WAEC SSCE - Commerce - 2013 (Essay)

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The following are terms used on the Stock Exchange, the organised market for buying and selling existing (second-hand) shares and stocks.

(a) Bull

A bull is a speculator on the Stock Exchange who expects the price of shares to rise in the near future. He therefore buys shares now at the current low price with the intention of selling them later at a higher price to make a profit. A market in which prices are generally rising is called a bull market.

(b) Bear

A bear is a speculator who expects the price of shares to fall. He therefore sells shares now (sometimes shares he does not yet own) at the current high price, hoping to buy them back later at a lower price to make a profit. A market in which prices are generally falling is called a bear market.

(c) Option

An option is a right, bought for a fee (premium), which gives the holder the choice either to buy or to sell a stated quantity of shares at an agreed price within a fixed period. The holder may exercise the option or allow it to lapse; his loss is limited to the premium paid.

(d) Backwardation

Backwardation is the fee or premium paid by a bear (a seller who has sold shares he does not possess) to the buyer in order to postpone the delivery of the shares to the next account or settlement date.

(e) Contango

Contango is the fee or interest paid by a bull (a buyer) to the seller in order to postpone payment for and delivery of the shares he has bought until the next settlement date. It is the opposite of backwardation.

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(a) Definition of terms

1. Nationalization: This is the act by which government takes over the ownership and control of privately owned business enterprises, with or without compensation, and runs them in the interest of the public.
2. Indigenization: This is a policy that transfers the ownership and control of businesses from foreigners to citizens (indigenes) of a country, so that nationals participate more fully in the economy.
3. Commercialization: This is the reorganization of a public enterprise so that it is run strictly on business (profit-making) lines to become self-financing, though government may still retain ownership.
4. Privatization: This is the transfer of ownership and control of a government-owned enterprise to private individuals or companies, wholly or partly, through the sale of shares.

(b) Four reasons why government should participate in business

1. To provide essential and social services such as water, electricity and health that private investors may neglect.
2. To undertake capital-intensive projects like railways and refineries which require huge capital beyond private means.
3. To prevent exploitation of consumers by private monopolists through high prices and poor quality.
4. To create employment and reduce unemployment in the economy.

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(a) Five importance of personal selling to a business

1. Two-way communication: The salesperson interacts directly with the customer, answering questions and clearing doubts on the spot.
2. Persuasion and closing sales: The seller can persuade a hesitant customer and actually close the sale, converting interest into a purchase.
3. Product demonstration: Complex or technical goods can be physically demonstrated so the buyer understands how they work.
4. Building customer relationships: Regular personal contact creates goodwill and encourages repeat buying and customer loyalty.
5. Market feedback: The salesperson gathers first-hand information on customer needs, complaints and competitors, which guides the firm's decisions.

(b) Five reasons why communication is important to a business

1. Coordination of activities: It links the various departments so that their efforts work together towards common goals.
2. Effective decision-making: Managers need accurate information passed to them to make sound decisions.
3. Placing and receiving orders: Buying and selling depend on the exchange of enquiries, orders and confirmations between firms.
4. Motivation of staff: Clear instructions, feedback and encouragement raise the morale and performance of employees.
5. Building good relations: It maintains understanding and goodwill with customers, suppliers and the public, improving the firm's image.

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(a) Meaning of market segmentation

Market segmentation is the process of dividing a large, heterogeneous market into smaller, distinct groups of buyers (segments) who share similar needs, characteristics or buying behaviour, so that the seller can design products and marketing programmes to suit each group. Each segment is made up of customers who are likely to respond in the same way to a given marketing effort, which allows resources to be used more effectively.

