WAEC SSCE - Commerce - 2008 (Essay)

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Insurance terms explained

• (a) Proximate cause: the principle that the insurer is liable only where the loss is caused by the nearest, most direct and effective cause covered by the policy, and not by a remote cause. Compensation is paid only if the insured peril is the proximate cause of the loss.
• (b) Contribution: the principle that where the same risk has been insured with more than one insurer, each insurer bears the loss only in proportion to the amount it insured. The insured cannot recover more than the actual loss from all the insurers together.
• (c) Utmost good faith (uberrimae fidei): the principle that both parties, especially the insured, must disclose all material facts about the risk honestly and completely. Concealment or misrepresentation of a material fact makes the policy void.
• (d) Re-insurance: an arrangement by which an insurer that has accepted a large risk transfers part of that risk to another insurance company (the re-insurer) so as to spread the risk and avoid heavy loss.
• (e) Contract of non-indemnity: a form of insurance (mainly life assurance and personal accident) in which the sum payable is fixed in advance because the loss (life, limb) cannot be measured in money. The agreed sum is paid on the happening of the event, rather than the exact loss suffered.

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(a) What is hire purchase?

Hire purchase is a system of buying goods on credit in which the buyer takes possession of the goods after paying an initial deposit and then pays the balance in agreed regular instalments. Ownership of the goods does not pass to the buyer until the last instalment has been paid; until then the goods legally belong to the seller.

(b) Advantages and disadvantages

(i) To the buyer

Advantages:

1. He enjoys the use of the goods while still paying for them.
2. It enables people of low income to acquire expensive goods they could not pay for at once.

Disadvantages:

1. The total amount paid is higher than the cash price because of interest charges.
2. The goods can be repossessed by the seller if the buyer defaults, and he may lose the instalments already paid.

(ii) To the seller

Advantages:

1. He attracts more customers and sells more goods, increasing his turnover and profit.
2. He earns extra income through the interest charged on the credit.

Disadvantages:

1. His capital is tied up while waiting to collect instalments over a long period.
2. He may suffer loss through bad debts or the cost of repossessing and reselling used goods.

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(a) Four functions of the stock exchange

1. Market for securities: it provides a ready and organised market where existing shares, stocks and bonds can be bought and sold.
2. Raising of capital: it helps companies and governments to raise long-term capital from the public through the sale of new securities.
3. Pricing of securities: it determines and publishes the fair market prices of securities through the forces of demand and supply.
4. Encourages saving and investment: it provides a safe outlet where surplus funds can be invested and later converted back into cash (liquidity), thereby mobilising savings.

(Others acceptable: barometer of the economy, protection of investors.)

(b) Four ways the Central Bank regulates commercial banks

1. Open market operations: buying or selling government securities to increase or reduce the amount of money in circulation.
2. Bank (rediscount) rate: raising or lowering the interest rate at which it lends to commercial banks, which influences their own lending rates.
3. Cash reserve ratio: fixing the proportion of deposits that commercial banks must keep with the Central Bank, so as to control how much they can lend.
4. Special directives and moral suasion: issuing instructions and giving advice to commercial banks on the amount and direction of their lending.

(Also acceptable: liquidity ratio, special deposits.)

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(a) Five factors that affect the rate of turnover

Rate of turnover is the number of times average stock is sold and replaced within a period. Factors affecting it are:

1. Type/nature of goods sold: perishable and everyday goods sell faster than durable or luxury goods.
2. Level of demand: high customer demand raises the rate of turnover.
3. Price charged: lower prices attract more sales and quicken turnover.
4. Location of the business: a shop in a busy, populated area sells stock faster.
5. Quality of goods and service (including advertising): good quality and effective advertising increase sales and turnover.

(b) What is working capital?

Working capital is the excess of current assets over current liabilities. It is the fund available for the day-to-day running of the business.

\[ \text{Working capital} = \text{Current assets} - \text{Current liabilities} \]

(c) Four importance of working capital

1. It enables the business to pay its short-term debts as they fall due.
2. It provides funds to buy stock and raw materials for continuous trading.
3. It is used to meet daily running expenses such as wages, rent and transport.
4. It allows the firm to take advantage of cash discounts and trade opportunities, and keeps it solvent.

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(a) What is transportation?

Transportation is the movement or carriage of goods and people from one place (where they are produced or located) to another place (where they are needed or consumed), using means such as road, rail, water, air and pipeline. It creates place utility by bridging the gap between producers and consumers.

