morale of lower-level managers by satisfying their needs for independence, participation, and status. It also fosters team-spirit and group cohesiveness among the subordinates.

3. Better Decisions: Under decentralization, the authority to make decisions is placed in the hands of those who are responsible for executing the decisions, as a result, more accurate and faster decisions can be taken as the subordinates are well aware of the realities of the situation. This avoids red-tapism and delays.

4. Growth and Diversification: Decentralisation facilitates the growth and diversification of the enterprise. Each product division is given sufficient autonomy for innovations and creativity. The top management can extend leadership over a giant enterprise. A sense of competition can be created among different divisions or departments.

5. Development of managers: When authority is decentralized, subordinates get the opportunity of exercising their own judgment. They learn how to decide and develop managerial skills. As a result, the problem of succession is overcome and the continuity and growth of the organization are ensured. There is a better utilization of lower-level executives.

6. Effective communication: Under decentralization, the span of an organization is wider and there are fewer levels of an organization. Therefore, the communication system becomes more effective. Intimate relationships between superiors and subordinates can be developed.

7. Efficient supervision and control: Managers at lower levels have adequate authority to make changes in work assignments, rechange production-schedules, recommend supervision, and take disciplinary actions. Therefore, more effective supervision can be exercised. Control can JiS-Jnade effective by evaluating the performance of each decentralized unit in the light of clear and predetermined standards. Decentralization permits management by objectives and self-control.

8. Democratic Management: Decentralisation of authority distributes decision making authority at all levels and in all departments. Therefore, it creates democracy in the management of an organization. People at all levels are involved in decision making.

Decentralization, may, however, create problems of coordination and control. It is costly to set up semiautonomous departments and divisions. Lack of competent managers at middle and lower levels hinders decentralization. The degree of decentralization varies from one organization to another. It may also change from one time period to another in the same organization.

Question 2.
Give the meaning of delegation of authority and its importance?
Answer:
Meaning of Delegation of Authority:
Delegation of authority takes place when a manager assigns a .part of his work to others and gives them the authority to perform the assigned tasks. The manager who delegates authority holds his subordinates responsible for the proper performance of the assigned tasks. Thus, the process of delegation involves assigning duties, entrusting authority, and imposing responsibility on subordinates.

Some popular definitions of the delegation are given below –

• Delegation of authority merely means granting of authority to subordinates to operate within prescribed limits. Theo Haimann
• Authority is delegated when enterprise discretion is vested in a subordinate by a superior. The entire process of delegation involves the determination of results expected, assignment of tasks, transfer of authority for the accomplishment of these tasks, and the exaction of responsibility for their accomplishment. – Koontz and O’ Donnell.

Importance of Delegation:
When the size of an organization expands, a manager alone cannot do all the work himself. He has to share his work and authority with others. An executive can extend his personal capacity through delegation of authority. Delegation is the means by which a manager can get results through others. Failure to delegate reduces the efficiency of the individual and blocks the development of his juniors. How one delegate determines how one manages. Just as authority is the key to the manager’s job, delegation is the key to the organization.

The main advantages of the delegation are as follows –
1. Relief to Top Executives: Delegation of authority enables a manager to share his workload with his subordinates. It reduces the burden of work on senior executives. By transferring routine work to subordinates, a manager can concentrate on important policy matters. He can, therefore, make better use of his valuable time and ability. Delegation facilitates the proper distribution of workload as it takes place at all levels. The manager who delegates authority can achieve greater results than the one who does not. This is because by delegating authority, a manager secures the cooperation and participation of his subordinates.

2. Scalar Chain: Delegation of authority creates a chain of superior-subordinate relationships among managers. It provides meaning and content to managerial jobs. It also directs and regulates the flow of authority from the top to the bottom of an organization. It serves as a basis of superior-subordinate relations.

3. Specialization: Through delegation, an executive can assign jobs to his subordinates according to abilities and experience. In this way, he can obtain the benefits of the division of work.

