Commerce Sample PDF English

UNIT 1: BUSINESS ENVIRONMENT
AND INTERNATIONAL BUSINESS
DIWAKAR EDUCATION HUB

UNIT 1: BUSINESS ENVIRONMENT AND INTERNATIONAL BUSINESS
What is Concepts and elements of business environment: Economic environment-
Economic systems, Economic policies(Monetary and fiscal policies); Political
environment- Role of government in business; Legal environment- Consumer
Protection Act, FEMA; Socio-cultural factors and their influence on business;
Corporate Social Responsibility (CSR) ?
Introduction to Business Environment
Business Environment is the most important aspect of any business. The forces which
constitute the business environment are its suppliers, competitors, media, government,
customers, economic conditions, investors and multiple other institutions working
externally
Definitions of Business Environment
The term ‘business environment’ connotes external forces, factors and institutions that
are beyond the control of the business and they affect the functioning of a business
enterprise. These include customers, competitors, suppliers, government, and the
social, political, legal and technological factors etc. While some of these factors or
forces may have direct influence over the business firm, others may operate indirectly.
Thus, business environment may be defined as the total surroundings, which have a
direct or indirect bearing on the functioning of business. It may also be defined as the
set of external factors, such as economic factors, social factors, political and legal
factors, demographic factors, technical factors etc., which are uncontrollable in nature
and affects the business decisions of a firm.
Business Environment has been defined by Bayard O. Wheeler as “the total of all
things external to firms and industries which affect their organization and operation”.
 According to Arthur M. Weimer, business environment encompasses the ‘climate’
or set of conditions, economic, social, political or institutional in which business
operations are conducted.
 According to Glueck and Jauch, “The environment includes factors outside the
firm which can lead to opportunities for or threats to the firm. Although
 there are many factors, the most important of the sectors are socio-economic,
technological, supplier, competitors, and government.”
 According to Barry M. Richman and Melvgn Copen “Environment consists of
factors that are largely if not totally, external and beyond the control of individual
industrial enterprise and their managements. These are essentially the ‘givers’
within which firms and their management must operate in a specific country and
they vary, often greatly, from country to country”.
From the above definitions we can extract that business environment consists of
factors that are internal and external which poses threats to a firm or these provide
opportunities for exploitation.
Concept of Business Environment
A business firm is an open system. It gets resources from the environment and
supplies its goods and services to the environment. There are different levels of
environmental forces. Some are close and internal forces whereas others are external
forces. External forces may be related to national level, regional level or international
DIWAKAR EDUCATION HUB Page 2

level. These environmental forces provide opportunities or threats to the business
community.
Every business organization tries to grasp the available opportunities and face the
threats that emerge from the business environment. Business organizations cannot
change the external environment but they just react. They change their internal
business components (internal environment) to grasp the external opportunities and
face the external environmental threats. It is, therefore, very important to analyze
business environment to survive and to get success for a business in its industry.
It is, therefore, a vital role of managers to analyze business environment so that they
could pursue effective business strategy. A business firm gets human resources,
capital, technology, information, energy, and raw materials from society. It follows
government rules and regulations, social norms and cultural values, regional treaty and
global alignment, economic rules and tax policies of the government. Thus, a business
organization is a dynamic entity because it operates in a dynamic business
environment.
Features of Business Environment
On the basis of the above discussion the features of business environment can be
summarized as follows.
 Business environment is the sum total of all factors external to the business firm
and that greatly influence their functioning.
 It covers factors and forces like customers, competitors, suppliers, government,
and the social, cultural, political, technological and legal conditions.
 The business environment is dynamic in nature, that means, it keeps on
changing.
 The changes in business environment are unpredictable. It is very difficult to
predict the exact nature of future happenings and the changes in economic and
social environment. .
 Business Environment differs from place to place, region to region and country to
country.
Importance of Business Environment
There is a close and continuous interaction between the business and its environment.
This interaction helps in strengthening the business firm and using its resources more
effectively. As stated above, the business environment is multifaceted, complex, and
dynamic in nature and has a far-reaching impact on the survival and growth of the
business. To be more specific, proper understanding of the social, political, legal and
economic environment helps the business in the following ways:
Identifying Firm’s Strength and Weakness:
Business environment helps to identify the individual strengths and weaknesses in
view of the technological and global developments
Determining Opportunities and Threats:
The interaction between the business and its environment would identify opportunities
for and threats to the business. It helps the business enterprises for meeting the
challenges successfully.
Giving Direction for Growth:

The interaction with the environment leads to opening up new frontiers of growth for
the business firms. It enables the business to identify the areas for growth and
expansion of their activities.
Continuous Learning:
Environmental analysis makes the task of managers easier in dealing with business
challenges. The managers are motivated to continuously update their knowledge,
understanding and skills to meet the predicted changes in realm of business.
Image Building:
Environmental understanding helps the business organisations in improving their
image by showing their sensitivity to the environment within which they are working.
Meeting Competition:
It helps the firms to analyse the competitors’ strategies and formulate their own
strategies accordingly.
Factors Affecting Business Environment
The business environment or the external forces acting on the business consists of a
large number of forces. These are;
1. Demographic Factors
Demography is a study of human population with reference to its size, density,
distribution and other connected vital statistics. This information is very essential in
modern days for planning and development and also for framing laws relating to
society and business. The density of population, the extent of their standard of living,
the level of their education and the nature of their occupation etc., greatly influence the
type of business the entrepreneurs could undertake. The business units require
customers for its survival and growth; naturally business can thrive in populace
regions, though now-a day’s transportation helps a lot in bringing the commodities to
the scarcely populated areas.
2. Economic Factors
The business enterprise is affected by various economic forces which cannot be
controlled by the business. These economic forces, can be divided into two categories,
ie. Demand Force and Competitive Force. For a business firm to survive and thrive, it
should have adequate demand for its products. At the same time, the firm has to
complete with the rival firm producing similar products or substitute products.
Economic forces affecting demand:
For customers to buy the commodity of the firm, they should have the ability to buy and
willingness to buy. The ability to buy a commodity depends on the income of the
customer, to be very precise, the disposable income of the customer. Out of the total
income, the individual has to pay taxes due to the government and the disposable
income will be less if the taxes are high. Secondly, if the individual wants to save more,
the amount for spending will be less.
Thus, the ability to buy a commodity depends on the a) Total income earned out of the
employment of the individual b) The taxes of the government and c) The savings of the
individual.
An increase in tax will reduce the demand for the commodity. The attitude of the
individual towards ‘Saving’ will affect the demand. A change in ‘Price’ of the commodity

will affect the demand. Expectation of a further change in price or change in taxes will
also affect the demand.
• Competitive forces: The competitive tools are price cutting, advertisement, product
differentiation, marketing strategies and consumer service.
Price cutting: Price cutting or price reduction is a method which has to be adopted very
cautiously, as it may ultimately lead to price-war between firms competing, resulting in
reduction of profits.
• Advertisement: Advertisements in modern days have become a very powerful tool in
persuading the consumers of a product to a particular brand. In monopolistic
competition, a large share of the market is entrenched by firms making effective and
aggressive advertisement.
• Product differentiation: A firm tries to get competitive strength by differentiating its
product from those of its rivals. By having special design, color, packing and features,
the firm tries to get competitive edges.
• Marketing strategies and Consumer Service: Modern firm adopt various types of
marketing strategies to create market for their products. Installment system, credit
system, hire-purchase, etc., are the prominent ways by which firms try to cut through
the poor segments of the society and convert them their customers. Besides customer
service like, free door delivery, quick service, after sales service, guarantee from
defects up to a certain period are adopted to have more and more demand for their
commodities.
3. Geographical and Ecological Environment
Geographical conditions, to a greater extent, influence the type of industries and
business in a region. Generally, the people of a particular geographical region will have
similar tastes, preferences and requirements. The geographical situation, the physical
feature, the climate, rainfall, humidity, the vegetation, etc., decide the type of living in a
particular region and only those industries which could cater to the needs of the
people, could develop. In other words, geographical conditions exert profound
influence on the location of the business.
Ecological is a study “dealing with the interaction of living organism with each other and
with their non-living environment”. It is a science telling about the relationship of all
living beings. (ie., human beings, animals, plants) with non- living beings (air, water,
soil represented by atmosphere, rivers, lakes, mountains and land).
4. Social and Cultural Environment
Social and Cultural attitudes of a region influence the business organizations of the
region influence the business organizations of the region in a verity of ways. The
business practices and the management technique of the organization should cope
with the social and cultural attitudes of the people.
The modern business is a social system in itself, but it is also part of a larger social
system represented by society in general. Clearly, there should be some reciprocal
relationship between business and this larger society. To put it shortly, the business
should adopt itself to the social and cultural environment.
It is the class structure of the society. It tells about the social roles and organizations
and the development of social institutions. The class-structure depend upon the

occupation of the people, their education, income level, social status, their mobility,
their attitude towards living, work and social relationship and above all, their attitude
towards business. Every society develops its own ‘culture’ which means how the
members of that society behave and interact with each other in society, as well as
outside society. The term culture includes values, norms, customs, ethics, goals and
other accepted behavior patterns.
5. Political and Legal Environment
Political Environment: All business firms are directly affected to a greater or lesser
degree by the government and its programmes. Political forces will decide the nature of
business, programmes and projects to be undertaken for the development of the
country. These political forces can be classified as long term forces, quick changes,
cyclical changes and regional factors.
• Long term forces denote the secular trends in business activities due to the political
conditions prevailing and the adoption of a particular line of policy in business.
• Quick Changes consist of sudden political changes due to army coup or revolt or
capturing of the government machinery by the dissident group. The quick change may
also be the result of proclamation of ‘emergency’ or ‘Martial Law’ due to sudden
outbreak of war with a belligerent nation. In all these cases, the business manager has
to take quick decisions to adopt his business to the changed environment.
• Cyclical Changes denote periodical anticipated changes like ’General Election’ which
may change the government and consequent change in plans and programmes as well
as priorities by the new Government.
Regional Factors the regional consideration may dominate the political scene.
Development of agricultural or development of an industrially backward region may
draw the attention of politicians and government. Consequently, special legislations or
policies will be framed to help the backward regions or sector. In such changes, the
business has to adopt itself by studying and estimating the risks and dangers involved
in taking decisions.
Legal Environment: Business in a country can be started and nurtured to grow into big
business only within the legal system of the country. In this connection, all countries of
the word have a separate set of laws for the control and direction of business. The
business law of the country is a complex system of regulations and intervention that
form the legal environment of the business. All business managers should have the
knowledge of business law for taking management decision.
6. Technological Environment
Technology means “the systematic knowledge of the industrial arts”. ‘Technique’
denotes the method of performance. These two are increasingly used in modern
literature on industrial production. The present age is the age of technology.
Technology affects the business in two ways.
Its impact on the society and
Its impact on business operation.
Relevance of Business Environment Concept In business all the activities are being
organized and also carried out by the people to satisfy the needs of the consumers.
So, it is an activity carried out by the people for the people which means people occupy
a central place around which all the activities revolve. It means business is people and
a human is always a dynamic entity who believes in change and it may be right to say
that the only certainty today is change. It poses a huge challenge for today’s and
especially tomorrow’s businessmen and managers to be aware of specific changes so
as to keep themselves abreast with the latest happenings in the field of business to
maintain their survival and sustainability in the market. Therefore, the study of business
environment is of importance for the managers and practitioners.
Economic environment
Economic environment Economic environment includes all those forces which have an
economic impact on business. Accordingly, total economic environment consists of
agriculture, industrial production, infrastructure, and planning etc. It includes: -
• ECONOMIC SYSTEM
• ECONOMIC POLICIES
• ECONOMIC PLANNING
ECONOMIC SYSTEM –
An economic system is an organized way in which a country allocates resources and
distributes goods and services across the whole nation or a given geographic area.
Every economic system looks at three or four basic questions: and or local
government. Market forces determine what is produced, how much is produced, how it
is distributed, plus the prices of goods and services.
2. type of economy today are North Korea and Cuba (to a lesser extent).
3. Mixed Economy:Having features of both 1 & 2. The developing countries like India
have adopted mixed economy to accelerate the pace of economic development. Even
the developed countries like UK, USA, etc. have also adopted ‘Mixed Capitalist
System.
ECONOMIC POLICIES-
Economic Policies includes fiscal policy. Monetary policy, foreign trade policy, licensing
policy, etc.
1. Fiscal Policy: - Fiscal Policy is the mechanism by means of which a government
makes adjustments to its planned spending and the imposed tax rates to monitor and
thus in turn influence the performance of a country’s economy.
2. Monetary Policy:- Monetary policy is how central banks manage liquidity to create
economic growth. Liquidity is how much there is in the money supply. That includes
credit, cash, checks, and money market mutual funds.
3. Foreign trade Policy of India:-The Foreign Trade Policy (FTP) was introduced by the
Government to grow the Indian export of goods and services, generating employment
and increasing value addition in the country.(Brief Details Given Below)
4. Licensing Policy:-In the pre-liberalization days, India has adopted licensing policy to
regulate the growth of industries in India. Since the days of Independence, India
adopted licensing policy, which in effect made the government control the growth of
industries in accordance with the national priorities.
ECONOMIC PLANNING –
Under Economic Planning. We can select best alternative for increasing the economic
strength of the company. We have to make plan regarding optimum use of our
resources in producing goods. We also have to make plan to produce
optimumsquantity of output. We can use Economic Planning at small level and at large
level like Investment decisions of Govt.
Political environment-Role of government in business
Political environment refers to the Government and political actions that impact the
business operations. The political environment can be studies in terms of the central
govt, the citizens of a country, rules and regulations examples of political factors are
levels of bureaucracy, corruption and govt stability.
A highly unstable govt is unable to offer businessman the security they need to trade
peacefully, hence a highly volatile trading environment. So the Role of government in
business is very important.
Legal Environment of Business in India
Legal environment of business means all factors relating to laws and legal orders
which affect business and its working.
Business must be operated under the rules and regulation of different laws of India.
The following is the list of main laws which affect business.
1. Indian contract act 1872
2. Indian sale of goods act 1930
3. Indian partnership act 1932
4. Industrial dispute Act 1947
5. Minimum wages act 1948
6. Indian companies act 1956
7. Foreign exchange regulation act (FERA) 1973
8. Foreign exchange management act 1999
9. Monopolies and restrictive trade practice act 1969
10. Consumer protection act 1986
11. Indian income tax act 1961
12. Central excise act 1944
13. Security exchange board of India act 1992
14. Banking regulation act 1949
15. Chartered accountant act 1949
16. Information technology act 2000
17. Competition act 2002
18. Right to information act 2005
19. Micro, Small and Medium Enterprises Development Act, 2006 20. Commissions for
Protection of Child Rights Act, 2005
As per syllabus, we have to cover: Consumer Protection Act, FEMA.
Consumer Protection Act:-
Consumer Protection Act, 1986 is an Act of the Parliament of India enacted in 1986 to
protect the interests of consumers in India. It makes provision for the establishment of
consumer councils and other authorities for the settlement of consumer’s disputes and