(b) Dead freight

Dead freight is the sum of money paid to a shipping company by a person who has hired space in a ship but fails to fill it with the full quantity of goods agreed. He is charged for the unused (empty) space that he reserved but did not occupy.

(c) Five factors that determine a seller's mode of transportation

1. Nature of the goods: perishable, fragile or bulky goods call for a suitable means of carriage.
2. Cost of transport: the seller compares freight charges and selects the cheapest suitable means.
3. Speed/urgency: where delivery is urgent, a faster means such as air is chosen.
4. Distance and destination: long or overseas journeys need ship, rail or air; short distances suit road.
5. Safety and value of the goods: valuable goods are sent by a means that offers greater security against damage or theft.

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(a) Abbreviations in full

1. C.O.D: Cash On Delivery.
2. C.I.F: Cost, Insurance and Freight.
3. F.O.B: Free On Board.
4. E and O.E: Errors and Omissions Excepted.

(b) Discount calculations

The quantity (trade) discount is deducted first, then the cash discount is worked out on the reduced amount.

(i) Quantity discount value

\[ \text{Quantity discount} = 5\% \times 100{,}000 = \frac{5}{100} \times 100{,}000 = 5{,}000 \]

Amount after quantity discount = \(100{,}000 - 5{,}000 = 95{,}000\).

(ii) Cash discount value

\[ \text{Cash discount} = 5\% \times 95{,}000 = \frac{5}{100} \times 95{,}000 = 4{,}750 \]

(iii) Net amount payable by the customer

\[ \text{Net amount} = 95{,}000 - 4{,}750 = 90{,}250 \]

The customer pays #90,250.

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(a) Explanations

• (i) Counter trade: a form of international trade in which goods are exchanged for other goods instead of money, or in which a country agrees to buy goods from another country as a condition for selling to it (for example barter and buy-back arrangements).
• (ii) Entrepot trade: the re-export trade, in which goods are imported into a country and then re-exported to another country, usually after being stored, graded or repackaged, without being consumed in the importing country.
• (iii) Import trade: the branch of foreign trade that involves buying and bringing in goods and services from other countries into one's own country.
• (iv) Invisible trade: the buying and selling of services (rather than physical goods) between countries, such as banking, insurance, shipping, tourism and transportation.

(b) Four barriers to international trade

1. Imposition of tariffs (import and export duties).
2. Import quotas limiting the quantity of goods that may be brought in.
3. Foreign exchange control and shortage of foreign currency.
4. Total ban (embargo) or import prohibition on certain goods.

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Types of retail outlets

• (a) Supermarket: a large self-service store, usually selling groceries and household goods, where customers pick items from open shelves, place them in baskets or trolleys and pay at a checkout counter on their way out. Goods are pre-packed and price-marked.
• (b) Mobile shops: shops built inside vehicles such as vans that move from place to place, taking goods directly to customers in different locations, especially where there are no fixed shops. They save customers the trouble of travelling.
• (c) Department stores: very large retail establishments, usually housed in one big building, divided into several sections or departments, each selling a different class of goods (clothing, furniture, cosmetics, etc.) under one roof and one management.
• (d) Chain (multiple) stores: a group of shops that are owned by the same firm, sell the same range of goods, bear the same name and are managed centrally, with branches spread in different towns. They buy in bulk and sell at standard prices.
• (e) Hawking: a form of petty retailing in which the seller (hawker) moves about from street to street or house to house carrying goods, often on the head or in the hands, to sell to customers wherever they are found.

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Comparison of a partnership and a public limited company

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Documents involved in the formation of a public limited company

1. Memorandum of Association: the document that governs the relationship between the company and the outside world. It contains the name clause, registered office (situation) clause, objects clause, capital clause and liability clause, and defines the powers and scope of the company.
2. Articles of Association: the document that contains the internal rules and regulations for the management of the company, such as the rights of shareholders, conduct of meetings, appointment and powers of directors and how dividends are shared.
3. Prospectus: a document (a public invitation) issued to invite the public to buy the shares or debentures of the company. It gives details of the company's prospects, capital and how to apply for shares.
4. Statement in lieu of prospectus / Certificate of Incorporation stage documents: a Statement in lieu of prospectus is filed where the company does not invite the public but wishes to obtain the Certificate of Trading. After registration, the Certificate of Incorporation is issued as evidence that the company legally exists, and a public company must also obtain the Certificate of Trading (Commencement) before it can begin business.