Verification of Assets and Liabilities – Meaning, Auditor's Responsibility and Duties

 Q. What do you understand by verification of assets and liabilities ? How far an auditor is responsible for the verification of assets appearing in the balance sheet ?

OR

Q. What are the duties of auditor regarding verification of assets and liabilities?

Ans. Meaning of Verification: Verification is a technique of auditing in which the auditor certifies the assets and liabilities as shown in Balance Sheet by actual checking or an̈y other technique. 

According to Joseph Lancaster, “The verification of assets is a process by which the auditor substantiates the accuracy of the right-hand side of the balance sheet and must be considered as having three distinct objects: (a) the verification of the existence of assets, (b) the valuation of assets, and (c) the authority for their acquisitions.”

General rules of Verification: The auditor has to certify the truth and fairness of the financial position of a business, therefore, he should should certify the assets and liabilities , as shown in the Balance Sheet. The auditor should not issue a report unless he believes that the assets and liabilities as shown in the Balance Sheet are present in the business and are free of any charge, in case they have a charge, the same should be explained. If under any circumstances, the auditor issues a report without checking and verifying he would be held guilty for negligence.

The following rules should be followed by an auditor for verifying assets and liabilities:

(1) As far as possible the task of verification should be done by the auditor himself. He should not obtain any help from the employees of the client. In case this is not possible, then the task of verification should be assigned to the most responsible and trustworthy member of his staff and a test check should be done on his work to establish the effectiveness of verification.

(2) The title documents of the assets should be verified to establish the title and right of the client on those assets.

(3) A physical verification of assets should be done on the date of the Balance Sheet or end of financial year to satisfy any doubts as to their existence. In case it is not possible to do a physical verification of any assets then a certificate certifying its existence in the organisation should be obtained.

(4) Easily exchangeable or liquid assets (like stock, cheque, securities, cash, etc.) should be verified in one sitting only.

(5) The incomes and expenditure incurred for various assets should be carefully verified and it should be seen that expenses are incurred on existing assets onĺy.

(6) A certificate should be obtained from the client stating that the assets are free of any charge or if a charge exists the details of such charge.

(7) In case any asset has been given as security, then a certificate should be obtained from the concerned person and the relevant documents should be verified.

(8) In case any asset has been kept in custody of a person, a certificate for the same should be obtained from him.

(9) A confirmation should be received for the balance receivable from the debtors.

(10) The appropriateness of the valuation of assets should be determined.

(11) Any under-valuation of assets should be verified. Adequate provision is made for any loans which seem doubtful or recovery should also be verified.

(12) It is not possible to physical verify fictitious and intangible assets like goodwill, unearned income, prepayments, etc. Therefore the auditor should verify the same on the basis of any documentary evidence available. 

(13) A certificate should also be obtained from the client regarding the various liabilities of the organisation specifying that the liabilities for the business only and have been duly authorized. 

(14) The balance outstanding to various creditors should be verified from the confirmation letters received from the debtors.

Duties of an Auditor in relation to Verification: An auditor’s primary responsibility regarding the verification of assets and liabilities is to ensure they exist, are owned by the business, are valued correctly, and are accurately presented in the balance sheet according to standard accounting principles. 

The duties of an auditor regarding verification can be divided into the following two parts:

(1) In relation to Assets, and

(2) In relation to Liabilities. 

● Auditor’s duty in relation to assets: The auditor should verify the following points while conducting a verification of assets:

(i) The assets actually exist on the date of the Balance Sheet. 

(ii) The assets belong only to the organisation and all the assets have been clearly mentioned in the Balance Sheet. There should be no assets which are not mentioned in the Balance Sheet.

(iii) The valuation of assets is appropriate.

(iv) The assets are in the name of the organisation and the organisation has a right on them.

(v) The assets are free of any charge or lien on them, but in case there is a charge on them the same has been mentioned clearly.

(vi) Any addition made to any asset should be added to the value of the asset in the Balance Sheet.

(vii) Any expenditure incurred in the repairs and renewal of the asset should be debited to the profit and loss account.

(viii) Adequate and appropriate depreciation is charged on tĥe assets  

(ix) In case a part of any asset is sold the auditor should verify the relevant sales, counterfoil copies of receipts and other evidence in that respect.

(x) For verification of movable assets like cash, bills, stock and securities etc. the auditor should be present in the organisation on the date of the Balance Sheet is made.

(xi) Other fictitious and intangible assets which need to be written off should be verified keeping in mind the principles applicable to them.

● In Relation to Liabilities: The auditor verifies liabilities also alongwith assets and for doing so he has to keep the following points into consideration.

(i) The liabilities shown in the Balance Sheet are of the organisation only and nobody else. 

(ii) Personal liabilities of the employees should not be included in the liabilities of the organisation.

(iii) The liabilities as shown in the Balance Sheet were actually liabilities on the date on which the Balance Sheet was made.

(iv) The libabilities are shown at their correct values. 

(v) Doubtful liabilities should not be included in the actual liabilities.

The auditor will be held liable for any loss incurred due to his being negligent in his duties.

Cost Control – Meaning, Process and Techniques

 Q. What is meant by Cost Control ? Discuss its process and techniques.  

Ans. SBP

Meaning of Cost Control: Cost control is an essential component of any system of cost accounting. It seeks to ensure that costs are kept in line with the requirements of corporate planning so as to achieve its objectives and targets. Cost control is exercised through comparing actual costs with pre-determined standard costs so that the variance between the two can be measured and corrective actions may be taken according to reasons of such variances, if any. 

According to W.H. Harper, “Control is the guidance of the internal operations of all divisions of the business to produce the most satisfactory profits at the lowest cost.”