for matters connected there with also. This act was passed in Assembly in October
1986. Various Consumer Organizations:To increase the awareness of consumer,
Important Points -
The Consumer Protection Act, 1986 was enacted to provide a simpler and quicker
access to redress of consumer grievances.
The Act seeks to promote and protects the interest of consumers against deficiencies
and defects in goods or services.
It also seeks to secure the rights of a consumer against unfair trade practices, which
may be practiced by manufacturers and traders.
The set-up of consumer forum is geared to provide relief to both parties, and
discourage long litigation. In a process called 'informal adjudication', forum officials
mediate between the two parties and urge compromise.
The Act applies to all goods and services unless specifically exempted by the Central
Government. It covers all the sectors whether private, public or cooperative.
This Act has provided machinery whereby consumers can file their complaints which
will be heard by the consumer forums with special powers so that action can be taken
against erring suppliers and the possible compensation may be awarded to consumer
for the hardships he has undergone.
The consumer under this law is not required to deposit huge court fees, which earlier
used to deter consumers from approaching the courts. The rigours of court procedures
have been replaced with simple procedures as compared to the normal courts, which
helps in quicker redressal of grievances. The provisions of the Act are compensatory in
nature.
BASIC RIGHTS OF CONSUMER
1. Right to be protected against marketing of goods and services which are hazardous
to life and property.
2. Right to be informed about the quality, quantity, standard and price of goods or
services so as to protect the consumer against unfair trade practices.
3. Right to be assured, wherever possible, access to variety of goods and services at
competitive prices.
4. Right to be heard and to be assured that consumers interests will receive due
consideration at appropriate forums.
5. Right to seek redressal against unfair trade practices.
6. Right to consumer education.
CONSUMER REDRESSAL FORUM
Under the Consumer Protection Act, every district has at least one consumer redressal
forum also called a consumer court. Here, consumers can get their grievances heard.
Above the district forums are the state commissions. At the top is the National
Consumer Disputes Redressal Commission in New Delhi.
A written complaint to the company is taken as proof that the company has been
informed. The complaint must be backed by copies of bills, prescriptions and other
relevant documents, and should set a deadline for the company to respond.
Consumers can also complain through a consumer organisation.
Claims of less than Rs. 5 lakh should be filed with district forum, claims of Rs. 5-Rs. 20
lakh directly with the state commission, and claims of more than Rs. 20 lakh with the
National Commission.
TO FILE THE COMPLAINT:
Complaint is to be filed within two years of buying the product or using the service.
Complaint needs to be in writing. Letters should be sent by registered post, hand-
delivered, by email or fax. Don't forget to take an acknowledgment.
 The complaint should mention the name and address of the person who is
complaining and against whom the complaint is being filed. Copies of relevant
documents must be enclosed.
 The consumer must mention details of the problem and the demand on the
company for redressal. This could be replacement of the product, removal of the
defect, refund of money, or compensation for expenses incurred and for
physical/mental torture. Please ensure that the claims are reasonable.
 You should preserve all bills, receipts and proof of correspondence related to the
case. Avoid using voice mail or telephone because such interactions are
normally difficult to prove.
 The complaint can be in any Indian language, but it is better to use English.
 There is no compulsion to hire a lawyer. Main cost consists of correspondence
and travelling to the consumer forum for the hearing
Maintain a complete record of the emails and documents sent by you.
APPEAL
Appeal is a legal instrumentality whereby a person not satisfied with the findings of a
court has an option to go to a higher court to present his case and seek justice. In the
context of consumer forums:
1. An appeal can be made with the state commission against the order of the district
forum within 30 days of the order which is extendable for further 15 days. (Section 15)
2. An appeal can be made with the National Commission against the order of the state
commission within 30 days of the order or within such time as the National Commission
allows. (Section 19)
3. An appeal can be made with the Supreme Court against the order of the National
Commission within 30 days of the order or within such time as the Supreme Court
allows. (Section 23)
PENALTIES
The consumer courts (district court, state commission and National Commission) are
given vast powers to enforce their orders. If a defaulter does not appear in court
despite notices and reminders, the court may decide the matter in his absence. The
forum can sentence the defaulter to a maximum of three years' imprisonment and
impose a fine of Rs. 10,000. Forums can issue warrants to produce defaulters in court.
They can use the police and revenue departments to enforce orders.
The rights of consumers needs to be protected since they avail services given by the
service providers based on trust and faith and thus it’s a necessity to keep a check on
the service providers for the sake of service recipient.

Answer: (1) (2) Licensing/Franchising
(3) Joint ventures
55. Match the following: (4) All the above
List – I List – II Answer: (4)
a. Matching approach 1. Dividend
Policy 59. The components of W.T.O. are
b. Structural ratios 2. Inventory (1) Ministerial Conference
Management (2) Disputes Settlement Body
c. Ordering quantity 3. Financing (3) Director General
Working Capital (4) All the above
d. Bonus shares 4. Capital Answer: (4)
Structure
Codes: 60. India is not associated with
abcd (1) SAARCD
(1) 1 2 3 4 (2) NAFTA
(2) 3 4 1 2 (3) BRICS
(3) 3 4 2 1 (4) None of the above
(4) 2 1 3 4 Answer: (2)
Answer: (3)
61. Which one of the following is true
56. Assertion (A): Operating style of the statement?
international business can be spread to the (1) A balance of trade deals with export
entire globe. and import of invisible items only.
Reason (R): The style is limited to the (2) A balance of payment deals with both
internal economy only. visible and invisible items.
Codes: (3) The current account is not a component
(1) Both (S) and (R) are true. of balance of payment.
(2) (S) is true, but (R) is false. (4) All the above.
(3) (S) is false, but (R) is true. Answer: (2)
(4) Both (S) and (R) are false.
Answer: (2) 62. SDRs are popularly known as
(1) Currency Notes
57. The Comparative Cost Advantage (2) Paper Gold
Theory was given by (3) Silver Coin
(1) David Ricardo (4) Gold Coin
(2) Adam Smith Answer: (2)
(3) Raymond Vernon
(4) Michael E. Porter 63. Which one is not international
Answer: (1) institution?
(1) IMF
58. The companies globalise their (2) IDA
operations through different means: (3) IBRD
(1) Exporting directly (4) TRAI

Answer: (4) abcd
(1) 4 2 3 1
64. Assertion (A): Indent may be open or (2) 3 1 2 4
closed. Open indent does not specify the (3) 1 3 2 4
price and other details of the goods. The (4) 2 1 3 4
closed indent specifies the brand, price, Answer: (2)
number, packing, shipping mode,
insurance, etc. 67. Assertion (A): Use of paper money is
Reason (R): This is required as a part of replaced by plastic money. The future will
export procedures. see the electronic money clearance
Codes: through satellite networking.
(1) Both (1) and (R) are correct. Reason (R): RBI is encouraging e-banking.
(2) Both (1) and (R) are not correct. Codes:
(3) (1) is true, but (R) is false. (1) (1) is false, but (R) is true.
(4) (R) is true, but (1) is false. (2) (1) is true, but (R) is false.
Answer: (3) (3) Both (1) and (R) are false.
(4) Both (1) and (R) are true.
65. Which one of the statements is not Answer: (4)
true?
(1) Institutional infrastructure facilitates 68. Which one is not Finance Company?
market intelligence. (1) Hire-Purchase Finance Company
(2) STC is the chief canalizing agent for (2) IRDA
export and import of agricultural products. (3) Mutual Benefit Finance Companies
(3) IIPO organizes trade fairs and (4) Loan Companies
exhibitions. Answer: (2)
(4) Letter of credit does not indicate that
the bank will pay the value of imports to 69. The Securities and Exchange Board of
the exporter. India was not entrusted with the function
Answer: (4) of
(1) Investor Protection.
66. Match the items of List – I with items of (2) Ensuring Fair practices by companies.
List – II. (3) Promotion of efficient services by
List – I List brokers.
– II (4) Improving the earnings of equity
a. Selective credit control holders.
1. Consumer Credit Regulation Answer: (4)
b. Encourage credit for desirable use
2. Cash Reserve Ratio 70. Which one is a not Non-Marketable
c. Quantitative credit control security?
3. Variation in Margin (1) Corporate Securities
d. Bank Rate 4. (2) Bank Deposits
Re-discounting Rate (3) Deposits with Companies
Codes: (4) Post Office Certificates and Deposits

Answer: (1) (1) Rs. 10,000
(2) Rs. 15,000
71. Minimum Alternative Tax (MAT) under (3) Rs. 20,000
Sec.115 JB of the Income Tax Act is (4) Without any limit
applicable on Answer: (4)
(1) Partnership firm
(2) Association of persons Please Be Careful from Fake Person buy
(3) Certain companies our Notes From Our Official Website
(4) All types of companies DIWAKAR EDUCATION HUB only OR Call
Answer: (3) Us On Our Official Number 7310762592.
72. For the Assessment Year 2011-12,

deduction under Sec. 80G is available
without any limit but at the rate of 50% on
(1) Prime Minister’s National Relief Fund.
(2) National Foundation for communal
Harmany.
(3) Jawahar Lal Nehru Memorial Fund.
(4) Chief Minister Relief Fund.
Answer: (3)
73. Interest on capital paid by a firm to its

partners, under the Income Tax Act, 1961,
is allowed
(1) 6%
(2) 12%
(3) 15%
(4) 18%
Answer: (2)
74. Under capital gains head of the Income

Tax Act, the income from sale of
Household Furniture is
(1) Taxable Income
(2) Capital Gain
(3) Revenue Gain
(4) Exempted Income
Answer: (4)
75. Under Section 80E of the Income Tax

Act, 1961 deduction in respect of payment
of interest on loan taken for higher
education shall be allowed up to

UNIT 2: ACCOUNTING AND AUDITING

What is Basic accounting principles; concepts and postulates ?
Basic accounting principles; concepts and postulates
A number of basic accounting principles have been developed through common

usage. They form the basis upon which the complete suite of accounting standards
have been built. The best-known of these principles are as follows:
Accrual principle
This is the concept that accounting transactions should be recorded in the accounting
periods when they actually occur, rather than in the periods when there are cash flows
associated with them. This is the foundation of the accrual basis of accounting. It is
important for the construction of financial statements that show what actually happened
in an accounting period, rather than being artificially delayed or accelerated by the
associated cash flows.
For example, if you ignored the accrual principle, you would record an expense only
when you paid for it, which might incorporate a lengthy delay caused by the payment
terms for the associated supplier invoice.
Conservatism principle
This is the concept that you should record expenses and liabilities as soon as possible,
but to record revenues and assets only when you are sure that they will occur. This
introduces a conservative slant to the financial statements that may yield lower
reported profits, since revenue and asset recognition may be delayed for some time.
Conversely, this principle tends to encourage the recordation of losses earlier, rather
than later. This concept can be taken too far, where a business persistently misstates
its results to be worse than is realistically the case.
Consistency principle
This is the concept that, once you adopt an accounting principle or method, you should
continue to use it until a demonstrably better principle or method comes along. Not
following the consistency principle means that a business could continually jump
between different accounting treatments of its transactions that makes its long-term
financial results extremely difficult to discern.
Cost principle
This is the concept that a business should only record its assets, liabilities, and equity
investments at their original purchase costs. This principle is becoming less valid, as a
host of accounting standards are heading in the direction of adjusting assets and
liabilities to their fair values.
Economic entity principle
This is the concept that the transactions of a business should be kept separate from
those of its owners and other businesses. This prevents intermingling of assets and
liabilities among multiple entities, which can cause considerable difficulties when the
financial statements of a fledgling business are first audited.
Full disclosure principle
This is the concept that you should include in or alongside the financial statements of
a business all of the information that may impact a reader's understanding of those
statements. The accounting standards have greatly amplified upon this concept in
specifying an enormous number of informational disclosures.
Going concern principle
This is the concept that a business will remain in operation for the foreseeable future.
This means that you would be justified in deferring the recognition of some expenses,
such as depreciation, until later periods. Otherwise, you would have to recognize all
expenses at once and not defer any of them.
Matching principle. This is the concept that, when you record revenue, you should
record all related expenses at the same time. Thus, you charge inventory to the
cost of goods sold at the same time that you record revenue from the sale of those
inventory
items. This is a cornerstone of the accrual basis of accounting. The cash basis of
accounting does not use the matching the principle.
Materiality principle. This is the concept that you should record a transaction in the
accounting records if not doing so might have altered the decision making process
of someone reading the company's financial statements. This is quite a vague
concept that is difficult to quantify, which has led some of the more picayune
controllers to record even the smallest transactions.
Monetary unit principle. This is the concept that a business should only record
transactions that can be stated in terms of a unit of currency. Thus, it is easy
enough to record the purchase of a fixed asset, since it was bought for a specific
price, whereas the value of the quality control system of a business is not
recorded. This concept keeps a business from engaging in an excessive level of
estimation in deriving the value of its assets and liabilities.
Reliability principle. This is the concept that only those transactions that can be
proven should be recorded. For example, a supplier invoice is solid evidence that
an expense has been recorded. This concept is of prime interest to auditors, who
are constantly in search of the evidence supporting transactions.
Revenue recognition principle. This is the concept that you should only recognize
revenue when the business has substantially completed the earnings process. So
many people have skirted around the fringes of this concept to commit reporting
fraud that a variety of standard-setting bodies have developed a massive amount
of information about what constitutes proper revenue recognition.
Time period concept. This is the concept that a business should report the results
of its operations over a standard period o f time. This may qualify as the most
glaringly obvious of all accounting principles, but is intended to create a standard
set of comparable periods, which is useful for trend analysis.
Definition and introduction
The worldview of accounting and accountants may certainly involve some unhelpful
characters poring over formidable figures stacked up in indecipherable columns.
However, a short and sweet description of accounting does exist.
Accounting is the language of business efficiently communicated by well-organised
and honest professionals called accountants.

A more academic definition of accounting is given by the American Accounting
Association: The process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of the information.
The American Institute of Certified Public Accountants defines accounting as:
The art of recording, classifying, summarising in a significant manner and in terms of
money, transactions and events which are, in part at least of financial character, and
interpreting the results thereof.
Accounting not only records financial transactions and conveys the financial position of
a business enterprise; it also analyses and reports the information in documents called
“financial statements.”
Recording every financial transaction is important to a business organisation and its
creditors and investors. Accounting uses a formalised and regulated system that
follows standardised principles and procedures.
The job of accounting is done by professionals who have educational degrees acquired
after years of study. While a small business may have an accountant or a bookkeeper
to record money transactions, a large corporation has an accounts department, which
supplies information to:
 Managers who guide the company.
 Investors who want to know how the business is doing.
 Analysts and brokerage firms dealing with the company’s stock.
 The government, which decides how much tax should be collected from the
company.
Accounting Principles
Obviously, if each business organisation conveys its information in its own way, we will
have a babel of unusable financial data.
Personal systems of accounting may have worked in the days when most companies
were owned by sole proprietors or partners, but they do not anymore, in this era of joint
stock companies.
These companies have thousands of stakeholders who have invested millions, and
they need a uniform, standardised system of accounting by which companies can be
compared on the basis of their performance and value.
Therefore, accounting principles based on certain concepts, convention, and tradition
have been evolved by accounting authorities and regulators and are followed
internationally.
These principles, which serve as the rules for accounting for financial transactions and
preparing financial statements, are known as the “Generally Accepted Accounting
Principles,” or GAAP.
The application of the principles by accountants ensures that financial statements are
both informative and reliable.
It ensures that common practices and conventions are followed, and that the common
rules and procedures are complied with. This observance of accounting principles has
helped developed a widely understood grammar and vocabulary for recording financial
statements.

