KCSE 2014 Business Studies Paper 2 Questions with Marking Scheme

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    1. Explain five benefits that a firm may enjoy by preparing a business plan. (10 marks)

    2. Explain five demerits that a country may suffer when the government becomes the major investor in the business. (10 marks)

    1. On first January 2012, Ndovu Traders had shs 30,000 in cash and 75,000 at the bank. During the month, the following transactions took place:
      January 2nd: Bought goods in cash worth shs 15,500
                            5th: Received cash from Chui shs 23,750 after allowing 5% cash discount.
                             8th: Withdrew cash 8,900 from the bank for personal use.
                             11th : Maro, a debtor settled her account of shs 16,800 by a cheque of sh 16,000.
                              15th: Sales amounted to shs 24,250 in cash.
                               17th: Paid Furaha Traders shs 29,100 in cash in full settlement of their account less 3% cash discount.
                              20th:Withdrew shs 15,500 from the bank for business use.
                               22nd: Koko a debtor, settled her account of shs 40,000 by cheque 2.5% cash discount.
                               25th: Paid wages shs 21,000 in cash.
      Prepare a duly balanced the column cash book. (12 marks)

    2. Explain four reasons for which traders observe ethical practices in product promotion. (8 marks)

    1. Explain five objectives that may be achieved by establishing firms in different parts of the country. (10 marks)

    2. Describe five accounting documents used in home trade. (10 marks)

    1. The following information relates to Bahari enterprises:
      Details                                                Shs
      Stock 1st January 2012                     430,000
      Purchases                                          930,000
      Sales                                                  1,155,000
      Carriage outwards                               25,000
      Carriage inwards                                  10,000
      Returns outward                                   20,000
      Returns inwards                                   30,000
      General expenses                                100,000
      Insurance                                              25,000
      Stock 31st December 2012                  470,000

      1. Turnover (1 mark)
      2. Rate of Stock Turnover (3 marks)
      3. Mark up (2 marks)
      4. Margin (2 marks)
      5. Net profit (2marks)