4. Quick Decisions: When authority is delegated, lower-level employees can take decisions quickly without consulting senior executives. Subordinates are better in touch with local conditions and can take more practicable decisions within the policy framework laid down by top management.

5. Motivation: Delegation provides a feeling of status and importance to subordinates. Their independence and job satisfaction increase due to the authority they enjoy. They become more willing to work hard and achieve the targets laid down by higher authorities. Thus, delegation promotes a sense of initiative and responsibility among employees. It inspires employees to make full use of their skills.

6. Executive Development: Delegation gives an opportunity to employees to learn decision-making and leadership skills by exercising authority. It helps to improve the quality of personnel at lower levels because they are required to handle situations and solve managerial problems. They acquire competence and problems and can take up higher responsibilities in course of time. In this way, the delegation of authority is a means of developing future managers.

7. Growth and Diversification: Delegation of authority facilitates expansion and growth of the organization. As the quality of managerial talent improves, the organization can face future challenges better. It can grow and expand to a bigger size.

Here we are providing Class 12 Accountancy Important Extra Questions and Answers Chapter 9 Analysis of Financial Statements. Accountancy Class 12 Important Questions and Answers are the best resource for students which helps in class 12 board exams.

Class 12 Accountancy Chapter 9 Important Extra Questions Analysis of Financial Statements

Analysis of Financial Statements Important Extra Questions Very Short Answer Type

Question 1.
State any one limitation of Financial Statement Analysis. (CBSE Compartment Delhi 2014, 2015)
Answer:
Historical Analysis of financial Statement.

Question 2.
State any one objective of analysis of financial statements. (CBSE Compartment Delhi 2014)
Answer:
To measure earning capacity of business.

Question 3.
State the type of Financial Statement Analysis in which figures of the same items of various years are compared.
Answer:
Horizontal analysis.

Question 4.
Which type of financial statement analysis helps a company to establish the relationship between different items financial statement of a same year?
Answer:
Vertical analysis.

Question 5.
“One of the objectives of Financial Statement Analysis is to assess solvency of business”. What does the term ‘solvency’ mean here ?
Answer:
Solvency means ability to pay the debts.

Analysis of Financial Statements Important Extra Questions Short Answer Type

Question 1.
From the following information extracted from the Statement of Profit and Loss for the years ended 31st March, 2017 and 2018, prepare a Comparative Statement of Profit & Loss. (CBSE Delhi 2019)

Answer:
Comparatwe statement of profit & loss for the year ended 31st March 17 & 18.

Question 2.
Prepare a comparative statement of Profit and Loss from the information extracted from the statement of Profit and Loss for the year ended 31st March, 2017 and 2018.

Answer:

Question 3.
Explain the importance of financial analysis for
(i) labour unions, and
(ii) creditors. (CBSE Outside Delhi 2019) ‘
Answer:
(i) Importance for Labour Unions: Labour unions analyse the financial statements to assess whether it can presently afford a wage increase and whether it can absorb a wage increase through increased productivity or by raising the prices.

(ii) Importance for Creditors: Creditors through an analysis of Financial Statements appraises not only the ‘ ability of the company to meet its short term obligations but also judges the probability of its continued ability to meet its financial obligations in future.

Question 4.
Prepare a comparative statement of Profit and Loss from the following information extracted from the statement of Profit and Loss for the year ended 31st March, 2017 and 2018.

Answer:

Question 5.
Following information is extracted from the Statement of Profit and Loss of Crypto Finance Ltd. For the year ended 31st March 2017 and 31st March 2018. Fill in the missing figures. (CBSE SP 2019-20)

Answer:

Question 6.
Prepare a Common-size Statement of Profit and Loss of ‘Hari Darshan Ltd.’ from the following information:

Answer:

Question 7.
Following information is extracted from the Statement of Profit and Loss of Delko Ltd. for the year ended 31st March, 2019:

Answer:

Question 8.
What is meant by ‘Analysis of Financial Statements’? State any two objectives of such analysis. (CBSE Outside Delhi 2017, Modified)
Answer:
Meaning of analysis of financial statements: Analysis of Financial Statements is the process of critical evaluation of the financial information contained in the financial statements.