Process of Cost Control / Steps in Cost Control: The following steps are taken in the system of Cost Control :

(1) Establishing Norms or Standards: The first step in cost control is to set norms or standards. These attainable standards are set on the basis of past performance adjusted for changes expected or estimated in respect of future.

(2) Clearly defined Authority and Responsibility: The authority-responsibility relationship within the organisation must be clearly defined so as responsibility may be fixed in case of controlled variances.

(3) Accumulation of Actual Cost: There should be foolproof system for accumulating and ascertaining costs because it is the actual costs which are compared with pre-determined standard costs.

(4) Timely Comparison: No doubt, actual costs are compared with standards but this must be done timely and promptly so as necessary corrective actions may be taken immediately.

(5) Effective Reporting System: A system of effective reporting system should also be developed. In this context accounting reports should be presented in such a way that those concerned with cost in incurrence can understand them fully and react to them in an appropriate manner. Accounting control reports should include (a) Expected level of performance in terms of costs, (b) Actual level of performance in terms of costs, (c) Indication, whether performance is getting better or worse, (d) Basis for investigating deviations from standards so as causes can be established and future actions may be modified accordingly.

(6) Investigating of Variances: After the availability of cost report, variances are analysed and investigated. In this process, they are classified as controllable and uncontrollable variances as well as random and significant variances.

(7) Corrective Action: It is an important step in order to prevent the recurrence of unfavourable, controllable and significant variances. In this context, it should be remembered that “if small leaks are plugged in time, a lot can be saved and contributed towards profits.”

Techniques of Cost Control: Among various techniques of cost control, 2 most popular are Standard Costing and Budgetary Control. 

(1) Standard Costing: The technique of the standard costing involves:

(a) the assertainment of standard costs of various elements of cost, viz., material, labour and overhead.

(b) the comparison of actual costs with pre-determined standard cost. 

(c) the analysis of variances for ascertaining the reasons for the same.

(d) the location of responsibility for the variances and the corrective measures to be taken.

(2) Budgetary Control: It is the tool of management control and accounting which directs and co-ordinates the working operation on the basis of budgets. If there are variances in actual results, then either they are corrected or budget is modified so that the objective of maximum efficiency as per the policy of management may be achieved. 

VK 

Meaning of Cost Control: Cost Control means to keep the cost of production of a product, job, batch, process, cost centre, or a contract within the prescribed limits (i.e. the laid down standards). In Cost Control, all rules and regulation are applied by the executive action of the cost of operating a business enterprise so that the predetermined plans may be effectively applied to achieve the given targets of cost in each area. Cost control is achieved through the application of various techniques like Budgetary Control, Standard Costing and Responsibility Accounting. Under cost control technique standard for the products or service for each elements of cost (like material, labour and other expenses) and for each level of the worker are set. Also, there is regular and continuous comparison of actuals with standards are carried out and in case of deviation (Difference or Variations) the necessary corrective actions are taken at the earliest possible to control these variances, specially negative variances. This exercise will control the gap in actual and expected performance. 

These variances can be materi material variances, labour variances or overhead variances. These variances for cost control purpose are further divided into different categories. Like usage variance,  price variance, cost variance, mix variance or field variance. Different names are given to these variances as per element of cost, i.e., Material, labour and other expenses. Further these variances can be divided into favourable variance and adverse variances.  These variances can also be categorised as: (a) Controllable variances: Controlable are those which can be controlled or reduce by the necessary or immediate action by the management. For eg (i) abnormal wastage of material. (ii) abnormal idal time of the workers. (iii) non availability of material, men power or machine hour or electricity power at the required time. All these needs timely action control these leakage and hence uncontrollable variances are those which are beyond the control of management like, price rise oe due to unexpectable events like war, earthquake, floods, draught or fire etc. 

In nutshell we can say that cost control means when actual cost productions equal to predetermined standard cost and there is zero variance. Thus cost relates to:

1. Fixing standard cost for each element of cost.

2. Comparing the actual cost with standard cost.

3. Calculating variances whether favourable or adverse.

4. Taking necessary and corrective action adverse variances specifically.

5. Ascertain the cause of adverse variances and fixing responsibility damage control action.

6. To review the standards from time to time so that the standards may be revised as per changed circumstances and situation.

Cost Control Techniques or Methods may be summarized as below:

(A) Control on material cost like:

1. Various stock levels.

2. ABC analysis and VED analysis.

3. Perpetual inventory system.

4. Slow moving material.

5. Controlling waste and scrap.

(B) Labour control like:

1. Time keeping and time booking records comparison.

2. Abnormal idle time report.

3. Over time reports.

(C) Standard costing and predetermined costing.

(D) Budgetary control techniques.

(E) Accounting ratio to be used as meaning barometer for efficiency, productivity, profitability and return on investments.

Necessary Steps for Effective Cost Control:

(1) Division of work and division of authority and responsibility in the organisation.

(2) Efficient collection and Transmission of call cost reports with adverse variances so that ‘Management by Exception’ policy may be implemented effectively.

(3) Two way communication channel should be established without fear or favour correct reporting.

(4) Motivation and rewards to the work force for better and higher efficiency,  performance and productivity, team spirit and sense of belongingness at all levels of organization should be the core factor. 

(5) Sense of cooperation at various levels and among various departments for successful implementation of budgetary control system and standard costing technique must exist.

