# Business Finance and Arithmetic

This page contains the CBSE entrepreneurship class 11 chapter Entrepreneurship as Business Finance and Arithmetic notes. You can find the questions/answers/solutions for the chapter 6 of CBSE class 11 entrepreneurship in this page.

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 payer by the government. Imposed on the products or services. This tax is 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 payer to the government The intermediary person or entity who collected the tax from the end user pays the tax to the government.
The direct tax can not be transferred to someone else Except the end user or entity, all the intermediary persons transfers the tax to the person or entity to whom the product or service is sold
Few examples of the direct tax are income tax, property tax, social security tax, corporation tax etc Examples include central excise duty, customs duty, entertainment tax, luxury tax, service tax, sales tax or Value added Tax (VAT) 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 Statement Cash flow Statement
It helps us to get an idea about the profit earned by the business over a period of time. It helps us to get an idea about the cash flowing into and out of the business, historically..
It is composed of

1. Revenues
2. Expenses
3. Gains
4. and Losses

It also includes the non-cash items such as depreciation and amortization.

It is composed of

1. Cash receipts (money received by the business)
2. Cash disbursements (money goes out of/paid by the business)
Income statement is will have a heading that depicts the profits of the company over a specified period of time. Typically, in the indirect method, the profit or loss to the company becomes the first statement in the cash flow statement. In the direct method, the cash flow is computed 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 product.The 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 Month) = Fixed Cost(Per 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 levels.The 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 = 120 * x Profit before tax = Rs.50000 We know that Profit Before tax = Total Gross Profit – Fixed Cost ⇒50000 = 120 * x – 100000 ⇒ 50000 + 100000 = 120 * x x = 150000 120 ⇒ x = 1250 ∴ Total sales volume in that quarter = 1250

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 sales.In 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.

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