Aiou solved assignment 2 for the course code 463 fundamental of business for the semester spring 2016. This is the second and last solved assignment for this course fundamental of business which is offered by the Open University to the B.Com students.

Spring 2016 Course: Fundamental of Business Level: BA/ B.Com Code: 463 Assignment No 2

Q I: The real strength of a business lies in the skills and competence of its employees for achieving growth and profitability. However, the employees of a business’ need to be trained for carrying out their duties. Discuss the role of training in the development of employees of an organization. (20)

ANSWER: Training
Training is very necessary for the growth of the organization. Man, Machine and material are the main capital of the organization. Men are most valuable resources of the organization. The effectiveness of the organization depends on competence of the employees. Training and career development are very vital in any company or organization that aims at progressing. Training simply refers to the process of acquiring the essential skills required for a certain job. It targets specific goals, for instance understanding a process and operating a certain machine or system. Career development, on the other side, puts emphasis on broader skills, which are applicable in a wide range of situations. This includes decision making, thinking creatively and managing people. Despite the potential drawbacks, training and development provides both the company as a whole and the individual employees with benefits that make the cost and time a worthwhile investment.
Need of Training:- Training of employees has a significant role in modern business era. Not just to equip them with latest tools your company has implemented, there is a lot more to it. I have sorted down them in a list. This is a must read if you employ or mean to employ in future at least one person.
Training for the Job:- This type of training is given before the new worker starts on the job. It is used where the jobs are rather complex and where inexperienced operators cannot be permitted to function without seriously interfering with production flow. Many firms operate so-called Company Schools or Training Sections to which new employees are sent after they are hired but before they are assigned to their jobs. In these schools they are given the requisite instruction for handling their jobs and they are tested for the proficiency that they acquire. These Schools or Section are staffed by special instructors who frequently devote their entire time to teaching. Obviously this sort of school is useful only where many workers are to be trained and where the training period is of more than brief duration. The apprenticeship system is one in which inexperienced workers are apprenticed to master craftsmen for a period of years, during which time they are supposed to become thoroughly grounded in their trades or skill.
The role of training in the development of Employees of Organization
Training presents a prime opportunity to expand the knowledge base of all employees, but many employers find the development opportunities expensive. Despite the potential drawbacks, training and development provides both the company as a whole and the individual employees with benefits that make the cost and time a worthwhile investment.
Overcoming Weaknesses:- Most employees have some weaknesses in their workplace skills. A training program allows you to strengthen those skills that each employee needs to improve. A development program brings all employees to a higher level so they all have similar skills and knowledge.
Employee Performance Improvement:- An employee who receives the necessary training is better able to perform his/her job. He/she becomes more aware of safety practices and proper procedures for basic tasks. The training may also build the employee’s confidence because she has a stronger understanding of the industry and the responsibilities of her job.
Consistency:- A structured training and development program ensures that employees have a consistent experience and background knowledge. The consistency is particularly relevant for the company’s basic policies and procedures. All employees need to be aware of the expectations and procedures within the company. This includes safety, discrimination and administrative tasks.
Job Satisfaction:- Employees with access to training and development programs have the advantage over employees in other companies who are left to seek out training opportunities on their own. The investment in training that a company makes shows the employees they are valued. The training creates a supportive workplace. Employees may gain access to training they wouldn’t have otherwise known about or sought out themselves. Employees who feel appreciated and challenged through training opportunities may feel more satisfaction toward their jobs. Training programs increases communication between different levels of an organization. Any deficiency in processes and jobs are eliminated and those close to production processes become involve in the management. Staff empowerment is a recent trend in management; such empowerment will only be successful when proper training is provided to those empowered.
Increased productivity:- Through training and development the employee acquires all the knowledge and skills needed in their day to day tasks. Workers can perform at a faster rate and with efficiency thus increasing overall productivity of the company. They also gain new tactics of overcoming challenges when they face them.
Improved quality of services and products:- Employees gain standard methods to use in their tasks. They are also able to maintain uniformity in the output they give. This results with a company that gives satisfying services or goods.
Reduced cost:- Training and development results with optimal utilization of resources in a company or organization. There is no wastage of resources, which may cause extra expenses. Accidents are also reduced during working. All the machines and resources are used economically, reducing expenditure.
Reduction in supervision:- The moment they gain the necessary skills and knowledge, employees will become more confident. They will become self-reliant and require only little guidance as they perform their tasks. The supervisor can depend on the employee’s decision to give quality output. This relieves supervisors the burden of constantly having to give directives on what should be done.
Necessity for Training:- All new employees require a certain amount of training before they can give their best efforts to their jobs. This training is of two types: training on the job and training for the job. This is described below.
Importance of Training:- Training the employees is important because:-
1. Rapid technological innovations impacting the workplace have made it necessary for people to consistently update their knowledge and skills
2. People have to work in multidimensional areas, which usually demand far more from their area of specialization.
3. Change in the style of management.
4. Due to non-practical college education.
5. Lack of proper and scientific selection procedure.
6. For career advancement.
7. For higher motivation and productivity.
8. To make the job challenging and interesting
9. For self and development
10. For employee motivation and retention
11. To improve organizational climate
12. Prevention of obsolescence
13. To help an organization to fulfill its future manpower needs.
14. To keep in pace with times
15. To bridge gap between skills requirement and skills availability
16. For survival and growth of organization and nation.

