WAEC SSCE - Commerce - 2009 (Essay)

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Stock exchange terms explained

1. Backwardation: This is a charge or premium paid by a bear (a seller of shares he does not yet own) to the buyer for permission to postpone the delivery of the securities to a later settlement date. It is the penalty for deferring delivery.
2. Bear: A bear is a speculator on the stock exchange who expects the price of shares to fall. He sells shares he does not own, hoping to buy them back later at a lower price and profit from the difference.
3. Jobber: A jobber (or dealer) is a member of the stock exchange who buys and sells securities in his own name and on his own account. He deals with brokers rather than the public and makes his living from the difference between his buying and selling prices.
4. Jobber's turn: This is the profit made by a jobber, being the difference between the lower price at which he buys a security and the higher price at which he sells it. It is the margin between his bid price and offer price.
5. Brokerage: This is the commission or fee charged by a stockbroker for buying or selling securities on behalf of a client. It is usually calculated as a percentage of the value of the transaction.

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Effects of a sole trader admitting other partners

When a sole trader admits partners, the business becomes a partnership. This brings both benefits and losses to the former sole trader.

Benefits derived

• More capital: The new partners bring in additional capital, enabling the business to expand its operations.
• Sharing of risks and losses: Business risks and losses are now borne by all the partners instead of one person.
• Combined skills and ideas: The partners bring different talents, experience and ideas that improve decision-making and management.
• More time and division of labour: The work and responsibilities are shared, reducing the burden on the original owner and allowing specialisation.
• Continuity and easier borrowing: The larger business can raise loans more easily and is more likely to continue if the original owner is ill or absent.

Losses suffered

• Sharing of profit: The profit that the sole trader formerly enjoyed alone must now be shared among the partners.
• Loss of sole control: The owner can no longer take decisions alone; he must consult and agree with the other partners.
• Delay in decision-making: Disagreement among partners can slow down decisions and cause quarrels.
• Loss of business secrets and privacy: Trade secrets and financial affairs must now be shared with the partners.
• Liability for partners' actions: Each partner is bound by the actions of the others, so the former owner may suffer for a partner's mistakes or misconduct.

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(a) Five functions of the Customs Authority

1. Assessment and collection of duties: The authority computes and collects import and export duties, excise duties and other tariffs on goods crossing the national frontier, thereby raising revenue for the government.
2. Prevention of smuggling: It patrols the borders, ports and airports to detect and seize goods brought in or taken out illegally so as to protect government revenue and local industries.
3. Control of prohibited and restricted goods: It enforces bans on dangerous or illegal items such as hard drugs, arms and counterfeit goods, and controls the movement of restricted goods that require licences.
4. Compilation of trade statistics: By recording the quantity and value of goods imported and exported, the authority provides data used for planning the balance of payments and national economic policy.
5. Enforcement of trade agreements and quotas: It ensures that import quotas, embargoes and international trade agreements entered into by the government are observed by traders.

(b) Five advantages of international trade

1. Access to goods not produced locally: A country can obtain raw materials, machinery and products that its climate or resources cannot provide.
2. International specialisation: Countries concentrate on producing what they make best and most cheaply, raising world output and efficiency.
3. Wider market for surplus: Producers can sell surplus output abroad, encouraging large-scale production and higher incomes.
4. Source of government revenue: Import and export duties provide funds for the government.
5. Promotes friendship and cooperation: Trading relations foster peace, understanding and technical cooperation among nations.

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(a) Explanation of terms

• (i) Goodwill: Goodwill is an intangible asset representing the good reputation, established customer base and business connections that a firm has built over time. It is the extra value a buyer is willing to pay for a business above the value of its net tangible assets, because the business already enjoys a steady flow of customers and earning capacity.
• (ii) Patents: A patent is a legal right granted by the government to an inventor giving him the exclusive right to make, use and sell his invention for a fixed number of years. It prevents other people from copying or exploiting the invention without the inventor's permission.
• (iii) Trade mark: A trade mark is a distinctive name, symbol, logo or sign registered and legally protected, which a manufacturer uses to identify and distinguish his products from those of competitors. It helps customers recognise the origin and quality of goods.
• (iv) Copyright: Copyright is the exclusive legal right given to the author or creator of an original literary, artistic, musical or intellectual work to reproduce, publish, sell or perform the work for a stated period. It protects the work from being copied without permission.

(b) Four factors that could lead to the dissolution of a limited liability company

1. Court order (winding up by the court): The court may order the company to be wound up where it is unable to pay its debts, or where it is just and equitable to do so.
2. Insolvency or persistent losses: When the company becomes insolvent and can no longer meet its financial obligations to creditors, it may be dissolved.
3. Special resolution by members: The shareholders may voluntarily pass a special resolution to wind up the company, for example when the objective for which it was formed has been achieved or is no longer profitable.
4. Completion of purpose or expiry of period: Where the company was formed for a specific purpose or for a fixed period stated in its articles, it is dissolved once that purpose is completed or the period expires.

Other acceptable factors include reduction of members below the legal minimum, and merger or amalgamation with another company.

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(a) Difference between industry and commerce

Industry is the branch of production concerned with the extraction of raw materials from nature and the conversion of those materials into finished or semi-finished goods. It covers extractive, manufacturing and constructive activities that actually create goods.

Commerce is the branch of production concerned with the distribution and exchange of goods and services, together with the aids that make such distribution possible. It covers trade (buying and selling) and the aids to trade such as banking, insurance, transport, warehousing, advertising and communication. In short, industry makes goods while commerce distributes them.