Industrial Marketing – Meaning and Difference Between Industrial Marketing and Consumer Marketing

 Q. What do you mean by Industrial Marketing? How it is different from consumer marketing? 

Ans. Meaning of Industrial Marketing: Industrial Marketing is also known as B2B Marketing, i.e., Business to Business Marketing. It is a process of exchange between the two business firms. Thus, when needs and wants of a firm are satisfied by some other firms through the exchange process, it is called industrial marketing. In the industrial market, markets are relatively concentrated and there are short channels of distribution, buyers are sophisticated in buying techniques, highly organized and fully informed. Therefore, industrial marketing creates its own set of conditions for the marketing decisions. It consists of all the activities involved in the marketing of products and services to the organizations that use these products and services for the production of other consumer or industrial products and services.

Industrial marketing is the human activity directed towards satisfying the needs, wants and demands of organizations through exchange process. It is basically marketing to customers who utilize the products and services they buy for manufacturing some other products and not for personal use. It consists of all the activities involved in the marketing of products and services to the organizations that use these products and services for the production of other consumer or industrial products and services. 

According to Philip Kotler, “Industrial Marketing is a human activity directed towards satisfying wants and needs of the organisations through the exchange process.”

Industrial Marketing involves exchange process between two business firms, thus, it is called B2B (business to business) marketing.

Difference between Industrial and Consumer Marketing: The differences between industrial marketing and consumer marketing are based on the characteristics of both. The considerable differences exist between industrial consumer marketing in the following areas:

1. Market

2. Marketing Mix 

3. Buyer’s Behaviour 

4. Exchange Transactions 

Basis		Industrial Marketing	Consumer Marketing
Market	Size	Global	Regional
	Number of Buyers	Fewer Buyers	Mass Market
	Competition	Oligopolistic Competition	Monopolistic Competition
	Buyer’s Location	Geographically Concentrated	Geographically Dispersed
Marketing Mix	Product Demand	Derived and Volatile	Direct and Less Volatile
	Product Nature	Tailor Made and Standardized	Standardized
	Requirement of Buyer	Service, Delivery, and Availability very important	Service, Delivery, and Availability less important
	Price	Non-Standardized	Standardized
	Negotiation	More with Price Lists	Less with Price Lists
	Promotion	Personal Selling	Advertising, Sales promotion, Publicity
	Place	Channel Length: Short Linkages: Fewer	Channel Length: Long Linkages: Multiple
Buyer’s Behavior	Quantity	Large	Small
	Brand	Loyal to brand	Brand Switching
	Nature	Rational Buying	Rational and Impulsive both
	Relationship	Strong Interpersonal Relationship	Weak Interpersonal Relationship
Exchange Transactions	Product Exchange	Need Satisfaction and Fulfillment of Product Specifications	Product Specifications not of a high order
	Information Exchange	Strong and Deep Interaction between buyer and seller	Limited Interaction between buyer and seller
	Financial Exchange	More Importance to purchase price and, commercial terms	Limited importance to terms and conditions relating to price
	Social Exchange	Cordial relations necessary	Cordial relations not necessary

industrial marketing meaning difference consumer marketing. 

Value Analysis – Meaning, Difference Between Value Analysis and Value Engineering, and Techniques

 Q. What is Value Analysis ? How is it different from Value Engineering ? Explain any two techniques of value analysis.

OR

What is Value Analysis ? Discuss various techniques of value analysis.

OR

What is the meaning of value analysis ? What are the techniques of value analysis ?

Ans. Meaning of Value Analysis: Value analysis or value engineering is such a technique which reduces the cost of products or services through following a scientific approach and analysis. The various unnecessary costs associated with the products or services are identified and eliminated without affecting the quality. The unnecessary costs are those which neither provide any additional satisfaction to customers nor their removal will affect the quality of the product or services. If these costs are identified and eliminated, it will reduce the cost of the products or services and ultimately the volume of turnover will increase. This technique saves the scarce resources and promotes indigenous development of substitutes.

Value analysis and value engineering are different in a sense that the term value analysis is used for existing products or services, whereas value engineering refers to new products or processes which are not finalised. Although these words are generally used interchangeably. 

Techniques of Value Analysis: The two techniques which are used in value analysis are as follows:

1. Functional Analysis System Technique (FAST): It is an evolution of the value analysis process which is created by Charles Bytheway. The set of original questions for FAST given by him includes the following:

(i) What subject or problem would you like to address?

(ii) What are you really trying to do when you want to do something?

(iii) What higher level function has caused to come into being?

(iv) Why is it necessary?

(v) How is it actually accomplished or how it is proposed to be accomplished?

(vi) Does the method selected to cause any supporting functions to come into being?

(vii) If you did not have to perform, would you still have to perform the other supporting function?

(viii) Do apparent dependent functions come into existence as a result of the current design?

FAST permits people with different technical backgrounds to effectively communicate and resolve issues that require multi-disciplined considerations. FAST builds upon VA by linking the simply expressed verb-noun functions to describe complex systems.

The FAST model has a horizontal directional orientation described as HOW-WHY dimensions. HOW and WHY questions are asked to structure the logic of the system’s functions. The two steps are followed: 

(i) Start with a function and ask HOW that function is performed to develop a more specific approach.

(ii) Abstract the problem to a higher level and ask WHY that function is performed. 

Addressing any function on FAST model can be as follows:

(i) The questions WHY is answered by the function on the left which expresses the goal of that function.

(ii) The questions HOW is answered by the function on the right, which is a method to perform that function.

2. Brain Storming: Brains Storming was originated from advertising industry to stimulate the creative thinking. It is a group activity in which the members of the group throw out ideas after applying their imagination to a single problem. The group is consisted of four to ten members. The ideas are welcomed no matter how ridiculous it may seen. It attempts to promote creative thinking. Chairman notes down every idea but they are not evaluated at the time of presentation. The logic behind this that one idea even though ridiculous will stimulate the other idea and so on. This process will ultimately lead to a genuinely original and workable solution to the problem. When the brain-stomming session is over, the resulting ideas are evaluated in terms of contribution on reducing cost.