Q 2: No business can be started without having reasonable capital. This capital or funds can be raised through different sources for business. Suppose you are planning to start a mobile shop. What different types of sources for getting the capital would be there for you to start your business?

ANSWER: Financial Planning
It involves the identification of financial needs, development of financial plans, identification of alternative sources of funds, obtaining and maintaining the funds and evaluating the financial performance of the company. Hence finance is the life of company. Financial planning is done by financial needs, which includes making projection of sales, income and assets based on alternative production and marketing strategies and then deciding how to meet this financial requirements business firm seeking to enhance earnings for the owners, employ a combination of short term and long term capital.
To project the firm resources a financial manager must think ways to avoid and reduce the risks, insurance companies play a major role in risk shifting for firms. Almost all firms face financial problems. Therefore a finance manager should be aware at all the alternatives to over financial problems
Finance: The most Important Function of Business Organization
Finance is the blood of a business. Due to lack of finance a business cannot be run. Business needs finance for its daily requirements and for the long & medium terms requirement. Business usually needs finance for the following purpose.
• Purchases of fixed assets.
• Purchases of floating assets.
• Payment of daily expenses.
• Payment of daily wages & salaries.
• Need for daily legal expenses.
• Need Ibr expanding business.
• Need for other formalities
Business requires the following kinds of finance:-
o. Short terms finance
o Medium terms finance
o long terms finance

If finance is for short period i.e. less than arc year it is named as short term finance, business needs it for the revenue expenditures are daily routine expense. If it required between one to there are finance it is named as medium term finance. If it is for purchasing fixed assets it is called long term finance
Types of finances in the business:-
❖ Fixed capital finance
 Current capital finance

Fixed capital financing:- If finance is needed for the perch asking of fixed assets it is called the fixed capital finance like purchases of building furniture etc.
Current Capital finance:- If the finds are required for meeting the current assts expenses it is called floating assets Expanses.
Businesses receive their money capital from three broad sources- investment by owners, accumulated profits, and debt or loan. These sources are described below.
1) Investments By Owners:- Sole proprietorship and partner-ship are usually started when the owner or owners invest cash and other assets in the business. Often these investments by owners are the primary resources by which the company is operated. Owners of a limited company invest in the company by buying shares when the company is formed, and sometimes through later sales of additional stocks. The shares held by them represent their ownership in the company.

2) Accumulated Profits:- The second source of capital comes from operations. The accumulated profit provides additional capital to the company. If the company is unprofitable, its losses will reduce its capital. The owners or directors have the choice to pay profits to the shareholders, or they may keep profits in the business by re-investing them in more assets in the hope of earning more profits. Some successful companies re-invest their profits for research and development activities or paying dividends to their shareholders. A company’s shares and its accumulated profits are usually referred to as equity capital.
3) Debt or Loans. The third source of capital is debt i.e. money, goods, or services borrowed by the company with the understanding that repayment must be made by a fixed future date. Such financing is usually classified by the length of time before repayment is due e.g. short term debts arc obligations that must be paid back within one year.

