Business Finance and Arithmetic,
Entrepreneurship, Class 11
Revision Notes |
Entrepreneurship Class 11 -
Commerce PDF Download
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We know that blood is very important in living beings. What is
equivalent of blood for an enterprise to survive?
Monetary resources or cash.
Where does the businesses usually record all the monetary
transactions on a daily basis?
The businesses usually record all the monetary transactions in cash
register or cash book. As these transactions are initially recorded in
the cash register or cash book, it is also called as book of original
entry.
In which cases the monetary transactions between businesses
are referred to as loan or credit?
At times, business perform monetary transactions on mutual trust
among them. In these cases these monetary transactions are
referred to as loan or credit.
Define inflow?
The cash that gets into the business or receipts of cash is called
as inflow.
:
This will usually results from
1. Operations performed by the organization.
2. Various investments flowing into the business.
3. As a result of financing.
Define outflow?
The cash that goes out of the business or payments of cash is
called as outflow
This will usually results from
1. Expenditure incurred by the organization.
2. Various investments made by the organizations in the other
businesses.
3. The organization provides the required finance for other
enterprises/businesses.
What is selling on credit?
Selling on credit refers to the monetary transaction in which the
business sells the products or services to the buyer on credit,
thereby giving the buyer some time to make the payment.
Is profit part of the balance recorded in the cash register or
cashbook include profit?
Profit is not part of the balance recorded in the cash register or cash
book.
Define Unit of Sale
Unit of Sale can be defined as the measure of product/service sold. It
is basically used for billing the buyer
:
Define Unit cost
Unit cost is the cost a company bears to produce, maintain the stock
and then sell the product or service to the buyer.
What does the unit cost refer to? Fixed cost or variable cost?
Unit cost refers to the variable cost.
How do you calculate the Gross Profit or Gross Margin?
Gross Profit or Gross Margin is calculated using the following
formula:
Gross Profit or Gross Margin = Unit Price – Unit Cost.
Name the business where the unit of sale is square feet or yard?
Construction business, Real estate, apartment
Which business uses meter as the unit of sale?
Textile, electrical (wires)
Which business uses litre as the unit of sale?
Beverages (water/juices), Fuel supply (petrol/diesel), Grocery (oil),
dairy (milk)
Which business uses kg as the unit of sale?
Metal trading, Fruit vendor(Grapes), Grocery (Salt), Construction
(cement)
Which business uses time as the unit of sale?
Freelancing (hourly jobs), Plumber, Lawyer
:
Which business uses Piece/Dozen as the unit of sale?
Clothes, Watches, Books, Fruit Vendor (bananas/apples)
What is the unit of time used by a consultant?
Time: hour
State and define the two types of costs.
The two types of costs associated with a business are
1. Start-up or One-Time cost: Start-up or one time cost is the cost
incurred during the initial phase of the business to meet all the
start-up expenses.
2. Operational costs: Operational costs are the costs incurred to
run the daily operations of the enterprise.
What is the other term used for One-time costs?
Start-up costs
What does the term ‘fixed’ signifies in the fixed costs?
The term fixed cost signifies that these costs are fixed in nature.
However these costs are not fixed in amount
Is it ok to classify that a particular type of expense is always
fixed or variable?
The same cost incurred in an activity fall into either fixed or variable
cost depending on the business. So, it can not definitely classified as
either fixed or variable. Depending on the business in which this cost
is incurred, it can be classified either as fixed or as variable cost
What are the other names used for the Income statement?
:
The other names used for the income statement are
1. Profit and Loss Statement
2. Statement of operations.
Which type of transactions are not included in the Income
statement?
Cash transactions or cash flow as given below are not part of the
income statement
1. Cash receipts (cash received by the business)
2. Cash disbursement (cash paid by the business)
What does the income statement depict?
The income statement depicts the profitability of an enterprise in a
given period of time. The time period is specified at the top of the
income statement.
By comparing the revenue, costs, expenses, and taxes, when
can you say that the business is running in profits?
When the revenue exceeds the sum of costs, expenses and taxes,
we can say that the business is running in profits.
What is the formula for calculating the profit?
Profit = Total revenue – total expenses
What is the break even point in a business?
A break even point is defined as the amount or volume of sales or
revenue that a business must generate to equate its expenses.
What is break even level?
:
The point at which the total revenue is equal to the total expenses is
called as break even level.
How is break even volume computed?