Question 9.
State the objectives of ‘Analysis of Financial Statements’. (Delhi 2017)
Answer:
Objectives of‘Financial Statements Analysis’:

1. Assessing the earning capacity or profitability of the firm as a whole as well as its different departments so as to judge the financial health of the firm.
2. Assessing the managerial efficiency by using financial ratios to identify favourable and unfavourable variations in managerial performance.

Question 10.
State any four limitations of analysis of financial statements. [Delhi 2017]
Answer:
Limitations of ‘Financial Statements Analysis’:
(a) Different Accounting Principles and Practices. Financial analysis is subject to limitations inherent in the financial statements like following different accounting principles or practices regarding depreciation methods, inventory valuation and pricing, etc.

(b) Ignores the Quality Elements. Financial statements contain only financial data and exclude from the preview of qualitative information, which cannot be expressed in money terms. Thus, analysis of such financial statements will also lack quality element.

(c) Ignores Price Level Changes. Transactions, in financial statements, are recorded on historical cost basis and generally no adjustment is made for price level changes. Thus, the analysis of financial statement will not yield comparable results due to lack of adjustments for the price level changes.

(d) Affected by Window Dressing. Some firms may resort to window dressing (showing better picture) to cover-up bad financial position. For example, closing stock may be overstated. In such case, the results of analysis will also be misleading.

Question 11.
From the Balance Sheets for the year ended March 31, 2013 and 2014. prepare the Comparative Balance Sheet of Omega Chemicals Ltd.:


Answer:

Question 12.
Prepare the Common Size Balance Sheet of KJ Ltd. from the following information.

Answer:

Question 13.
From the following Balance Sheet of R Ltd., Prepare a Common Size Statement


Answer:

Question 14.
From the following Statement of Profit and Loss of the Sakhi Ltd. for the year ended 31st March 2018, prepare Comparative Statement of Profit & Loss.

Answer:

Here we are providing Class 12 Business Studies Important Extra Questions and Answers Chapter 4 Planning. Business Studies Class 12 Important Questions are the best resource for students which helps in class 12 board exams.

Class 12 Business Studies Chapter 4 Important Extra Questions Planning

Planning Important Extra Questions Short Answer Type

Question 1.
Why is planning regarded as a pervasive function of management? (1992,1999,2002)
Answer:
Planning is needed for all activities at all levels although the nature and extent of planning vary with the delegated authority, or position a person is holding in the organizational hierarchy and with the broad guidelines outlined by his superiors. Thus planning is a pervasive function of Management.

Question 2.
What are the key elements in the concept-of Planning? (2001)
Answer:
The key elements in. the concept of planning is –

1. Establishing clear, precise, and realistic objectives.
2. Determining and evaluating the various available alternatives of doing the task.
3. Selecting the most suitable alternative.

Question 3.
“Planning restricts creativity” Explain. (2000,2002)
Answer:
Planning involves deciding in advance what is to be done, how it is to be done and when it is to be done, and by whom. Thus all organizational activities are pre-conceived and pre-determined at the stage of planning itself and there is very little or no scope for deviating from the plans due to factors like capital investments, government policies, and so on. This blind conformity with predetermined guidelines discourages individual initiative and freedom.

Question 4.
“Planning is a basic function of management” Explain. (2001)
Answer:
Among various functions of management, planning occupies the foremost position. It precedes the execution of all other managerial functions because it provides the frame of reference for future decisions, reduces the overall impact of changes, and allows managers to organize, staff direct, and control the activities necessary.