Once a company has been organized and money been provided ler its operations, management’s duly is to invest these funds in productive resources. These resources are assets of two main kinds.
1. Fixed Assets:- Fixed assets are the tools of the business e.g. land building, machines, showroom, fixtures, vehicles etc. They are generally not • for sale by the business that owns them but they are used by the business to produce goods and services. They are subject to deterioration and decrease in value according to the age and use and become obsolete because of technological advancement.
2. Current Assets:- These assets consist of cash, and items that can be converted into cash in a short period .of time. Examples are money on hand and bank accounts, uncollected accounts, inventories and merchandise to be sold.
3. Allocation of Capital:- Financial management must allocate the company’s capital among appropriate current and fixed assets to ensure smooth operations and earning as much profit as possible. There must be balance between the sources and uses of capital. The relationship between the two is shown in the following diagram.

Q 3: A business needs to keep different records for checking its performance. The accounting records present a picture of the financial position of a company. Discuss in detail the different types of accepting records that a business might use for knowing the details of incomes, expenses, assets and liabilities. (20)

ANSWER: Financial Position of the Company Financial statements present the results of operations and the financial position of the company. Four statements are commonly prepared by publicly-traded companies: balance sheet, income statement, cash flow statement and statement of changes in equity.
Balance Sheet A balance sheet lays out the ending balances in a company’s asset, liability, and equity accounts as of the date stated on the report. The most common use of the balance sheet is as the basis for ratio analysis, to determine the liquidity of a business. Liquidity is essentially the ability to pay one’s debts in a timely manner. The information listed on the report must match the following formula: Total assets Total liabilities + Equity.
The balance sheet is one of the key elements in the financial statements, of which the other documents are the income statement and the statement of cash flows. A statement of retained earnings may sometimes be attached. The format of the balance sheet is not mandated by accounting standards, but rather by customary usage. The two most common formats are the vertical balance sheet (where all line items are presented down the left side of the page) and the horizontal balance sheet (where asset line items are listed down the first column and liabilities and equity line items are listed in a later column). The vertical format is easier to use when information is being presented for multiple periods. The line items to be included in the balance sheet are up to the issuing entity, though common practice typically includes some or all of the following items:-
Current Assets:-
• Cash and cash equivalents
• Trade and other receivables
• Investments
• Inventories
• Assets held for sale
Non-Current Assets:
• Property, plant, and equipment
• Intangible assets
• Goodwill


Current Liabilities:-
• Trade and other payables
• Accrued expenses
• Current tax liabilities
• Current portion of loans payable
• Other financial liabilities
• Liabilities held for sale

Non-Current Liabilities:
• Loans payable
• Deferred tax liabilities
• Other non-current liabilities

• Capital stock
• Additional paid-in capital
• Retained earnings

Within the balance sheet, the following should be classified as current assets:
• Cash:- This includes all liquid, short-term investments that are easily convertible into cash. Do not include in current assets cash that is restricted, or to be used to pay down a long-term liability.
• Marketable securities:- This includes all securities that are held for trading.
• Accounts receivable:- This includes all trade receivables, as well as all other types of receivables that should be collected within one year.
• Prepaid expenses:- This includes any prepayment that is expected to be used within one year.
• Inventory:- This includes all raw materials, work in process, and finished goods items, less an obsolescence reserve. In general, any asset is classified as a current asset when there is a reasonable expectation that the asset will be consumed within the next year, or within the operating cycle of the business. All other assets are to be classified as non-current. Within the balance sheet, the following should be classified as current liabilities:
• Payables. This is all trade payables related to the purchase of goods or services from suppliers.
• Accrued expenses. This is expenses incurred by the business, for which no supplier invoice has yet been received.
• Short-term debt. This is loans for which payment is due within the next year.
• Unearned revenue. This is advance payments from customers that have not yet been earned by the company.

In general, a liability is classified as current when there is a reasonable expectation that the liability will conic due within the next year, or within the operating cycle of the business. All other liabilities are to be classified as non-current.

Income Statement:-
The income statement (also known as the profit and loss statement or P&L) tells you both the earnings and profitability of a business. The P&L is always for a specific period of time, such as a month, a quarter or a year. Because a company’s operations are ongoing, from a business perspective these cut-offs are arbitrary, and they result in many of the problems in income measurement. Nevertheless, periodic income statements are essential, because they allow users to compare results for the company over time and to the results of other firms for the same period. Depending on the industry, year over year comparisons that eliminate seasonal variables may be especially uselbl.

