Business Studies Paper 2 Questions and Answers - MECS Cluster Joint Mock Exams 2021/2022

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  • The paper consist of Six questions.
  • Answers any Five questions in the spaces provided.
  • Non programmable electronic calculator may be used.
  • Candidates should answer all questions in English.
    1. Explain Five features that are common to under-developed countries. (10marks)
    2. Outline Five differences between public limited companies and private limited companies. (10marks)
    1. Explain Five methods that the central Bank of Kenya can use to increase the amount of money in circulation. (10marks)
    2. Explain Five factors that would determine the size of a firm (10marks)
    1. Explain Five benefits of insurance to the Kenyan economy. (10marks)
    2. The following balances were extracted from the books of Kassu Traders on 1st January 2018.
      MOTOR VAN 200,000
      MACHINERY 200,000
      DEBTORS 60,000
      STOCK 80,000
      CASH 240,000
      CAPITAL 210,000
      CREDITORS 180,000
      2 YEARS LOAN 390,000
      The following transcations took place during the period ended 31st January, 2018.
      1. Sold machinery worth Ksh 60,000 for Ksh 100,000 and received the whole amount in cash.
      2. Cash of Ksh 10,000 was taken from the business to pay the son’s school fees.
      3. Purchased goods worth Ksh 80,000 and paid Ksh 50,000 in cash the balance was still outstanding at the end of the month.
      4. Opened a business bank account and deposited Ksh 50,000 from the cash box.

        Draw Kassu Traders balance sheet as at 31st January, 2018. (10marks)
    1. Explain Five circumstances under which cash with order(C.W.O) would be preferred by a retailer. (10marks)
    2. Describe Five channels of distribution that a Kenyan farmer would use to ensure his flowers reach consumers abroad. (10marks)
    1. Highlight Five benefits of an efficient transport system to the Kenyan economy. (10marks)
    2. County X, has been experiencing low levels of national income. Explain Five possible causes of the situation. (10marks)
    1. Outline Four problems associated with specialisation and division of labour to the workers. (8marks)
    2. The following information relates to Viola Traders for the Month of May 2010.
      May 1. Started busines with cash Ksh 180,000 and a bank overdraft of Ksh 450,000.
      • 3. Received a cheque of Ksh 1,500,000 from Maina a debtor.
      • 7. Cash sales Ksh 280,000
      • 10. Jared, a creditor was paid his account of Ksh 600,000 by cheque of Ksh 400,000 and the balance by cash.
      • 14. Received commission in Cash Ksh 150,000
      • 16. A debtor, Abdul, paid his account of Ksh 185,000 by cheque less 2% cash discount.
      • 17. Paid for the rent expenses Ksh 10,000
      • 18. Juma bought goods on credit worth Ksh 10,000
      • 21. Withdrew Ksh 100,000 from the bank to pay hospital bill.
      • 24. Paid cash Ksh 133,280 to Kanai after deducting 2% cash discount.
      • 25. Juma paid in cash the value for goods bought on credit.
      • 26. The owner introduced cash Ksh 10,000 into the business from private sources.
      • 27. Paid salaries Ksh 120,000 by cheque.
      • 28. Withdrew Ksh 30,000 from the bank for office use.
      • 29. Banked all cash except Ksh 50,000
        Prepare a three column cash book dully balanced (12marks).


    1. Explain five features common to under developed countries. (10 mks)
      • High population growth rate – the rate is higher than the rate at which economy is growing thereby increasing dependency ratio.
      • High level of poverty – making large proportion of the population live at subsistence/below poverty line.
      • Disparity in income distribution – small percentage of population own large proportion of country’s wealth/ large gap between the poor and the rich.
      • Low levels of income/ investments – due to little income earned/ income consumed thus reducing savings.
      • Unemployment – hence low incomes / leading to poverty.
      • Low labour productivity – due to inadequate skills/ low levels of education.
      • High levels of illiteracy – due to inadequate education facilities/ fees / teachers / colleges
      • Low life expectancy – due to inadequate diet/ medical attention
      • Dependency on more developed countries/ economies for aids/ grants/ loans- making them lack economic independence
        (2x5= 10 mks)

