WAEC SSCE - Commerce - 2014 (Essay)

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(a) What is a stock exchange market?

A stock exchange is an organised and regulated market where existing (second-hand) stocks, shares, bonds and other securities of public limited companies and government are bought and sold through licensed dealers (brokers and jobbers). The Nigerian Exchange is an example.

(b) Six functions of the stock exchange market

• Provides a ready market for securities: it enables holders of shares and stocks to sell them and buyers to acquire them easily, giving liquidity to investments.
• Mobilises capital for industry and government: it channels the public's savings into productive investment by making it easy for companies and government to raise long-term capital.
• Determines and publishes prices of securities: the forces of demand and supply on the exchange fix fair prices, which are quoted for the information of the public.
• Protects investors: it enforces strict rules on listed companies and dealers, ensuring honesty and that only sound securities are traded.
• Acts as an economic barometer: movements in share prices reflect the state of business and the economy, guiding investors and government.
• Encourages savings and investment: by offering a safe and profitable outlet, it encourages members of the public to save and invest.

Other functions include valuing securities for use as collateral and aiding the government's implementation of economic and privatisation policies.

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(a) What is branding?

Branding is the practice of giving a product a distinctive name, mark, symbol, sign or design (or a combination of these) that identifies the goods of one manufacturer and distinguishes them from those of competitors. Examples of brand names are Peak, Omo and Coca-Cola.

(b) Three advantages of branding

To the Manufacturer

• It distinguishes his product from rivals' goods and builds customer loyalty, leading to repeat sales.
• It aids advertising and sales promotion, since the brand name is easy to advertise and remember.
• It enables the manufacturer to fix and maintain his own price and to build a good reputation (goodwill).

To the Retailer

• Branded goods are easy to sell because they are already known and demanded by customers, reducing selling effort.
• They reduce the need to weigh, measure or grade, since they come pre-packed and standardised.
• Advertising of the brand by the manufacturer helps the retailer to sell more with less cost.

To the Consumer

• It makes it easy to identify and ask for a product of consistent, known quality.
• It guarantees uniform quality, so the consumer knows what to expect each time.
• It simplifies shopping and, through competition among brands, can help keep prices reasonable.

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(a) Definition of a contract of sale

A contract of sale is a legally binding agreement in which the seller transfers or agrees to transfer the ownership (property) in goods to the buyer for a money consideration called the price. It is an agreement enforceable at law between a buyer and a seller for the exchange of goods for money.

(b) Six items that must be contained in a contract of sale

1. The parties: the names and addresses of the buyer and the seller.
2. Description of the goods: the nature, type, quality and quantity of the goods being sold.
3. The price: the amount of money to be paid and the currency.
4. Terms of payment: whether payment is by cash or credit, and details of any discount allowed.
5. Terms of delivery: the place, date and mode of delivery, and who bears carriage and insurance (for example F.O.B. or C.I.F.).
6. Passing of ownership and risk: the point at which title to, and risk in, the goods passes from seller to buyer.

Other items that may be included are the conditions and warranties, and the signatures of the parties or their agents.

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(a) Five problems of the barter system of trading

• Lack of double coincidence of wants: each trader must find another who has what he wants and also wants what he has, which is difficult.
• Absence of a common measure of value: there is no standard unit for expressing and comparing the values of different goods.
• Indivisibility of some goods: some goods, such as a cow or a house, cannot be divided into smaller parts to match the value of what is wanted.
• Difficulty in storing wealth: many goods, especially perishables like yam or fish, cannot be stored to keep value for the future.
• Lack of a standard for deferred (future) payments: it is difficult to make and settle debts or credit transactions in goods.

(b) Five ways money has solved these problems

• Medium of exchange: money removes the need for double coincidence of wants; a seller collects money and uses it to buy whatever he needs from anyone.
• Measure of value (unit of account): money provides a common standard in which the value of all goods and services can be expressed and compared.
• Divisibility: money exists in small and large denominations, so goods of any value can be bought and change can be given.
• Store of value: money can be saved and kept without losing its value, allowing wealth to be held for future use.
• Standard of deferred payment: money makes credit transactions easy, since debts can be measured in money and repaid later.

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Explanation of the insurance concepts

(a) Non-indemnity insurance

This is a form of insurance in which the insurer does not merely restore the insured to his former financial position but pays an agreed fixed sum on the happening of the insured event. Because human life and limb cannot be valued in money, the principle of indemnity does not apply. Examples are life assurance and personal accident insurance, where a stated sum assured is paid.

(b) Group insurance

This is a single (master) policy taken to cover a number of persons who share a common feature, for example all the employees of one company or members of one association. It gives the members cover, often life or accident cover, at a lower premium than each would pay individually.