However, it should be said that just as there may be variations in the usage of a
language by two people living in two continents, there may be minor differences in the
application of accounting rules and procedures depending on the accountant.
For example, two accountants may choose two equally correct methods for recording a
particular transaction based on their own professional judgement and knowledge.
Accounting principles are accepted as such if they are
(1) objective;
(2) usable in practical situations;
(3) reliable;
(4) feasible (they can be applied without incurring high costs); and
(5) comprehensible to those with a basic knowledge of finance.
Accounting principles involve both accounting concepts and accounting conventions.
Here are brief explanations.
Accounting Concepts
1. Business entity concept: A business and its owner should be treated
separately as far as their financial transactions are concerned.
2. Money measurement concept: Only business transactions that can be
expressed in terms of money are recorded in accounting, though records of
other types of transactions may be kept separately.
3. Dual aspect concept: For every credit, a corresponding debit is made. The
recording of a transaction is complete only with this dual aspect.
4. Going concern concept: In accounting, a business is expected to continue for
a fairly long time and carry out its commitments and obligations. This assumes
that the business will not be forced to stop functioning and liquidate its assets at
“fire-sale” prices.
5. Cost concept: The fixed assets of a business are recorded on the basis of their
original cost in the first year of accounting. Subsequently, these assets are
recorded minus depreciation. No rise or fall in market price is taken into
account. The concept applies only to fixed assets.
6. Accounting year concept: Each business chooses a specific time period to
complete a cycle of the accounting process—for example, monthly, quarterly, or
annually—as per a fiscal or a calendar year.
7. Matching concept: This principle dictates that for every entry of revenue
recorded in a given accounting period, an equal expense entry has to be
recorded for correctly calculating profit or loss in a given period.
8. Realisation concept: According to this concept, profit is recognised only when
it is earned. An advance or fee paid is not considered a profit until the goods or
services have been delivered to the buyer.
Accounting Conventions
There are four main conventions in practice in accounting: conservatism; consistency;
full disclosure; and materiality.
Conservatism is the convention by which, when two values of a transaction are
available, the lower-value transaction is recorded. By this convention, profit should
never be overestimated, and there should always be a provision for losses.
Consistency prescribes the use of the same accounting principles from one period of
an accounting cycle to the next, so that the same standards are applied to calculate
profit and loss.
Materiality means that all material facts should be recorded in accounting.
Accountants should record important data and leave out insignificant information.
Full disclosure entails the revelation of all information, both favourable and
detrimental to a business enterprise, and which are of material value to creditors and
debtors.
Basic Accounting Terms
Here is a quick look at some important accounting terms.
Accounting equation: The accounting equation, the basis for the double-entry system
(see below), is written as follows:
Assets = Liabilities + Stakeholders’ equity
This means that all the assets owned by a company have been financed from loans
from creditors and from equity from investors. “Assets” here stands for cash, account
receivables, inventory, etc., that a company possesses.
Accounting methods: Companies choose between two methods—cash accounting or
accrual accounting. Under cash basis accounting, preferred by small businesses, all
revenues and expenditures at the time when payments are actually received or sent
are recorded. Under accrual basis accounting, income is recorded when earned and
expenses are recorded when incurred.
Account receivable: The sum of money owed by your customers after goods or
services have been delivered and/or used.
Account payable: The amount of money you owe creditors, suppliers, etc., in return
for goods and/or services they have delivered.
Accrual accounting: See “accounting methods.”
Assets (fixed and current): Current assets are assets that will be used within one
year.
For example, cash, inventory, and accounts receivable (see above). Fixed assets (non-
current) may provide benefits to a company for more than one year—for example, land
and machinery.
Balance sheet: A financial report that provides a gist of a company’s assets and
liabilities and owner’s equity at a given time.
Capital: A financial asset and its value, such as cash and goods. Working capital is
current assets minus current liabilities.
Cash accounting: See “accounting methods.”
Cash flow statement: The cash flow statement of a business shows the balance
between the amount of cash earned and the cash expenditure incurred.
Credit and debit: A credit is an accounting entry that either increases a liability or
equity account, or decreases an asset or expense account. It is entered on the right in
an accounting entry. A debit is an accounting entry that either increases an asset or
expense account, or decreases a liability or equity account. It is entered on the left in
an accounting entry.

Double-entry bookkeeping: Under double-entry bookkeeping, every transaction is
recorded in at least two accounts—as a credit in one account and as a debit in
another.
For example, an automobile repair shop that collects Rs. 10,000 in cash from a
customer enters this amount in the revenue credit side and also in the cash debit side.
If the customer had been given credit, “account receivable” (see above) would have
been used instead of “cash.” (Also see “single-entry bookkeeping,” below.)
Financial statement: A financial statement is a document that reveals the financial
transactions of a business or a person. The three most important financial statements
for businesses are the balance sheet, cash flow statement, and profit and loss
statement (all three listed here alphabetically).
General ledger: A complete record of financial transactions over the life of a company.
Journal entry: An entry in the journal that records financial transactions in the
chronological order. Profit and loss statement (income statement): A financial
statement that summarises a company’s performance by reviewing revenues, costs
and expenses during a specific period.
Single-entry bookkeeping: Under the single-entry bookkeeping, mainly used by small
or businesses, incomes and expenses are recorded through daily and monthly
summaries of cash receipts and disbursements. (Also see “double-entry bookkeeping,”
above.)
Types of accounting: Financial accounting reports information about a company’s
performance to investors and credits. Management accounting provides financial data
to managers for business development.
Important Topics in Accounting
Financial Accounting Basic Concepts and Principles
Profit, it has been said often, is the sole objective of business. Therefore, for those
running a business, information about the financial performance of the enterprise is a
most important requirement.
This information is not available easily and can be obtained only by systematically
recording, classifying, and summarising all the business transactions. The branch of
accounting that accomplishes these tasks under internationally standardised
procedures is called financial accounting.
However, financial accounting is not limited to recording, classifying, and summarizing
information about business transactions. It also deals with reporting this information to
stakeholders outside the organisation, such as investors and creditors, who are the
important, primary recipients of the information.
There may be secondary recipients, too, such as competitors, customers, employees,
and stock-market analysts, but the information generated by financial accounting is
mainly aimed at external stakeholders who are not part of the business organisation
per se.
Therefore, to put together a formal definition of financial accounting, it is a specialized
branch of accounting that records and reports information about the financial position

and performance of a company, mainly for use by the business entity’s external
stakeholders.
How does financial accounting achieve its tasks? Financial accounting mainly
generates three financial statements to provide the information required—the balance
sheet, income statement, and cash flow statement.
These documents provide the stakeholders a clear idea about the performance of the
business during a particular period and its financial position at a specific time. The
objective of the financial accountants is not to estimate the value of a company but to
facilitate this valuation by others.
According to the International Financial Reporting Standards, financial accounting
provides information about a business organisation that is useful to existing and
potential investors, lenders, and other creditors in making decisions about providing
resources to the organisation.
Objectives
The objectives of financial accounting can be put in four categories, as follows:
 Record financial transactions as and when they occur (bookkeeping), so that
the data can be analysed for preparing financial statements
 Calculate profit or loss, to enable management to take course-correction
strategies if required
 Ascertain the financial strength of the company by determining its assets and
liabilities
 Communicate the information to stakeholders through statements and reports,
so that these stakeholders can take appropriate decisions on their investments
in the business
Financial statements
For meeting these objectives, financial accountants mainly prepare three types of
documents, as briefly mentioned in the introduction above—the balance sheet, which
reflects the assets and liabilities; income statement, which shows the profit and loss;
and, cash flow statement, which charts the cash inflow and outflow.
The external users of financial statements look at the balance sheet to find out how
strong the business is, financially (assets vs. liabilities), and at the income statement to
find out how well the business is doing (profit vs. loss).
Creditors and other lenders would be happy to see a positive balance sheet so that
they know their investments are safe, and investors would like to see an income sheet
with profit so that they know some money would be coming to them from the company
in the form of dividend or interest.
Almost all stakeholders want to see the cash flow statement to know the cash
availability with the company and whether it will be able to clear its liabilities.
Among the internal users of financial statements are managers, who can take
decisions on the basis of the financial statements, and among the external users are
government authorities, who can initiate tax measures.
Here are some additional notes on the three financial statements mentioned above.
Balance sheet: The balance sheet of a company shows its assets, liabilities, and
stockholders’ equity as on the last day of the accounts-reporting period. Assets include
cash, stocks, buildings, and machinery, while liabilities include loans, interest, and
wages. Stockholders’ equity is the difference between the assets and the liabilities.
Read more about balance sheets.
Income statement: The income statement (issued quarterly or annually) reports the
company’s profitability in a given period. It presents the revenues (sales and service
revenues), expenses (operating expenses, such as wages and rent, and non-operating
expenses, such as loan interest), gains, and losses. Read more on Profilt and Loss.
Cash flow statement: The cash statement shows the inflow and outflow of cash and
its use for operating, financing, and investing activities. Here are some details on the
cash flow statement.
Concepts of Financial Accounting
At the core of financial accounting is the double-entry accounting method, by which
each financial transaction is entered in at least two accounts (assets, liabilities, and
expenses are examples of accounts)—as a debit in one account and as a credit in
another account.
“Debit” simply means to enter a transaction on the left side of an account, and credit
means to enter a transaction on the right side. A debit increases some accounts and
decreases some others. Similarly, a credit increases some accounts and decreases
some others.
Imagine that a company takes a bank loan. Under the double-entry system, this
transaction has to be entered as a credit in one account and as a debit in another
account. Bolstered by the loan, the company’s cash/assets increase, and this
transaction, where the assets have increased, is a debit transaction. Therefore, it is
entered as a debit transaction under the assets account.
However, with the loan, the company’s liabilities also increase, and this transaction,
where the liabilities have increased, is a credit transaction. So, it is entered as a credit
transaction under the liabilities account. This procedure is followed under the double-
entry system of accounting.
Information about which accounts to credit or debit for each transaction is available
from online resources on accounting. For example, an increase in expense and a
decrease in income are always debit entries, and a decrease in assets and an increase
in liabilities are always credit entries.
An important aspect to remember is that debiting an account does not always mean
decreasing it, nor does crediting an account always mean increasing it.
Each credit should be balanced by a debit, and vice versa (it is not a question of
balancing each increase in an account with a decrease in another account).
The advantage of double-entry accounting is that it helps keep the accounting equation
(assets = liabilities + stockholders’ equity) always balanced. If a company records its
accounts accurately, the left side of the equation will match the right side.
Another cornerstone of financial accounting is the accrual accounting system, by which
revenues and expenses are recorded in the financial statements when they are earned
or incurred, not when the cash comes in or goes out, as is done under the cash
accounting system.

The accrual system ensures that the statements reflect the financial position of the
company accurately, and that there is no overestimation of revenue or profits.
Principles of Financial Accounting
As discussed in the post “Accounting basics,” the rules of accounting, including
financial accounting, have been standardised to achieve the following goals:
 Objectivity: Financial statements should be free from bias, and financial
accountants should scrupulously follow the principle of objectivity.
 Usability: Users of financial documents should be able to depend on them—the
documents should facilitate decision-making.
 Materiality: Omission of data from financial statements will mislead financial
decision-makers; therefore, all important data should be recorded and
misstatement of facts avoided.
 Comparability: Financial statements should enable users to compare the
performances of companies, and the documents should follow the standards set
internationally.
Financial Accounting Standards
Most or all of the general principles of accounting apply to financial accounting, too.
These principles are kept in mind in the preparation of financial statements under the
“Generally Accepted Accounting Principles,” or GAAP, followed internationally.
In India, financial accounting standards are notified by the Ministry of Corporate Affairs
in tune with the guidelines of the International Financial Reporting Standards.
A new set of standards known as “Indian Accounting Standards,” or “Ind AS,” is about
to be implemented in the country.
Comparison: Financial vs Management vs Cost Accounting
A final word on financial accounting: it differs from management accounting and cost
accounting in that it mainly caters to external stakeholders, such as investors.
Management accounting, however, is intended for a company’s internal use and
provides managers with the information necessary for taking steps to improve the
performance of their company.

UNIT 2: ACCOUNTING AND AUDITING MCQs
(3) MiniTab (3) (v), (iv), (iii), (ii) and (i)
(4) All of the above (4) (iii), (v), (iv), (i) and (ii)
Answer: (4) Answer: (4)
20. F-test is used to test the significance of 23. Assertion (S) : One can be sure about
the differences between/among future course of actions by making good
(1) Two sample mean plans.
(2) More than two samples mean Reasoning (R) : Planning brings certainty in
(3) Variance of two samples future course of actions of an organisation.
(4) (2) and (3) (1) (R) is correct but (S) is not correct.
(2) (S) is correct but (R) is not correct.
Answer: (4) (3) Both (S) and (R) are correct.
(4) Both (S) and (R) are not correct.
21. Match the following
List-I List- Answer: (S)
II
(i) The Practice of Management 24. According to Kieth Devis, which one is
(1) Henry Fayol not a barrier of communication?
(ii) Philosophy of Management (1) Physical Barriers
(2) F.W. Taylor (2) Technological Barriers
(iii) Scientific Management (3) Personal Barriers
(3) Oliver Sheldon (4) Linguistic Barriers
(iv) General and Industrial Administration
(4) Peter F Drucker Answer: (2)
Codes :
(i) (ii) (iii) (iv) 25. While establishing relation between
(1) (1) (2) (3) (4) Maslow’s and Herzberg’s theories, which
(2) (4) (3) (2) (1) Needs of Hierachy Theory will fall under
(3) (4) (3) (1) (2) the Hygiene Factors?
(4) (3) (4) (2) (1) (1) Self actualisation, esteem and social
needs
Answer: (2) (2) Esteem, social and safety needs
(3) Social, safety and physiological needs
22. Identify the correct sequence of steps (4) Only social needs
involved in planning:
(i) Selecting the best course of action Answer: (3)
(ii) Establishing the sequence of activities
(iii) Establishment of objectives 26. Howard-Sueth model of consumer
(iv) Evaluating alternative courses behaviour is popularly known as
(v) Determining alternative courses (1) Machine Model
(1) (i), (ii), (iii), (iv) and (v) (2) Human Model
(2) (iii), (v), (iv), (ii) and (i) (3) Marketing Model

(4) Purchase Model (3) Selling volume
(4) Consumer satisfaction
Answer: (1)
Answer: (4)
27. To generate and facilitate any
exchange intended to satisfy human needs 31. Which one is not an important
or wants such that the satisfaction of these objective of Financial Management?
wants occur with minimal detrimental (1) Profit Maximisation
impact on the natural environment is (2) Wealth Maximisation
known as (3) Value Maximisation
(1) Aggressive marketing (4) Maximisation of social benefits
(2) Operating marketing
(3) Green marketing Answer: (4)
(4) All of the above
32. Which one refers to cash inflow under
Answer: (3) payback period method?
(1) Cash flow before depreciation and
28. All the activities involved in selling taxes
goods or services directly to final (2) Cash flow after depreciation and taxes
consumers for personal non-business uses (3) Cash flow after depreciation but before
are done by taxes
(1) Wholesalers (4) Cash flow before depreciation and after
(2) Retailers taxes
(3) Mediators
(4) Commission Agents Answer: (2)
Answer: (2) 33. The concept of present value is based

on the :
29. To manage a business well is to (1) Principle of compounding
manage its future and to manage the (2) Principle of discounting
future is to manage information is termed (3) (1) and (2)
as (4) None of the above
(1) Management information system
(2) Marketing information system Answer: (2)
(3) Future information system
(4) General information system 34. Cost of capital from all the sources of
funds is called
Answer: (1) (1) Specific cost
(2) Composite cost
30. DAGMAR approach in marketing is (3) Implicit cost
used to measure (4) Simple Average cost
(1) Public relations
(2) Advertising results Answer: (1)

