WAEC SSCE - Commerce - 1998 (Essay)

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(a) Danchukwu's working capital

Working capital is the excess of current assets over current liabilities.

Current assets: Cash in hand \(18{,}000\) + Stock \(24{,}000 = 42{,}000\).
(Vehicles \(50{,}000\) and Furniture & Fittings \(20{,}000\) are fixed assets; Capital is a source of funds, not an asset.)

Current liabilities: Creditors \(= 22{,}000\).

\[\text{Working capital} = \text{Current assets} - \text{Current liabilities}\]\[= 42{,}000 - 22{,}000 = \mathbf{N20{,}000.00}\]

(b) Four uses of working capital

• To purchase stock (goods) for resale.
• To pay wages and salaries of workers.
• To meet day-to-day running expenses such as rent, electricity and transport.
• To pay short-term creditors and other current liabilities as they fall due.

(c) Difference between current (circulating) capital and fixed capital

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(a) Who is an actuary?

An actuary is a professional expert in insurance mathematics and statistics who calculates insurance risks and, using probability and mortality tables, determines the premiums that policyholders should pay so that the insurance fund remains solvent. The actuary assesses the likelihood of insured events occurring and fixes premiums high enough to cover expected claims, administrative costs and profit, yet competitive enough to attract policyholders.

(b) Difference between contribution and group insurance

(c) Three types of risks insured under marine insurance

• Marine perils of the sea: loss or damage to the ship or cargo caused by storms, heavy waves, collision, sinking or the vessel running aground.
• Fire: destruction of the ship or its cargo by fire while at sea or in port.
• Jettison and general average: the deliberate throwing overboard of cargo to lighten and save the ship; the loss so caused is shared by all parties to the voyage.

Other insurable marine risks include piracy and theft, and barratry (wrongful acts of the master or crew against the shipowner).

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(a) Definition of a bill of exchange

A bill of exchange is an unconditional order in writing, addressed by one person (the drawer) to another (the drawee), signed by the person giving it, requiring the drawee to pay on demand, or at a fixed or determinable future time, a certain sum of money to a specified person or to the bearer.

(b) Six essential features of a bill of exchange

1. It must be an order in writing.
2. The order must be unconditional (not tied to any condition).
3. It must be signed by the drawer.
4. It must state a certain sum of money to be paid.
5. The money must be payable on demand or at a fixed or determinable future date.
6. It must be addressed to and payable to a specified person or to the bearer, and must state the date of drawing.

(c) Parties to a bill of exchange

• Drawer: the person (usually the creditor/seller) who prepares and signs the bill, ordering payment.
• Drawee: the person (usually the debtor/buyer) on whom the bill is drawn and who is ordered to pay; when he accepts the bill he becomes the acceptor.
• Payee: the person to whom the money is to be paid (may be the drawer himself or a third party).

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These are shipping and price-quotation terms used in foreign (overseas) trade to show what costs the seller has included in the quoted price.

• (a) C.I.F. - Cost, Insurance and Freight. The quoted price includes the cost of the goods, the insurance premium and the freight (carriage) charges to the buyer's named port of destination. The seller bears these charges until the goods reach that port.
• (b) F.O.B. - Free On Board. The seller's price covers all charges up to the point where the goods are loaded on board the ship. Once loaded, the buyer bears freight, insurance and all other charges.
• (c) F.A.S. - Free Alongside Ship. The seller's price covers all charges of delivering the goods alongside the ship at the port of shipment. From that point (loading, freight, insurance) the buyer bears the costs.
• (d) F.O.R. - Free On Rail. The seller's price covers the cost of the goods and their delivery loaded onto the railway wagon at the departure station. Thereafter the buyer bears carriage and other charges.
• (e) C.F. (C. & F.) - Cost and Freight. The quoted price includes the cost of the goods and the freight to the destination port, but not insurance; the buyer arranges and pays for the insurance himself.

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(a) Four types of co-operative societies

1. Consumer (retail) co-operative society
2. Producer co-operative society
3. Wholesale co-operative society
4. Credit and thrift (co-operative bank) society

(b) Distinguishing features and functions of each

1. Consumer co-operative society

Features: (i) It is owned and controlled by consumers who are its members. (ii) It buys goods in bulk and sells directly to members, and surplus (dividend) is shared according to purchases made.

Functions: (i) It supplies members with genuine goods at fair prices, eliminating middlemen. (ii) It protects members from exploitation and price cheating.

2. Producer co-operative society

Features: (i) Membership is made up of producers such as farmers or craftsmen. (ii) Members pool resources to produce and market goods jointly.

Functions: (i) It provides members with inputs such as seeds, fertiliser and tools. (ii) It markets members' produce collectively and secures better prices.

3. Wholesale co-operative society

Features: (i) Its members are usually the retail (consumer) co-operative societies themselves. (ii) It performs the wholesaling function on behalf of member societies.

Functions: (i) It buys goods in large quantities from manufacturers for member societies. (ii) It warehouses goods and distributes them to the retail co-operatives.

4. Credit and thrift co-operative society

Features: (i) Members contribute regular savings into a common pool. (ii) Loans are granted to members at low interest rates.

Functions: (i) It encourages the habit of saving among members. (ii) It grants credit facilities to members to meet personal and business needs.