3. Comparative Analysis: Sometimes comparative analysis off similar items provide more savings than by applying tests of value individually to each item. A comparison might provide some clues. For example, an analyst of cooler industry might review all the available alternatives regarding front grill. If he replaces the iron sheet grill with fiber or plastic grills, it will reduce the weight and will also decrease the cost. Simultaneously the cooler will be noiseless and will be more handy to clean. Some analysis plot it on a graph taking to different variables on X-axis and Y-axis. A curve like graph appears after plotting the values on the graph. The value that do not follow the curve are not necessarily poor values, since there may be some additional features that justify the premium charged in cost. But they should be properly investigated. 

4. Design Analysis: First of all the components and functions of the products are to be visualised thoroughly. When a product is designed and developed, initially engineers developed the components or parts individually. Then the value analysis team analyses each sub-assembly in relation to each other and to the total product. After analysing, they made suggestions regarding new material and method to be used or to add or eliminate an assembly for adding more value to the product.

5. Buyer-Supplier Seminars: The number of suppliers for each smallest part may be numerous and each supplier may have different knowledge about the functioning performance and usefulness of the part. This technique of Buyer-Supplier Seminars is to create a pool of knowledge and know-how. In the seminars, the suppliers introduce new components, new knowledge, etc. On the other hand, the company’s executives introduce their new initiatives, objectives and discuss future plans. They may also invite suppliers for their valuable suggestions for improvement in the product.

6. Gordon Technique: This technique is closely related to brainstorming technique. But the major difference between the two is the approach. In this technique, the group leader opens the session with a statement of the board to be discussed, while in brainstorming session technique, the problem is pinointed.

7. Checklist Technique: The value analysis procedure starts with the detailed checklist to ensure that every pertinent questions is asked about each component. But in this technique, the checklists are prepared specifically for solving a particular problem. The following type of suggestions are included in the checklist:

(i) What does it cost?

(ii) What does it do?

(iii) Can it be eliminated?

(iv) Can a standard item be used?

(v) Can the item be redesigned?

8. Synectics Techniques: This is the preset method was first introduced in 1960 by J.J. Fordon. Synectics was derived from the Greek word ‘synektiken’ which means joining of different items together and reflect the early discovery of the synergistic effects of ‘banging things together’ where the creative equation of A + B = C illustrates how new ideas can be created from two old ideas. Thus synectics is a structured and efficient method of creative problem solving. In Synectics, the problem is stated very broadly such that problem solvers have not even inkling of the problem. When the discussion proceeds and perspectives are formed, then the facts of the problem are revealed which makes the solution more refined and specific to the actual problem. Team leader plays a crucial role during the session. The analogous and metaphorical information is exchanged within group of individuals having different specialisations and personalities.

9. Morphological Analysis: This method was deloped by Fritz Zwicky in 1966. Morphological analysis is actually a group of methods that share the same structure. This structure breaks down a system, product or process into its essential sub-concepts. Each concept represents a dimension in a multi-dimensional matrix. Thus every product is considered as a bundle of attributes. New ideas are found by searching the matrix for new combination of attributes that do not yet exist. It doesn’t provide any specific guidelines for combining the parameters. It tends to provide a large number of ideas. It helps in discovering new relationships and configurations which are overlooked by others.

10. Attribute Listing Technique: Attribute listing is a technique from the early 1930’s which takes an existing product or system, breaks into parts and identifies various ways of achieving each part. It prompts the different ways to change, modify or improve each attribute and recombine them to identify new forms of the product or system. Attribute listing is a very useful technique for quality improvement of complicated products, procedures for services. Let us take an example of business of making torches. The torch has different components - casing, switch, bulb, battery and the attribute weight. A list of ideas can be developed to improve each one. 

Attribute Listing  – Improving a torch

Feature	Attribute	Ideas for Improvement
Casing	Plastic	Metal
Switch	On/off	On/off/flow beam
Battery	Power	Rechargeable
Bulb	Simple Bulb	LED
Weight	Heavy	Light

Income Tax Authorities in India – Powers of the Director-General of Income Tax

 Q. What are the various authorities envisaged in the Indian Income Tax Law ? Discuss the power of the Director-General of Income Tax. 

Ans. There shall be the following classes of income tax authorities for the purposes of the Income Tax Act: (Sec. 116)

(1) The Central Board of Direct Taxes (CBDT)

(1A) Principal Directors General of Income Tax or Principal Chief Commissioners of Income Tax. 

(2) Directors-General of Income Tax or Chief Commissioners of Income Tax.

(2A) Principal Directors of Income Tax or Principal Commissioners of Income Tax.

(3) Directors of Income Tax or Commissioners of Income Tax or Commissioners of Income Tax (Appeals)

(4) Additional Directors of Income Tax or Additional Commissioners of Income Tax or Additional Commissioners of Income Tax (Appeals)

(5) Joint Director of Income Tax or Joint Commissioner of Income Tax.

(6) Deputy Directors of Income Tax or Deputy Commissioners of Income Tax. 

(7) Assistant Directors of Income Tax or Assistant Commissioners of Income Tax.

(8) Income Tax Officers.

(9) Tax Recovery Officers.

(10) Inspectors of Income Tax.