(2) (S) is correct but (R) is not correct.
35. Match the following with most suitable (3) (S) and (R) both are correct.
option: (4) (S) and (R) both are not correct.
(1) Modigiliani- Miller Approach
(i) Commercial papers Answer: (4)
(2) Net Operating Income Approach
(ii) Working Capital Management 38. Which of the following are covered
(3) Short term Money Market under the scope of Human Resource
Instrument (iii) Capital Structure Management?
(4) Factoring (i) Forecasting Human Resource Needs
(iv) Arbitrage (ii) Replacement Planning
Codes : (iii) Human Resource Dynamics
(1) (2) (3) (4) (iv) Human Resource Development
(1) (iv) (iii) (i) (ii) Planning
(2) (iii) (iv) (i) (ii) (v) Human Resource Audit
(3) (iii) (ii) (i) (iv) (1) (i), (iii), (v)
(4) (iii) (ii) (iv) (i) (2) (i), (ii), (iii), (iv)
(3) (iii), (v)
Answer: (2) (4) (i), (ii), (iii), (iv), (v)
36. Which four are the factors influencing Answer: (4)

the Human Resource Management of an
organisation? 39. On which of the following, at the initial
(i) Size of workforce stage, the Indian IT companies relying
(ii) Employee Expectations more for getting good IT professionals?
(iii) Composition of workforce (1) Job Portals
(iv) Political influence (2) Placement Agencies
(v) Changes in technology (3) Campus Placement
(1) (i), (ii), (iii) and (iv) (4) All of the above
(2) (i),(ii), (iii) and (v)
(3) (i), (ii), (iv) and (v) Answer: (3)
(4) (i), (iii), (iv) and (v)
40. Statement (i): Labour always get a
Answer: (3) major share of productivity gains.
Statement (ii): Partial stoppage of work by
37. Assertion (S) : One can not be sure workers amounts to strike.
about the quality of appraisal on the basis (1) Statement (i) is true but (ii) is false.
of length of service. (2) Statement (ii) is true but (i) is false.
Reasoning (R): Initial appraisal and (3) Both statements are true.
promotional appraisal are done separately (4) Both statements are false.
and differently since the length of service
is different. Answer: (2)
(1) (R) is correct but (S) is not correct.

41. Imperial Bank was established on (3) SEBI Act, 1992
January 27, 1921 on the advise of (4) Statutory Auditor
(1) J. M. Keynes
(2) Lord Illingworth Answer: (2)
(3) King George V
(4) Winston Churchill 45. Which among the following is not true
with regard to merchant banker?
Answer: (1) (i) It can accept deposits.
(ii) It can advance loans.
42. Read the following events: (iii) It can do other banking activities.
(i) Allowing convertibility of rupee at the (iv) It can be manager to a public issue.
market rate in the current account (1) (i), (ii) and (iii)
(ii) Nationalisation of general insurance (2) (ii), (iii) and (iv)
business (3) (i), (iii) and (iv)
(iii) Establishment of IDBI (4) (ii) and (iv)
(iv) Nationalisation of life insurance
business Answer: (1)
(v) Capital adequacy norms for commercial
banks 46. Balance of Payments can be made
Arrange the events in the ascending order favourable if
of their occurrence: (1) Exports are increased
(1) (iv), (iii), (ii), (i), (v) (2) Imports are increased
(2) (v), (iv), (iii), (ii), (i) (3) Devaluation of money
(3) (i), (ii), (iii), (v), (iv) (4) (1) and (3)
(4) (i), (v), (ii), (iv), (iii)
Answer: (4)
Answer: (1)
47. Which one is not an objective of IMF?
43. In India, the Commercial Banks are (1) To promote international monetary co-
given license of operation by operation
(1) The Government of India (2) To ensure balanced international trade
(2) The Ministry of Finance (3) To finance productive efforts according
(3) Reserve Bank of India to peace-time requirement
(4) Banking Companies Regulation Act, (4) To ensure exchange rate stability
1949
Answer: (3)
Answer: (3)
48. EPCG denotes
44. The provisions of General Reserve in (1) Export Potential and Credit Guarantee
Banking Companies are made keeping in (2) Earning Promotion and Credit
view the provisions of Guarantee
(1) Indian Companies Act, 1956 (3) Export Promotion and Credit Guarantee
(2) Banking Companies Act, 1949 (4) Export Potential and Credit Goods

Answer: (3)
49. Which one of the following matches

correspond to the Member and Observer
countries of the SAARC?
(i) India, Pakistan, Bangladesh, Bhutan,
Nepal, Sri Lanka, Afghanistan, Maldive
(ii) Iran, China, Japan, USA, South Korea,
European Union
(iii) Pakistan, Nepal, India, Bangladesh, Iran
(iv) UK, USA, North Korea, South Africa
(1) (iii) and (iv)
(2) (ii) and (iv)
(3) (i) and (ii)
(4) (ii) and (iii)
Answer: (3)
50. Which one is not an international

organisation?
(1) SAARC
(2) ASEM
(3) ASEAN
(4) CBDT
Answer: (4)
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UNIT 3: BUSINESS ECONOMICS

What is Meaning and scope of business economics ?
Meaning and scope of business economics
Business Economics:
The teaching of economics is, thus, an abstract theorization with little connection to
business.
But theoretical models of economics are to be applied in business areas. Once
theoretical models of economics are applied in business, the gap between economics
and business gets minimised.
The branch of managerial economics or business economics has established links
between business and economics.
Business economics is, thus, an applied economics. Economics is the study of human
beings (e.g., consumers, firms) in producing and consuming goods and services in the
midst of scarcity of resources. Managerial or business economics is an applied branch
of organising and allocating a firm’s scarce resources to achieve its desired goals.
Managerial economics or business economics is economics applied in decision-
making. Business economics, thus, interweaves economic principles and business.
Business managers apply economic laws and principles while presenting business
problems and their ways of solutions. Thus, business economics can be defined as the
application of economic analysis to business problems faced by an enterprise. It
provides a link between economic theory and the decision sciences in the analysis of
managerial decision-making. It relies heavily on traditional economics and decision
sciences.
Identification of the problems and the solving of the problems are the two crucial
elements of decision-making of a business firm. Business economists help business
managers in making sound business decisions. Business success, in fact, greatly
depends on appropriate business decisions. However, appropriate decision-making is
not an easy job in this changing world.
On the basis of past knowledge and experience, business managers take business
decisions and make future plans. But decision-makers are constrained by the
‘uncertainty’ of the real world where changes occur either in a hidden way or in an
open way. In this changing but uncertain world, an accurate decision-making is
impossible even if talents of top quality business economists are employed.
It is due to this uncertainty, prediction or estimation relating to the volume of sales of a
product, cost of production, profit, etc., is more likely to be imperfect. In other words,
against the backdrop of uncertainty and a changing world, business managers will
have to anticipate changes so that the impact of unfavorable situations becomes
insignificant. Thus, business decision-making is an art.
Cultivation of this art is made through economic principles. In this sense, managerial
economics is an applied economics. It is concerned with the application of economic
concepts and analytical tools to the process of decision-making of a business
enterprise.

Thus, managerial economics or business economics is a ‘special branch of economics
that bridges the gap between abstract economic theory and managerial practice.
Through a process of application of the principles, concepts and tools of economics to
solve the managerial problems of a business enterprise, business economists have
greatly minimised the problem of uncertainty arising in business.
[An Illustration of the Relationship between Economic Theory and Business—
Machlup’s Overtaking Analogy]
The application field of economic theory is popularly known as business economics or
managerial economics. Can economic theory be applied in business practice
efficiently? Fritz Machlup, in answering this question, gave an analogy between the
behaviour of a motorist deciding whether or not to overtake on a two-lane highway and
the behaviour of a profit- maximising firm. Overtaking decision of the motorist involves
construction of a very complex set of equations.
While overtaking, the motorist must have a knowledge about the weight, power, speed
of the vehicle being driven, the condition of the road, weather, information about the
number of vehicles plying on the highway, and a set of assumptions about the
behaviour and objectives of other drivers. Unfortunately, even the most expert and
cautious drivers do not have all these information.
But the model-builder makes such unrealistic assumptions. Under the circumstance,
the decision of overtaking in a two- lane highway seems to be next to impossible. In
reality, all the drivers overtake dozens of times every day. Such overtaking decisions
are deemed to be ‘correct’ only if accidents are not met with.
If we compare this behavioural overtaking decision of a motorist with that of the
behaviour of a profit- maximising firm, we will reach the same conclusion. A profit-
maximising firm assumes that it has perfect information about costs and revenue
conditions. But that too is an unrealistic assumption.
Still they assume such and are always guided by profit-maximising motive. “Like the
driver taking-the decision to overtake, managers ‘behave’ as if they had the
relevant information, in which case they will behave like the profit- maximising
model and that model will be a good predictor of their behaviour. ”
Characteristics of Business Economics:
Business economics is essentially concerned with the various decisions of a business
enterprise. The unit of study of business economics is the firm. Thus, managerial
economics studies decision-making behaviour of a firm or an industry. Microeconomics
takes into account the behaviour of smaller economic agents, such as a firm or a
consumer or an input owner.
It deals with the operation of a consumer, a firm involving the determination of price of
a commodity, revenue, costs and, hence, profit levels, etc. Managerial economics is,
thus, essentially microeconomic in character as it has its origin in theoretical
microeconomics. Profs. H. C. Petersen and W. C. Lewis suggest that managerial
economics should be thought of as applied microeconomics.
It is an application of that part of microeconomics focusing on those topics which are of
great interest and importance to business managers. These topics include theories of
demand, production and cost, profit-maximising model of the firm, optimal prices and

advertising expenditures, government regulation, etc. Managerial economics is
concerned with finding optimal solutions to business decision problems.
Secondly, economic concepts and principles of the ‘theory of firm’ are employed in
business economics. Thus, in business economics, the main emphasis is given upon
the firm, the environment in which the firm finds itself, and the business decision which
firms have to take. In this sense, managerial economics is narrower in scope than pure
economic theory.
Thirdly, broadly there are two main branches of economics—’positive’ economics and
‘normative’ economics. Positive economics deals with ‘description’ while normative
economics deals with ‘prescription’. By building up propositions on the basis of a set of
assumptions, positive economics tries to explain economic phenomenon.
Normative economics comments on the desirability of that phenomenon and suggests
policy measures. Value judgments are, thus, pronounced in normative economics. In
the words of Profs. Mote, Paul and Gupta: “Managerial economics is a part of
normative economics as its focus is more on prescribing choice and action and less on
explaining what has happened. Managerial economics draws on positive economics by
utilizing the relevant theories as a basis for prescribing choices.”
Fourthly, business economics not only seeks to investigate and analyse how and why
businesses behave as they do but also the implications of their actions and policies for
the industry in which they operate and, finally, for the economy as a whole. In this
business environment, both internal and external factors work.
Business economics seeks to analyse various internal and external constraints that
businesses experience in their process of growth and survival, draw conclusions as to
how and why businesses behave as they do. “Business economics therefore
focuses on the issues relevant to a business and its operations, and to the
business environment.” Thus, business economics is considered as applied
economics. It casts away abstract economic theories. Managerial economists look at
practical applications of theoretical models.
Finally, business economics is essentially microeconomic in character. In other words,
macroeconomic theory has less relevance for managerial economics. Truly speaking,
business economics should also deal with a wider environment—the macro-economy.
Macroeconomics is concerned with the behaviour of the economic system in totality. It
studies the determination of aggregate national income, level of employment, general
price level, the international balance of payments, etc.
It is true that aggregating economic trends or external economic factors do not directly
affect business decisions of a firm. But what is true is that changing macro-economy
not only influences aggregate or national income but also the demand for the product
of a business firm. Efficient business managers must have awareness as well as
keenness of studying and explaining macroeconomic environment. In this sense,
business economics cannot be devoid of macroeconomics.
Subject-Matter and Scope of Business Economics:
We know that managerial economics or business economics is applied
microeconomics employed for the purpose of facilitating decision-making and forward

planning. As far as decision-making and forward planning are concerned, one has to
face the following problems:
Problem of resource allocation seems to be a pressing problem for any organisation.
Resources are not plentiful. A firm has to organise scarce resources efficiently so that
optimal outcomes are obtained. Such resource allocation problem includes production
programming, transportation problem, etc. Non-optimal organisation of resources may
spell disaster to any organisation.
Inventory and queuing are important problems to any firm. A firm has to hold an
optimal level of stocks of raw materials and finished product so that business
uncertainties can be minimised. Business managers must decide an optimal level of
inventories. Such decisions are taken by firms after considering demand and supply
conditions.
Since forward planning by management is essential, a firm must make decisions—
whether new machines are to be installed or more professionals are to be employed.
As most of the decisions cannot be implemented simultaneously, the firm manager
must make a trade-off between decisions. Taking a particular decision out of a variety
of decisions is known as queuing problem. A manager places or queues alternative
decisions and picks up a right one. Price fixation is another interrelated problem
connected with decision-making. A firm has to take up a right pricing decision.
Finally, the decision-maker faces investment problems for a variety of reasons. Truly
speaking, any forward planning by management involves investment problems which
are by nature knotty. Investment problems boil down to the problems of allocating
resources over time. A firm has to make decision about the volume of investment. It
must decide where to invest, when to invest. It must know the sources of funds, etc.
Anyway, business economics is concerned with decision-making and forward planning.
The scope of business economics (both micro and macro variety) is a wider one since
it “uses the logic of Economics, Mathematics and Statistics to provide effective ways of
thinking about business decision problems.” In view of this saying of Prof. D. C. Hague,
we can argue that there are links between managerial economics and management
science. In fact, the boundaries between the two subjects are not clear-cut but
overlapping.
Managerial economics is largely an applied branch of microeconomics. Its
macroeconomic content is not to be belittled. It uses the methods and techniques of
microeconomics mostly in the field of management. As Haynes and William Warren
state: “The relation of managerial economics to economic theory (of either the micro or
macro variety) is much like that of engineering to physics, or of medicine to biology or
bacteriology. It is the relation of an applied field to the more fundamental but more
abstract basic discipline from which it borrows concepts and analytical tools.”
It is to be pointed out here that measurement without theory may lead to false precision
and diagnosis while theory without measurement can hardly be operationally useful.
Now we are in a position to explain the scope of business economics. By scope of
(business) economics we mean the field of the subject, the boundaries that delimit and
delineate the topics to be addressed.
Determination of the scope of the subject includes:
(i) Definition of the subject,
(ii) Subject matter of business economics,
(iii) Is business economics a positive or a normative science?
Since business economics is thought of as applied microeconomics, the scope
of business economics includes:
i. Analysis, estimation and forecasting of consumer demand for a product;
ii. Analysis of cost and output;
iii. Determination of price of a commodity, work policy and business strategies of a
business enterprise;
iv. Long-run planning decisions of a firm that studies capital budgeting and capital
management.
Managerial economics now includes ‘operations research’—a mathematical technique
to solve business problems.
Finally, we must say that there is a great deal of linkages between managerial
economics and other disciplines and fields of study. It uses the logic of economics,
mathematics and statistics. Managerial economics is related to management science
or the decision sciences. Management science is concerned with techniques for
improvement of decision-making.
Business economics is related to accounting. Accounting is essentially concerned with
recording and analysing the financial activities of a business firm. To quote Prof. D. C.
Hague: “The main task of management accounting is now seen as being to provide the
sort of data which managers need if they are to apply the idea of managerial
economics to solve business problems correctly; accounting data are also to be
provided in a form so as to fit easily into the concepts and analysis of managerial
economics.”
In view of the relationship between managerial economics and other disciplines, it may
be called an art, and not a science. Though an art, decision-making in this uncertain
world has become more perfect. Better choices, better prediction, etc., are likely to
emerge because of the interaction among basic disciplines.
Thus, it is clear from the above discussion that managerial or business economics
helps managers of firms, administrators of non-profit and profit-making hospitals,
schools, colleges and universities to recognise how economic forces affect
organisations. It applies economic theory and methods to business and administrative
decision-making in both profit and non-profit sector.
Business economics links economic concepts with quantitative methods to develop
tools for managerial decision-making. Business economics, thus, intends to bridge the
gap that exists between economics and business management theory. This process is
illustrated in Fig. 1.1.

