NCERT Solution- Business Arithmetic | Entrepreneurship Class 12 - Commerce PDF Download

Very Short Answer Type Questions

Question 1. Explain the following terms with proper example:

1. SKU
2. Cash flow
3. Cash inflow
4. Cash outflow
5. Re-order point
6. Cash flow projection
7. Cash conversion cycle

1. SKU: Stock Keeping Unit (SKU) code
   • All items in the inventory is to be identified with a unique code which signifies certain aspects of the item.
   • It can be colour, size, weight or any other characteristics that is of importance in its use.
   • The SKU code can be a combination of alpha and numeric.
   • SKU is the very basic unit for data collection and further manipulation for deriving meaningful statistics and decision making.
   • Bar Codes and RFID (Radio Frequency Identification tags are used in tracking etc. using SKU.
2. Cash flow: Cash flow refers to the movement of money in and out of a business during a specific period of time.
   Example: Loan Received, Sales Receipts, Sale of Assets.
3. Cash inflow: All receipts of money in the business is known as cash inflow like rent received and loan received.
4. Cash outflow: It is defined as the movement of money out of a business.
   Example: Furniture and Fixtures, Interior Decoration, Tools, Computers, Raw Material.
   • Re-order point: It is a level at which a new order must be placed so that the inventory is renewed before the stock reaches zero level.
     It is estimated by using the formula Reorder Point = Usage Rate x Lead Time.
5. Cash flow projection: Cash flow projection shows how cash is expected to flow in and out of your business.
6. Cash conversion cycle: (CCC or Operating Cycle) is the length of time between a firm’s purchase of inventory and the receipt of cash from accounts receivable. It is the time required for a business to turn purchases into cash receipts from customers.
   CCC represents the number of days a firm’s cash remains tied up within the operations of the business.

Question 2. Pareto’s Law formed the basis for a technique. Name it.

In 1906, Italian economist Vilfredo Pareto noted that 80% of Italy’s land was owned by 20% of the people. Pareto principle is a prediction that 80% of effects come from 20% of causes. The 80:20 ratio of cause-to-effect became known as the Pareto Principle. He became somewhat obsessed with this ratio, seeing it in everything. For example, he observed that 80% of the peas in his garden came from 20% of his pea plants.

Short Answer Type Questions- I

Question 1. What is ABC analysis?

ABC analysis is an inventory categorization method which consists in dividing items into three categories (A, B, C):

1. A being the most valuable items.
2. B-items are the inter class items, with a medium consumption value.
3. C being the least valuable ones.
   This method aims to draw managers’ attention on the critical few (A-items) not on the trivial many (C-items).

Question 2. What is Pareto’s Principle?

In 1906, Italian economist Vilfredo Pareto noted that 80% of Italy’s land was owned by 20% of the people. Pareto principle is a prediction that 80% of effects come from 20% of causes. The 80:20 ratio of cause-to-effect became known as the Pareto Principle. He became somewhat obsessed with this ratio, seeing it in everything. For example, he observed that 80% of the peas in his garden came from 20% of his pea plants.

Question 3. Differentiate between cash flow projection and cash flow statement.

Question 4. What is financial management? What is the main objective of financial management?

1. Financial management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise.
2.  It is an activity which is concerned with acquisition and conservation of capital funds in meeting financial need an overall objectives of business organisation.
3. It means applying general management principles to financial resources of the enterprise.

The main objectives of financial management is wealth maximization of shareholder’s wealth.

1. To ensure regular and adequate supply of funds to the concern.
2. To ensure adequate returns to the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.

Short Answer Type Questions- II

Question 1. There are three key elements in the process of financial management. Explain them.

1. Financial planning: Management need to ensure that enough funding is available at the right time to meet the needs of the business.
   • The short term funding may be needed to invest in equipment and stocks, pay employees and fund sales made on credit.
   • The medium and long term funding may be required for significant additions to the productive capacity of the business or to make acquisitions.
2. Financial control: It ensures that the business is meeting its goals and objectives. Financial control addresses questions such as:
   • Are assets being used efficiently?
   • Are the business assets secure?
   • Does management act in the best interest of shareholders and in accordance with business rules?
3. Financial decision-making: The key aspects of financial decision-making relate to investment, financing and dividends. For example, it is possible to raise finance from selling new shares, borrowing from banks or taking credit from suppliers.
   • A key financing decision is whether profits earned by the business should be retained or distributed to share-holders through dividends.
   • If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further.