    2. Differences between public limited companies and private limited companies. (10 mks)
      Private Ltd Co. Public Ltd Co. 
      Formed by a minimum of 7 and a maximum of 50 shareholders Formed by a minimum of 2 shareholders and a maximum of 50
      Restricts transfer of shares Shares are freely transferable
       Do not invite subscription for shares and debentures from members of public Invites subscription for shares and debentures from members of public
       Can be managed by at least one director or two  Managed by board of directors
       Start business after receiving certificate of registration/ incorporation  Start business after receiving certificate of trading
       Audited accounts do not have to be published  Audited accounts must be published in the press
       (2x5= 10 marks)
      NB; No splitting of marks

    1. Methods that central banks can use to increase money in circulation (10 MKS)
      • Decrease bank rates – will increase demand for loans/ loans become cheap hence more people get loans, increasing the amount of money in circulation
      • Buying of government securities in OMO – this enables members of public to get back their money/ commercial banks get their money hence increasing their lending capacity
      • Reduction of cash/ Liquidity ratio requirements – money available to commercial banks for lending increases which in turn increases the money in supply
      • Advising/ instructing commercial banks to lend/ give credit to various sectors of the economy, thus increasing money in circulation
      • Directives to commercial banks to reduce interest rates charged on loans, thus encouraging people to borrow loans, increasing money supply.
      • Reducing the amount of compulsory deposit requirement – this act will have the effect of increasing the amount of money available to the commercial banks for lending.
      • Requests / moral suasion/ persuasion – to commercial banks to expand credit activities.
        (2x5=10 mks)
        Mention = 1mk Expansion = 1mk

    2. Explain five factors that determine the size of a firm. (10 mks)
      • Number of employees – large firms are associated with a large number of workers and small firms are associated with a small number of employees
      • Volume of output – a firm with high output is considered to be large and vice versa
      • Floor area covered by premises – a firm with large floor area covered by premises is considered large and vice versa
      • Capital invested – the larger the capital of the firm in terms of assets, the larger the firm and vice versa
      • Production methods /technology used– the higher the level of technology used by a firm, the larger the firm and vice versa
      • Market served – a firm serving a big market / with many branches is considered to be large and vice versa
      • Sales volume – the higher the amount of sales in an year the larger the firm and vice versa
        (2x5 = 10 mks)
        Mention =1mk Expansion = 1mk

    1. Explain benefits of insurance to the Kenyan economy (10mks)
      • Ensures continuity of business – by providing compensation to the insured in the event of loss
      • Promotes economic growth – they invest money collected through premiums in the economy / savings collected by insurance companies finance long-term projects such as housing
      • Creation of employment – insurance employs people directly as sales persons, underwriters, brokers thus earning income which help improve their living standards
      • Encourage savings – policy holders can acquire loans using life insurance policies/ on maturity policy holders get their savings in full.
      • Offer credit facilities – some advance loans to policy holders enabling them to engage in investments
      • Collateral/ security for credit – life assurance policy may be used as security to obtain loans which can be invested to earn profit
      • Earns revenue to the government – through taxation of profits and benefits which help boost the country’s economy
      • Creates confidence in investors – encouraging them to venture in risky but profitable business
        (2x5 = 10mks)
        Mention = 1mk Expansion = 1mk

    2. Balance sheet
      • Motor van 200,000
      • Machinery 200,000-60,000 = 140,000
      • Debtors 60,000
      • Stock 80,000+80,000 = 160,000
      • Cash 240,000+100,000-10,000-50,000 = 230,000
      • Capital 210,000
      • Creditors 180,000+30,000 = 210,000
      • Profit 40,000
      • Drawings 100,000
      • Bank 50,000
          Kassu Traders
        Balance sheet✓
        As at 1st January 2018
        Fixed Assets   Capital   210,000✓
        Motor van
        200 000✓
        Add. Profit 40,000✓
        Current Assets     250,000✓


        Less Drawings
        New Capital


        2 Year loan


        20x ½ = 10marks
    1. Explain circumstances under which C.W.O would be preferred by a retailer (10 marks)
      • When the buyer is new to the seller hence his credit worthiness is unknown
      • When c.w.o is the business policy the business/ buyers have to abide/ comply by the rule
      • When the seller is operating mail order store/business – such business operate strictly on c.w.o
      • When credit worthiness of buyer is doubtful – hence the seller fears the risk of bad debts
      • Where the seller would want to avoid cash flow problems / want working capital – since the business maybe is small and cash flow is a problem
      • Where there is need to limit/ reduce need for a lot of record keeping – since its expensive to keep records/ tedious
      • When the transaction involves little amount of money – its economical/ help eliminate need for keeping records of debtors