Thus, business economics is closely linked with many disciplines (such as marketing,
finance, management accounting, management science etc. in a business curriculum).
What is Objectives of business firms ?
Objectives of business firms
Profit Maximisation:
In the conventional theory of the firm, the principal objective of a business firm is profit
maximisation. Under the assumptions of given tastes and technology, price and output
of a given product under perfect competition are determined with the sole objective of
maximising profits. The firm is supposed to act as one of a large number of producers
which cannot influence the market price of the product.
It is the price-taker and quantity-adjuster. Thus the demand and cost conditions for the
product of the firm are determined by factors external to the firm. In this theory,
maximum profits refer to pure profits which are a surplus above the average cost of
production. It is the amount left with the entrepreneur after he has made payments to
all factors of production, including his wages of management.
In other words, it is a residual income over and above his normal profits. It is a
necessary payment for an entrepreneur to stay in the business. The rules for profit
maximisation are (1) MC = MR and (2) MC should cut MR from below.
Multiple Objectives:
The basis of the difference between the objectives of the neo-classical firm and the
modern corporation arises from the fact that the profit maximisation objective relates to
the entrepreneurial behaviour while modem corporations are motivated by different

objectives because of the separate roles of shareholders and managers. In the latter,
shareholders have practically no influence over the actions of the managers.
As early as in 1932, Berle and Means suggested that managers have different goals
from shareholders. They are not interested in profit maximisation. They manage firms
in their own interest rather than in the interests of shareholders. Shareholders cannot
have much influence on managers because they do not possess adequate information
about companies.
The majority of shareholders cannot attend annual general meetings of companies and
thus give their proxies to the directors. Thus modem firms are motivated by objectives
relating to sales maximisation, output maximisation, utility maximisation, satisfaction
maximisation and growth maximisation which we explain briefly.
a. Simon’s Satisficing Objective:
Nobel laureate, Herbert Simon was the first economist to propound the behavioural
theory of the firm. According to him, the firm’s principal objective is not maximising
profits but satisficing or satisfactory profits.
In Simon’s words:
“We must expect the firms goals to be not maximising profits but attaining a certain
level or rate of profit holding a certain share of the market or a certain level of sales.”
Under conditions of uncertainty, a firm cannot know whether profits are being
maximised or not.
In analysing the behaviour of the firm, Simon compares the organisational behaviour
with individual behaviour. According to him, a firm, like an individual, has its aspiration
level in keeping with its needs, drives and achievement of goals.
The firm aspires to achieve a certain minimum or ‘target’ level of profits. Its aspiration
level is based on its different goals such as production, price, sales, profits, etc., and
on its past experience. This also takes into account uncertainties in the future. The
aspiration level defines the boundary between satisfactory and unsatisfactory
outcomes.
In this context, the firm may face three alternative situations:
(a) The actual achievement is less than the aspiration level;
(b) The actual achievement is greater than the aspiration level; and
(c) The actual achievement equals the aspiration level.
In the first situation, when the actual achievement lags behind the aspiration level, it
may be due to wide fluctuations in economic activity or on account of qualitative
deterioration in the performance level of the firm.
In the second situation, when the actual achievement is greater than the aspiration
level, the firm is satisfied with its commendable performance. The firm is also satisfied
in the third situation when its actual performance matches its aspiration level. But the
firm does not feel satisfied in the first situation.
It may be that the firm has set its aspiration level very high. It will, therefore, revise it
downward and start a search activity to fulfil its various goals in order to achieve the
aspiration level in the future. Similarly, if the firm finds that the aspiration level can be
achieved, it will be revised upward. It is through such search activity that the firm will be
able to reach the aspiration level set by the decision-maker.

The search process may be done through sequence of possible alternatives using past
experience and rules-of-thumb as guidelines. But the search activity is not a costless
affair.
“The advantage of search activity must be balanced against its cost, and once search
has revealed that what appears to be a satisfactory course of action, it will be
abandoned for the time being. In this way, the firm’s aspiration level is periodically
adapted to circumstances and the firm’s reaction to them. The firm is not maximising,
since, partly on account of the cost, it limits its searching activities. The firm, while
behaving rationally, is ‘satisficing’ rather than maximising.”
Criticism:
This theory has certain weaknesses.
1. The main weakness of the satisficing theory of Simon is that he has not specified the
‘target’ level of profits which a firm aspires to reach. Unless that is known it is not
possible to point out the precise areas of conflict between the objectives of profit
maximising and satisficing.
2. Baumol and Quant do not agree with Simon’s notion of ‘satisficing’. According to
them, it is “constrained maximisation with only constraints and no maximisation.”
Despite these weaknesses, Simon’s model was the first model on which the later
behavioural models have been developed.
b. Behavioural theory of organisational goals:
Cyert and March have put forth a systematic behavioural theory of the firm. In a
modern large multiproduct firm, ownership is separate from management. Here the firm
is not considered as a single entity with a single goal of profit maximisation by the
entrepreneur.
Instead, Cyert and March regard the modem business firm as a group of individuals
who are engaged in the decision-making process relating to its internal structure
having multiple goals. They emphasise that the modern business firm is so complex
that individuals within it have limited information and imperfect foresight with respect to
both internal and external developments.
Organisational goals:
Cyert and March regard the modern business firm as a complex organisation in which
the decision-making process should be analysed in variables that affect organisational
goals, expectations and choices. They look at the firm as an organisational coalition of
managers, workers, shareholders, suppliers, customers, and so on.
Looked at it from this angle, the firm can be supposed to have five different goals:
production, inventory, sales, and market share and profit goals.
Implications of the Cyert-March Model for Price Behaviour:
They illustrate the key processes at work in an oligopolistic firm when it makes its
decisions on price, output, costs, profits, etc. In this theory, each firm is assumed to
have three sets of goals for profits, production and sales, and three basic decisions to
make on price, output and sales effort in each time period.
It takes into consideration the firm’s environment at the beginning of each period which
reflects its past experience. Its aspiration levels are modified in the light of this

experience. The organisational slack is the difference between total available
resources and total necessary payments to members of the coalition.
Price is sensitive to factors influencing increases and decreases in the amount of
organisational slack, to feasible reductions in expenditure on sales promotion and to
changes in profit goals.
Each firm is assumed to estimate its demand and production costs and choose its
output level. If this output level does not yield the aspired level of profits, it searches for
ways to reduce costs, re-estimate demand and, if required, to lower its profit goal.
If the firm is prepared to lower its profit goal, it will readily reduce its price. Thus price is
found to be sensitive to factors affecting costs due to the close relationship between
prices, costs and profits.
Criticism:
The Cyert and March theory of the firm has been severely criticised on the
following grounds:
1. Economists have questioned: ‘Whether it is a theory at all? It deals with particular
cases whereas a theory is expected to be a general approximation of the behaviour of
firms. Its empirical base is too limited to provide the details of theorising. Hence it fails
as a theory of the firm.
2. The behavioural theory relates to a duopoly firm and fails as the theory of market
structures.
3. The theory does not consider either the conditions of entry or the effects on the
behaviour of existing firms of a threat of potential entry by firms.
4. The behavioural theory explains the short-run behaviour of firms and ignores their
long-run behaviour.
Conclusion:
Despite these criticisms, the behavioural theory of Cyert and March is an important
contribution to the theory of the firm which brings into focus multiple, changing and
acceptable goals in managerial decision-making.
c. Williamson’s Utility Maximisation:
Williamson has developed managerial utility-maximisation objective as against profit
maximisation. It is one of the managerial theories and is also known as the ‘managerial
discretion theory’. In large modem firms, shareholders and managers are two separate
groups. The former want maximum return on their investment and hence the
maximisation of profits.
The managers, on the other hand, have consideration other than profit maximisation in
their utility functions. Thus the managers are interested not only in their own
emoluments but also in the size of their staff and expenditure on them.
Thus Williamson’s theory is related to the maximisation of the manager’s utility which is
a function of the expenditure on staff and emoluments and discretionary funds. “To the
extent that pressure from the capital market and competition in the product
market is imperfect, the manager, therefore, has discretion to pursue goals other
than profits.”

UNIT 3: BUSINESS ECONOMICS MCQs
(2) 50 (4) the project returns 92 cents in present
(3) 80 value for each current dollar invested
(4) 70 (cost)
Answer: (2) Answer: (4)
22.If a company's earnings per share is $20 26.The LMN Corporation is considering an
and it has a share price of $600, what is the investment that will cost $80,000 and have
P/E a
ratio? useful life of 4 years. During the first 2
(1) 30 years, the net incremental after-tax cash
(2) 40 flows are
(3) 50 $25,000 per year and for the last two years
(4) 20 they are $20,000 per year. What is the
Answer: (1) payback period for this investment?
(1) 3.2 years.
23.Making gifts of money, goods, or time (2) 3.5 years.
to help non-profit organizations, groups or (3) 4.0 years.
individuals is: (4) Cannot be determined from this
(1) Corporate social marketing information.
(2) Cause marketing
(3) Cause-related marketing Answer: (2)
(4) Corporate philanthropy
Answer: (4) 27.Bulging Stomach Restaurants, Inc., has
estimated that a proposed project's 8-year
24.The term _____ can be used in a broad net
sense to describe all the policies, cash benefit will be $4,000 per year for
procedures, years 1 through 8, with an additional
relationships, and systems in place to terminal
oversee the successful and legal operation benefit of $8,000 at the end of the eighth
of the enterprise. year. Assuming that these cash inflows
(1) corporate governance satisfy exactly Bulging's required rate of
(2) corporate policy return of 8 percent, the project's initial
(3) corporate oversight cash
(4) corporate strategy outflow is closest to which of the following
Answer: (1) four possible answers?
(1) $27,309
25. A profitability index (PI) of .92 for a (2) $25,149
project means that __________. (3) $14,851
(1) the project's costs (cash outlay) are (is) (4) $40,000
less than the present value of the project's Answer: (1)
benefits
(2) the project's NPV is greater than zero 28.Which of the following statements is
(3) the project's NPV is greater than 1 incorrect regarding a normal project?

(1) If the NPV of a project is greater than 0, or more alternative projects is referred to
then its PI will exceed 1. as __________.
(2) If the IRR of a project is 8%, its NPV, (1) a mutually exclusive project
using a discount rate, k, greater than 8%, (2) an independent project
will be less than 0. (3) a dependent project
(3) If the PI of a project equals 0, then the (4) a contingent project
project's initial cash outflow equals the PV Answer: (2)
of its cash flows.
(4) If the IRR of a project is greater than 31.When operating under a single-period
the discount rate, k, then its PI will be capital-rationing constraint, you may first
greater than 1. want to
try selecting projects by descending order
Answer: (3) of their __________ in order to give
yourself the best chance to select the mix
29. Assume that a firm has accurately of projects that adds most to firm value.
calculated the net cash flows relating to (1) profitability index (PI)
two mutually (2) net present value (NPV)
exclusive investment proposals. If the net (3) internal rate of return (IRR)
present value of both proposals exceed (4) payback period (PBP)
zero Answer: (1)
and the firm is not under the constraint of
capital rationing, then the firm should 32.Which of the following statements is
__________. correct regarding the internal rate of
(1) calculate the IRRs of these investments return (IRR) method?
to be certain that the IRRs are greater than (1) Each project has a unique internal rate
the of return.
cost of capital (2) As long as you are not dealing with
(2) compare the profitability index of these mutually exclusive projects, capital
investments to those of other possible rationing, or unusual projects having
investments multiple sign changes in the cash-flow
(3) calculate the payback periods to make stream, the internal rate of return method
certain that the initial cash outlays can be can be used with reasonable confidence.
recovered within a appropriate period of (3) The internal rate of return does not
time consider the time value of money.
(4) accept the proposal that has the largest (4) The internal rate of return is rarely used
NPV since the goal of the firm is to by firms today because of the ease at
maximize shareholder wealth and, since which net present value is calculated.
the projects are mutually exclusive, we Answer: (2)
can only take one
Answer: (4) 33.Which of the following is not a potential
for a ranking problem between two
30. A project whose acceptance does not mutually exclusive projects?
prevent or require the acceptance of one

(1) The projects have unequal lives that (4) In this situation, we need to rely on the
differ by several years. profitability index (PI) method and choose
(2) The costs of the two projects differ by the one with the highest PI.
nearly 30%. Answer: (1)
(3) The two projects have cash flow
patterns that differ dramatically. 36. High P/E ratios tend to indicate that a
(4) One of the mutually exclusive projects company will _______
involves replacement while the other (1) grow quickly
involves expansion. (2) grow at the same speed as the average
Answer: (4) company
(3) grow slowly
34. A project whose acceptance precludes (4) not grow
the acceptance of one or more alternative Answer: (1)
projects
is referred to as __________. 37. _________ is equal to (common
(1) a mutually exclusive project. shareholders' equity/common shares
(2) an independent project. outstanding).
(3) a dependent project. (1) Book value per share
(4) a contingent project. (2) Liquidation value per share
Answer: (1) (3) Market value per share
(4) Tobin's Q
35.Two mutually exclusive projects are Answer: (1)
being considere(4) Neither project will be
repeated again in the future after their 38.The _______ is defined as the present
current lives are complete. There exists a value of all cash proceeds to the investor in
potential problem though -- the expected the
life of the first project is one year and the stock.
expected life of the second project is three (1) dividend payout ratio
years. This has caused the NPV and IRR (2) intrinsic value
methods to suggest different project (3) market capitalization rate
preferences. What technique can be used (4) plowback ratio
to help make a better decision in this Answer: (2)
scenario?
(1) Rely on the NPV method and make 39. Historically, P/E ratios have tended to
your choice as it will tell you which one is be _________.
best. (1) higher when inflation has been high
(2) Use the common-life technique to (2) lower when inflation has been high
replicate the one-year project three times (3) uncorrelated with inflation rates but
and recalculate the NPV and IRR for the correlated with other macroeconomic
one-year project. variables
(3) Ignore the NPV technique and simply (4) uncorrelated with any macroeconomic
choose the highest IRR since managers are variables including inflation rates
concerned about maximizing returns. Answer: (2)