Cash Flow Statement:-
The cash flow statement tells you the sources and uses of cash during the period (in fact, the term “sources and uses statement” is a synonym). It also provides information about the company’s investing and financing activities during the period. The format of a cash flow statement is typically:
• Net cash flow from operating activities (sales, inventories, rent, insurance, etc.)
• Cash flow from investing activities (e.g. buying and selling equipment)
• Cash flow from financing activities (e.g. selling common stock, paying off long-term debt )
• Exchange rate impact
• Net increase (decrease) in cash
• Cash and equivalents at start of period
• Cash and equivalent at end of period
• Schedule of non-cash financing and investing activities (e.g. conversion of bonds)

There are two methods for preparing the cash flow statement, direct and indirect. Using the direct method, the accountant shows the items that affected cash flow, such as cash collected from customers, interest received, cash paid to suppliers, etc. The indirect method adjusts net income for any revenue and expense item that did not result from a cash transaction. Under EAS95, the direct method is preferred, although the indirect method – the more traditional approach favored by preparers and less costly to prepare – is still widely used.

Statement of Changes in Equity:-
A separate Statement of Changes in Stockholders’ (or Owners) Equity is also prepared that reconciles the various components of OE on the balance sheet for the start of the period with the same items at the end of the period. The statement recognizes the primacy of OE for investors and other readers of financial statements.

Q 4: The government imposes taxes on the business to get the required revenues for meeting its budgetary requirements. What are the different types of taxes that a business has to pay in Pakistan? Explain in detail. (20)

ANSWER: Business Taxation:-
Many countries impose corporate tax or company tax on the income or capital of some types of legal entities. A similar tax may he imposed at province or lower levels. The taxes may also be referred to as income tax or capital tax. Entities treated as partnerships are generally not taxed at the entity level. Most countries tax all corporations doing business in the country on income from that country. Many countries tax all income of corporations organized in the country.

Pakistan Taxation System for Companies:- Pakistan’s taxation system for companies is based upon two basis i.e. Direct Taxation and Indirect Taxation. Effective rate of tax may differ for company’s depending upon their size, allowances and exemption to particular company/industry, location, exports and so forth. As a general guide companies are taxed as follows on their net income directly: Corporate Tax Rates — Tax Year 2010(running from 1st of july, 2009 to 30th of June,
2010) Public Companies 35% Private Ltd. Companies 35% Banking Companies 35% Small company 20% up to 35%
Indirect Taxation include deduction at source which may be payment on supplies, services, imports, exports, dividends and so forth. Rates of’ deduction may vary from a meagre I% up to as high as 30%.
Pakistan’s Taxation System Pakistan’s Current Taxation system is defined by Income Tax Ordinance 2001, promulgated on 13 September 2001, which became effective from I July 2002 Federal taxes in Pakistan like most of the taxation systems in the world are classified into two broad categories, viz., direct and indirect taxes. A broad description regarding the nature of administration of these taxes is explained below:

Direct Taxes:-
Direct taxes primarily comprise income tax, along with supplementary role of wealth tax. For the purpose of the charge of tax and the computation of total income, all income is classified under the following heads:
 Salaries
 Interest on securities;
 Income from property;
 Income from business or professions
 Capital gains; and
 Income from other sources.

Personal Tax:-
All individuals, unregistered firms, associations of persons, etc., are liable to tax, at the rates rending from 10 to 35 per cent.

Tax on Companies:-
All public companies (other than banking companies) incorporated in Pakistan are assessed for tax at corporate rate of 39%. However, the effective rate is likely to differ on account of allowances and exemptions related to industry, location, exports, etc.

Inter-Corporate Dividend Tax:-
Tax on the dividends received by a public company from a Pakistan company is payable at the rate of 5% and at the rate of 15% in case dividends are received by a foreign company. Inert-corporate dividends declared or distributed by power generation companies is subject to reduced rate of tax i.e., 7.5%. Other companies are taxed at the rate of 20%. Dividends paid to all non-company shareholders by the companies are subject to withholding tax of 10% which is treated as a full and final discharge of tax liability in respect of this source of income.

Customs:- Goods imported and exported from Pakistan are liable to rates of Customs duties as prescribed in Pakistan Customs Tariff. Customs duties in the form of import duties and export duties constitute about 37% of the total tax receipts. The rate structure of customs duty is determined by a large number of socio-economic factors. However, the general scheme envisages higher rates on luxury items as well as on less essential goods. The import tariff has been given an industrial bias by keeping the duties on industrial plants and machinery and raw material lower than those on consumer goods.