Question 2. What are the key aspects of financial decision-making?

The key aspects of financial decision-making relate to investment, financing and dividends. Investments must be financed in some way however there are always financing alternatives that can be considered.

For example, it is possible to raise finance from selling new shares, borrowing from banks or taking credit from suppliers:

1. A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends.
2. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further.

Question 3. What is a budget? What are the essentials of a budget?

For any business, a budget is a quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, etc. Essentials of budget include:

1. To control resources
2. To communicate plans to various responsibility center managers.
3. To motivate managers to strive to achieve budget goals.
4. To evaluate the performance of managers.
5. For accountability.

Question 4. Explain Inventory Control and state its objectives.

Inventory Control is a systematic and detail record of purchase of materials, their storage capacity, quantity in order to supply quantity order for large discounts, handling delivery of materials etc. It is a process which facilitates an entrepreneur in smooth production operation and to take important decisions in a production line.

The objectives of inventory management are:

1. To ensure that the supply of raw materials and finished goods will remain continuous so that production process is not halted and demands of customers are duly met.
2.  To minimise carrying cost of inventory.
3.  To keep investment in inventory at optimum level.
4.  To reduce the losses of theft, obsolescence and wastage, etc.
   • To make arrangement for sale of slow moving items.
5. To minimise inventory ordering costs.

Long Answer Type Questions

Question 1. What is a budgeting process?

1. Budgeting is a collective process in which operating units prepare their plans in conformity with corporate goals published by top management.
2. Each unit plan is intended to contribute to the achievement of the corporate goals.
3. Unit managers prepare projections of sales, operating costs, overhead costs, and capital requirements. They calculate operating profits and returns on the investment they intend to use.
   The budget itself is the projection of these values for the next calendar or fiscal year.
   In this process, each unit presents its plans and budget to a reviewing upper management panel and may, thereafter, make whatever changes result from instructions or negotiations with the higher level.
   Texts presenting, documenting, and defending the rationales underlying the numbers are usually part of the planning document.
   Approved budgets then become the road¬map for operations in the coming year. Ideally monthly or quarterly budget reviews track performance against the budget.
   As part of such reviews, changes to the budget may be approved. At the end of year managers are judged by their performance against the budget.

Question 2. There is a Budget to suit every business and its need. Elucidate

1. Sales Budget:
   • This budget shows what finished products can be sold in what quantities and at that prices.(an estimate of future sales)
   • It may be prepared product wise, region wise, customer wise and period wise.
   • It is often broken down into both units and currency.
2. Production Budget: It is always based on sales budget. It is generally prepared into two parts:
   • It shows the estimates in volume or quantities. It estimates the number of units that must be manufactured to meet the sales goals.
   • It shows production cost. The production budget also estimates the various costs involved with manufacturing those units, including labour and material,
3. Capital Budget:
   • It is generally prepared to estimate the total capital required for acquiring the fixed assets for fulfilling the production demand of an organisation.
   • Long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. Capital required for developing research and development should be totally different from the work of manufacturing unit.
   • The capital budget helps you figure out how much money you need to put in place of new equipment or procedures to launch new products or increase production or services.
   • This budget estimates the value of capital purchases you need for your business to grow and increase revenues.
4.  Cash Flow/Cash Budget/Financial Budget:
   • It is one of the important budgets because success of any business totally depends upon the cash flow management and liquidity.
   • It gives a prediction of future cash receipts and expenditures for a particular time period. A cash flow budget details the amount of cash you collect and pay out.
   • It usually covers a period in the short term future.
   • It helps the business determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.
   • It makes a provision for minimum cash balance which will be available at all times.
   • The minimum cash balance should be equal to one month’s operating expenses including contingencies.
   • A positive cash flow is essential to grow your business.
5. Marketing Budget: It is an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.
6. Project Budget:
   • It estimates of the costs associated with a particular company project. These costs include labour, materials, and other related expenses.
   • The project budget is often broken down into specific tasks, with task budgets assigned to each. A cost estimate is used to establish a project budget.
7. Operational Budget:
   • An operational budget is the most common type of budget used.
   • It forecasts and tries to closely predict yearly revenue and expenses for a business.
   • It is a short term budget.
   • This budget can be updated with actual figures on a monthly basis and then you can revise your figures for the year, if needed.