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(a) Four channels of distribution of manufactured goods

• Channel 1: Manufacturer → Wholesaler → Retailer → Consumer (the traditional full channel).
• Channel 2: Manufacturer → Retailer → Consumer (used by large retailers such as multiple shops who buy in bulk).
• Channel 3: Manufacturer → Consumer (direct sale, for example factory outlets, mail order or industrial goods).
• Channel 4: Manufacturer → Agent/Broker → Wholesaler → Retailer → Consumer (used especially in foreign trade).

(b) "The longer the channel, the higher the price"

Each middleman in the chain of distribution buys the goods and resells them at a profit, adding his own margin to cover his costs and reward. The more middlemen (wholesaler, agent, retailer) that the goods pass through, the more times a profit margin and handling, transport and storage costs are added. These accumulated margins and expenses are ultimately passed on to the final consumer, so a long channel with many intermediaries results in a higher final selling price than a short or direct channel.

(c) Five reasons why small scale retail businesses may fail

• Shortage of capital: insufficient funds to buy adequate stock or sustain the business through difficult periods.
• Poor management: lack of business knowledge, poor record keeping and inability to control costs.
• Competition: pressure from larger retailers such as supermarkets and multiple shops who sell more cheaply.
• Granting of too much credit: selling on credit to customers who fail to pay ties down funds and causes bad debts.
• Poor location: siting the shop where there are too few customers reduces sales.

Other reasons include holding too much unsaleable stock and mixing business money with personal expenses.

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(a) Meaning of an agency

An agency is a relationship in which one person, called the agent, is employed and authorised to act on behalf of another person, called the principal, in dealings with third parties, so as to create or affect legal relations between the principal and those third parties.

(b) Features of the following agents

(i) Factor

A factor is a mercantile agent who is given possession of his principal's goods for the purpose of sale. He sells the goods in his own name, is paid a commission, and may have a lien on the goods for money owed to him. He can also give credit and receive payment on behalf of the principal.

(ii) Broker

A broker is a mercantile agent employed to buy and sell goods for a commission (brokerage), but who is never given possession of the goods. He merely brings buyers and sellers together, makes contracts in the name of his principal, and does not sell in his own name.

(iii) Del-credere agent

A del-credere agent is an agent who, in return for an extra commission (del-credere commission), guarantees to his principal that the third parties (buyers) to whom he sells goods on credit will pay. If any buyer defaults, the del-credere agent bears the loss and pays the principal himself.

(iv) Auctioneer

An auctioneer is an agent employed to sell goods by public auction to the highest bidder. He is given possession of the goods, sells in the open to the public, and earns a commission. The sale is complete on the fall of his hammer, and he may sue for the price in his own name.

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(a) Distinction between marketing and a market

Marketing is the whole range of business activities involved in moving goods and services from producers to final consumers. It includes market research, product planning, pricing, promotion (advertising and selling), distribution, warehousing and after-sales service. It is a process aimed at identifying and satisfying customers' needs at a profit.

A market, on the other hand, is any arrangement, place or set of contacts that brings buyers and sellers of a particular commodity into communication with one another so that exchange can take place. A market need not be a physical place; it exists wherever buyers and sellers are in contact (for example a stock market or a foreign-exchange market).

In short, marketing is an activity/process, while a market is the arrangement or medium through which buyers and sellers meet to exchange goods.

(b) Four ways marketing is important to a developing country

1. Creation of employment: marketing activities such as advertising, transport, warehousing and selling provide many jobs, reducing unemployment.
2. Encouragement of production and industrialisation: effective marketing widens the market for goods, encouraging producers to expand output and set up new industries.
3. Raising the standard of living: marketing makes a wide variety of goods and services available to consumers, improving their welfare and satisfaction.
4. Earning of foreign exchange and revenue: the marketing of goods abroad (exports) earns foreign exchange, while taxes on marketing activities boost government revenue for development.

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(a)(i) What is a trade association?

A trade association is an organisation formed by firms or businessmen engaged in the same trade, industry or profession to protect and promote their common interests and to regulate the conduct of members.

(a)(ii) Two examples

• Manufacturers Association of Nigeria (MAN).
• Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA).

(Others include the Nigerian Bar Association and the Association of Nigerian Licensed Customs Agents.)

(b) Five functions of a trade association

• Protecting members' interests: it speaks with one voice and lobbies government on policies, taxes and legislation affecting the trade.
• Fixing standards and prices: it sets quality standards and may recommend prices to prevent harmful competition among members.
• Settling disputes: it arbitrates and settles disagreements between members or between members and their customers.
• Providing information and advice: it collects and supplies members with market information, statistics and technical or legal advice.
• Training and welfare: it organises seminars, workshops and training for members and promotes their general welfare.

Other functions include promoting research and representing members in negotiations with trade unions and other bodies.

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(a) Meaning of production

Production is the creation of utility by making goods and services available to satisfy human wants. It includes the extraction of raw materials, their processing into useful goods, and the provision of services that bring goods to consumers.

(b) Main divisions and subdivisions of production

The divisions and subdivisions of production are illustrated below:

Explanation:

• Direct production is the production of goods and services for the producer's own use, for example, a farmer growing food for his family.
• Indirect production is the production of goods and services for exchange or sale.
• Primary production involves obtaining raw materials from nature, for example farming, fishing, mining, forestry and quarrying.
• Secondary production involves processing raw materials into semi-finished or finished goods. It includes manufacturing and construction.
• Tertiary production involves the provision of services. These services may be commercial services, such as transport, banking and insurance, or direct services, such as teaching, medical and legal services.