44.Which of the following illustrates the
40. All of the following influence capital use of a hedging (or matching) approach to
budgeting cash flows EXCEPT: financing?
(1) Accelerated depreciation (1) Short – term assets financed with long
(2) Salvage value term liabilities
(3) Tax rate changes (2) Permanent working capital financed
(4) Method of project financing used with long-term liabilities.
Answer: (4) (3) Short – term assets financed with
equity.
41. A capital investment is one that (4) All assets financed with a 50 percent
(1) Has the prospect of long term benefit equity, 50 percent long-term debt mixture.
(2) Has the prospect of short term benefit Answer: (2)
(3) Is only undertaken by large
corporations 45. Permanent working capital
(4) Applies only to investment in fixed (1) Varies with seasonal needs.
assets (2) Includes fixed assets.
Answer: (1) (3) Is the amount of current assets
required to meet a firm's long-term
42.Companies may adopt an aggressive or minimum needs.
a conservative working capital policy. An (4) Includes accounts payable.
aggressive policy means that a company Answer: (3)
(1) holds high levels of cash and
inventories 46. Which of the following would not be
(2) expects a lower level of profitability financed from working capital?
(3) has a low level of flexibility (1) Cash float
(4) faces a low level of risk (2) Accounts receivable
Answer: (3) (3) Credit sales
(4) A new personal computer for the office
43.Which of the following would be Answer: (4)
consistent with a more aggressive
approach to financing working capital? 47. The bank should verify the letter of
(1) Financing short-term needs with short- credit/sale contract for booking a-
term funds. [1] forward sale contract
(2) Financing permanent inventory buildup [2] forward purchase contract
with long-term debt. [3] cancelleing a forward contract
(3) Financing seasonal needs with short- [4] none of the above
term funds. Answer: [3]
(4) Financing some long-term needs with
short-term funds. 48.Which of the performance evaluation
Answer: (4) methods takes into consideration tax
effects?
(1) Economic value added
(2) Return on sales

(3) Residual income
(4) Return on investment
Answer: (1)
49. Which of the following best describes
"Market Value Added"?
(1) The value added to the product the firm
produces above and beyond the costs of
the inputs.
(2) The difference between the book value
of equity and debt versus the market value
of the firm.
(3) The difference between the market
value of the firm and the amount of
contributed capital.
(4) None of the above accurately describes
Market Value Added.
Answer: (3)
50. Market price per share of a firm having

equity capital of Rs. 100000 consisting of
shares of Rs. 10 each, profit after tax of Rs.
82000, & P/E ratio of 8 is
(1) Rs. 65.70
(2) Rs.10.25
(3) Rs.65.60
(4) Rs.1.025
Answer: (3)

UNIT 4: BUSINESS FINANCE

What is Scope and sources of finance; Lease financing ?
Scope and sources of finance; Lease financing
Leasing is a simple but unique, innovative source of medium term/long term finance. It
is a method of acquiring the use of an asset without buying it. Leasing provides cent
percent finance to a business which requires new plant and machinery, other offfce
equipments, miscellaneous industrial, construction and commercial equipments. Hence
it is an alternative to borrowing funds for the purchase of fixed assets.
This method of acquiring fixed assets gained ground in western countries by the
middle of this century. In India, it got momentum only in the eighties.
The growth in the volume of leasing activity in the recent past shows that the business
community in India has widely accepted this mode of financing. It is estimated that
there are nearly 1400 leasing companies (including private limited companies) in India
at present and many are in the offing.
Banks both in the public as well as in the private sector have managed to enter this
field by starting subsidiaries.
Of late, almost all manufacturing groups have formed captive leasing units. Quite
recently Reserve Bank of India has issued orders allowing commercial Banks to
Leasing refers to a contract between the less or who owns the equipment and the
lessee (user), for the lease of specifically approved items of equipment, on payment of
a periodical amount (lease rental) for a definite period of lease. The lease rental paid
by the lessee to the less or incorporates the components of interest charges and the
actual cost of an asset.
Leasing Transaction:
A lessee chooses an asset and locates the lessor who will acquire it for him. The
period of lease may spread over the entire economic life of the asset. The ownership in
legal terms will always be with the lessor. The lessor may or may not be the
manufacturer of the equipment. If he is the manufacturer (which is not the case
usually) he capitalises the cost of the equipment in his books, funding it as a capital
asset, and then gives it out on lease to the lessee.
If he is not a manufacturer, he will purchase the equipment from the manufacturer
paying the cost (including duties and taxes). He becomes the owner and will capitalise
it in his books and then leaas it out. Basically there are two major forms of leases —
Financial lease and operational lease.
Financial lease period may be primary lease period and secondary lease period.
Primary lease is usually for five years which is followed by a ‘secondary lease’ of
another three or four years depending on the type of equipment.
During the primary lease period, the rentals are generally higher, to cover the cost.
Rent for the subsequent period is normally lower and during this period, the lessor is
getting the maximum profit, as the cost of equipment might have been covered in the
initial period.

Lease financing is one of the important sources of medium- and long-term financing
where the owner of an asset gives another person, the right to use that asset against
periodical payments. The owner of the asset is known as lessor and the user is called
lessee.
The periodical payment made by the lessee to the lessor is known as lease rental.
Under lease financing, lessee is given the right to use the asset but the ownership lies
with the lessor and at the end of the lease contract, the asset is returned to the lessor
or an option is given to the lessee either to purchase the asset or to renew the lease
agreement.
Different Types of Lease:
Depending upon the transfer of risk and rewards to the lessee, the period of lease and
the number of parties to the transaction, lease financing can be classified into two
categories. Finance lease and operating lease.
i. Finance Lease:
It is the lease where the lessor transfers substantially all the risks and rewards of
ownership of assets to the lessee for lease rentals. In other words, it puts the lessee in
the same condition as he/she would have been if he/she had purchased the asset.
Finance lease has two phases: The first one is called primary period. This is non-
cancellable period and in this period, the lessor recovers his total investment through
lease rental. The primary period may last for indefinite period of time. The lease rental
for the secondary period is much smaller than that of primary period.
ii. Features of Finance Lease:
From the above discussion, following features can be derived for finance lease:
1. A finance lease is a device that gives the lessee a right to use an asset.
2. The lease rental charged by the lessor during the primary period of lease is sufficient
to recover his/her investment.
3. The lease rental for the secondary period is much smaller. This is often known as
peppercorn rental.
4. Lessee is responsible for the maintenance of asset.
5. No asset-based risk and rewards is taken by lessor.
6. Such type of lease is non-cancellable; the lessor’s investment is assured.
iii. Operating Lease:
Lease other than finance lease is called operating lease. Here risks and rewards
incidental to the ownership of asset are not transferred by the lessor to the lessee. The
term of such lease is much less than the economic life of the asset and thus the total
investment of the lessor is not recovered through lease rental during the primary period

of lease. In case of operating lease, the lessor usually provides advice to the lessee for
repair, maintenance and technical knowhow of the leased asset and that is why this
type of lease is also known as service lease.
iv. Features of Operating Lease:
Operating lease has following features:

1. The lease term is much lower than the economic life of the asset.
2. The lessee has the right to terminate the lease by giving a short notice and no
penalty is charged for that.
3. The lessor provides the technical knowhow of the leased asset to the lessee.
4. Risks and rewards incidental to the ownership of asset are borne by the lessor.
5. Lessor has to depend on leasing of an asset to different lessee for recovery of
his/her investment.
Advantages and Disadvantages of Lease Financing:

At present leasing activity shows an increasing trend. Leasing appears to be a cost-
effective alternative for using an asset. However, it has certain advantages as well as
disadvantages.
i. Advantages:
Lease financing has following advantages
a. To Lessor:
The advantages of lease financing from the point of view of lessor are summarized
below
Assured Regular Income:

Lessor gets lease rental by leasing an asset during the period of lease which is an
assured and regular income.
Preservation of Ownership:
In case of finance lease, the lessor transfers all the risk and rewards incidental to
ownership to the lessee without the transfer of ownership of asset hence the ownership
lies with the lessor.
Benefit of Tax:
As ownership lies with the lessor, tax benefit is enjoyed by the lessor by way of
depreciation in respect of leased asset.
High Profitability:

The business of leasing is highly profitable since the rate of return based on lease
rental, is much higher than the interest payable on financing the asset.
High Potentiality of Growth:

The demand for leasing is steadily increasing because it is one of the cost efficient
forms of financing. Economic growth can be maintained even during the period of
depression. Thus, the growth potentiality of leasing is much higher as compared to
other forms of business.
Recovery of Investment:
In case of finance lease, the lessor can recover the total investment through lease
rentals.
b. To Lessee:
The advantages of lease financing from the point of view of lessee are discussed
below:
Use of Capital Goods:

A business will not have to spend a lot of money for acquiring an asset but it can use
an asset by paying small monthly or yearly rentals.
Tax Benefits:
A company is able to enjoy the tax advantage on lease payments as lease payments
can be deducted as a business expense.
Cheaper:
Leasing is a source of financing which is cheaper than almost all other sources of
financing.
Technical Assistance:
Lessee gets some sort of technical support from the lessor in respect of leased asset.
Inflation Friendly:
Leasing is inflation friendly, the lessee has to pay fixed amount of rentals each year
even if the cost of the asset goes up.
Ownership:
After the expiry of primary period, lessor offers the lessee to purchase the assets— by
paying a very small sum of money.
ii. Disadvantages:
Lease financing suffers from the following disadvantages

a. To Lessor:
Lessor suffers from certain limitations which are discussed below:
Unprofitable in Case of Inflation:

Lessor gets fixed amount of lease rental every year and they cannot increase this even
if the cost of asset goes up.
Double Taxation:
Sales tax may be charged twice:
First at the time of purchase of asset and second at the time of leasing the asset.
Greater Chance of Damage of Asset:

As ownership is not transferred, the lessee uses the asset carelessly and there is a
great chance that asset cannot be useable after the expiry of primary period of lease.
b. To Lessee:
The disadvantages of lease financing from lessee’s point of view are given
below:
Compulsion:
Finance lease is non-cancellable and even if a company does not want to use the
asset, lessee is required to pay the lease rentals.
Ownership:
The lessee will not become the owner of the asset at the end of lease agreement
unless he decides to purchase it.
Costly:
Lease financing is more costly than other sources of financing because lessee has to
pay lease rental as well as expenses incidental to the ownership of the asset.
Understatement of Asset:
As lessee is not the owner of the asset, such an asset cannot be shown in the balance
sheet which leads to understatement of lessee’s asset.
Abbreviations
AFC : Asset Finance Companies
AS : Accounting Standards
ATM : Automated Teller Machine
BPO : Business Process Outsourcing
CAGR : Compound Annual Growth Rate
CBDT : Central Board of Direct Taxes
CGST : Central Goods and Service Tax
CRR : Cash Reserve Ratio
CST : Central Sales-tax Act
ECB : External Commercial Borrowings
FAS : Financial Accounting Standards (US accounting standards)
FASB : Financial Accounting Standards Board
FDI : Foreign Direct investment
FY : Financial Year
GDP : Gross domestic Product
GST : Goods and Services Tax
IAS : International Accounting Standards
IASB : International Accounting Standards Board
ICAI : Institute of Chartered Accountants of India
ICDS : Income Computation and Disclosure Standards
IFC : International Finance Corporation
IFRS : International Financial Reporting Standards
IGST : Inter Goods and Service Tax
INR : Indian currency (Rupee)
IPOs : Initial Public Offers
IRFC : Indian Railways Finance Corporation
IRR : Internal Rate of Return
IT : Information Technology
ITC : Input Tax Credit
KPO : Knowledge Process Outsourcing
LST : Local VAT Law (local sales-tax)
MFI Micro Finance Institutions
MNC : Multinational Corporation
MSME : Micro Small and Medium Enterprise
MW : Mega Watt
NBFCs : Non- Banking Financial Companies
NBNC : Non-Banking Non-Financial Company
NIC : National Industrial Classification
NPA : Non-Performing Assets
OEM : Original Equipment Manufacturer
OTP : Obligation to Pay (in context of IFRS 16)
PSL : Priority Sector Lending
RBI : Reserve Bank of India
RoU : Right of Use (in context of IFRS 16)
SARFAESI : Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002
SGST : State Goods and Service Tax
SIDBI : Small Industries Development Bank of India

SLR : Statutory Liquidity Ratio
SMEs : Small and Medium Enterprises
UK : United Kingdom
USA : United States of America
USD : United States Dollars
VAT : Value Added Tax
VKC Analysis : VKC Analysis represents the facts and findings of the study carried out
by the Consultant during the course of the assignment
WDV : Written-Down Value
There is no separate legal regime for leasing in India; instead leasing transactions are
governed by the common law of contracts. Lease transactions are regarded as
contracts of hire. Over the years a series of court rulings have upheld the lessor’s
overarching rights over the asset as the legal owner of it. Since the lessor remains the
owner of the asset, in the event of default, the lessor can simply take back his/her
asset. On the other hand, in a loan transaction, in the event of default the lender must
take over possession of the asset which is actually in the name of the borrower.
Hence typically, loans come with higher credit risk, and therefore, higher risk premium,
resulting into higher cost of funding. Lease transactions are expected to increase the
ease of financing, reduce the cost of funding, as also save the equity of the lessee that
would have otherwise gone into meeting the borrower’s contribution in case of a loan.
Development and State of Leasing in India

While leasing had several phases of rapid development and gradual/rapid decline, the
state of the leasing industry is a product of the regulatory and tax environment. Past
instances of misuse of depreciation benefits in several lease transaction have made
tax officers generally apprehensive of leasing. Hence, even genuine lease transactions
face difficulties in getting their depreciation claims allowed.
As for financial leases, there is no incometax motivation; on the contrary, there was a
double hit of indirect taxes owing to VAT as well as service tax. Thus, financial leases
have lost attraction over time. Owing to such factors, India presents an unusual picture
compared to many other countries where the volume of operating leases is far higher
than finance leases. Of course, the Indian Railway Finance Corporation (IRFC), a
dedicated leasing entity for the Indian Railways, does financial leases, but being
exclusively dedicated to the railways, these volumes may not be relevant for industry
data. Operating leases are mostly offered by some NBFCs, and some Non-Banking
Non-financial Companies (NBNCs). Banks are currently not offering leasing services in
India.
A substantial part of the leasing market, consists of lease options provided by vendors
and OEMs to their customers - this is the case in sectors such as automobiles,
healthcare, IT equipment and so on. Leasing looks set to undergo a revival in India -
this is not because of newer and more transparent regulatory regime or because of any
tax arbitrage - but simply because of the phase the Indian economy finds itself in.
New-age businesses and start-ups believe in lighter balance sheets, focusing on their
core operations rather than asset build-up. Leasing may play a significant role
particularly in light of the looming NPA crisis.
Lessors retain ownership of the asset, hence repossession of the asset is easier.
Secondly, in case the lessee defaults and has to go undergo corporate debt
restructuring, operating lease rentals are classified as operating expenses and hence
receive priority in any payout settlement. Notably, the Insolvency and Bankruptcy Code
recognizes leased assets as excluded from the bankruptcy estate for liquidation
purposes, thereby granting the lessor the uppermost right to stay out of liquidation
proceedings.
Amendments to the SARFAESI Act permit lessors under a financial lease to make use
of the SARFAESI process for recovery; it is felt that this does not rule out common law
procedures. Additionally, certain sectors have emerged as new thrust areas for leasing
- this includes the solar sector. A solar lease has several attractions: high depreciation
rates allowed on solar equipment, and the ability to tie the payments by the user to the
savings energy costs.
Leasing worldwide
Globally, leasing has grown at a CAGR of 10.35% between 1983 and 2000 and at a
CAGR of 5.04% between 2000 and 2014. The leasing volumes rose from USD 93.5
billion in 1983 to USD 944.3 billion as at the end of 2014. Region-wise, North America
has always been the market leader, capturing the maximum share of the global leasing
volumes, followed by Europe and Asia.
In terms of leasing penetration, India is placed much lower in the ranks among the
developed and developing countries around the world. As at the end of 2014, Australia,
Canada and UK had the best the penetration rates with 40%, 31% and 28.6%
respectively.
Leasing to MSME sector