Break even volume (for a given period) = Fixed cost (for the given
period)/ gross margin per unit.
Is the business making profit or suffering loss at the break even
point?
At the break even point, the business is neither making profits nor
suffering losses.
What do you call the tax that can not be shifted from the taxpayer to
someone else?
Direct tax is the one that can not be shifted from taxpayer to
someone else.
What do you call the tax that can be shifted from the taxpayer to
someone else?
Indirect tax is the one that can be shifted from taxpayer to someone
else.
Define the property tax. What is the other name for property tax?
Property tax is the local tax imposed on the owners of buildings and
land. It is also called as the house tax.
What do you call the tax imposed on the goods or services?
The tax imposed on the goods or services is called indirect tax.
What does the government do with the revenue generated by
:
collecting the taxes?
The government spends the revenue generated by collecting taxes
to implement social welfare programs. Few of the social welfare
programs include
1. the infrastructure development
2. social service
3. salaries for the government employees
4. social benefits
5. military expenditure
6. providing better education etc.
Give few examples of direct tax?
1. Corporation tax
2. Income tax
3. Property tax
Define ‘Unit of Sale’?
Unit of Sale can be defined as the measure of product/service sold. It
is basically used for billing the buyer
Define ‘Gross Profit’?
Gross profit is the profit that a business can make by selling a
product or service before deducting the fixed expenses. It is also
know as Gross Margin. It is calculated as follows:
Gross Profit per unit = Unit Price – Unit cost
What is the term used for ‘selling a product or service and
collecting the payment at a later date’?
This is called selling on credit where in the buyer pays the seller at a
:
later date.
State few of the start-up or one-time costs
1. Appliances (like refrigerator/air conditioner/ water dispenser/TV
etc for employees)
2. Advance paid towards lease/rent
3. Building
4. Business Registration expenses
5. License expenses
6. Computers, Software & hardware
7. Electricity and electrical wiring setup expenses
8. Furniture and Interior decoration
9. Infrastructure
10. Initial payment for procuring electricity, telephone, internet etc
11. Land
12. Raw materials, Machinery, tools and equipment
13. Recreation (providing a gym TV room, or table tennis or caroms
facility for the employees)
14. Utensils
15. Vehicles for business purpose
16. Salary to the employees in the start-up period
State few fixed costs.
1. Building or office maintenance
2. Depreciation
3. Electricity
4. Equipment maintenance
5. External Consultant charges
6. Housekeeping
7. Internet and Telephone
8. Marketing and promotional
:
9. Property tax
10. Rent for the building/equipment/vehicles
11. Research and development
12. Salary to the employees
13. Stationery
14. Utility
15. Wages
State few ways in which the cash inflows into the business.
1. Claims Received
2. Franchise payments received
3. Investor equity
4. Legal settlements’ amount received
5. Loans from banks/family/friends
6. Owner’s equity
7. Rent received
8. Sale of Assets or Scrap
9. Sales Receipts
10. Sale of shares
11. Subsidy from the government
State few ways in which the cash outflows from the business.
1. Building maintenance and other expenses.
2. Building
3. Computers and related hardware
4. Electricity, Telephone, Internet expenses
5. Employee recreational expenses
6. Employee salaries and other perks/benefits
7. Employee training expenses
8. External consultant charges
9. Interior decoration
:
10. Marketing and promotional expenses
11. Money paid for legal settlements
12. Raw material
13. Software purchases and other related license renewal charges
14. Stationery
15. Tools, Equipment and machinery
16. Utility expenses
Define inflow?
The cash that gets into the business or receipts of cash is called
as inflow.
This will usually results from
1. Operations performed by the organization.
2. Various investments flowing into the business.
3. As a result of financing.
Define outflow?
The cash that goes out of the business or payments of cash is
called as outflow
This will usually results from
1. Expenditure incurred by the organization.
2. Various investments made by the organizations in the other
businesses.
3. The organization provides the required finance for other
enterprises/businesses.
Tabulate the key distinguishing factors between direct and
indirect tax.
Direct Taxes Indirect Taxes
:
Imposed directly on the tax Imposed on the products or services. This tax is
payer by the government. collected by an intermediary person or entity (such
as a restaurant or a medical store or supplier) and is
born by the end user or entity.
Paid directly by the tax The intermediary person or entity who collected the
payer to the government tax from the end user pays the tax to the
government.