(c) Re-insurance

This is the practice whereby an insurer who has accepted a very large risk transfers part of that risk to another insurance company (the re-insurer). It enables the original insurer to spread the risk so that it is not ruined by a single heavy claim.

(d) Under-insurance

This occurs when the value at which property is insured is less than its true (actual) value. On the average principle, the insured then bears part of any loss himself, recovering only the proportion that the sum insured bears to the true value. For example, goods worth \(N100{,}000\) insured for \(N60{,}000\) will attract only 60% of any loss.

(e) Consequential loss insurance

Also called loss-of-profits or business-interruption insurance, this covers the loss of profit and continuing expenses (such as rent and salaries) that a business suffers as a result of an interruption of trade following an insured event like a fire, rather than the direct physical damage itself.

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(a) Current assets

Current assets are assets that are held for a short period and can quickly and easily be converted into cash in the ordinary course of business, usually within one year. Their form keeps changing as the business trades.
Two examples: stock (goods for resale) and cash in hand; others are debtors and bank balances.

(b) Two uses of working capital

• To buy stock (goods) for resale.
• To pay day-to-day running expenses such as wages, rent and short-term creditors.

(c) Zig Stores computations

(i) Current liabilities

Creditors \(60{,}000\) + Bank overdraft \(10{,}000\)

\[= N70{,}000\]

(ii) Current assets

Stocks \(76{,}000\) + Debtors \(50{,}000\) + Cash in hand \(20{,}000\)

\[= N146{,}000\]

(Furniture and fittings \(30{,}000\) and Motor van \(164{,}000\) are fixed assets and are excluded.)

(iii) Working capital

\[\text{Working capital} = \text{Current assets} - \text{Current liabilities}\]\[= 146{,}000 - 70{,}000 = \mathbf{N76{,}000}\]

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Comparison of a public limited company with a partnership

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(a) What is packaging?

Packaging is the act of wrapping, bottling, boxing or otherwise enclosing goods in suitable containers to protect them, preserve them, and make them attractive and convenient for handling, storage, transport and sale.

(b) Three disadvantages of packaging

• It increases the cost of production, and this higher cost is passed on to the consumer in the form of higher prices.
• Attractive packaging can be deceptive, misleading the consumer about the quantity or quality of the contents.
• Discarded packaging materials such as plastics and cartons cause environmental pollution and waste-disposal problems.

(c) Five reasons why manufacturers package products

• Protection: to protect the goods from damage, dirt, moisture and contamination during handling, storage and transport.
• Preservation: to keep the goods, especially foods and drinks, fresh and to extend their shelf life.
• Easy identification and branding: distinctive packages carrying the brand name help customers recognise and remember the product.
• Convenience: to make the goods easy to carry, measure, store and use, and to allow sale in convenient quantities.
• Sales promotion: attractive packaging appeals to customers and acts as a silent salesman, boosting sales and advertising the product.

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(a) Definition of a multiple shop

A multiple shop (chain store) is a group of two or more retail shops that are owned by the same person or organisation, sell the same class of standardised goods, and are managed under a common central control with uniform pricing and appearance. Examples include Kingsway and UAC chain stores.

(b) Three features of a multiple shop

• There is central ownership and central control from a head office.
• The branches sell the same standardised goods at the same fixed prices.
• Buying is done centrally in bulk, and the shops usually have a uniform layout, colour and name.

(c) Three advantages and three disadvantages

Advantages

• Economies of large-scale buying: central bulk purchasing earns trade discounts, so goods are bought and sold more cheaply.
• Common services save cost: advertising, transport, storage and administration are shared among all branches, reducing cost per shop.
• Wide market and spread of risk: having many branches brings the goods nearer to customers and a loss in one branch can be offset by profits in others.

Disadvantages

• Lack of flexibility: branch managers cannot easily vary prices or stock to suit local tastes because of rigid central control.
• Limited variety: each shop deals in only one class of goods, so customers cannot buy all their needs in one place.
• No credit and impersonal service: sales are usually strictly for cash and the personal relationship between customer and seller is weak.

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(a) The term "exchange" in commerce

Exchange means the process of transferring goods and services from those who produce or own them to those who need them, usually with money acting as the medium. It is the buying and selling of goods and services, and it forms the very heart of commerce because it moves goods from the producer to the final consumer. Exchange may be by barter (goods for goods) or, more commonly today, through the use of money as a medium of exchange. It creates possession utility by placing goods in the hands of those who want them and are willing to pay for them.

(b) Impulse buying

Impulse buying is the unplanned purchase of goods, where a customer buys on the spur of the moment without having intended to do so before entering the shop. It is triggered by attractive display, packaging, advertising or a sudden desire, rather than by prior need or planning. For example, a shopper who goes to buy only bread but suddenly picks up chocolate placed near the counter is engaged in impulse buying.