One of the key aims of this report has been to understand the needs of the MSME
segment and understand why leasing has so far not been able to play a bigger role in
meeting the financial needs of this segment. Towards this, we carried out a primary
survey with various MSMEs, consultants to MSMEs and NBFCs. It emerged that one of
the main reasons why MSMEs avail of finance options instead of lease options is the
relative simplicity of the loan product. It is easy to understand, there are no residual
value issues.
Moreover even consultants to MSMEs recommend them to avail of traditional debt as
opposed to leases - this is owing to the fear of the complications of the taxation regime
- both direct and indirect. Lack of awareness of leasing option emerged as a

substantial contributor to the present state of leasing industry. Vendors of standard
equipment also confirmed that most of the NBFCs they deal with find it easier to sell a
loan rather than a lease.
Changes required in the taxation environment:
a. Financial leases, which are akin to financial transactions, must be taxed as a

financial transaction, instead of GST being levied on the rentals in case of financial
leases; the GST rules should create a tax parity between financial leases and loans.
b. The Income Computation and Disclosure Standard on Leases, issued by the Central
Board of Direct Taxes, which is yet to be notified, attempts to remove the anomalies
with respect to lease classification for the purpose of direct tax purposes, may be put to
effect.
c. Currently stamp duty is levied on lease of certain assets which are affixed to the
ground for usage and stamp duty happens to be a sunk cost. This acts a deterrent for
the leasing entities to engage into such transactions, therefore, there is a need for a
clarification from the government in this regard that would affirm that a property will not
be rendered as an immovable property just by virtue of annexation with any immovable
property for the purpose of its ultimate usage.
Changes required in the regulatory environment:

a. Currently certain concessions and exemptions that are available in case of imported
assets are not available in case of leases. These exemptions were denied; it is
important that the benefits be restored.
b. Cross border financial leases are considered as External Commercial Borrowings,
however, there is a lack of clarity with respect to cross border operating lease
transactions.
A clarification from the appropriate authority on the treatment of cross border operating
leases is required.
B. Currently micro-finance institutions (MFIs) are not permitted to primarily engage in

leasing, MFIs may be allowed to extend leasing arrangements as well.
C. The financial sector in India is mainly driven by the priority sector lending
requirements for the banks. Priority sector includes MSMEs; however, leasing
exposures to MSMEs do not qualify for the purpose of priority sector lending
requirements. Therefore, the requirements must be adequately modified to include
leasing as well.
Promotion of leasing in India:

a. The MSME industry bodies must arrange for platforms to promote leasing as an
alternative source of financing for the MSMEs.
UNIT 4: BUSINESS FINANCE MCQS
Reason (R): The Company can alter or (2) (i) (ii) (iii) (iv)
modify such factors to suit the (3) (ii) (iii) (i) (iv)
environment. (4) (i) (iv) (iii) (ii)
Codes: Answers: (1)
(1) Both (1) and (R) are correct. 50. The flagship project of Government of
(2) (1) is correct, but (R) is incorrect. India launched for generating guaranteed
(3) Both (1) and (R) are incorrect. employment in rural areas is known as
(4) (1) is incorrect. (1) PMRY
Answers: (1) (2) MNREGA
46. The concept of ‘Rolling Plan’ in India (3) JRY
was introduced by the (4) NREP
(1) BJP Government Answers: (2)
(2) Janta Government 51. The conflicts in project ranking in
(3) Congress Government capital budgeting as per NPV and IRR may
(4) All of the above arise because of
Answers: (2) (1) Size disparity
47. Which one of the following is an (2) Time disparity
obstacle to globalization? (3) Life disparity
(1) Wide base (4) All the above
(2) Niche markets Answers: (4)
(3) Obsolescence 52. The degree of financial leverage
(4) Competition reflects the responsiveness of
Answers: (3) (1) Operating income to changes in total
48. ‘VSAT’ technology is first followed for revenue
on-line trading by (2) EPS to changes in EBIT
(1) BSE (3) EPS to changes in total revenue
(2) OTCEI (4) None of the above
(3) NSE Answers: (2)
(4) ISE 53. The overall capitalization rate and the
Answers: (3) cost of debt remain constant for all
49. Match the following: degrees of financial leverage is advocated
List – I List – II by
Years Act (1) Traditional Approach
(1) 1956 (i) Consumer (2) Net Income Approach
Protection Act (3) Net Operating Income Approach
(2) 1986 (ii) Indian Companies (4) M-M-Approach
Act Answers: (3)
(3) 1992 (iii) Securities and 54. Which of the following is not included
Exchange Board of India in the assumptions on which Myron
(4) 2002 (iv) Securitization Act Gordon proposed a model on stock
Codes: valuation?
(1) (2) (3) (d) (1) Retained earnings, the only source of
(1) (ii) (i) (iii) (iv) financing

(2) Finite life of the firm (iii) Expanding
(3) Taxes do not exist theproductioncapacities
(4) Constant rate of return on firm’s 3. AdvantagesofInternationalBusiness
investment (iv) Geocentric approach
Answers: (2) 4. Stage of Globalisation
Codes:
55. Match the following: i ii iii iv
List – I List – II (1) 4 2 3 1
(i) Factoring services (1) Cash (2) 3 1 2 4
Management (3) 1 2 3 4
(ii) Economic Order Quantity (2) (4) 4 3 2 1
Receivable Management Answers: (2)
(iii) Commercial paper (3)
Inventory Management 58. BRICS includes
(4) Working Capital Financing (1) Bhutan, Romania, Indonesia, Chile and
Codes: South Korea
(i) (ii) (iii) (2) Brazil, Russia, Indonesia, Chile and
(1) (1) (3) (b) Sudan
(2) (3) (2) (a) (3) Brazil, Russia, India, China and South
(3) (2) (3) (d) Africa
(4) (2) (1) (c) (4) Britain, Russia, India, Czechoslovakia,
Answers: (3) Sri Lanka
56. Assertion (s): International business Answers: (3)
focuses on global resources, opportunities 59. Out of the following, one is not related
to buy/sell worldwide. with WTO:
Reason (R): The efforts of IMF, World Bank (1) TRIPS
and WTO to liberalise their economies led (2) Ministerial Conference
to globalisation. (3) TRIMS
Codes: (4) TRAI
(1) Both (s) and (R) are true. Answers: (4)
(2) Both (s) and (R) are false. 60. Balance of Payment includes
(3) (s) is true, but (R) is false. components
(4) (s) is false, but (R) is true. (1) Current Account, Capital Account,
Answers: (1) Unilateral Payments Accounts, Official
57. Match the items of List – I with items of Settlement Account
List – II: (2) Revenue Account, P & L Account,
List – I List Capital Account, Official Account
– II (3) Trade Account, Activity Account,
(i) Wider Market 1. Revenue Account, Currency Account
Modes of Entry (4) Forex Account, Trade Account, Funds
(ii) Turn key Projects Account
2. Goal of International Business Answers: (1)

61. Assertion (A): International Monetary Answers: (1)
Fund was set up in 1944. 65. Assertion (s): The Treasury Manager
Reason (R): To promote international uses the derivatives in the Bond market as
monetary cooperation through a well as in Forex market.
permanent institution this provides Reason (R): It helps risk coverage.
machinery for consultation and Codes:
collaboration on international monetary (1) Both (s) and (R) are false.
problems. (2) Both (s) and (R) are true.
Codes: (3) (s) is true, but (R) is false.
(1) Both (s) and (R) are false. (4) (R) is true, but (1) is false.
(2) Both (s) and (R) are true. Answers: (2)
(3) (s) is true, but (R) is false. 66. Factoring and forfeiting have not taken
(4) (R) is true, but (s) is false. off in the Indian economy due to lack of
Answers: (2) expertise and experience. One is not
62. The commercial banks do not perform included in the factoring services rendered.
one function out of the following: (1) Purchase of book debts and
(1) Mobilisation of savings receivables.
(2) Giving Loans and Advances (2) Prepayment of debts partially or fully
(3) Issuing Currency Notes (3) Giving advice
(4) Financing Priority Sectors (4) Covering the credit risk of the suppliers
Answers: (3) Answers: (3)
63. There are two lists of items, match the 67. Which one is not the form of FDI?
items of List – I with items of List – II: (1) Purchase of existing assets in foreign
List – I List – II currency
I. Reserve Bank of India 1. NPA (2) New Investment in property, plant,
II. EXIM Bank 2. Facilitating equipment
Small Scale Industries (3) Making investment in the mutual funds
III. SIDBI 3. Credit Control (4) Transfer of many types ofassets
IV. Capital Adequacy 4. Answers: (3)
Export/Import Financing 68. Match the items of List – I with items of
Codes: List – II:
I II III IV List – I List
(1) 1 2 3 4 – II
(2) 4 3 2 1 1. Measures towards globalization
(3) 2 3 4 1 I. Globalisation
(4) 3 4 2 1 2. Off-shoring
Answers: (4) II. FEMA
64. One of the items is not related with e- 3. FERA III.
banking: Liberalise the inflow of FDI
(1) Demand Draft 4. Mr. AruthurDunkel
(2) SPNS IV. Uruguay Round
(3) ECS Codes:
(4) ATM 1234

(1) III I II IV 73. Which of the following is not a capital
(2) II I III IV asset under capital gains head of income?
(3) IV II I III (1) Stock in trade
(4) I II IV III (2) Goodwill of business
Answers: (1) (3) Agricultural Land in Delhi
69. Which one of the following is not the (4) Jewellery
advantage of MNCs to the host country? Answers: (1)
(1) Increase in social activity 74. Match the items of List – I with List – II:
(2) Increase in economic activity List – I List – II
(3) Utilization of natural resources I. Tax Planning 1. Making
(4) R & D efforts enhanced suitable arrangement of TDS
Answers: (1) II. Tax Avoidance 2.
70. India suffered from deficit balance Understatement of Income
both in trade balance and net invisibles, III. Tax Evasion 3. Availing
hence, took up a number of steps to deduction under Section 10A of IT Act.
manage this problem. Which one is not IV. Tax Administration 4.
appropriate for this? Misinterpreting the provisions of the IT Act
(1) Export control Codes:
(2) Current Account Convertibility I II III IV
(3) Liberalized Export Policy (1) 2 1 4 3
(4) Unified Exchange Rate (2) 1 4 3 2
Answers: (1) (3) 3 4 2 1
71. Mr. James, a citizen of U.S., arrived in (4) 4 1 3 2
India for the first time on 1st July, 2010 Answers: (3)
and left for Nepal on 15thDecember 2010. 75. Under the Income Tax Act, 1961
He arrived to India again on 1st January unabsorbed depreciation can be carried
2011 and stayed till the end of the financial forward for set-off purpose:
year 2010-11. His residential status for the (1) For 4 years
assessment year 2011-12 is (2) For 5 years
(1) Resident (ordinarily resident) (3) For 8 years
(2) Not ordinarily resident (4) For unspecified period
(3) Non-resident Answers: (4)
(4) None of the above
Answers: (2) Please Be Careful from Fake Person buy
72. The value of free accommodation in our Notes From Our Official Website
Delhi provided by employer in the private DIWAKAR EDUCATION HUB only OR Call
sector is Us On Our Official Number 7310762592.
(1) 10% of salary
(2) 15% of salary
(3) 20% of salary
(4) 25% of salary
Answers: (2)

UNIT 5: BUSINESS STATISTICS AND RESEARCH
METHODS

UNIT 5: BUSINESS STATISTICS AND RESEARCH METHODS
What is Measures of central tendency?
Measures of central tendency

Measures of central tendency help you find the middle, or the average, of a data set.
The 3 most common measures of central tendency are the mode, median, and mean.
 Mode: the most frequent value.
 Median: the middle number in an ordered data set.
 Mean: the sum of all values divided by the total number of values.
In addition to central tendency, the variability and distribution of your data set is
important to understand when performing
Distributions and central tendency
A data set is a distribution of n number of scores or values.
Normal distribution
In a normal distribution, data is symmetrically distributed with no skew. Most values

cluster around a central region, with values tapering off as they go further away from
the center. The mean, mode and median are exactly the same in a normal distribution.
Example: Normal distributionYou survey a sample in your local community on the

number of books they read in the last year.
A histogram of your data shows the frequency of responses for each possible number
of books. From looking at the chart, you see that there is a normal distribution.
The mean, median and mode are all equal; the central tendency of this data set is 8.

Skewed distributions
In skewed distributions, more values fall on one side of the center than the other, and
the mean, median and mode all differ from each other. One side has a more spread
out and longer tail with fewer scores at one end than the other. The direction of this tail
tells you the side of the skew
In a positively skewed distribution, there’s a cluster of lower scores and a spread out
tail on the right. In a negatively skewed distribution, there’s a cluster of higher scores
and a spread out tail on the left.
 Positively skewed distribution
 Negatively skewed distribution

In this histogram, your distribution is skewed to the right, and the central tendency of
your data set is on the lower end of possible scores.
In a positively skewed distribution, mode < median < mean.
Mode
The mode is the most frequently occurring value in the data set. It’s possible to have
no mode, one mode, or more than one mode.
To find the mode, sort your data set numerically or categorically and select the
response that occurs most frequently.
Example: Finding the modeIn a survey, you ask 9 participants whether they identify as
conservative, moderate, or liberal.
To find the mode, sort your data by category and find which response was chosen
most frequently.