The direct tax can not be Except the end user or entity, all the intermediary
transferred to someone persons transfers the tax to the person or entity to
else whom the product or service is sold
Few examples of the direct Examples include central excise duty, customs duty,
tax are income tax, entertainment tax, luxury tax, service tax, sales tax
property tax, social security or Value added Tax (VAT) etc
tax, corporation tax etc
What is the primary objective of the business?
When it comes to the economy stand point, earning significant profit
is the primary motive of almost all the businesses. They always strive
to earn profit and work with this as their primary objective. Everyone
in the enterprise should work towards the goal of fulfilling this
objective. Only through profits the company can sustain a business
and does not fall into the bankruptcy.
For continuous sustenance in the business, it should start earning
money to meet the expenses like salaries to the employees etc. The
moment the business start seeing losses, it should spend the
amount from investment to meet these expenses. This will be
against the objective of the business.
When you are looking at a financial statement, how do you
determine whether it is an income or cash flow statement?
Both the income and cash flow statements have noticeable
difference and can be easily recognized. They can be distinguished
:
on the following grounds.
Income StatementCash flow Statement
Income Statement Cash flow Statement
It helps us to get an idea about It helps us to get an idea about the cash flowing into and
the profit earned by the of the business, historically..
business over a period of time.
It is composed of It is composed of
Revenues Cash receipts (money received by the business)
Expenses Cash disbursements (money goes out of/paid by the
Gains business)
and Losses
It also includes the non-cash
items such as depreciation and
amortization.
Income statement is will have a Typically, in the indirect method, the profit or loss to the
heading that depicts the profits company becomes the first statement in the cash flow
of the company over a specified statement. In the direct method, the cash flow is comput
period of time. from the cash inflow and outflow.
Explain how the expenses like depreciation and amortization
projected in the income statement.
The expenses like depreciation and amortization do not involve any
cash outflow and hence are referred to as non-cash expenditure.
However, they are reported as expenses in the income statement.
They usually represent the decrease in the value of a tangible(ex.
machinery) or intangible(ex. license) asset, over a period of time.
Depreciation represents the decrease in the value of the asset over a
period of time. This value is computed on an yearly basis and
projected as expense in the income statement for a given accounting
period, till the asset is completely deprecated.
Similarly, when a payment is paid towards amortization, for instance
towards procuring a license to perform a business or partial loan
repayment. The total cost of the renewal/payment is computed and
distributed over the period for which the license expires or loan is
:
completely paid. This partial expense is then projected as expense in
the income statement.
What is start up cost comprised of?
Start up cost is the cost incurred when setting up the business.
Usually for starting an enterprise the entrepreneurs need to acquire
the
1. assets
2. raw materials
3. any other items
To acquire these they need to invest money at the time of starting
the business. All these expenses incurred are known as start-up
expenses. It is also known as working capital. These expenses occur
much before the enterprise starts actually producing the products or
delivering the services. Usually these expenses start occurring from
the time the planning and preparation starts. The expenses occur
during the start up might repeat again. For instance, a business that
incurs the start up expenses to purchases might have to spend again
to purchase the same machinery once the old one is depreciated.
Few of the expenses that the business need to incur are as follows.
1. Acquisition of land
2. Building
3. Computers
4. Dealing with registration
5. Equipment
6. Furniture and Fixtures
7. Goods and Services (that will be input to the products or
services offered by the business)
8. Installation of machinery and other equipment/appliances
9. Hiring expenses (hiring of employees, equipment etc)
:
10. Judicial expenses
11. Key resources acquisition (employees, raw materials etc)
12. Licenses
13. Machinery
14. Operational expenses (salaries/rent etc)
15. Purchase of software, utilities etc
What is Expenditure?
Expenditure represents payment or disbursement of money and
hence represents the outflow of money. The payment or
disbursement can be in the form of cash payment or cheque
payment. The business incurs expenditure when the payment is
made for
1. Assets like machinery, land and building.
2. Marketing and promotional expenditure
3. Payment of dues.
4. Payment to the suppliers to procure the raw material
5. Payments to the stakeholders
What is expense?
An expense occurs whenever there is a cash flow in or out of the
business. All the expenses are recorded in the accounts. They are
useful to keep track various sources and events of cash flow. They
occur by consuming goods and services. Examples include the
maintenance or operational expenses that are incurred in the
business.
What is cost?