POWERS OF THE DIRECTOR-GENERAL, CHIEF COMMISSIONER AND COMMISSIONER

(1) If authorised by the Central Government they (he) may appoint income tax authorities below the rank of an Assistant Commissioner or Deputy Commissioner. [Sec. 117(2)]

(2) If authorised by the Board, they may appoint any executive or ministerial staff as may be necessary to assist them in the execution of their functions. [Sec. 117(3)]

(3) The Director-General or the Chief Commissioner or the Commissioner may transfer any case from one or more Assessing Officers subordinate to him to any other Assessing Officer or Assessing Officers subordinate to him. [Sec. 127]

(4) The Director-General or the Chief Commissioner or any such Joint Director or Joint Commissioner as may be empowered by the Board or any such Dy. Director or Dy. Commissioner or Asstt. Director or Income Tax Officer as may be authorised by the Director General or Chief Commissioner, may take all steps regarding search and seizure u/s 132. [Sec. 132]

(5) The Director-General or the Chief Commissioner or Commissioner or Joint Commissioner shall be competeent to make any enquiry under this act. For this purpose, he will have all the powers that an assessing officer has under this act in relation to the making of enquiries. [Sec. 135]

(6) On an application being made to the Chief Commissioner or Commissioner to supply such information relating to any assessee as is received or obtained by any income tax authority in the performance of his functions under this act, he may, if he is satisfied that it is in public interest to do so, order the furnishing of such information to the applicant. [Sec. 138]

(7) The Chief Commissioner or Commissioner is authorised to sanction issue of a notice for re-assessment u/s 148 after the expiry of four years from the end of the relevant assessment year. [Sec. 151(1)]

(8) Where a refund is found to be due to any person, the Chief Commissioner or Commissioner may order the set-off of the sum to be refunded against the sum, if any, remaining payable to him under this act. [Sec. 245] 

(9) If the Commissioner considers that any order passed under this Act by the Assessing Officer is erroneous and prejudicial to the interest of the revenue,  he may pass such order thereon as is justified including an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. [Sec. 263]

(10) In the case of any order other than the one revised under Sec. 263, the Commissioner may either of his own motion or on an application , by the assessee for revision,  call for the record of any proceeding under this Act in which any such order has been passed and after making necessary enquiry, may pass revised order, which should not be prejudicial to the assessee. [Sec. 264]

(11) The Commissioner may reduce or waive the penalty imposed on a person u/s 272(1)(iii) (Concealment of income). [Sec. 273A]

(12) The Chief Commissioner or Director-General has the power to approve the order of reduction or waiver of penalty imposed u/s 271(1)(c), issued by the Commissioner, if the amount of income concealed or amount of inacurate income furnished exceeds ₹ 5,00,000. [Sec. 273A(2b)]

(13) Where the Assessing Officer is of the opinion that for the purpose of protecting the interests of revenue it is a necessary to attach any property of the assessee, he has to obtain prior approval of the Director General or Chief Commissioner or Commissioner for issuing such order. (Sec. 281B)

(14) The Chief Commissioner or Director General can reduce or waive interest payment under Sections 234A, 234B and 234C in the prescribed circumstances.

(15) The Director-General or the Chief Commissioner or Commissioner may order requisition of books of accounts or any property which is in the possession or custody of any officer or authority under any law.  (Sec. 132A)

(16) In the case of interest payable by the Government on delayed refunds, where any question arises as to the period to be excluded for calculation of interest, such question shall be decided by the Chief Commissioner or Commissioner, whose decision shall be final. [Sec. 244A(2)]

Business – Meaning, Stages and Life Cycle of a New Business

 Q. What do you mean by Business ? Explain various stages of a life-cycle of a new business.

OR

What is Business ? Explain various stages of a life-cycle of a new business.

OR

Discuss the main focuses on a new business in different stages of a life-cycle of a new business.

Ans. Meaning of Business: Business is an economic activity which involve the production and sale of goods and services with the motive of earning profit by satisfying human needs. It is the sum total of all the activities which starts from the production of goods an ends when the goods reach the consumers. 

Business is an economic activity which involves production, or purchase of goods for sale, transfer or exchange goods for earning profit.

According to Lewis H. Haney, Business may be defined as / Business is “ human activity directed toward producing or acquiring wealth through buying and selling goods.”

According to Peterson and Plowman, Business may be defined as / Business is “ an activity in which different persons exchange something of value, whether goods or services for mutual gain or profit.”

Different stages of a life cycle of a new business: During its total life, a business has to go through various stages.  Every stage has its own characteristics, advantages, limitations and challenges. Every stage has its own life period also. The life cycle of every business is affected by a number of factors like nature of business, competition, financial position, location, government policies, etc. The concept of various stages can be understood with the help of following diagram: 

These stages of the life cycle of a new business have been explained here:

1. Seed/ Development Stage: This is the beginning of the business life cycle. This is called the birth of a new business. This is known as the inception stage. It starts from that point when as the entrepreneur starts thinking about his business idea. Then he conducts research, gets feedback from friends, family, colleagues or other industry specialists. At this stage, it is anlysed that whether the conceived idea of business should be pursued or not. This stage is considered as the most challenging stage. The entrepreneur has to face and consider the various factors at this stage. These factors may be like business idea, profitability, market acceptance, establishing business, analysing financial availability, etc. As this stage is the early stage of the business, so for financial requirement the entrepreneur mainly depends on cash from owners, friends and family. He may depend upon suppliers, customers and government grants also. At this stage of the business, the focus is given on matching the business opportunities with the skill, experience and passion of the entrepreneur.  Some other important points at this stage are deciding of a business structure, finding professional advisor and business planning.  

2. Start-Up Stage: At this stage, entrepreneur has come into existence. The business idea has now become a reality. Business starts its working as a legal entity. Production of goods or rendering of service is started according to the requirement of the society. At this stage initially the quantity of production is kept at a moderate level. The demand of the product and feedback from the market becomes a base for the future course of action. At this stage, main focus is given on creating a consumer base. Financial resources are major point of consideration. Entrepreneur may take help from friends, suppliers, customers and financial institutions for this purpose. This stage is also full of challenges. Some of the important challenges can be: managing cash reserves, managing sales expectations, creating customer base, facing competition, management of human resource, etc. 