    2. Explain five guidelines that should be followed by the government in its expenditure. (10 marks)

    1. Explain five disadvantages that a developing country may suffer by liberalizing foreign trade. (10 marks)

    2. Explain five features of monopolistic competition. (10 marks)

    1. Apart from selling shares, explain five sources of finance by a public limited company. (10 marks)

    2. There has been a decline in the demand for wooden furniture. Explain five factors that may have caused this trend.

Marking Scheme

    1. Benefits that a firm may enjoy by preparing a business plan include:
      1. Sourcing for finance/capital/loans. It can be used to convince financial institutions and investors to fund the firm’s operations.
      2. A tool for evaluation. It can be used to determine whether the firm is achieving its goals and objectives/ help to make necessary adjustment/changes/ for supervision purposes.
      3. A tool for management. It can be used for structuring the implementation of the functions /tool for planning, organizing, directing, staffing, coordinating budgeting/communicating.
      4. Gives the firm a competitive edge. It enables the firm to get a better understanding of the market and competitors.
      5. Enhances efficiency in the use of the resources of the firm. It ensures that the resources available are allocated and used in the best way possible without wastage.
      6. Motivational tool. It inspires the management /employees /creates team work in accomplishing the objectives of the firm.
      7. Framework /blue print/guide for implementing a new business, thus assisting management in decision/actions on the (possible) strengths, weaknesses, opportunities and threats on a day to day basis.
        (Any 5 x 2 = 10 marks)
    2. Demerits that a country may suffer when the government becomes a major investor in business include:
      1. Discourage private investment. The move may discourage private investment due to unfair competition and acquisition of monopoly powers/unfavourable laws.
      2. Poor quality goods and services. The quality of goods and services may be compromised due to lack of competition. Government employees also lack enthusiasm since there is no profit motive.
      3. Limited choices for consumers. Where the government is the only provider of good/service, consumers may be denied a variety to choose from.
      4. Inefficiency. Leading to low/poor productivity/continuous loss.
      5. Burden to tax payers. The investments may drain public resources by increasing government expenditure in situations where the enterprise is not able to sustain itself (burdening tax payers).
      6. Lack of accountability/transparency/corruption. Managers of government-run businesses tend to misappropriate and embezzle public funds/ misuse public funds.
      7. Unstable management. Government-run businesses are prone to frequent changes in their management occasioned by changing political leadership.
      8. Political interference/patronage. Appointment of cronies/nepotism and unethical practices may lead to social discontent.
      9. Bureaucracy/red tape. Leading to rigidity/slow response to market changes.
        (Any 5 x 2 = 10 marks)
      Date Details Discount Allowed Cash
      Date Details  Discount Received  Cash
      Jan 1st Bal b/d   30,000 75,000 Jan 2nd Purchases   15,500  
      Jan 5th Chui 1,250 23,750   Jan 8th Drawings     8,900
      Jan 11th Maro 800   16,000 Jan 17th Furaha 900 29,100  
      Jan 15th Sales   24,250   Jan 20th Cash     15,000
      Jan 20th Bank   15,000   Jan 25th Wages   21,000  
      Jan 22nd Koko 1,000   39,000 Jan 30th Bal c/d   27,400 106,000
          3,050 93,000 130,000     900 93,000 130,000
        Bal b/f   27,400 106,100          
      (36 x 1/3 = 12 marks)
    2. Reasons for which traders observe ethical practices in product promotion include:
      1. To avoid misleading the consumers by not making false claims about their products.
      2. To ensure that consumers are not offended by not making use of appeals that go against their cultural values.
      3. To avoid exploiting certain vulnerable groups like children since they lack the knowledge and experience to understand and evaluate the purpose of persuasive appeals.
      4. To avoid negative influence on the consumers’ values and lifestyles that may lead to immorality and ill health like glorifying the image of alcohol and cigarettes.
      5. To avoid portraying rival businesses negatively in an attempt to capture the market or gain undue advantage.
      6. To create a positive image reputation of business hence maintaining customer loyalty.
      7. To abide by the laws of the country to avoid law suits/conflicts/frictions with law enforcement agencies/government.
        (Any 4 x 2 = 8 marks)
    1. Objectives that may be attained by establishing firms in different parts of the country include:
      1. To reduce rural-urban migration. Setting up firms in several parts of the country may curb the influx of people from rural to urban areas. This helps to retain the productive population in the rural areas.
      2. To utilize local resources/factors of production/untapped resources. Establishing firms in various parts of the country will enhance the use of idle resources in those areas.
      3. To create employment opportunities. This is a sure way of creating employment opportunities in several parts of the country which improves the standard of living.
      4. To provide balanced regional development. Creating firms in various parts of the country will ensure that all parts grow/ develop at the same rate/time.
      5. To promote development of infrastructure. Setting up of firms will encourage the growth of infrastructure like roads, power, water, railway and communication in various parts of the country which opens up the country and facilitates production/movement of goods/services/factors.
      6. To promote development of social amenities / schools/ health facilities. When firms are set up in various parts of the country, social amenities will also be developed. This improves the social welfare of the people.
      7. To reduce social problems hence avoiding/minimizing polution/crime/ prostitution/drug abuse/theft.
      8. To promote urban growth hence encouraging growth of market/economy/ commercial activities.
      9. To reduce congestion in certain areas in order to ease pressure on resources.
      10. To reduce effects of concentrated pollution which may negatively affect the environment.
      11. To minimize effects/impact of calamities/terrorism/catastrophe which may polarize the economy.
      12. To reduce income disparities/inequalities as people will be engaged in production activities.
        (any 5 x 2 = 10 marks)
    2. Accounting documents that are used in home trade include:
      1. Invoice. This is a document sent by the seller to a buyer demanding payment for goods supplied. It shows details of the goods, quantity, unit price, value, any discount given, net payment and terms of payment sold/bought on credit/a source document for sales/purchases day bool/A Ledger.
      2. Debit note. A document sent by the seller to the buyer to correct an undercharge. It is issued when the invoice shows a lesser amount than what is actually owed. It is an additional invoice/may be used when empty containers have not been returned and have to be charged for.