    2. Channels of distribution that a Kenyan farmer would use to distribute flowers abroad (10mks)
      • Kenyan/ local farmer → foreign consumer
      • Kenyan/ local farmer → import agent → (foreign) consumer
      • Kenyan/ local farmer → import agent → Retailer → Consumer
      • Kenyan/ local farmer → Retailer (foreign) → Consumer (foreign)
      • Kenyan/ local farmer → Wholesaler → Foreign Consumer
      • Kenyan/ local farmer → Wholesaler → Retailer → Foreign consumer
      • Kenyan/ local farmer → Marketing board → Wholesaler → Retailer → Foreign consumer
      • Kenyan/ local farmer → Marketing board → Retailer → Foreign consumer
        (2x5 = 10mks)

      • To score candidate must start with Kenyan/ local farmer
      • Must show along the channel evidence of goods crossing the boarder
      • Where a candidate writes in prose form/ paragraph check above
      • Arrows must be clearly shown
    1. Five benefits of an efficient transport system to the Kenyan economy (10mks)
      • Assist in distribution of finished goods to the market thus saving time/ avoid wastage
      • Aids in transportation of labour/ workers to the industries/ firms/ working areas thus saving time/ ensuring continuous production
      • Facilitates movement of raw materials to the industries thus ensuring continuous production/ avoid wastage
      • Creates place utility for goods that would otherwise go bad if they don’t reach consumers/ by bridging geographical gap between producers and consumers
      • Widens market by moving goods from areas of surplus to areas of shortage thus encouraging more production/ earning more profits
      • Facilitates large scale production/ mass production by ensuring that goods produced are taken to the market
      • Encourages specialization in production by enabling producers to concentrate in production and distribution concentrate in distribution
      • Saves on cost of repair and maintenance of various units of carriage which causes losses to their owners (2x5= 10mks)
        1. No splitting of marking 2/0 mks
        2. Award when the benefit/ gain comes out clearly

    2. Explain Five factors leading to low National income. (10marks)
      • Unskilled/Low labour supply - Low quality/quantity of workforce in a country lead to low productivity thus low National income.
      • Low capital – Low amount and quality of capital lead to production of low quality/quantity of goods and services hence low national income.
      • Political instability/insecurity – Lead to uncondusive environment for production hence low quantity of goods and services produced/ destruction of industries/closure of firms.
      • Poor/Negative attitudes towards work – Lead to low productivity hence low national income.
      • Large size of the subsistence sector – the output may be under estimated/ low production.
      • Low/ Poor enterprenuership - Inability to start firms/ businesses lead to low productivity/low GDP/Low Net Income.
      • Poor /Low natural resources endowment leads to low capacity to produce hence low national income.
      • Low levels of foreign investment – Lead/hence low levels of production leading to low national income.
      • Poor technology – hence low quality/ quantity produce leading to low national income.
        2x5 = 10marks
        Mention /stating = 1mark
        Expansion = 1mark

    1. Outline Four problems associated with specialisation and division of labour to the workers. (8marks)
      • Lead to monotony of work which results to boredom/and lack of interest in the job/low productivity.
      • Encourages use of machines which may hinder creativity thus no new ideas or inventions
      • Makes workers depend on one trade, which in case of fall in demand lead to unemployment.
      • Encourages use of machines which replace human labour causing unemployment.
      • Bring many people together resulting in social problems such as crimes(which lowers quality of life) NB: Accept example of social evils as expansion.
      • The worker do not have pride in the final product as it is as a result of efforts of several people, hence may lack interest.
      • Encourages firms/countries to specialise which may disadvantage workers with skills not neeeded in some areas/countries causing unemployment.
        NB: No splitting of marks
        The problem must come out to score
      Three Column Cash Book
      2010             2010          
      May 1
      May 1
      May 7
      May 14
      May 16
      May 25
      May 26
      May 28
      May 29
      180 000

      280 000
      150 000

      10 000
      10 000
      30 000
      1 500 000

      181 300


      May 1
      May 10
      May 17
      May 21
      May 24
      May 26
      May 28
      May 29
      May 30











            3700 650 000 1 948 020         2720 650 000 1 948 020
      24x ½ = 12marks

NB: Award only when details column is correct
Deduct 2 marks if dates are completely missing

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