3. Growth Stage: It is the stage where the idea has started giving the rewards in the form of sale of product. The business is consistently generating revenue and adding more and more customers. These revenues are used to meet out the operating cost of the business and to open up new branches and to explore the new business opportunities in the same business stream. This is survival or life giving stage of the business. At this stage, the major focus of the entrepreneur remains on running the business in a more formal and efficient way to deal with the increased sales and customers. Better accounting standards and management system are used. More efficient employees are recruited in the business. For the financial need, the bank, profits, partnership, grants and leasing are used. This stage is full of challenges and all those need to be faced very carefully. The media major challenges can be dealing with increasing revenue, dealing with increased customers, management of human resource, facing competition, etc.

4. Established Stage: This is stage when the business has matured into a established company. The business has a satisfied list of customers and a good market share. Growth of the scale is not explosive but manageable. Entrepreneur has entered into a life cycle where business activities have become a part of routine. This is special stage for an entrepreneur in the life cycle of his business. So, the entrepreneur focuses on some special areas like working out the best marketing strategies. To compete and stay in the market, he is required to adopt better business practices along with automaton and outsourcing to improve productivity. At this stage, he can fulfil his financial requirement from money sources like: Profits, banks, investors, government, etc. This stage is also followed by various challenges and the entrepreneur should work on each challenge. The main challenges at this stages can be anticipating the business with entire financial requirement throughout establishment phase, working out on the best marketing strategy, etc.

5. Expansion/ Rapid Growth Stage: Every entrepreneur dreams for this stage. This is stage when the business has become a thriving company and has marked its establishment in the industry. The business of the entrepreneur has expanded and established its roots into new markets and distribution channels. This is stage through which business units take advantage from the proven sales model, marketing model and operation models in the form of higher sales and higher profits. So, the entrepreneur adds new product or services to existing markets or expand existing business into new markets. For meeting out his financial requirement, he may use the sources like joint venture, banks, new investors, partners, etc. Like every stage this stage also brings challenges for the entrepreneur. These challenges may be like increasing marketing competition, moving into new markets, adding new product, expanding existing business. Entrepreneur should work out on every point with professional attitude to meet out these challenges. 

6. Maturity Stage: Maturity stage means that presently the business is on the top of its industry and has matured enough. The business presence in the marketing is remarkable. But it is also having a parallel problems. At this stage, the growth rate of the business may not be substantial, as it was in the earlier one. So, the entrepreneur has to focus on the business in a critical analytical way. He has to decide to take a step back towards the expansion stage or to think of a possible exit strategy. He may also search for new opportunities and business venture, cutting cost and finding ways to sustain cash flow, etc. At this stage, financial requirements can be met out by using suppliers, customers, owners, banks, profits, etc. This stage decides the future directions of the business. It is followed by the challenges of dropping sales, profits, negative cash flows. So, this is considered to be do or die position for the entrepreneur. He is required to use all his expertise to come out of these problems.

7. Exit Stage: This is very dangerous and unwanted stage of business life cycle. No entrepreneur wants his business to face this stage. At this stage, every thing goes negative. Sales, profits, market shares, etc. show declining trend. So, at this stage, entrepreneur is required to put all his efforts to safeguard his business otherwise,  he may have to face the situation of closing down of his unit. Even after all his effort, if there is no chance of recovery, he should close his business unit if he decides to shut down his unit then he goes for proper valuation of the unit. Taking into consideration his business operations, management, previous business turnovers, etc., he tries to tries to assess the value of the business, so as to sell the business.

At the end, it can be stated that every stage of the business life cycle brings new or pre existing challenges. Solution that may have worked at one stage may not work in another stage. So, every entrepreneur should study and understand the significance of each stage of his business life cycle and should adjust his business plans and operations accordingly.

Sales Force Automation – Meaning and Role in Sales Force Management

 Q. Explain the sales force automation. Discuss its role in various functional areas of sales force management. 

Ans. Meaning of Sales Force Automation (SFA): When IT tools are used in sales force management, it is called ‘Sales Force Automation’. Sales force automation enables the sales force in performing routine office tasks in less time which helps them in sparing more time for customers. It has a significant role in every aspect of sales force management, like  recruitment, selection, training, equipping, reporting, communication, designing sales territory, planning sales routes, redressing customer complaints, controlling sales force, forecasting sales, establishing links with dealers, stockists and other channels of distribution, etc. Further, by providing relevant market information to the management on daily basis, these IT tools help management in modifying the marketing policies and strategies well in time. Thus, sales force automation refers to application of various IT tools in performing various activities of sales force management.

According to Pulling, “Sales force automation involves application of information technology to selling function.”

Role of IT in various functional areas of Sales Force Management. Sales force management is a comprehensive term. It includes various functional areas viz. recruitment and selection, training, equipping, performance evaluation, controlling, compensating, reporting, designing sales territory, sales route planning, etc. The use of IT tools has brought phenomenal improvement in all these functional areas. It is clear from the following:

1. Recruitment of Sales Force: Recruitment is the process of searching for prospective employees and stimulating them to apply for job in the organization. The business units seeking recruitment give job specifications and requirements on their websites. The persons possessing these requirements can send their bio-data through e-mail. For online recruitment, e-recruitment softwares are available through which talented persons can be attracted. Services of some specialised agencies like naukri.com, recruitin.com, etc. can also be hired for recruiting sales force. Various social network sites like Facebook, Twitter, LinkedIn, etc. are also helpful in attracting required workforce.