Question 3. Explain the two dominant forms of budgeting process.

The two dominant forms of budgeting processes are traditional and zero- based. Business planning is usually a combination of the two.

Traditional budgeting:

1. It is based on a review of historical performance and then the projection of such findings to the future with modifications.
2. If inflation is high, for instance, cost trends of the last several years are projected forward but with adjustments both for inflation and for projected growth or decline in business activity.
3. Historical sales patterns, using established trends in sales growth, are projected; new sales from planned new product introductions are then added.

Zero-based budgeting:

1. It is the creation of a completely new budget from the ground up—as if no history existed.
2. When using this method, the operation must justify and document every item of expenditure and income anew.

Question 4. What is working capital? What is the need for a working capital?

Money needed to fund the normal, day- to-day operations of a business is known as the working capital.

1. Adequate working capital is required for the smooth running of any business.
2. It is required by a business for meeting day to day business expenses to complete a business cycle or the operating cycle.

The working capital of a business keeps on circulating or changing since the money circulates in various forms of assets in a continued manner.

The above diagram explains that:

1. In a business concern operating cycle begins with outflow of cash towards the purchase of raw materials, payment of labour, power, fuel and other expenses converting the raw materials into work in progress and converting them into finished goods. Sale of finished good for cash or credit.
2.  If on credit then conversion of account receivables into cash.
3. This operating cycle indicates that funds once tied up in the form of raw materials are later converted into the form of finished goods.
4. In a manufacturing concern there is a time gap between the first step of purchasing of raw-materials to last step of selling of goods and realizing cash. This time duration is called operating cycle. It is also called the “changing” or circulating capital because money circulates in various forms of assets in a continued manner.

High Order Thinking Skill

Question 1. Calculate working capital of Raja & Co. has the following items in its Balance sheet: Stock — 50,000; Trade creditors – 32,000; Debtors – 75000; Cash -1,00000; Dividend payable – 50,000; Tax – 44,000; Short term loan – 61,000; Short term investments – 76,000. Calculate gross and net working capital.

1. Total Current Assets = Debtors + Stock + Cash + Short term investment Total Current Assets = (Rs 75000 + Rs 50,000 + Rs 1,00000 + Rs 76,000) Total Current Assets = Rs 3,01,000
2. Total Current Liabilities = Sundry Creditors + Dividend Payable + Tax + Short Term loan)
   Total Current Liabilities = (Rs 32,000 + Rs 50,000 + Rs 44,000 + Rs 61,000) = Rs 1,87,000
3. Gross Working Capital = Total Current Assets
   Gross Working Capital = Total Current Assets = Rs 3,01,000
4. Net Working Capital = Total Current
   Assets – Total Current Liabilities
   Net Working Assets = Rs 3,01,000 – Rs 1,87,000 = Rs 1,14,000
   • Gross Working Capital = Rs 3,01,000
   • Net Working Assets = Rs 1,14,000

Question 2. Ramu is buying and selling ice-cream.Explain his working capital requirement.

Ramu is a trading entrepreneur.

1. Trading entrepreneur is one who undertake trading activities, whether domestic or overseas.
2. They deal in buying and selling of manufactured goods.
3. Before launching the business they identify the potential market for his product in order to stimulate the demand.

They believe in creating a demand in the market to market survey and push many ideas ahead of others in the form of demonstration to promote

Operating cycle or cash conversion cycle for trading business:

1. Money needed to fund the normal, day to day operations of a business is known as the Working Capital.
2. For trading, where there is no manufacturing (or conversion), the operating cycle will be shorter.
3. Ramu needs less amount of working capital as ice-cream is a perishable goods and can’t keep for a long time period.
4. Therefore, Ramu has to purchase and sale of goods through cash only.