(b) Four factors considered in segmenting a market

1. Geographical factors: The market is divided according to location such as region, country, urban or rural areas and climate. Consumer needs differ from one area to another, for example demand for raincoats is higher in wet areas.
2. Demographic factors: Buyers are grouped by measurable population characteristics such as age, sex, family size, occupation and education. For example, products may be designed separately for children, adults, men or women.
3. Income (economic) factors: The market is divided according to the income or purchasing power of consumers into high, middle and low income groups, since ability to pay determines the goods and brands they can buy.
4. Psychographic and behavioural factors: Buyers are grouped by lifestyle, social class, taste, religion, attitudes and buying habits such as brand loyalty and rate of usage, because these influence the choice and quantity of goods bought.

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Insurance terms explained:

1. Proximate cause: This is the active, direct and effective cause that sets in motion a chain of events producing a loss, without the intervention of any new and independent force. The insurer is only liable for a loss whose proximate (nearest real) cause is a peril insured against. For example, if a fire causes a wall to collapse and damage goods, the proximate cause of the damage is the fire.
2. Surrender value: This is the cash amount the insurer pays to a life-policy holder who decides to discontinue and cancel the policy before it matures. It represents part of the premiums already paid, less the insurer's charges. It applies mainly to life assurance because such policies build up value over time.
3. Contribution: This is the principle under which, where the same risk is insured with more than one insurer (double insurance), each insurer bears only a rateable proportion of the loss. It prevents the insured from recovering more than the actual loss from the several insurers. It applies to indemnity policies.
4. Utmost good faith (uberrimae fidei): This is the principle that both parties to an insurance contract must fully and honestly disclose all material facts relating to the risk, whether asked or not. If the insured conceals or misrepresents a material fact, the insurer may repudiate the contract.
5. Premium: This is the consideration (money) paid by the insured to the insurer, usually periodically, in exchange for the insurer's promise to indemnify or pay a benefit on the happening of the insured event. It is calculated on the basis of the degree of risk involved.

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(a) Five features of a public corporation

1. Owned by the government: A public corporation is established and owned by the state on behalf of the public.
2. Created by an Act of Parliament (statute): It is set up by a special law which states its aims, powers and duties.
3. Separate legal entity: It has a legal personality of its own; it can sue and be sued, own property and enter into contracts in its own name.
4. Capital provided by the government: Its funds come mainly from government grants, loans and its own internally generated revenue rather than from shareholders.
5. Service (rather than profit) motive: Its main aim is to provide essential services to the public, though it may also aim to break even or make a modest surplus.

(Management by a board appointed by the government and public accountability are also acceptable.)

(b) Five sources of capital available to a limited liability company

1. Issue of shares: The company raises capital by selling ordinary and preference shares to the public who become part-owners.
2. Issue of debentures: It borrows long-term funds from the public by issuing debentures on which fixed interest is paid.
3. Bank loans and overdrafts: It obtains short- and medium-term finance from commercial banks.
4. Ploughed-back (retained) profit: Part of the company's profit is kept in the business as reserves and used for expansion.
5. Trade credit: The company obtains goods and materials from suppliers on credit, paying at a later date.

(Leasing/hire purchase and loans from finance houses are also acceptable.)

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(a) Distinction between Commerce and Industry

Commerce is that branch of production concerned with the distribution and exchange of goods and services and all the aids that facilitate this distribution, such as trade, banking, insurance, transport, warehousing and advertising. Industry is the branch of production concerned with the actual creation or production of goods and direct services, that is, the extraction of raw materials, their processing and manufacture, and construction. In short, industry makes the goods while commerce distributes them to where they are needed.

(b)(i) Three activities involved in industry

1. Extraction: Drawing raw materials from nature, for example mining, fishing, farming and quarrying.
2. Manufacturing: Converting raw materials into semi-finished or finished goods, for example turning cotton into cloth.
3. Construction: Assembling materials to build roads, bridges, dams and houses.