2. Selection of Sales Force: Selection is the process in which suitable candidates are selected and others are rejected. Selection process involves conducting selection tests, conducting interviews, checking references, conducting medical examination, etc. For screening out unsuitable applications, specific software packages are available which assess bio-data of candidates on the basis of requirements of the business unit. Selection tests can be conducted online. Intervievs can be conducted to video confidencing, smart phones, references of selected candidates can be checked by sending e-mail, SMS to the referred persons or through conversation on mobile phone. Some software packages evaluate the skills like prospecting skills, handling objections skills, presentation skills, communication skills, etc. Evaluation of these skills helps in selection of suitable sales force.

3. Sales Force Training: Training helps in improving the skills and abilities of workforce. It gives knowledge about the sales techniques, market conditions, competitors, marketing strategies, technical features of the product, use of IT tools in various selling activities, etc. Computer based sales training packages, video conferencing, etc. can be used to impart training to sales force at any time, at any  location, without disturbing the routine selling activities. The sales trainees need not leave their work place to attend the training programme. Training aids like projector, audio-visual instruments, laptops, smart phones, etc. are used in imparting sales training. Training videos can be uploaded on the company’s website which can be viewed by the sales trainee many times at any location and at any point of time.

4. Equipping the Sales Force: Equipping means providing required sales and promotional material to the salesmen, like list of company’s products, catalogues, display materials, charts, list of reputed customers, etc. Now a days, companies equip their sales force with laptops, mobile phones/smart phones so as to better display the product features, colors, three-dimensional view of the product, etc. In case the business unit sells customized products, then as per the desires of the customers, the product can be depicted using related softwares on the laptop. The salesmen need not carry catalogues, list of customers, display charts in physical form. These can be depicted in electronic form, like various colours, shades, designs of the product can be shown on laptops. For example, salesmen selling paints can take the picture of building and feeling fill it with desired colours on computer and show the same to the perspective customer. The customer can view his building in various colours on computer screen and can select a appropriate colour.

5. Sales Forecasting: Sales forecasting refers to predicting future sales of business unit. It helps helps in sales planning, sales budgeting and coordinating the activities of sales department with other functional departments. Various statistical packages like SPSS, e-view, excel, etc. are used in sales forecasting. By using various values of independent variable viz. size of advertising budget, price level, disposeable income of consumers, level of competition, etc. the sales for the future period can be estimated. These statistical packages can be run using computer.

6. Sales Reporting: Sales people have to send various types of reports regarding various selling activities viz. details of sales calls made, customer contacted, orders procured, travelling expenses incurred, boarding and lodging expenses, etc. Earlier, these reports were sent on printed forms through posts. But now these reports can be submitted online. It has reduced time and cost of reporting. The management gets timely information about current market situation and can mould its marketing strategies and policies well in time. 

7. Optimising Sales Territories: For exercising effective control over selling activities, the total market area ia divided into various market segments. These segments are called sales territories. These territories can be designed on the basis of geographical area, product, customer, etc. If these territories are designed manually, then there is more possibilities of imbalances in sales territories, i.e. some territories may be large while other territories may be small. Various software packages have been developed to design sales territories. Data regarding number of salesmen, total market area, home locations of salesmen, office locations, sales potential of different regions, etc. is fed and the computer software gives the optimum territory shape and design. It also guides the business unit in assigning sales territories to different salesmen.

8. Routing the Sales Force: Routing refers to movement plan of sales persons in the sales territory. In route-charts, sequence of sales call is determined that maximises the time of salesman with the customers and minimises the time of salesman on road. Traditionally, route charts were made using map, pen and experience, which may result in inefficient route plan. With the help of computer software, efficient route charts are designed so as to reduce travelling time and travelling cost. The software designs route charts considering the location of prospective customers to whom sales call are to be made, travelling time, sales call time, waiting time, buffer (Reserve) time, i.e., time for contingency, etc. 

9. Controlling Sales Force: Sales force control is a process through which functions of sales force are supervised, compared with predetermined standards to ascertain whether the sales personnel are working in accordance with organisational sales objectives or not. With the help of information technology tools, sales executives can get timely reports regarding performance of sales force. The timely reports help the high officials of sales department to take timely actions and devise suitable strategies to overcome weaknesses. Moreover, the reports regarding working of sales force are sent online which reduces the postage expenses and time.

10. Compensating Sales Force: Compensating , here refers to providing monetary and non-monetary remuneration to sales force for their services. The main component of sales force remuneration include: salary, commission, bonus, fringe benefits, etc. Computation of sales force remuneration can be easily done with the help of computers. Manual computation is time consuming and prone to errors, while use of computers makes this task easy, fast and error free. 

Difference between Private Company and Public Company.

Q. Distinguish between a private and a public company.

Ans. Though both private and public companies are incorporated according to the provisions of the Indian Companies Act, there are basic differences between the two which are listed in the following table:

Sr. No.	Basis	Private Company	Public Company
1.	Number of Members	The minimum number of members is 2, and the maximum excluding the present and past employees is 200.	The minimum number of members is 7 and the maximum can be as many as the number of shares of the company.
2.	Invitation to the Public	A private company cannot invite the public to invest in its shares. It needs to arrange the required capital from its own sources.	A public company arranges the total capital requirement from the public. To do that, it invites the public to invest in its shares and debentures.
3.	Allotment of Shares	A private company can allot shares immediately on the receipt of the incorporation certificate.	A public company cannot allot its shares to the public.
4.	Commencement of Business	A private company can commence its business immediately on the receipt of the certificate of incorporation.	A public company cannot commence its business so long as it gets an official letter of commencement to do so.
5.	Issue of Prospectus	A private company cannot issue a prospectus or a statement in lieu of a prospectus.	It is mandatory for a public company to issue a prospectus. In the absence of a prospectus, it is necessary to issue a statement in lieu of a prospectus.
6.	Transfer of Shares	The transfer of shares (if any)is restricted to specified limitation.	The transfer of share is not restricted and is at the will of shareholders.
7.	Preparation of Articles	Preparation of Articles is mandatory for a private company.	Preparation of Articles is not compulsory in a public company. In case the Articles are not registered, the provisions of Schedule 1A Table shall be applicable.
8.	Issue of Bearer Share Warrant	A private company cannot issue bearer share warrants.	A public company may issue bearer share warrants if the shares of the company are fully paid-up.
9.	Number of Directors	There must be at least two directors.	There must be at least three directors.
10.	Qualification Shares	It is not mandatory for the directors to have qualification shares in a private company.	It is mandatory for the directors of a public company to have qualification shares.
11.	Increase in Number of Directors	A private company can increase its number of director without the permission of Government.	A public company cannot increase the number of its directors without the permission of the Central Government.
12.	Loan to Directors	It is not necessary for a private company to get prior permission of the Central Government to give loan to its directors.	Prior permission of the Central Government is necessarily required for a public company to give loan to its directors.
13.	Retirement of Directors by Rotation	It is not required by law for the directors of a private company to retire by rotation.	One-third of the directors of a public company are required to retire by rotation.
14.	Filing of Documents	A private company need not submit the following documents to the Registrar of Companies: (a) list of directors (b) consent of directors (c) copy of any contract with the directors.	For the incorporation of a public company, it is compulsory to file these documents with the Registrar of Companies.
15.	Share-Capital	The minimum paid-up Share-Capital should be ₹1,00,000.	The minimum paid-up Share-Capital should be ₹5,00,000.

Q. Difference between Private Company and Public Company.

Under-Capitalisation – Meaning, Causes and Remedies

 Q. Define Under Capitalisation. Explain its causes and remedies. 

Ans. Under-capitalisation: The term ‘under-capitalisation’ does not mean shortage or inadequacy of capital. The term is just reverse to over-capitalisation. In the words of Grestenberg :

“A corporation may be under-capitalised when the rate of profits, it is making on total capital, is exceptionally high in relation to the return enjoyed by similarly situated companies in the same industry, or when it has too little capital with which to conduct its business.”

In simple words, under-capitalisation is a state of affairs when the capital or the resources of the company are being utilised more efficiently. As a result, the company succeeds in continuously earning abnormally high rate of return on the capital employed in it. Such company declares a high rate of dividend in comparison to the prevailing rate and the market value of its shares exceeds their book value. Thus, under-capitalisation refers to the sound financial position and good management of the company.  

Causes of Under-Capitalisation: The following are the important causes of under-capitalisation : 

(1) Under-Estmation of Capital Requirements: At the time of promotion, the promoters may under-estimate the capital requirements of the company.  This results in a situation of under-capitalisation at later stages when more capital is required.

(2) Under-Estimation of Earnings: Sometimes at the time of promotion, the future earnings of the company are under-estimated and the company is capitalised accordingly. If, afterwards it is found that the actual earnings are far in excess of the estimates, the company company may find itself in a situation of under-capitalisation.

(3) Over-Estimation of Rate of Return at the Time of Promotion: Sometimes a concern estimate its income correctly but it over-estimates its rate of return (i.e. capitalisation rate) 

(4) Promotion of Company During Deflation: Companies which are floated under recessionary conditions often experience under-capitalisation after recession is over. This is because of two reasons. Firstly, during the recession assets are purchased at a price which is much lower in comparison to their earning capacity. Secondly, companies established during recession are capitalised at a low figure anticipating low earnings but when recession is over the earnings increase and the company becomes under-capitalised.

(5) Conservative Dividend Policy: Certain companies follow a policy of declaring low dividends and ploughing back a major part of their earnings. They build up large funds for replacement, renovation and expansion. The result of such a policy is reflected in high earnings which is a situation of under-capitalisation. 

(6) High Level of Efficiency: In a company where the management is very efficient, the company may operate on a high level of efficiency even with a meagre amount of capital. Over a period, earning position of the company will improve and it will become under-capitalised.

(7) Desire to Retain Control: In many companies, the promoters desire to retain full control over the management of the company. For this purpose, they issue lesser number of shares to monopolise them. This may lead to under-capitalisation.

(8) Difficulty in Raising Capital: Sometimes the promoters find it difficult to raise the required amount of capital. Even then they start the company and run it mostly with the help of short-term loans. This is a situation of under-capitalisation.

Remedies of Under-Capitalisation: Under-capitalisation can be corrected by adopting the following remedial measures: 

(i) Issue of Bonus Shares: If company has adequate balance of reserves and surplus, the company can capitalise it by distributing bonus shares. This is the most widely used and effective remedy for under-capitalisation because by distributing bonus shares, the number of shares will increase which will reduce both dividend per share and earning per share. 

(ii) Issue of Fresh Shares: If under-capitalisation is due to the shortage of capital, it can be remedied by issuing new shares.

(iii) Splitting of Shares: Another effective method of correcting under-capitalisation is to split up the existing shares into large number of shares by reducing the par value of shares. Supposing, the share capital of a company is divided into 10,000 shares of ₹20 each and its earning is ₹80,000 which comes to ₹8 per share. If the management decides to reduce the par value of shares by 50% and increase the number of shares in the same proportions, the new shares after the split will be 20,000 shares of ₹10 each. As a result of split the earning per share will come down to ₹4 per share (i.e., 

₹80,00020,000). Due to this, the market price of shares will decrease and this will have a psychological effect on the investors. Shareholders do not object to this procedure because they would continue to receive the same amount of income even after split.