WAEC SSCE - Commerce - 1989 (Essay)

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(a) Meaning and importance of working capital

Meaning: Working capital is the excess of current assets over current liabilities. It is the part of a firm's capital used to finance day-to-day trading operations, that is:

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

Importance:

• It is used to buy stock (goods) for resale and to keep the business trading.
• It enables the firm to pay wages, salaries and running expenses as they fall due.
• It enables the firm to meet its short-term debts (creditors) promptly, maintaining a good credit reputation.
• It allows the firm to take advantage of cash discounts and sudden business opportunities.

(b) Seven factors that affect the rate of turnover

1. Nature of the goods: perishable and everyday goods sell faster and have a high rate of turnover, while durable goods sell slowly.
2. Price of the goods: low-priced goods generally sell faster than expensive ones.
3. Location of the business: a shop sited where there are many customers records a faster turnover.
4. Demand for the goods: goods in high or steady demand move faster off the shelves.
5. Advertising and sales promotion: effective advertising increases sales and speeds up turnover.
6. Amount of credit given: selling on credit and after-sales service can boost the volume and speed of sales.
7. Level of competition and quality of service: good service, variety and competitive pricing attract more customers and raise turnover.

(Other factors include the season of the year and the income level of customers.)

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Distinctions

(a) Broker and Jobber

(b) Gross profit and Net profit

(c) Fixed capital and Liquid capital

(d) Factors and Del credere agents

(e) F.O.B. and C.I.F.

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(a) Meaning of insurable risk

An insurable risk is a risk that can be accepted for insurance because it satisfies certain conditions: it is a pure risk (offering only the chance of loss, not gain), the loss is accidental and unintentional, it is measurable in money, the insured has an insurable interest in the subject matter, there are a large number of similar exposures so that the chance of loss can be calculated, and the loss is not against public policy. Examples are fire, theft, motor accident and death.

(b) Four circumstances when an insured may not be indemnified

• Absence of insurable interest: if the insured has no legal or financial interest in the subject matter at the time of loss, he cannot be paid.
• Non-disclosure or misrepresentation: where the insured fails to disclose or gives false material facts, breaching the principle of utmost good faith, the insurer can refuse the claim and treat the policy as void.
• Loss caused by an uninsured (excepted) peril: if the loss arises from a risk not covered by the policy, no indemnity is payable.
• Fraud or self-inflicted loss: where the insured deliberately causes the loss or makes a fraudulent claim, or the loss results from his own wilful act, he is not indemnified.

(Indemnity is also refused where the proximate cause of the loss is not the insured peril, or where a claim is made after the policy has lapsed for non-payment of premium.)

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(a) What is Commerce?

Commerce is the branch of business (production) concerned with the buying and selling (trade) of goods and services and all the ancillary or aid-to-trade activities that make trade possible, such as transport, warehousing, banking, insurance, advertising and communication. In short, commerce is trade together with the aids to trade that remove the obstacles between the producer and the final consumer.

(b) Importance of five ancillary (aids to) services to trade

• Transportation: it moves raw materials to factories and finished goods from producers to consumers, thereby overcoming the barrier of place (distance) and creating place utility.
• Warehousing (storage): it keeps goods safely from the time of production until they are needed, overcoming the barrier of time and ensuring a steady supply, especially of seasonal goods.
• Banking: it provides safe keeping of money, a means of payment such as cheques, and credit and loans to finance trade, thus overcoming the problem of finance.
• Insurance: it provides cover against risks such as fire, theft and accident, giving traders the confidence to invest by overcoming the barrier of risk.
• Advertising: it informs and persuades customers about the existence, features and prices of goods, overcoming the barrier of ignorance and widening the market.

(Communication is a further aid, linking buyers and sellers who are far apart.)

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Five advantages of the Stock Exchange Market

• Provides a ready and continuous market for securities: holders of shares and stocks can sell them at any time, and buyers can readily acquire them, giving investments liquidity.
• Mobilises savings for investment: it channels the idle savings of the public into productive use, enabling companies and government to raise long-term capital for expansion and development.
• Fixes fair prices of securities: through the free interplay of demand and supply, it determines and publishes fair market prices, guiding investors.
• Protects investors: its strict rules on listing and dealing ensure that only sound securities are traded and that dealings are honest, safeguarding the investing public.
• Acts as an economic barometer: the movement of share prices reflects the general state of business and the economy, providing useful information to investors and to government for policy making.

