Unit 1: The Nature of Business

PAPER 1 Exam Practice

Multiple Choice Questions

1. D The exchange of goods and services without the use of money

2. B Employees
3. B Goods traded were very durable
4. C State fixed pricing
5. C Human Resources Department
6. C Tele-banking
7. D Shareholder
8. B It is perishable.
9. A It is universally accepted.
10. C Any individual, business or group that has a vested interest in how well a business
performs
11. B Greater customer loyalty
12. C Compliance officer
 Unit 1: The Nature of Business

PAPER 2 Exam Practice

Structured Questions
Question 1
(a) (i) Barter is the exchange of goods or services without the use of money.
(ii) Problems early traders encountered with barter:
1. Difficulty establishing a double coincidence of wants
2. The indivisibility of goods
3. Difficulty establishing on agree rate of exchange
(iii) Ways in which money has resolved some of the challenges of the barter system:
1. It is a universal medium of exchange: money is universally accepted in exchange
for all goods and services. This resolves the challenge of establishing a double
coincidence of wants for one’s commodity.
2. It is divisible: money can be divided into smaller units. This resolves the problem of
the indivisibility of goods under the barter system.
3. It is a unit of account: This means the value of prices of all other goods and
services can be expressed in units of money. This overcomes the need to fix rates of
exchange between every different item in a barter system.
(b) (i) Telebanking entails the use of a telephone to conduct business, whereas e-
commerce may be defined as business activities (such as marketing of goods/services) or
business transactions that entail the use of a computer-mediated network such as the
internet; World Wide Web; e-mail; fax; intranet, or extranet.
(ii) Problems customers may experience when they participate in e-commerce include:
1. Damaged goods can be difficult to replace, and customers may be required to pay
a return shipping fee.
2. Security issues regarding personal and financial information put consumers at risk
of identity theft and online scams or fraud.
(iii) Other instruments of exchange include:
1. Credit cards
2. Debit cards
3. Bill of exchange
Question 2
(a) (i) Benefits Alisa Smith enjoys as a sole trader:
1. As the sole owner of the enterprise, all profits go directly to her.
2. As the sole owner of the firm, decisions are made quickly.
(ii) Benefits Alisa Smith can enjoy by converting to a private limited company:
1. Greater access to financing for the business through shareholder contributions.
2. Limited liability: Should the business fail, liability for the debts incurred by the
business is limited to Alisa Smith’s investments in the business. Her personal assets
cannot be seized to settles the debts of the business.
(b) (i) Functional areas Alisa Smith may need to establish within her firm as her business
expands are:
1. Production department
2. Marketing department
3. Finance department
(ii) Stakeholders who may be interested in the performance of Alisha Smith’s business
as it grows include:
1. Customers
2. Employees
3. Suppliers
(iii) The main purpose of:
1. Memorandum of Association: to provide general information about the company
including: the name of the company; its location or address; the authorised share
capital of the business; the types of shares to be issued, as well as the objectives of
the company.
2. Articles of Association: provides guidance as it relates to the internal operations of
the company. It outlines: the number of shares the company is authorised to issue;
the procedures for calling an Annual General Meeting (AGM); the number of
directors, and their rights and obligations; the procedures that govern the election of
directors; policies or restrictions as it relates to the transfer of shares; policies and
procedures for paying out dividends to shareholders; the borrowing power of the
company.
3. Partnership Agreement: A legally binding document which outlines the terms and
conditions of a partnership.
(iv) The differences between a planned economy and a free-market economy:
1. In the planned economy all decisions on what to produce are made by the state,
whereas in the free-market economy decisions on what to produce are based on the
market forces of demand and supply. State intervention is minimal.
2. In the planned economy all resources are owned by the state, whereas in the free-
market economy resources are largely owned by private individuals or firms.
Question 3
(a) (i) Money is a medium of exchange that is generally accepted within a society. It can be
any commodity that people are willing to accept in exchange for all other goods and services.
(ii) Functions of Money:
1. It is a standard of deferred payment
2. It is a unit of account
(iii) Characteristics of money:
1. It is divisible
2. It is portable
3. It is durable
(b) (i) The key difference between a regular cheque and a bank draft is that the bank draft
guarantees payment of funds by the bank. As such a bank draft will not ‘bounce’ like a
cheque. The bank will set aside or put a hold on the customer’s bank account funds, so that it
is reserved and therefore available for the payment of the bank draft to the recipient. A bank
draft is, therefore, more reliable than a cheque and is normally used for large payments such
as purchase of a car, house, appliances, or payment of university tuition. Bank drafts can be
made out for any amount and are used for international payments as well. International bank
drafts can take a few weeks to be cleared while local bank drafts can take a few days to be
processed. There is a fee attached for use of a bank draft.
(ii) Situations where a cheque may be classified as a “dishonoured cheque”:
1. The amount of money stated on the cheque is more than the amount of money in
the drawer’s chequing account.
2. The drawer cancelled or stopped payment of the cheque.
3. The drawer closed his bank account before the cheque has been presented for
payment.
(c) The private sector is that part of an economy that is owned and controlled by private
individuals or firms, whereas the public sector is that part of an economy that is owned and controlled
by the state.
Question 4
(a) (i) A transnational firm consists of a parent company (normally located within the home
country of the firm) which controls the operation of a group of subsidiary companies within
one specific industry, or many industries in other countries around the world.
(ii) Benefits of transnational investments to the parent company:
1. Easier access to cheap labour and raw materials
2. Taxation benefits such as tax holidays