(b)(ii) Five activities involved in commerce

1. Trade: The buying and selling of goods, both home trade (wholesale and retail) and foreign trade (import and export).
2. Banking: Providing finance, accepting deposits, granting loans and aiding the settlement of debts.
3. Insurance: Providing protection against various business risks and losses.
4. Transportation: Moving goods and people from one place to another, creating place utility.
5. Warehousing: Storing goods safely until they are needed, creating time utility.

(Advertising and communication are also acceptable commercial activities.)

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Two distinguishing features between each pair are given below.

(a) Tramp vessels and ocean liners

(b) A factor and a broker

(c) A commission agent and a del credere agent

(d) Consular invoice and pro-forma invoice

(e) Insurance and assurance

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(a) Types of discount

1. Trade discount: This is a reduction in the catalogue or list price granted by a manufacturer or wholesaler to a retailer or another trader who buys goods for resale. It allows the trader to make a profit and covers the cost of distribution. It is deducted on the invoice and does not appear in the ledger accounts.
2. Quantity discount: This is an allowance given to a buyer for purchasing goods in large quantities at a time. It encourages bulk buying and helps the seller to clear stock quickly.
3. Cash discount: This is a reduction granted to a debtor for paying his account promptly or within an agreed period. It encourages prompt payment and reduces the risk of bad debts, for example "5% for payment within 7 days."
4. Seasonal discount: This is a price reduction given to buyers who purchase goods in the off-season or out of season, for example buying umbrellas in the dry season. It encourages sales throughout the year and helps the seller to keep production going.

(b) Five functions of a development bank

1. It provides medium and long-term loans to industry, agriculture and commerce for development purposes.
2. It provides equity (share) capital by taking part-ownership in new and expanding enterprises.
3. It gives technical and managerial advice to businesses to help them operate efficiently.
4. It promotes and finances new industries, especially in priority sectors, thereby encouraging industrialization.
5. It underwrites shares and helps enterprises to raise funds from the capital market and attracts foreign investment.

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Trading information (in Le)

(a) Turnover = Sales - Returns inwards = 850,000 - 25,000 = Le825,000

(b) Cost of goods sold = Opening stock + Purchases - Returns outwards - Closing stock. With opening and closing stock both nil:

= 0 + 400,000 - 15,000 - 0 = Le385,000

(c) Gross profit = Turnover - Cost of goods sold = 825,000 - 385,000 = Le440,000

(d) Rate of stock turn

\[ \text{Rate of stock turn} = \frac{\text{Cost of goods sold}}{\text{Average stock}}, \qquad \text{Average stock} = \frac{\text{Opening stock} + \text{Closing stock}}{2} \]

Since no opening or closing stock is given, average stock = \( \dfrac{0 + 0}{2} = \text{Le}0 \), so the rate of stock turn is indeterminate from the data provided (there is no stock held to turn over).

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(a) What is mail order business?

Mail order business is a form of retail trade in which goods are sold and delivered to customers through the post office or courier without the buyer and seller meeting face to face. Customers select goods from catalogues, price lists or advertisements, place their orders by post or online, and the goods are then despatched to them. It requires no shop or showroom and is useful for reaching customers in distant and rural areas.

(b) Six trends in retailing

1. Growth of self-service: More stores now allow customers to pick goods from open shelves and pay at a checkout, reducing the number of sales assistants needed.
2. Rise of e-commerce (online retailing): Goods are increasingly bought and sold over the internet, with delivery to the customer's home.
3. Branch/chain-store expansion: Retailers open many branches under one name in different locations, buying in bulk and selling at competitive prices.
4. Use of electronic payment methods: Retailers now accept cards, mobile money and other cashless means of payment instead of only cash.
5. Increased use of automatic vending machines: Goods such as drinks and snacks are sold automatically through coin- or card-operated machines.
6. Emergence of large-scale outlets (supermarkets, hypermarkets and shopping malls): Retailing is moving towards large stores that sell a very wide range of goods under one roof.

(Growth of self-branding/own-label goods and after-sales services such as home delivery are also acceptable.)