Cost is the monetary value that is incurred to produce a good or
provide a service. The cost provide the business a measure of how
:
the capital is being consumed. This helps them to make key decision
regarding how to improve profits. A cost does not necessarily
represent a cash flow. They are usually computed relatively based on
the volume of consumption. All the costs summed up will be equal to
an expense.
For instance when the expense towards electricity is Rs.12,000/- per
month. If there were 1000 products produced then the cost of
electricity to produce each product would be Rs.12/-. Here there is
no cash outflow of Rs.12/- every time a product is produced.
However, there is a total cash flow of Rs.12,000 at the end of the
month, which is recorded as an expense.
What is the role of cash register in a business?
Cash register refers to the book or register used to record all the
monetary transactions either in the form of cash or in the form of
cheque or in the form of credit or loan. From the accounting point of
view this is also known as the book of original entry.
A cash book has prominent significance in the business. It helps the
business to get an understanding of various elements like
1. Costs
2. Expenses
3. Income
4. Profit
5. Loss
6. Loans to be recovered
7. Credit sales
Earlier accounts department was using a book to maintain these
entries. Now a days various softwares are available to maintain the
cash registers which are more accurate and faster in nature and help
in generating various reports related to the monetary transactions
:
done by the business.
Why does the government collect taxes from people?
Taxes are levied by the government from the tax payers as a financial
charge. The tax payer can be an individual or a legal entity such as a
business or organization or institution. Evading taxes is illegal. The
tax is usually levied on an activity (such as entertainment) or income
or [Link] functioning of the government needs money. Taxes
are a means to collect money. The taxes thus collected are used for
implementing various welfare activities such as building
infrastructure, national security, health care, education, salaries to
the government employees. By paying the tax, a citizen is
contributing to the development or welfare of the nation. So, it is the
responsibility of every citizen to ensure that they pay the tax without
failure. Every citizen experiences many of the social welfare and
development activities implemented by the government. So, it is a
way of paying back or contributing to the nation and is the
responsibility of the citizens.
What is the significance of Break Even Point in a business?
Break Even Point refers to the stage at which the business is able to
generate the revenues or sales to meet its expenses. At this stage,
the business is neither making profits nor incurring losses. It is just
making enough revenues to meet its expenses.
The business performs the Break Even Analysis to find the Break
Even Point as it is a significant measure of how the business is
performing. It helps them to determine whether a product or service
is worth continuing. This is determined whether the associated costs
with a product or service are covered by the revenue generated from
that product or service.
Thus after performing the Break Even Analysis and determining the
:
bream even point, the business can make key decisions regarding
the subsequent measures to be taken. Few of these decisions could
be like altering the prices, ensuring that the bids are competitive and
start preparations to procure additional funds through various
resources. One of the key decisions taken after the break even
analysis is the Goal/Target Setting and Profit Planning.
Mathematically, we can say that when the break even point is
reached
Total Revenue/Income = Total Expenses
The break even point is computed by using the following
formula.
Break Even Volume (Per Fixed Cost(Per Month)
Month) = Gross Margin Per Unit
What is the maximum cap on the profit a business can make?
Are there any regulations by the government on the maximum
profit a business can make?
Profit is the monetary reward gained in a business and a business
results in a profit when the total revenue generated is in excess of
costs, expenses and taxes incurred during the course of business.
The profits(or losses) are usually projected through the Income
statement also known as Profit and Loss statement.
Mathematically it can represented as
Profit = Total Revenue from Sales – Total Sales Expenses
Thus the way one can increase profits is by increasing the revenue
from the sales or by decreasing the overall expenses or both.
Increase in the revenue through sales can be achieved either through
increasing the number of sales as much as possible or increasing the
price of the product.
Decrease in the sales expenses can be done by optimizing the sales
process and ensuring that there are minimum possible expenses at
:
each stage.
Thus we can say that there is no limit to the profit earned by an
organization. The maximum profit earned by a business is dependent
on the sales price, sales volume and the expenses. Thus it can go to
any [Link] government did not lay out any policies to restrict the
amount of profit made by any business. If the product or service is
innovative and effectively takes care of peoples’ needs, its sales
volume is high and hence the business makes more profits.
If the product or service has lot of value to offer, it is priced at high
margin and the business can make more money even from low sales
volumes.
Another way of increasing the profits is to reduce the expenses by
optimizing the profits.
Thus in any case it is well adopted by the public and hence the
government does not intervene in these matters.