Central Excise:-
Central Excise duties are leviable on a limited number of goods produced or manufactured, and services provided or rendered in Pakistan. On most of the items Central Excise duty is charged on the basis of value or retail price. Some items arc, however, chargeable to duty on the basis of weight or quantity. Classification of goods is done in accordance with the Harmonized Commodity Description and Coding system which is being used all over the world. All exports are exempted from Central Excise Duty.

Sales Tax:-
Sales Tax is levied at various stages of economic activity at the rate of 15 per cent on:
• All goods imported into Pakistan, payable by the importers;
• All supplies made in Pakistan by a registered person in the course of furtherance of any business carried on by him;
• There is an in-built system of input tax adjustment and a registered person can make adjustment of tax paid at earlier stages against
• The tax payable by him on his supplies. Thus the tax paid at any stage does not exceed 15% of the total sales price of the supplies;

Q 5: Over the time, as a business gets mature; the need for expansion of business arises. The expansion of business can be done through several ways. One of such ways is to enter into international trade and starts exporting the products to other countries. What factors needs to be considered before starting exports of the products of the business. Explain in detail. (20)

ANSWER: Entering into International Market There are a number ways businesses can sell their products in international markets. The most appropriate method will depend on the business, its products, the outcome of its Marketing Environment analysis and it’s Marketing Plan. This article talks you through market entry options.

Direct Export:-
The organization produces their product in their home market and then sells them to customers overseas.
Direct exporting is selling directly into the market you have chosen using in the first instance you own resources. Many companies, once they Have established a sales program turn to agents and, or distributors to represent them further in that market. Agents and distributors work closely with you in representing your interests. They become the face of your company and thus it is important that your choice of agents and distributors is handled in much the same way you would hire a key staff person.

Indirect Export:-The organizations sells their product to a third party who then sells it on within the foreign market.

Another less risky market entry method is licensing. Here the Licensor will grant an organization in the foreign market a license to produce the product, use the brand name etc. in return that they will receive a royalty payment. Licensing is relatively sophisticated arrangement where a firm transfers the rights to the use oil product or service to another firm. It is a particularly useful strategy if the purchaser of the license has a relatively large market share in the market you want to enter. Licenses can be marketing or production licensing.

Franchising is another form of licensing. Here the organization puts together a package of the ‘successful’ ingredients that made them a success in their home market and then franchise this package to overseas investors. The Franchise holder may help out by providing training and marketing the services or product. McDonalds is a popular example of a Franchising option for expanding in international markets. Franchising is a typical North American process for rapid market expansion but it is gaining traction in other parts of the world, franchising works well for firms that have a repeatable business model (e.g. food outlets) that can be easily transferred into other markets. Two caveats are required when considering using the franchise model. The first is that your business model should either be very unique or have strong brand recognition that can be utilized internationally and secondly you may be creating your future in your franchisee.

Another of form on market entry in an overseas market which involves the exchange of’ ideas is contracting. The manufacturer of the product will contract out the production of the product to another organization to produce the product on their behalf. Clearly contracting out saves the organization exporting to the foreign market.

Manufacturing Abroad:-
The ultimate decision to sell abroad is the decision to establish a manufacturing plant in the host country. The government of the host country may give the organization some form of tax advantage because they wish to attract inward investment to help create employment for their economy.

Joint Venture:-
To share the risk of market entry into a foreign market, two organizations may come together to form a company to operate in the host country. The two companies may share knowledge and expertise to assist them in the development of company, of course profits will have to be shared between the two firms. Joint ventures are a particular form of partnership that involves the creation of a third independently managed company. It is the 1+1=3 process. Two companies agree to work together in a particular market, either geographic or product, and create a third company to undertake this. Risks and profits are normally shared equally. The best example of a joint venture is Sony/Ericsson Cell Phone.

Partnering is almost a necessity when entering foreign markets and in some parts of the world (e.g. Asia) it may be required. Partnering can take a variety of forms from a simple co-marketing arrangement to a sophisticated strategic alliance for manufacturing. Partnering is a particularly useful strategy in those markets where the culture, both business and social, is substantively different than your own as local partners bring local market knowledge, contacts and if chosen wisely customers.

Buying a Company In some markets buying an existing local company may be the most appropriate entry strategy. This may be because the company has substantial market share, are a direct competitor to you or due to government regulations this is the only option for your firm to enter the market. It is certainly the most costly and determining the true value of a firm in a foreign market will require substantial due diligence. On the plus side this entry strategy will immediately provide you the status of being a local company and you will receive the benefits of local market knowledge, an established customer base and be treated by the local government as a local firm.

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