Question 5.
Distinguish between goals and objectives.
Answer:

Goals	Objectives
1. Goals are the overall or collective ends of the organization.	1. Objectives are specific and particular ends of the organization.
2. Goals are not expressed in numerical terms.	2. Objectives are always expressçd in numerical terms.
3. Goals are generally made for the long term.	3. Objectives are mostly made for the short term and these must be achieved within a specific time limit.
4. Example – Increase in sales or becoming the leader in the market.	4. Increase in sales by 10% in 6 months’ time or increase in market share by 20% in 1 year.

Question 6.
“Planning is not a guarantee of success of a business.” Comment.
Answer:
It is right to say that planning is not a guarantee of the success of a business because the planning function is based on certain assumptions regarding the future and no one care to give a guarantee that assumptions regarding the future are a hundred percent accurate. The planning function suffers from certain limitations which may be lack of accuracy, cost problem, delay in action, etc.

Planning Important Extra Questions Long Answer Type

Question 1.
Explain the nature and characteristics of planning.
Or
“No enterprise can achieve its objective without systematic planning”. Do you agree with the statement?(1990, 1992, 1993, 1995, 1996, 1997, 1999, 2004) (2003)
Answer:
Characteristics of Planning:
1. Goal Oriented: Goals or objectives are the end results towards which activity is directed. The first stage of planning is the conscious and explicit statement of the ultimate objectives.

2. Primacy of Planning: Among various functions of management planning occupies the foremost position. Planning precedes the execution of all other managerial functions because it provides a frame of reference for future decisions. Allows managers to organize staff directly and control the activities necessary to achieve the organizational goals.

3. Pervasiveness of Planning: Planning is needed for all activities at all levels although the nature and extent of planning vary with the delegated authority or position a person is holding in the organizational hierarchy and with the board guidelines provided by his superiors.

4. Intellectual Process: Planning involves logical thinking and decision making. It implies determining what is to be done; how and when it is to be done and by whom. All these decisions require ability, experience, and foresightedness on the part of the management.

5. Continuous function: Planning is a continuous activity. As a matter of fact, the planning process continues so long as an enterprise is in existence.

6. Flexibility: Effective plans have an element of flexibility! Management can’t afford to follow rigid plans in the era of fast changes in the technology market, government policy, etc.

As we all know, the resources of an organization are limited. Planning aims at providing the blueprints to optimum utilization of given resources to achieve the desired goals. Thus it can be concluded that no enterprise can achieve its objectives without systematic planning.

Question 2.
Why is planning necessary for effective management? Give reasons. (1993,1994,1996,1997,2004)
Answer:
Planning is important for better management of business planning determines objective, decides the course of action, removes uncertainty results in economics in operation, and makes control possible its importance is analyzed as below.
1. Takes care of future uncertainties: Future is full of uncertainties planning takes care of all future uncertainties and minimizes business risks since it makes effective use of forecasting techniques.

2. Focuses attention on objectives: All planning is directed towards achieving the objectives of an enterprise. Planning makes these objectives more concrete and tangible by determining the program’s policies, procedures that provide guidelines to the employees to achieve these objectives.

3. Facilitates decision making: Decision making is the core of planning. It is the process of developing and selecting a course of action from among the various alternatives available. Planning provides a framework for decision-making by specifying the organizational objectives and planning premises.

4. Facilitates Control: Controlling is the process that measures current performance against desired standards to ensure that the objectives are attained according to plans. Control is always exercised in the light of planning which provides performance standards in quantitative terms.

5. Promotes efficiency: Proper planning ensures better utilization of organizational resources. Planning involves the selection of the best or most profitable course of action. This reduces the idle time for workers, machines, and so on.

6. Helps in Co-ordination: Planning is necessary for the organization as a whole. Derivative plans are prepared for each department within the limits of the master plan. Thus planning leads to the coordination of activities of all the departments in order to achieve the basic objective of the organization.