# Business Arithmetic Class 12 Entrepreneurship Important Questions

Students can read the important questions given below for Business Arithmetic Class 12 Entrepreneurship. All Business Arithmetic Class 12 Notes and questions with solutions have been prepared based on the latest syllabus and examination guidelines issued by CBSE, NCERT and KVS. You should read all notes provided by us and Class 12 Entrepreneurship Important Questions provided for all chapters to get better marks in examinations. Entrepreneurship Question Bank Class 12 is available on our website for free download in PDF.

## Important Questions of Business Arithmetic Class 12 Entrepreneurship

Question. What is Pareto’s Principle?
Answer: In 1906, Italian economist Vilfredo Pareto noted that 80% of Italy’s land was owned by 20% of the people. Pareto principle is a prediction that 80% of effects come from 20% of causes. The 80:20 ratio of cause-to-effect became known as the Pareto Principle. He became somewhat obsessed with this ratio, seeing it in everything. For example, he observed that 80% of the peas in his garden came from 20% of his pea plants.

Question. What is ABC analysis?
Answer: ABC analysis is an inventory categorization method which consists in dividing items into three categories (A, B, C):
1. A being the most valuable items.
2. B-items are the inter class items, with a medium consumption value.
3. C being the least valuable ones. This method aims to draw managers’ attention on the critical few (A-items) not on the trivial many (C-items).

Question. What is financial management? What is the main objective of financial management?
Answer. 1. Financial management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise.
2. It is an activity which is concerned with acquisition and conservation of capital funds in meeting financial need an overall objectives of business organisation.
3. It means applying general management principles to financial resources of the enterprise.

The main objectives of financial management is wealth maximization of shareholder’s wealth.

1. To ensure regular and adequate supply of funds to the concern.
2. To ensure adequate returns to the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.

Question. Differentiate between cash flow projection and cash flow statement.

Question. What are the key aspects of financial decision-making?
Answer: The key aspects of financial decision-making relate to investment, financing and dividends. Investments must be financed in some way however there are always financing alternatives that can be considered. For example, it is possible to raise finance from selling new shares, borrowing from banks or taking credit from suppliers:
1. A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends.
2. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further.

Question. There are three key elements in the process of financial management. Explain them.
Answer:1. Financial planning: Management need to ensure that enough funding is available at the right time to meet the needs of the business.
(а) The short term funding may be needed to invest in equipment and stocks, pay employees and fund sales made on credit.
(b) The medium and long term funding may be required for significant additions to the productive capacity of the business or to make acquisitions.
2. Financial control: It ensures that the business is meeting its goals and objectives. Financial control addresses questions such as:
(a) Are assets being used efficiently?
(b) Are the business assets secure?
(c) Does management act in the best interest of shareholders and in accordance with business rules?
3. Financial decision-making: The key aspects of financial decision-making relate to investment, financing and dividends. For example, it is possible to raise finance from selling new shares, borrowing from banks or taking credit from suppliers.
(a) A key financing decision is whether profits earned by the business should be retained or distributed to share¬holders through dividends.
(b) If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further.

Question. What is working capital? What is the need for a working capital?
Answer: Money needed to fund the normal, day- to-day operations of a business is known as the working capital.

1. Adequate working capital is required for the smooth running of any business.
2. It is required by a business for meeting day to day business expenses to complete a business cycle or the operating cycle.

The working capital of a business keeps on circulating or changing since the money circulates in various forms of assets in a continued manner. The above diagram explains that:

1. In a business concern operating cycle begins with outflow of cash towards the purchase of raw materials, payment of labour, power, fuel and other expenses converting the raw materials into work in progress and converting them into finished goods. Sale of finished good for cash or credit.
2. If on credit then conversion of account receivables into cash.
3. This operating cycle indicates that funds once tied up in the form of raw materials are later converted into the form of finished goods.
4. In a manufacturing concern there is a time gap between the first step of purchasing of raw-materials to last step of selling of goods and realizing cash. This time duration is called operating cycle. It is also called the “changing” or circulating capital because money circulates in various forms of assets in a continued manner.

Question. Explain the two dominant forms of budgeting process.
Answer: The two dominant forms of budgeting processes are traditional and zero- based. Business planning is usually a combination of the two. Traditional budgeting:
1. It is based on a review of historical performance and then the projection of such findings to the future with modifications.
2. If inflation is high, for instance, cost trends of the last several years are projected forward but with adjustments both for inflation and for projected growth or decline in business activity.
3. Historical sales patterns, using established trends in sales growth, are projected; new sales from planned new product introductions are then added.
Zero-based budgeting:
1. It is the creation of a completely new budget from the ground up—as if no history existed.
2. When using this method, the operation must justify and document every item of expenditure and income anew.

Question. What do you mean by Order lead time?
Answer: It is an average time that elapses between placing an order and receiving the goods.

Question. How Cash Flow Projection will be considered as a better idea for your business plan?
Answer: As part of a business plan, Cash Flow Projection will always give an entrepreneur a much better idea, of how much capital investment a business idea needs to start and to run the business.

Question. What are the key aspects of financial decision-making?
Answer: The key aspects of financial decision-making relate to investment, financing and dividends.

Question. What do you understand by Usage Rate?
Answer: It is an average rate at which the inventory is drawn down over a period.

