WAEC SSCE - Commerce - 2012 (Essay)

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(a) Explanation of terms

• (i) Limited liability: This means the liability of a shareholder for the debts of the company is limited to the amount unpaid on the shares he holds. His personal property cannot be taken to settle the company's debts.
• (ii) Separate legal entity: This means a company is regarded in law as a person distinct from its owners. It can own property, enter into contracts, sue and be sued in its own name.
• (iii) Certificate of incorporation: This is the legal document issued by the Registrar of Companies which brings a company into existence and gives it the right to begin operating as a body corporate.
• (iv) Participating preference shares: These are preference shares whose holders, after receiving their fixed dividend, also share in the surplus profit along with ordinary shareholders, earning an additional dividend.
• (v) Ordinary shares: These are the equity or risk-bearing shares of a company whose holders receive a variable dividend paid only after preference shareholders, and who carry voting rights and control the company.

(b) Advantages of a public corporation

• It is financed by government, so large capital is available for big projects that private firms cannot easily undertake.
• It provides essential services to the public at affordable prices without aiming solely at profit.
• It enjoys monopoly in providing certain services, which avoids wasteful competition and duplication.
• It can be used by government to control key sectors of the economy and prevent exploitation of the public.
• It provides employment and can bear losses in the short run because it is backed by government funds.

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(a) Market segmentation

Market segmentation is the process of dividing a large, varied market into smaller distinct groups of buyers who share similar needs, characteristics or buying behaviour, so that each group can be served with a suitable marketing approach.

(b) Factors that influence market segmentation

1. Age of consumers
2. Income or purchasing power
3. Sex or gender
4. Geographical location
5. Occupation or social class
6. Taste, preference and lifestyle

(c) Advantages of advertising

• It informs customers: Advertising makes consumers aware of the existence, features and prices of goods and services.
• It increases sales: By creating and stimulating demand, advertising helps the producer to sell more goods and earn higher profit.
• It creates and sustains goodwill: Regular advertising builds a favourable image and brand loyalty for the firm and its products.
• It supports mass production: The wide demand created by advertising enables firms to produce on a large scale and enjoy lower unit costs.
• It provides employment: Advertising creates jobs for artists, marketers, media houses and others engaged in the advertising industry.

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Documents used in international trade

• (a) Indent: This is an order for goods sent by an importer to an agent or exporter abroad, giving details of the goods required. An open indent leaves the agent free to buy from any supplier, while a closed indent names the particular supplier from whom the goods must be bought.
• (b) Bill of lading: This is a document issued by a shipping company acknowledging that the goods have been received on board for shipment. It serves as a receipt for the goods, evidence of the contract of carriage, and a document of title which the holder can use to claim the goods at the port of destination.
• (c) Consular invoice: This is an invoice certified and stamped by the consul of the importing country stationed in the exporting country. It confirms the value, quantity and origin of the goods and helps the importing country to assess the correct import duty and prevent dumping.
• (d) Certificate of origin: This is a document stating the country in which the goods were produced or manufactured. It is used by the importing country to determine the rate of duty to charge and to enforce trade agreements or restrictions on goods from particular countries.
• (e) Bill of exchange: This is an unconditional order in writing, drawn by the exporter (drawer) on the importer (drawee), requiring the importer to pay a certain sum of money on demand or at a fixed future date to the drawer or a named person. It is a means of demanding and obtaining payment in international trade.

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(a) Factors affecting the choice of transport for frozen products

• Perishability of the goods: Frozen products spoil quickly, so a fast means of transport that gets them to the market in good time is essential.
• Availability of refrigeration: The transport chosen must be fitted with cold-storage or refrigerated facilities to keep the products frozen throughout the journey.
• Distance to be covered: For long distances, faster transport such as air or refrigerated vehicles is needed to avoid deterioration, while short distances allow cheaper means.
• Cost of transport: The trader must weigh the transport cost against the value of the goods, choosing a means that is affordable yet preserves the products.
• Nature of the route and infrastructure: Good roads, ports or airports and the condition of the terrain determine which means of transport can reliably reach the destination.

(b) Disadvantages of air transport

• It is the most expensive means of transport, with high fares and freight charges.
• It cannot carry very heavy and bulky goods such as machinery and building materials.
• It is greatly affected by bad weather, which can cause delays or cancellation of flights.
• It requires expensive airports and terminals, so it cannot deliver goods directly to the customer's door.
• Accidents in air transport are usually very serious, often resulting in total loss of lives and goods.

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(a) Difference between nationalization and indigenization

Nationalization is the taking over of the ownership and control of privately owned businesses (often foreign or local) by the government, so that such enterprises become owned and run by the state. Indigenization, on the other hand, is the transfer of the ownership and control of businesses from foreigners to the citizens (indigenes) of a country, so that nationals own all or a substantial part of the shares and management of those businesses.

In short, nationalization moves ownership from private hands to the government, while indigenization moves ownership from foreigners to the citizens of the country.

(b) Reasons a country would indigenize some industries

• To place the ownership and control of key businesses in the hands of the citizens of the country.
• To reduce the excessive dominance and control of the economy by foreigners.
• To retain profits within the country and check the repatriation of earnings by foreigners.
• To create more opportunities for citizens to participate in business and gain managerial and technical experience.
• To ensure that the wealth and natural resources of the country benefit the indigenes.
• To promote rapid economic growth and self-reliance by developing indigenous entrepreneurs.

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(a) Credit

Credit is an arrangement whereby goods, services or money are supplied to a person on trust, allowing him to pay for them at a later agreed date rather than immediately. It is a means of buying now and paying later.