(b) Activities of those engaged in commercial occupations

• Trade (buying and selling): Wholesalers and retailers buy goods from producers and sell them to consumers, thereby moving goods from where they are produced to where they are needed.
• Banking: Bankers keep customers' money safe, lend money, and provide a means of making and receiving payments, thus financing and easing trade.
• Insurance: Insurers accept the risks of trade such as fire, theft and accident in return for a premium, giving traders confidence to operate.
• Transportation: Transporters carry goods and people from the place of production to the place of consumption, bridging the distance between producers and consumers.

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(a) Personal selling

Personal selling is a method of promotion in which a salesman meets prospective buyers face to face to present, explain and persuade them to buy goods or services. It involves direct, personal communication between the seller and the customer with the aim of making a sale.

(b) Media available to an advertiser

1. Television: It combines sound, colour and motion to reach a very large audience, making it powerful for demonstrating and creating strong impressions of products, though it is expensive.
2. Radio: It passes advertising messages by sound and reaches a wide audience, including those in rural areas and non-literate people, at a relatively low cost, but it lacks visual appeal.
3. Newspapers: They carry advertisements in print to a wide readership and can give detailed information, and they can be kept for future reference, but they reach mainly literate people.
4. Magazines: They target particular groups of readers with quality, coloured advertisements that last long, making them suitable for special or luxury products.
5. Posters and billboards (hoardings): These are large printed advertisements placed in public places and along roads to catch the attention of passers-by with brief, striking messages.
6. The internet and social media: These carry advertisements online to a very wide and global audience at relatively low cost, and they allow interaction and quick response from customers.

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Documents used in international trade and their uses

• (a) Consular invoice: This is an invoice certified and stamped by the consul of the importing country resident in the exporting country, showing the true value, quantity and description of the goods. Use: It enables the importing country to assess the correct import duty and to guard against under-invoicing and dumping.
• (b) Bill of lading: This is a document issued by a shipping company acknowledging the receipt of goods on board a ship for carriage, and it is a document of title to the goods. Use: It is used by the holder to claim the goods at the port of destination, and it serves as a receipt and evidence of the contract of carriage.
• (c) Certificate of origin: This is a document that states the country in which the goods were produced or manufactured. Use: It is used by the importing country to determine the rate of import duty to charge and to enforce trade agreements or restrictions on goods from certain countries.
• (d) Bill of sight: This is a document that an importer presents to the customs authorities when he does not have full particulars of the goods and cannot make a complete declaration. Use: It allows the importer to inspect the goods in the presence of a customs officer so as to obtain the details needed to complete the proper entry and pay the correct duty.

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Explanation of terms

• (a) Fixed assets: These are assets of a permanent or long-term nature that a business acquires not for resale but for use in running the business over a long period, for example land, buildings, machinery, motor vehicles and furniture.
• (b) Certificate of trading (certificate to commence business): This is a document issued by the Registrar of Companies to a public limited company, after it has met the required conditions such as raising the minimum subscription, which entitles it to begin business and to borrow. A private company does not need it.
• (c) Dividend: This is the portion of a company's profit that is distributed to its shareholders as a reward for investing in the company, usually expressed as an amount per share or as a percentage of the nominal value of the shares.
• (d) Authorized capital (registered or nominal capital): This is the maximum amount of capital that a company is permitted by its memorandum of association to raise through the issue of shares. The company cannot issue shares beyond this amount unless it is legally increased.
• (e) Promoters: These are the persons who conceive the idea of forming a company and take all the necessary steps to bring it into existence, such as preparing the formation documents, raising initial capital and registering the company.

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Auntie Justie - year ended 31/12/15

(a) Gross profit

Cost of goods sold = Opening stock + Purchases - Closing stock

= 60,000 + 180,000 - 70,000 = Le170,000

Gross profit = Sales - Cost of goods sold = 220,000 - 170,000 = Le50,000

(b) Average stock

= (Opening stock + Closing stock) / 2 = (60,000 + 70,000) / 2 = Le65,000

(c) Net profit

Total expenses = Salaries and wages + Transport + Rent = 8,000 + 6,000 + 5,000 = Le19,000

(Debtors of 16,000 is an asset, not an expense, so it is excluded.)

Net profit = Gross profit - Total expenses = 50,000 - 19,000 = Le31,000

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(a) Distinction between nationalization and indigenization

Nationalization is the act by which the government takes over the ownership and control of privately owned businesses or industries and runs them as public (state) enterprises. Ownership passes from private hands to the state, usually with compensation.

Indigenization is the government policy that requires that ownership, control and management of certain businesses be transferred to, or reserved for, the citizens (indigenes) of the country. Ownership passes from foreigners to private citizens of the country, not to the government.

(b) Five advantages of nationalization

1. It brings essential and strategic industries under government control for the benefit of the whole nation.
2. It prevents exploitation of the public by private monopolists through excessive pricing.
3. It ensures the provision of essential services that private investors may find unprofitable.
4. Profits made accrue to the government and are used for national development rather than enriching a few individuals.
5. It promotes even development and enables the government to plan the economy and control key sectors such as power and petroleum.

Three disadvantages of indigenization

1. Shortage of local capital may make it difficult for citizens to buy over and adequately finance the enterprises.
2. It may lead to a fall in foreign investment as foreigners are discouraged from investing.
3. Inadequate managerial and technical skills among indigenes may cause inefficiency and poor performance of the businesses.