(A further advantage is that quoted securities are accepted as good collateral for bank loans, since they are easy to value and to sell.)

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(a) Five advantages of advertising

• It informs: it makes customers aware of the existence, features, uses and prices of goods and services.
• It increases sales: by persuading people to buy, it widens the market and raises the volume of sales.
• It creates and maintains demand: it builds brand loyalty and keeps a product in the minds of consumers.
• It supports mass production: the larger sales it generates allow firms to produce on a large scale and enjoy economies of scale, which can lower prices.
• It provides employment and revenue: it gives work to advertising agents, artists and media houses, and provides income to newspapers, radio and television.

(b) Five distinctive merits of television as an advertising medium

• Sight and sound combined: it appeals to both the eyes and the ears, and shows the product in action, making the message vivid and convincing.
• Use of colour and motion: moving, coloured pictures demonstrate how a product is used and attract strong attention.
• Wide coverage: it reaches a very large audience, including the literate and the illiterate, over a wide area.
• Great impact and memorability: the combination of drama, sound and pictures leaves a lasting impression on viewers.
• Live demonstration: products can actually be demonstrated on screen, so viewers see the benefits for themselves.

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(a) Five types of business units in Nigeria

1. Sole proprietorship (one-man business).
2. Partnership.
3. Private and public limited liability companies.
4. Co-operative societies.
5. Public corporations (state-owned enterprises).

(b) Five differences between a retail co-operative society and a public limited liability company

(A further difference: shares in a co-operative are not freely transferable and cannot be sold on the stock exchange, whereas shares of a public company are freely transferable and quoted on the stock exchange.)

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(a) What is consumerism?

Consumerism is an organised movement of consumers, and of government and other bodies acting on their behalf, aimed at protecting the rights and interests of consumers against unfair, dishonest and harmful practices of producers and sellers.

(b) Three reasons why consumers need protection

• To protect them from the sale of harmful, adulterated, fake or expired goods that endanger health and life.
• To protect them from cheating through short weights, wrong measures, overpricing and hoarding by dishonest traders.
• To protect them from misleading and false advertising and from the ignorance that leaves the individual consumer weak against large producers.

(c) Five measures taken by government or associations to protect consumers in Nigeria

• Establishment of standards bodies: the Standards Organisation of Nigeria (SON) sets and enforces quality standards for goods.
• Drug and food control: the National Agency for Food and Drug Administration and Control (NAFDAC) tests and registers food, drugs and other products and bans fake ones.
• Consumer protection body: the Federal Competition and Consumer Protection Commission (formerly the Consumer Protection Council) receives and settles consumer complaints.
• Enactment of laws: government passes laws against adulteration, false advertising, hoarding and the sale of substandard goods, and enforces the use of correct weights and measures.
• Price control and consumer associations: government fixes prices of essential goods, while voluntary consumer associations educate the public and campaign for consumers' rights.

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(a) What is a bonded warehouse?

A bonded warehouse is a special warehouse, licensed and controlled by the customs authorities, in which imported goods that are liable to import duty are stored under bond until the duty on them is paid or the goods are re-exported. The owner cannot remove the goods until he has settled the duty, and the warehouse is kept under customs supervision.

(b) Four ways a bonded warehouse is useful in international trade

• Deferment of duty: the importer can store goods and pay import duty only when he removes them for sale, so he does not tie up all his money in duty at once.
• Re-export without paying duty: goods meant for re-export (entrepot trade) can be kept and shipped out again without duty being paid, encouraging international trade.
• Safe storage and gradual clearing: it provides secure storage so the importer can clear and sell the goods gradually as he finds buyers or funds.
• Permitted operations on the goods: certain acts such as grading, blending, packing, bottling or labelling may be carried out on the goods in bond before duty is paid.

(It also helps government to collect the correct duty and to control smuggling.)

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(a) Reasons for cash and for credit

Four reasons why Ola insists on cash payment

• To avoid bad debts arising from customers who fail to pay.
• To have ready cash always available to run the business and restock quickly.
• To avoid the cost and trouble of keeping records of debtors and chasing them for payment.
• To be able to sell at lower prices, since he ties up no capital in credit and bears no risk of default.

Four reasons why Musa allows credit sales

• To attract and retain more customers and so increase his volume of sales.
• To meet competition, since rival traders who give credit would otherwise take his customers.
• To sell high-priced goods that customers may not be able to pay for in a lump sum.
• To earn extra income, because credit prices are usually higher than cash prices.

(b) Distinction between cash discount and trade discount