However, one can not make more than a specified percentage of
profit on certain items like essential medicines etc. Only in this case
the government has laid down a policy to restrict the amount of
profit a company can make on a product (not on overall profit which
again depends on the sales volume).
Also, the more the profits made by a business, the more it is
beneficial to the government, as the government then gets revenue
in the form of taxes.
A mobile phone accessories company sells a screen guard at Rs.300
per piece. Their fixed costs were Rs.1,00,000 and the variable cost
per piece is Rs.180. In three months, the company made profit of
Rs.50,000. What is the total sales volume in this quarter?
The following data is given.
Sales Price of each product = Rs.300
Variable cost per piece = Rs.180
:
∴Gross Profit = Sale Price – Cost= 300 – 180 = 120
Assuming the number of units sold is x, the total gross
=
profit
Profit before tax = Rs.50000
We know that Profit Before tax = Total Gross Profit – Fixed Cost
50000 =
50000 + 100000 =
x =
x =
∴ Total sales volume in that quarter =
Note that in the above example, Gross profit is completely
different from the Profit before tax
In a cash register, where will the purchase of packing material
go?
When the packing material is purchased from a vendor, the business
has to pay the supplier. This results in cash flowing out of the
business. Hence, the purchase of raw material will fall into outflow of
cash.
In which category does the tools purchased will fall into? Inflow
or outflow?
When the business purchases the tools, it has to pay the specified
price to the supplier of the tools. This results in cash flowing out of
the business. The tools purchased will result in an outflow of cash.
When a company issues owner’s equity shares. Will they result
in an inflow or outflow of cash?
:
The company issues owner’s equity shares when the owner invests
his money into the business. The investment results in cash coming
into the business. Hence, the owner’s equity results in an inflow of
cash
When the company sells of the scrap, will it result an inflow or
outflow of cash?
When the business sells the scrap, the individual or company pays
the business, the cost of the scrap. This results in cash coming into
the business. The sale of scrap results in an inflow of cash
Will there be an inflow or outflow when the machinery undergoes
through depreciation?
When a building or equipment or machinery is depreciated in value,
there won’t be any physical cost going out of the business or cash
coming into the business. It is just the cost computed and taken into
consideration but does not result in cash flow. As this expenditure
does not involve any cash flow, it will neither fall into the inflow or
outflow.
When a venture capitalist invests in the business, will it be called as
inflow or outflow?
When the venture capitalist invests into the business, it results in
huge investment in the form of cash flowing into the business. Hence
this is categorized as the inflow of cash
Will the sales commission paid fall into the inflow or outflow of
cash?
When the payments are made in the form of sales commission, it
results in payout of the cash. In other words, the cash is going out of
:
the business. Hence, the sales commission paid will result in an
outflow of cash
What will you classify the rent received on land as? Inflow or
outflow?
When the tenant of the land makes a payment towards the rent, it
results in cash getting into the business. Hence this is considered as
inflow of cash
What did you understand about break-even?
In a business, Break-even refers to the situation where in the
business is able to generate the sales or revenues so as to meet the
expenses of the business. When the business has reached the state
of break-even, it will be neither profits nor in losses. Its revenues and
profits will be evenly matched. Break even plays a critical role in the
business, as it is a major mile stone and from then on the business
will start making its profits.
What is your opinion about using the break-even analysis in a
business which is engaged in selling multiple products?
A multi-product firm will be producing more than one product. These
products may vary in size, appearance and purpose. As it is difficult
to calculate the break-even point by considering only one product,
the company has to consider a common unit to calculate the break-
even point. Usually this occurs when the business is allocating
budget and provided that it has already started the [Link] order to
calculate the break-even point, the company should first calculate
the product mix. The product mix is the cumulative range of
products produced by the company. Also, the expenses are spread
across multiple products and hence the overall cost on each product
will be less than that if it was produced as a single unit.
:
Also, in case of multi-product firm, the various costs are not
associated with a single product but distributed across all the
products offered by the business. Thus the business will be able to
reach the break-even point much before as compared to a business
that is offering a single product or service.
Thus we can say that the in a business engaged in the product of
multiple products the break-even analysis is of reduced value in a
multi-product firm.
The document Business Finance and Arithmetic, Entrepreneurship,
Class 11 Revision Notes | Entrepreneurship Class 11 - Commerce is a
part of the Commerce Course Entrepreneurship Class 11.
: