ISC Commerce 2016 Class-12 Previous Year Question Papers

(b) Two sources of short-term finance are :
Public Deposits: Public deposits are the deposits raised by business organisations directly from the public. These deposits usually offer a higher rate of interest as compared to interest on bank deposits. This source fulfills the medium as well as short term finance requirements of the business. Any individual willing to deposit money in a business firm, can do so by fulfilling a prescribed form. In return a firm issues a deposit receipt as acknowledgement of the debt. Public deposits are considered to be an important source for raising funds because their cost to the company is less than that of borrowings from banks.

Trade Credit: It refers to the credit provided by one firm to another for the purchase of goods and services. It is a source of short-term financing and facilitates purchase of goods and services without immediate payment. The volume and period of credit extended by the business firms varies from one industry to another and from one firm to another. Also, it varies from customer to customer in a particular firm. The various factors affecting the volume and period of credit include reputation of the purchasing firm, volume of purchases, past record of payment etc.

(c) Debentures are common securities issued under borrowed fund capital. Debentures are instruments for raising long-term debt capital. Debentures are called creditor ship securities because debenture holders are called creditors of a company.

A debenture can be defined as ‘a document or a certificate” issued by a company under its seal as an acknowledgement of its debt. Holder of debenture certificate is called debenture holder. Following are disadvantages of Debenture :

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Fixed Obligation: Payment of interest is a fixed commitment of the organisation whether it is earning profit or not. Sometimes companies have to borrow fund for payment of interest to debenture holders.

Reduction in Credibility : Financial institutions and lenders hesitate to lend funds in the companies having more of debentures. The credit-worthiness of a company which has issued a large number of debentures is low.

Charge on Assets : Usually debentures are issued against securities of fixed assets. During the time of depression, if a company is unable to pay the regular amount of interest and finds it difficult to repay the amount, in this situation the debenture holders can have claim over the assets of the company.

No Voting Rights: The debenture holders are not allowed to vote in the management of the company. All the decisions regarding interest rate for debentures are taken by the equity shareholders only. Therefore, they remain at the mercy of equity shareholders.

Question 3.   (ISC Commerce 2016 Class-12 )
(a) Write any four features of equity shares. [4] (b) Explain any four factors that affect the capital structure of a company. [8] Answer 3:
(a) The features of equity shares are as follow :
Primary Risk Bearers : The equity- shareholders are the primary risk bearers of the company. In case the company suffers losses then equity- shareholders have to bear the loss. The due payment is given to creditors before paying the equity shareholders.

Claim over Residual Income : The equity shareholders have claim over the leftover income of the company only. They get share in the income left after satisfying the claims of all creditors, outsiders and preference shareholders.

Basis for Loans : Equity share capital is the basis on which loans can be raised. The amount of equity share capital adds to the credibility- of the company. The amount of equity share capital increases the confidence of the creditors.

Control : Equity shareholders have control over the activities of the company-. The equity shareholders have voting rights. The equity shareholders cast vote to select the Board of Directors w ho control and manage the affairs of the company.

(b) Following are the factors that affect the capital structure of a company :
Cost of Equity : Another factor which helps in deciding capital structure is cost of equity. Owners or equity shareholders expect a return on their investment i.e., earning per share. As far as debt is increasing earning per share (EPS), then we can include it in capital structure but w hen EPS starts decreasing with inclusion of debt then we must depend upon equity share capital only.

Floatation Costs: Floatation cost is the cost involved in the issue of shares or debentures. These costs include the cost of advertisement, underwriting statutory- fees etc. It is a major consideration for small companies but even large companies cannot ignore this factor because along with cost there are many legal formalities to be completed before entering into capital market. Issue of shares, debentures requires more formalities as well as more floatation cost. Whereas there is less cost involved in raising capital by loans or advances.

Risk Consideration : Financial risk refers to a position when a company is unable to meet its fixed financial charges such as interest, preference dividend, payment to creditors etc. Apart from financial risk business has some operating risk also. It depends upon operating cost, higher operating cost means higher business risk. The total risk depends upon both financial as well as business risk. If firm’s business risk is low then it can raise more capital by issue of debt securities where as at the time of high business risk it should depend upon equity.

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Flexibility: Excess of debt may restrict the firm’s capacity to borrow further. To maintain flexibility it must maintain some borrowing power to take care of unforeseen circumstances.

Question 4.     (ISC Commerce 2016 Class-12 )
(a) Briefly explain any three demerits of public deposits. [3] (b) Differentiate between line organisation and line and staff organisation. [4] (c) Write five features of an informal business organisation. [5] Answer 4:
(a) The demerits of Public deposits are :
Uncertainty : Public deposits is an uncertain and unreliable source of finance. During depression period the depositors may not respond. Also, deposits may be withdrawn whenever the financial position of the company is not stable.

Suitable for Short-term Finance : A company cannot depend upon public deposits for a long-term financing requirement as the maturity’ period of public deposits is between six months to three years.

Hindrance to Growth of Capital Market : Public deposits hamper the growth of a healthy capital market in the country. Widespread use of public deposits creates a shortage of industrial securities.
(b)

Line Organization Line and Staff Organization
(i) Line managers are generalists. (i) These are experts know n as staff to advise and assist the line officials.
(ii) There is strict discipline (ii) There is loose discipline.
(iii) It is not based upon planned specialization. (iii) It is based upon planned specialization
(iv) It is suitable for small scale operations. (iv) It is suitable for medium scale operations.

(c) The basic features of informal organisation are as under :

  • Informal relations are unplanned. They arise spontaneously.
  • Formation of informal organisations is a natural process.
  • Informal organisation reflects the pattern of human relationships.
  • Informal organisations are based on common taste, problem, language, religion etc.
  • The membership of the informal organisation is voluntary.
  • Informal organisation is unstable in nature, its life is generally short.

Question 5.     (ISC Commerce 2016 Class-12 )
(a) Why is management considered as a science ? [3] (b) Differentiate between centralization of authority and decentralization of authority. [4] (c) State and explain the principles of management as laid down by F. W.Taylor. [5] Answer 5:
(a) Management is called a science because it has a systematic body of knowledge including concepts, principles and theories. But it is not a perfect science as its principles are mostly situation based and do not produce the same results every time. In fact, management is a social science as it deals with humans whose behavior is not fully predictable.

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