Question. Give some examples of current assets.
2. Account receivables:
(a) Bills receivable, and
(b) Debtors
3. Short term investments/Temporary investment
4. Prepayment:
(a) Prepaid rent,
(b) Unexpired insurance, etc.
5. Accrued Income

Question. Give four examples of items which are hazardous in nature and special precautions have to be taken in their storage.
Answer: Gasoline, other combustible items, some hazardous chemicals, etc.

Question. Give some examples of Current Liabilities.
1. Bank overdrafts
2. Accounts Payable: (a) Creditors (b) Bills payable
3. Outstanding Expenses: wages, rent, commission, etc.
5. Dividend Payable
6. Provision for doubtful debt.

Question. Give one example each of bulky items with low value and high value items with low volume.
Answer:1. Bulky items with low value – straw for use in paper mill.
2. High value items with low volume — Diamond.

Question. Name the French word for the origin of the word ‘Budget’. Or
Write the etymology of the word “Budget”.

Answer: The French word bougette, meaning purse (referring to money), is the origin of the word budget.

Question. If Bhavin spends Rs 2,00,000 to open a grocery shop and earns a net profit of Rs 40,000 in one year. Calculate the annual return on investment.

Question. Explain the various categories of inventory.
Answer: In a manufacturing firm inventories work as a link between production and sale. The three categories of inventories are as follows:

1. Raw materials: Those materials which have purchased and stored in a godown at a particular time for future production.

2. Work in progress: These are the goods in the course of manufacture. It means goods which are likely to be in various stages but not reached to the final stage. It consist of material, labour and factory expenses applied to the unit up to the last stage. In these the goods are in semi-finished stage.

3. Finished goods: These are the goods reached at the final stage of production process. These goods are ready for sale. The size of three types of inventories depends upon varying nature of their business.

Question. Why is Return on Investment deemed as a yardstick for the performance of an enterprise?
Answer: Return on Investment is a relationship between profit before interest and tax and capital employed. It is deemed as a yardstick for the performance of an enterprise because it measures the overall profitability and efficiency of the enterprise in relationship to investment made by an entrepreneur in business. Higher the ratio, higher the overall profitability of the business. The ratio is compared with earlier years ratio and important conclusions are drawn from such comparison. As a yardstick it also shows how efficiently the resources are used in the business.

Question. Why is inventory control essential for an enterprise?
Answer: The process of inventory control gives direction to the entrepreneur to take important decision about the various activities like production line and use of material in the business. It is very essential for the enterprise:
1. To ensure efficient, effective and optimum use of raw materials.
2. To know the availability of resources for production.
3. To ensure and make efforts to purchase raw materials in bulk to get quantity discounts.
4. To ensure that delivery of finished materials to customers are prompt and not being delayed.
5. To stabilize the fluctuation of demands. Thus we can say that it is an important tool in the hand of enterprise.

Question. What is B.E.P? Why an entrepreneur should know about it?
Answer: The business to break even when its value is equal to its total cost. The Break Even Point (B.E.P) is the sales volume at which there is neither profit nor loss, cost being equal to revenue. Break Even Point is a neutral point. Sales below this point show loss and sales excess of this point show profit. It is the relationship amongst cost of production, volume of production, profit and the sales value. The entrepreneur should know B.E.P as:
1. He can forecast about profit accurately.
2. He can ascertain costs, sales and profits at different levels of activity.
3. For taking decision regarding price policy.

Question. Distinguish between Budget and Budgeting.

Question. Differentiate between Unit Cost and Unit Price.
Answer: The following are the differences between Unit Cost and Unit Price.

Question. What is the need of financial management?
Answer: Financial management is needed for:
1. Ensuring availability of funds in the right amount at the right time.
2. Ensuring the safety of funds.
3. Ensuring efficient utilization of the available fund.
4. Ensuring the desired level of income and profit

Question. What do you mean by financial management?
Answer: Financial management is the part of management which deals with planning, organizing and controlling financial activities of an entrepreneur or the activity undertaken by the entrepreneur,
1. For acquiring and maintaining fund.
2. For fulfilling the financial requirements of the objectives of the enterprise.
3. And for attaining the goals and objectives of the enterprise.

Question.Explain trading on equity with the help of a suitable example.
Answer: Trading on equity relates to a situation when the debt component is likely to provide higher rate of return on share capital. Debt and equity are the two sources of finances. Both have their own merits and demerits.But when a mix of both is used wisely, the rate of return equity can increase. This is because the interest paid on the loan is deductible from earning before tax payment. The payment of dividend is only made after realizing the interest.

Question. Distinguish between Fixed Capital and Working Capital.
Answer. The following are the differences between fixed capital and working capital

Question. What factors should be kept in mind for ordering an inventory?
Answer: Inventory means list of materials used in a business. An entrepreneur must be very careful and wise while deciding about the level of inventory. An entrepreneur must avoid overstocking and under-stocking of each item of the inventory. The factors that influence the decision on such orders are:
1. Order lead time 2. Usage rate or rate of consumption
3. Reorder-point or minimum quantity of the item to be kept. An entrepreneur must maintain the supply line in a proper manner so that at any time he may have adequate flexibility to change the process of production according to customer’s requirement.

Question . Explain the concept of ROI (Return on Investment).
Answer: Meaning: It is the ratio of net profit before interest and tax and total investment.