      3. Credit note. A document sent by the seller to the buyer to correct an overcharge. It is issued when goods are returned to the seller because they are defective, not the ones ordered or they were not required. When returning empty containers (which had been charged for). A source document for sales returns/purchases returns day books.
      4. Receipt. This is a document issued by the seller to the buyer when payment is made for goods / services. A source document for the cash book/cash payment journal/cash receipts journal.
      5. Statement of account. This is a document sent by the seller to the buyer showing details of transactions for the month with a running balance shown with each entry.
      6. Payment voucher. A document used to validate payment for service/goods rendered. It is issued by a cashier and signed by the service provider/ payee/ recipient/a sosurce document for the petty cash book/imprest used where the receipt is not readily available.
      7. Remittance advice note. This is a document that accompanies a cheque issued for settlement of a debt. It provides information on the payment.
      8. A1E (Authority to incurr expenditure. written instructions allowing one to spend institutional funds up to a certain amount.
      9. Bank deposit slip - As a source document for cash book/evidence of payment into the bank account.
      10. Consignment note supports hire of carriage services/shows transport charges.
        (Any 5 x 2 = 10 marks)
    1. Calculating:
      1. Turnover = Sales - Returns inwards
        = 1,155,000 - 30,000
        = shs 1,125,000 (4 x 1/4 = 1 mark)
      2. Rate of stock turnover (ROSTO)
        ROSTO = Cost of goods sold 
                         Average stock
        Cost of goods sold = opening stock + purchases + carriage inwards - Return outwards - closing stock
        ROSTO = 430,000 + 930,000 + 10,000 - 470,000 - 20,000
                                     (430,000 + 470,000) ÷ 2
        = 1.96 times
        = 2 times
        (12 x 1/4 = 3 marks)
      3. Mark up =        GP            
                    Cost of goods sold
        = 1,125,000 - 880,000
        =49 = 27.8%
        (4 x 1/2 = 2 marks)
      4. Margin =   GP   
        = 49 or 21.77%
        (4 x 1/2 = 2 marks)
      5. Net profit = Gross profit - Expenses
        = 245,000 - (25,000 + 100,000 + 25,000)
        = 95,000
        (8 x 1/4 = 2 marks)
    2. Guidelines that should be followed by the government in its expenditure include:
      1. Maximum social benefit/optimal benefit. Government spending should benefit as many people as possible.
      2. Flexibility. Should be elastic enough to accommodate changing circumstances.
      3. Economy. Should be capable of being changed to accommodate prevailing economic circumstances.
      4. Equity. Should aim at distributing incomes fairly.
      5. Sanction. Government spending must be approved by the relevant authority to enhance accountability.
      6. Accounting. Proper accounting records should be kept to facilitate good financial management.
      7. Productivity. A larger proportion of the national income should be spent on development projects.
      8. Surplus. Expenditure should be less than the total revenue collected.
      9. Elasticity - should be capable to being expanded/contracted depending on the size of the economy.
        (Any 5 x 2 = 10 marks)
    1. Disadvantages that a developing country may suffer by liberalizing foreign trade include.
      1. May lead to dumping of inferior products into the country.
      2. May cause over exploitation of resources leading to their depletion.
      3. May lead to loss of jobs due to closure of firms that cannot cope with competition.
      4. May contribute to worsening balance of payment situation as developing countries have fewer/ lowly valued exports.
      5. Cultural values and beliefs may be eroded due to unrestricted trade.
      6. Entry of harmful goods. Goods with harmful ingredients such as beauty creams and drugs may find their way into the country.
      7. Slow economic development. The country may stagnate due to over dependence on other countries for supplies.
      8. Brain drain. The developing country looses skilled personnel to better developed countries who provide better pay and amenities.
        (Any 5 x 2 = 10 marks)
    2. Features of monopolistic competition include:
      1. Many sellers and buyers. The market is comprised of many sellers and buyers who operate independently.
      2. Free entry and exit into the market. There are no barriers to entry into, or exit from the market.
      3. Commodities sold are very close substitutes. Firms sell similar products but which are highly differentiated by names, shapes, colour, odour and packaging.
      4. All firms earn normal profits in the long run. Some firms may earn supernormal profits in the short run.
      5. Firms are independent. There is little interdependence in terms of pricing and quantities to produce.
      6. Entry or exit of a firm does not significantly affect the market. None of the firms can influence the market supply by joining or leaving the industry.
      7. No single firm has control over the factors of production. All firms acquire the factors at the prevailing market rates and conditions.
      8. Perfect knowledge of the market. Buyers and sellers are aware of the prices, quantities and other market factors.
        (Any 5 x 2 = 10 marks)
    1. Sources of finance for a public limited company apart from the sale of shares include:
      1. Borrowing from financial institutions in the form of loans, bank overdraft and mortgage.
      2. Trade credit. Buying goods for re-sale on credit so as to pay at a later date.
      3. Hire purchase. Buying goods and paying for them on instalment basis.
      4. Debentures. Borrowing from members of the public for which interest is paid at a fixed rate and over a predetermined period of time.
      5. Sale and leaseback. Selling an asset like a building and then hiring it back for a specified period of time.
      6. Retained profits. Profits made are not shared out as dividends but ploughed back into the business.
      7. Discounting bills of exchange. Receiving payment from financial institutions at a discount against bills of exchange before their maturity.
      8. Use of reserves/ provisions. The company may make use of funds set aside for depreciation, tax and bad debts to finance its day to day operations.
        (Any 5 x 2 = 10 marks)
    2. Factors that may have caused a decline in the demand for wooden furniture include:
      1. Decline in consumer incomes. This may reduce their purchasing power hence less able to afford the furniture.
      2. Fall in the price of substitutes. Furniture made from other materials like plastic and metal may be cheaper.
      3. Increase in the price of wooden furniture. This makes the furniture to be out of reach for most consumers.
      4. overnment policy. The government may have increased rates on timber products hence making the furniture more expensive.
      5. Unfavourable change in tastes and preferences. Consumers may be purchasing more plastic and metallic furniture.
      6. Decline in population. A decrease in population will lead to reduced numbers of potential and actual customers.
      7. Expectations of a future fall in price. Consumers may be anticipating a fall in price in the future hence currently suspend buying.
        (Any 5 x 2 = 10 marks)
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