Benefits of transnational investments to the host country:

1. Introduction of more modern forms of technology
2. Exposure to expert knowledge and training
(iii) Possible drawbacks a host country may experience as a result of investments by
transnational firms:
1. Local natural resources may be over-exploited. For example, when multinational
hotels are established within our islands, our beaches, coastlines and coral reefs are
exploited very heavily.
2. The attractive tax holiday packages offered to multinationals to encourage
investment in the host country results in losses of millions of dollars in tax revenue for
the host country. Many multinationals pull out of the country or change ownership
when this tax holiday period expires.
(b) (i) Difference between a “private limited company” and a “public limited company”:
1. A Private Limited Company usually has the abbreviation ‘Ltd.’ at the end of the
business name, whereas as a Public Limited Company has the abbreviation ‘plc’ at
the end of the business name.
2. A Private Limited Company has a minimum of 1 and a maximum of 50
shareholders, whereas as a Public Limited Company has a minimum of 2
shareholders but no maximum number of shareholders.
3. A Private Limited Company can only sell shares privately to family members or
people nominated by the other shareholders, whereas as a Public Limited Company
can sell shares publicly through a stock exchange market.
(ii) Limited liability means that should a business fail, liability for the debts incurred by the
business is limited to the entrepreneur’s investments in the business. His or her personal
assets cannot be seized to settle the debts of the business.
Question 5
(a) (i) A co-operative is an organisation that is jointly owned and democratically controlled
by its members.
(ii) Types of co-operatives:
1. Producer co-operatives
2. Consumer co-operatives
3. Worker co-operatives
(iii) Principles of governing co-operatives:
1. Voluntary and open membership: Co-operatives are voluntary organisations that
are open to all persons who are able to use their services and who also accept the
responsibilities of being a member of the organisation.
2. Democratic member control: Members of co-operatives have equal voting rights
(one member, one vote) on the activities and operations of the organisations.
3. Member economic participation: Members contribute equitably to the capital base
of the organisation through their share contributions or deposits, as well as the
general operations of co-operatives to ensure good returns on the organisation’s
investment.
(b) Responsibilities of employers to:
(i) Employees:
1. Provide a safe working environment for all employees.
2. Provide employees with the necessary tools to complete their jobs.
(ii) Consumers:
1. Ensure that the products and services offered by businesses are of a good quality
2. Ensure that the products and services offered by businesses are reasonably
priced.
(iii) Government:
1. Ensure that all corporate taxes owed to the government are paid.
2. Ensure that the business adheres to all government regulations.
(c) Various answers acceptable. One example of an unethical business practice is that a firm
may engage in improper disposal of garbage. Two possible consequences of this practice are:
(i) Governments can charge fines for breaching laws;
(ii) The business can be closed if citizens are at risk from improper disposal of waste.