(b) Principles of insurance

1. Utmost good faith (uberrimae fidei): Both parties, especially the insured, must disclose all material facts about the risk honestly and completely; concealment of a material fact makes the contract void.
2. Insurable interest: The insured must have a lawful financial interest in the subject matter, such that he would suffer a loss if it were damaged or destroyed.
3. Indemnity: The insured is placed back in the same financial position he was in before the loss, no more and no less, so that he does not profit from the loss. (This does not apply to life assurance.)
4. Subrogation: After the insured has been fully compensated, the insurer takes over any rights or remains of the damaged property so that the insured does not gain twice for the same loss.
5. Contribution: Where the same risk is insured with more than one insurer, each insurer contributes proportionately to the loss so that the insured recovers only the actual amount of the loss once.
6. Proximate cause: The insurer is liable only for a loss caused directly by the risk insured against, and not by a remote or excluded cause.

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(a) Meaning of channel of distribution

A channel of distribution is the route or path through which a product moves from the manufacturer or producer to the final consumer or industrial user. It may involve intermediaries such as agents, wholesalers and retailers.

(b) Four examples of channels of distribution

(c) Five advantages of home trade over foreign trade

1. Use of local currency: Payment is made in the national currency. Therefore, there is no need to exchange currencies or face foreign-exchange difficulties.
2. Less documentation: Home trade does not usually involve import and export documents and the formalities required when goods cross national borders.
3. Shorter distance and lower transport cost: Buyers and sellers are generally closer together within one country. Goods can reach the buyer more quickly and transport costs are usually lower.
4. Common language and fewer cultural differences: Traders commonly use the same official language and are more familiar with local customs, making communication and bargaining easier.
5. Greater knowledge of the market and lower risk: Local traders usually know domestic customers, laws, business practices and market conditions better than foreign markets. This makes trading decisions easier and reduces risks such as loss, delay or misunderstanding.

Examination reminder: For each advantage, state the feature of home trade and then explain how it makes trading easier, cheaper, quicker or less risky than foreign trade.

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(a) Completing the divisions of Commerce chart

The chart divides Commerce into two great branches: Trade (the actual buying and selling of goods) and Aids to Trade (the services that make trade possible). On the diagram, Commerce is at the top, the left branch runs down through Home trade and a further blank, while the right branch is headed Aids to trade. Working from that structure, the blanks fill in as follows:

How the branches fit together:

• Trade (i) splits into Home trade (buying and selling within one country) and Foreign trade (ii) (buying and selling between countries, made up of import, export and entrepot trade).
• Home trade itself splits into Wholesale trade (iii) (buying in bulk from producers and selling in smaller quantities to retailers) and Retail trade (iv) (selling in small quantities directly to the final consumer).
• Aids to trade are the supporting services; besides Banking (v), Insurance (vi), Transportation (vii) and Warehousing (viii), other accepted answers include advertising and communication.

(b) Types of production, with one example each

(i) Primary production is the extraction of raw materials directly from nature (land, water and air). It is the first stage of production and provides the raw materials used by other stages.
Example: mining of coal (also farming, fishing, or lumbering).

(ii) Secondary production is the processing or converting of raw materials from primary production into semi-finished or finished goods. It covers manufacturing and construction.
Example: a factory turning cocoa beans into chocolate (also building of houses, or refining crude oil).

(iii) Tertiary production is the provision of services rather than physical goods. It is divided into commercial services (aids to trade such as banking and transport) and direct/personal services (such as teaching and nursing).
Example: the services of a banker (also a teacher, doctor, or transporter).

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(a) Contract

A contract is a legally binding agreement between two or more persons which the law will enforce. It is an agreement that creates rights and obligations that the parties are bound to observe.

(b) Elements of a valid contract

1. Offer and acceptance
2. Consideration
3. Intention to create legal relations
4. Capacity of the parties to contract
5. Genuine consent (free consent) and legality of the object

(c) Ways a contract may be discharged

• By performance: When both parties completely carry out their obligations as agreed, the contract comes to an end.
• By agreement: The parties may mutually agree to end the contract or to replace it with a new one before it is performed.
• By breach: When one party fails to perform his part of the contract, the innocent party is discharged and may sue for damages.
• By frustration (impossibility of performance): When an unforeseen event beyond the control of the parties, such as destruction of the subject matter or a change in the law, makes performance impossible, the contract is discharged.

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Ade Company Limited: capital and asset calculations

(a) Issued capital

Issued capital is the value of the shares that have been offered to and taken up by the public. Only 30,000 of the shares have been subscribed and allotted, each of nominal value N20.

Issued capital = \(30{,}000 \times N20 = N600{,}000\)

(b) Unissued capital

Unissued capital is the part of the authorised capital that has not yet been offered to the public. Authorised capital is 80,000 shares; 30,000 have been issued, leaving 50,000 shares.

Unissued capital = \((80{,}000 - 30{,}000) \times N20 = 50{,}000 \times N20 = N1{,}000{,}000\)

(c) Total assets

Total assets are the sum of all the fixed and current assets of the company.

Total assets = \(N235{,}000\)

(d) Working capital

Working capital = Current assets - Current liabilities. The current assets are stock, debtors and cash; the current liability is creditors.

Current assets = \(60{,}000 + 15{,}000 + 5{,}000 = N80{,}000\)

Current liabilities (creditors) = \(N35{,}000\)

Working capital = \(N80{,}000 - N35{,}000 = N45{,}000\)