To make it easier, you can create a frequency table to count up the values for each
category.
Political ideology Frequency

Conservative 2
Moderate 3
Liberal 4
Mode: Liberal
The mode is easily seen in a bar graph because it is the value with the highest bar.
When to use the mode

The mode is most applicable to data from a nominal level of measurement. Nominal
data is classified into mutually exclusive categories, so the mode tells you the most
popular category.
For continuous variables or ratio levels of measurement, the mode may not be a
helpful measure of central tendency. That’s because there are many more possible
values than there are in a nominal or ordinal level of measurement. It’s unlikely for a
value to repeat in a ratio level of measurement.
Example: Ratio data with no modeYou collect data on reaction times in a computer
task, and your data set contains values that are all different from each other.
Participant 1 2 3 4 5 6 7 8 9
Reaction time (milliseconds) 267 345 421 324 401 312 382 298 303
In this data set, there is no mode, because each value occurs only
once.
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Median
The median of a data set is the value that’s exactly in the middle when it is ordered
from low to high.
Example: Finding the medianYou measure the reaction times of 7 participants on a
computer task and categorize them into 3 groups: slow, medium or fast.
Participant 1 2 3 4 5 6 7
Speed Medium Slow Fast Fast Medium Fast Slow
To find the median, you first order all values from low to high. Then, you find the value
in the middle of the ordered data set – in this case, the value in the 4th position.
Ordered data set Slow Slow Medium Medium Fast Fast Fast
Median: Medium
In larger data sets, it’s easier to use simple formulas to figure out the position of the
middle value in the distribution. You use different methods to find the median of a data
set depending on whether the total number of values is even or odd.
Median of an odd-numbered data set

For an odd-numbered data set, find the value that lies at the (n+1)/2 position,
where n is the number of values in the data set.
ExampleYou measure the reaction times in milliseconds of 5 participants and order the
data set.
Reaction time (milliseconds) 287 298 345 365 380
The middle position is calculated using (n+1)/2, where n = 5.
(5+1)/2 = 3
That means the median is the 3rd value in your ordered data set.
Median: 345 milliseconds
Median of an even-numbered data set

For an even-numbered data set, find the two values in the middle of the data set: the
values at the n/2 and (n/2) + 1 positions. Then, find their mean.
ExampleYou measure the reaction times of 6 participants and order the data set.
Reaction time (milliseconds) 287 298 345 357 365 380
The middle positions are calculated using n/2 and (n/2) + 1, where n = 6.
6/2 = 3
(6/2) + 1 = 4
That means the middle values are the 3rd value, which is 345, and the 4th value, which
is 357.
To get the median, take the mean of the 2 middle values by adding them together and
dividing by two.
(345 + 357)/2 = 351
Median: 351 milliseconds
Mean
The arithmetic mean of a data set is the sum of all values divided by the total number
of values. It’s the most commonly used measure of central tendency because all
values are used in the calculation.
Example: Finding the mean
Participant 1 2 3 4 5

First you add up the sum of all values:
⅀x = 287 + 345 + 365 + 298 + 380 = 1675
Then you calculate the mean using the formula ⅀x/n. There are 5 values in the
dataset, so n = 5.
Mean (x̄) = 1675/5 = 335
Mean: 335 milliseconds
Outlier effect on the mean
Outliers can significantly increase or decrease the mean when they are included in the
calculation. Since all values are used to calculate the mean, it can be affected by
extreme outliers. An outlier is a value that differs significantly from the others in a data
set.
Example: Mean with an outlierIn this data set, we swap out one value with an
extreme outlier.
Participant 1 2 3 4 5
⅀

x = 832 + 345 + 365 + 298 + 380 = 2220
Mean (x̄) = ⅀x/n = 2220/5 = 444
Due to the outlier, the mean becomes much higher, even though all the other numbers
in the data set stay the same.
Mean: 444 milliseconds
Population versus sample mean
A data set contains values from a sample or a population. A population is the entire
group that you are interested in researching, while a sample is only a subset of that
population.
While data from a sample can help you make estimates about a population, only full
population data can give you the complete picture.
In statistics, the notation of a sample mean and a population mean and their formulas
are different. But the procedures for calculating the population and sample means are
the same.
 Sample mean formula
 Population mean formula

The sample mean is written as M or x̄ (pronounced x-bar). For calculating the mean of
a sample, use this formula:
x̄ = ⅀x/n
 x̄: sample mean
 ⅀x: sum of all values in the sample data set
 n: number of values in the sample data set
When should you use the mean, median or mode?
The 3 main measures of central tendency are best used in combination with each other
because they have complementary strengths and limitations. But sometimes only 1 or
2 of them are applicable to your data set, depending on the level of measurement of
the variable.
 The mode can be used for any level of measurement, but it’s most meaningful for
nominal and ordinal levels.
 The median can only be used on data that can be ordered – that is, from ordinal,
interval and ratio levels of measurement.
 The mean can only be used on interval and ratio levels of measurement because
it requires equal spacing between adjacent values or scores in the scale.
Levels of Examples Measure of central
measurement tendency
Nominal  Ethnicity  Mode
 Political ideology
Ordinal  Level of anxiety  Mode

 Income bracket  Median

Levels of Examples Measure of central
measurement tendency
Interval and ratio  Reaction time  Mode
 Test score  Median
 Temperature  Mean
To decide which measures of central tendency to use, you should also consider the
distribution of your data set.
For normally distributed data, all three measures of central tendency will give you the
same answer so they can all be used.
In skewed distributions, the median is the best measure because it is unaffected by
extreme outliers or non-symmetric distributions of scores. The mean and mode can
vary in skewed distributions.
What is Measures of dispersion?
Measures of dispersion
Suppose you are given a data series. Someone asks you to tell some interesting facts
about this data series. How can you do so? You can say you can find the mean, the
median or the mode of this data series and tell about its distribution. But is it the only
thing you can do? Are the central tendencies the only way by which we can get to
know about the concentration of the observation? In this section, we will learn about
another measure to know more about the data. Here, we are going to know about the
measure of dispersion. Let’s start.
Suppose you have four datasets of the same size and the mean is also same, say, m.
In all the cases the sum of the observations will be the same. Here, the measure of
central tendency is not giving a clear and complete idea about the distribution for the
four given sets.
Can we get an idea about the distribution if we get to know about the dispersion of the
observations from one another within and between the datasets? The main idea about
the measure of dispersion is to get to know how the data are spread. It shows how
much the data vary from their average value.
Characteristics of Measures of Dispersion
 A measure of dispersion should be rigidly defined

 It must be easy to calculate and understand
 Not affected much by the fluctuations of observations
 Based on all observations

Classification of Measures of Dispersion
The measure of dispersion is categorized as:
(i) An absolute measure of dispersion:
The measures which express the scattering of observation in terms of distances i.e.,
range, quartile deviation.
The measure which expresses the variations in terms of the average of deviations of
observations like mean deviation and standard deviation.
(ii) A relative measure of dispersion:
We use a relative measure of dispersion for comparing distributions of two or more

data set and for unit free comparison. They are the coefficient of range, the coefficient
of mean deviation, the coefficient of quartile deviation, the coefficient of variation, and
the coefficient of standard deviation.
Range
A range is the most common and easily understandable measure of dispersion. It is

the difference between two extreme observations of the data set. If X max and X min
are the two extreme observations then
Range = X max – X min
Merits of Range
 It is the simplest of the measure of dispersion

 Easy to calculate
 Easy to understand
 Independent of change of origin
Demerits of Range
 It is based on two extreme observations. Hence, get affected by fluctuations

 A range is not a reliable measure of dispersion
 Dependent on change of scale
Quartile Deviation

The quartiles divide a data set into quarters. The first quartile, (Q1) is the middle
number between the smallest number and the median of the data. The second quartile,
(Q2) is the median of the data set. The third quartile, (Q3) is the middle number
between the median and the largest number.
Quartile deviation or semi-inter-quartile deviation is
Q = ½ × (Q3 – Q1)
Merits of Quartile Deviation
 All the drawbacks of Range are overcome by quartile deviation

 It uses half of the data
 The best measure of dispersion for open-end classification
Demerits of Quartile Deviation
 It ignores 50% of the data

 Dependent on change of scale
 Not a reliable measure of dispersion
Mean Deviation
Mean deviation is the arithmetic mean of the absolute deviations of the observations
from a measure of central tendency. If x1, x2, … , xn are the set of observation, then
the mean deviation of x about the average A (mean, median, or mode) is
Mean deviation from average A = 1⁄n [∑i|xi – A|]
For a grouped frequency, it is calculated as:
Mean deviation from average A = 1⁄N [∑i fi |xi – A|], N = ∑fi
Here, xi and fi are respectively the mid value and the frequency of the ith class interval.
Merits of Mean Deviation
 Based on all observations

 It provides a minimum value when the deviations are taken from the median
Demerits of Mean Deviation
UNIT- 5 BUSINESS STATISTICS AND RESEARCH METHODS MCQs
3. The midpoint in a set of scores decreasing order of magnitude, is called a
4. The sum of all the values in a group, measure of:
divided by the number of values in 1. Skewness
that group 2. Symmetry
Answer: The sum of all the values in a 3. Central tendency
group, divided by the number of values in 4. Dispersion
that group Answer: Central tendency
412. Below mention formula is used for 417. Scores that differ greatly from the
calculating L1 + N2− c.ff × iL1 + N2− c.ff × i measures of central tendency are called:
1. Range 1. Raw scores
2. Median 2. The best scores
3. Mode 3. Extreme scores
4. Mean 4. None of the above
Answer: Median Answer: Extreme scores
413. There are three Quartiles 418 While computing the arithmetic mean
1. Q0, Q1, Q2Q0, Q1, Q2 of a frequency distribution, the each value
2. Q1, Q1, Q2Q1, Q1, Q2 of a class is considered equal to:
1. Class mark
3. Q1, Q2, Q3Q1, Q2, Q3 2. Lower limit
4. Q1, Q3, Q5Q1, Q3, Q5 3. Upper limit
Answer: Q1, Q2, Q3Q1, Q2, Q3 4. Lower class boundary
414. There are two methods of finding Answer: Lower limit
mode in discrete series 419 The measure of central tendency listed
1. Ascending method and grouping below is:
method 1. The raw score
2. Descending method and grouping 2. The mean
method 3. The range
3. Inspection method and grouping 4. Standard deviation
method Answer: The mean
4. Midpoint method and table method 420. The population mean μ is called:
Answer: Inspection method and grouping 1. Discrete variable
method 2. Continuous variable
415. Relationship between mode is 3. Parameter
4. Sampling unit
1. Mode = 4Median – 2Mean
Answer: Parameter
421 If a constant value is added to every
observation of data, then arithmetic mean
is obtained by:
Answer: Mode = 3Median – 2Mean 1. Subtracting the constant
416 Any measure indicating the centre of a 2. Adding the constant
set of data, arranged in an increasing or 3. Multiplying the constant
4. Dividing the constant 1. Arithmetic mean
Answer: Adding the constant 2. Geometric mean
422. The elimination of extreme scores at 3. Weighted mean
the bottom of the set has the effect of: 4. Harmonic mean
1. Lowering the mean Answer: Arithmetic mean
2. Raising the mean 428. When the values in a series are not of
3. No effect equal importance, we calculate the:
4. None of the above 1. Arithmetic mean
Answer: Raising the mean 2. Geometric mean
423. The elimination of extreme scores at 3. Weighted mean
the top of the set has the effect of: 4. Mode
1. Lowering the mean Answer: Weighted mean
2. Raising the mean 429. When all the values in a series occur
3. No effect the equal number of times, then it is not
4. Difficult to tell possible to calculate the:
Answer: Lowering the mean 1. Arithmetic mean
424. The sum of deviations taken from 2. Geometric mean
mean is: 3. Harmonic mean
1. Always equal to zero 4. Weighted mean
2. Sometimes equal to zero Answer: Weighted mean
3. Never equal to zero 430. The mean for a set of data obtained
4. None of the above by assigning each data value a weight that
Answer: Always equal to zero reflects its relative importance within the
425 The sum of the squares fo the set, is called:
deviations about mean is: 1. Geometric mean
1. Zero 2. Harmonic mean
2. Maximum 3. Weighted mean
3. Minimum 4. Combined mean
4. All of the above Answer: Weighted mean
Answer: Minimum 431. The arithmetic mean of 10 items is 4
426. The sum of the squares of the and the arithmetic mean of 5 items is 10.
deviations of the values of a variable is The combined arithmetic mean is:
least when the deviations are measured 1. 4
from: 2. 5
1. Harmonic mean 3. 6
2. Geometric mean 4. 90
3. Median Answer: 6
4. Arithmetic mean 432. The midpoint of the values after they
Answer: Arithmetic mean have been ordered from the smallest to
427. Step deviation method or coding the largest or the largest to the smallest is
method is used for computation of the: called:
1. Mean
2. Median 438. In _______ sense, statistics refers to a
3. Lower quartile set of methods and techniques used for
4. Upper quartile collection, tabulation, analysis and
Answer: Median interpretation of statistical data.
433. The first step in calculating the (1) Normal
median of a discrete variable is to (2) Singular
determine the: (3) Plural
1. Cumulative frequencies (4) Varied
2. Relative weights Answer: (2)
3. Relative frequencies 439. Which branch of statistics is used to
4. Array make generalisation about the population
Answer: Array based on the samples?
434. Extreme scores will have the following (1) Descriptive Statistics
effect on the median of an examination: (2) Inferential Statistics
1. They may have no effect on it (3) Empirical Statistics
2. They may tend to raise it (4) General Statistics
3. They may tend to lower it Answer: (2)
4. None of the above 440. Statistics can
Answer: They may have no effect on it (1) Prove anything
435. We must arrange the data before (2) Disprove anything
calculating: (3) Neither prove nor disprove anything:
1. Mean but is a tool
2. Median (4) solve everything
3. Mode Answer: (3)
4. Geometric mean 441. Statistical results are
Answer: mean (1) Absolutely correct
436. Which one of the following is not a (2) Universally Correct
function of statistics? (3) True on an average
(1) To simplify complexities (4) Not correct
(2) To compare data with respect to Answer: (3)
time and date 442. Distrust of statistics arises on account
(3) To forecast the future of
(4) To pass a bill
(1) Lack of Knowledge and limitation of its
Answer: (4) uses
437. Statistical methods are (2) Science of statistics
(1) Collection of data (3) Collection of data by skilled persons
(2) Analysis of data
(4) Complete disclosure of data collected
(3) Classification of data
Answer: (1)
(4) All of these
443. Which one of the following is not
Answer: (4)
true?

(1) Statistics does not study the individual (2) equally reliable
cases (3) not actual data
(2) Statistical results are true only an (4) more reliable
average Answer: (4)
(3) Statistics reveal the entire story of the 445. Data collected from “The Hindu”
problem newspaper is an example of
(4) Statistics are only one of the methods (1) Primary data
of studying a problem (2) Secondary data
Answer: (3) (3) Continuous data
444. Primary data as compared to (4) None of these
secondary data are Answer: (2)
(1) less reliable

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UNIT 1: BUSINESS ENVIRONMENT

AND INTERNATIONAL BUSINESS

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Consumer Protection Act:-

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72. For the Assessment Year 2011-12,

73. Interest on capital paid by a firm to its

74. Under capital gains head of the Income

75. Under Section 80E of the Income Tax

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Basic accounting principles; concepts and postulates

A number of basic accounting principles have been developed through common

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Answer: (4) Answer: (4)

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Answer: (2) 33. The concept of present value is based

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36. Which four are the factors influencing Answer: (4)

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49. Which one of the following matches

50. Which one is not an international

Please Be Careful from Fake Person buy

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Meaning and scope of business economics

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What is Objectives of business firms ?

Objectives of business firms

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50. Market price per share of a firm having

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Scope and sources of finance; Lease financing

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Different Types of Lease:

iii. Operating Lease:

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Operating lease has following features:

Advantages and Disadvantages of Lease Financing:

Assured Regular Income: