BARINGO COUNTY

EDUCATIONAL IMPROVEMENT EXAMINATION 2011

565/2
BUSINESS STUDIES
Paper 2

MARKING SCHEME

(CONFIDENTIAL)
1. (a) Explain five differences between a monopoly and perfect competition market structures. (12mks)
Monopoly
 There is only one supplier / seller in the
entire market.
 It is mainly difficult for other firms
(suppliers / sellers) to enter the market.
 Mainly prices are fixed by the supplier.
 Always commodities supplied have no
close substitutes.
 Price discrimination may be practiced
(charging different prices for same
commodity in different market).
 Restricted use of factors of production.
Perfect Competition
 There are many sellers / suppliers in the market
in that separate actions of each has no effect on
the market.
 The sellers have freedom to enter the market at
will.
 Prices are mainly determined by the forces of
demand and supply. No excess demand / supply
(Equilibrium price prevails in the market / price
takers.
 Commodities sold from different producers are
always identical in all aspects such that one
cannot distinguish them.
 There is perfect knowledge of the market by
buyers thus non of the sellers would effect
business at any price other than equilibrium
price.
 Perfect mobility of factors of production

(b) Explain four ways in which the government gets involved in business activities. (10mks)
 Through licensing – the government issue licenses to legal businesses.
 Through setting standards that every business should meet before the product is released
to the market.
Kebs is the body entrusted with the regulation.
 Legislation – the government may come up with rules and regulations (laws) that regulate business
activities.
 Training (business) people at KBTI / Colleges / universities.
 Through external trade promotion to promote export.
 Through internal trade promotion to promote home trade.
 Through provision of public utilities such as water, transport, sewerage, power and communication
through the central government or local authorities.
 Through provision of subsidies through provision of cheap finance, technical assistance and
manpower
to business.
 Through provision of incentives such as tax holidays / duty free privileges / favourable expatriate
protection that safeguards the interests of foreigners.
 Protection of local industries to shield them from foreign competition.
 Through government loan guarantee to local business persons to acquire loans from international
lending bodies.
 Through formulation of fiscal and monetary policies.
 Through fixing quotas.
 Total ban on certain goods.
 Through improving infrastructural facilities.
 Through provision of credit on easy terms.
2. (a) Explain five reasons why high per capita income is not an indicator of a better living standard in a
country. (10mks)
 Statistical Problems
- The collection of data of the national income may be inaccurate meaning that the national figures
might be inaccurate hence wrong per capita income.
 Change in the value of money
- If the currency has been devalued, for example, there can be change in the value of money without
necessarily representing any changes in the welfare of the people.
 Income distribution
- Although income per capita may be high, there is need to consider who has what share of the
“national cake.” If the national cake is in the hands of a few, then we cannot say that people’s
welfare has improved.
 Nature of products
- If the products are not meant to satisfy immediate wants of the people, then an increase in per
capita income may not lead to a higher economic welfare.
 People’s hard work and sacrifice
- Increased National income may mean less sleep and more worries. People have not time to enjoy
what they produce and their welfare may be low despite the rise in national income.
 Social costs
- e.g. people may migrate from rural to urban areas straining family relationships, while an increase
in industries may create pollution, congestion and other environmental disruptions.
Such developments may make the average citizen worse off than was before the increase in per
capita income.
 Difficult to measure welfare
- Economic welfare is subjective. People’s wants and aspirations keep on changing and their tastes
change over time. Hence per capita income is not the best method.
 Change in population
- If a static population is assumed, a false higher state of the economic welfare of the people will
be the result.
 Quantity of goods and services produced.
- Did the increase in the per capita income come from increased production of goods and services
or from increased prices? If the former, then per capita income will be a true reflection of the people’s
economic welfare but if the latter then it is inflation. (Any 5x2 = 10mks)

(b) Give five differences between a single unit shop and a tied shop.
Single Unit shop
 Sell goods from different manufacturers.
 The shop is owned by the owner.
 The shop is designed by the owner.
 Need not seek permission from any
producer on what to stock.
 The owner fixes own prices which are not
standardized in all shops.
 The shop owner promotes his own
products / different producers promote
their products.
 Depending on credit worthiness, can be
offered credit by the different sellers /
wholesalers.
 Specialized unit shop owners stock variety
of goods from different producers e.g. in
clothes.
Tied Shops
 Sell goods from one particular manufacturer.
 The shop is owned and controlled by the
manufacturer.
 The manufacturer designs the organization of
the shop and its appearance e.g. painting.
 The shop cannot deal in goods from other
manufacturers without authority from the
manufacturer.
 Prices in all the shops are standardized by the
manufacturer.
 Advertisement / product promotion is done by
the manufacturer.
 They are financed by the manufacturer and can
obtain goods on credit from the manufacturer.
 Similarity of the goods may discourage the
buyers from buying more e.g. shoes.

Business Studies Paper 2 Pg.3

3. (a) Bogoria Hotels Spa
Trading, profit loss a/c
For the year ended 30th September, 2010
Shs. Shs. Shs.
Opening stock 25000  Sales 400000 
Add: Purchases 300000  Less: Returns inwards 3000 
Add: Carriage inwards 3000 397000

Less: Returns outwards 303000 298800
COGAS 4200 323800
Less: Closing stock  30000
Cost of sales 
Gross profit c/d 293800
 397000
Carriage outwards 103200 Gross profit b/d 103200 

Motor vehicle expenses 397000
Rent 4000
Telephone charges 
Wages and salaries 3300
Insurance 
Office expenses 1120
Sundry expenses 
Net profit c/d 2000
 103200
12000

600

1500

800

77880

103200

Bogoria Hotels Spa

Balance sheet
As at 30th September, 2010
Shs. Shs. Shs.
Motor vehicle 400000  Capital 641000 
Office equipment 200000  Add: Net profit c/d 77880 
600000 718880
Less: Drawings 25200 
693680
Current assets
Stock 30000 Current liabilities
Debtors  Creditors 18120 
Cash 15000 115000 Bank overdraft 3200 

70000 715000 715000

30 x 2/5 = 12

(b) Explain four circumstances under which Co-Insurance may be necessary in Insurance . (8mks)
 Where the value of property being insured is too high to be insured by one insurance company for
instance in Marine, Air and Plant Insurance.
 In cases where the insurance company has insured many risks and chances of loss are very high.
 If the insurer wants / wishes to share liability in events of losses.
 If the insurer has insured many different risks and it would be too costly to pay many claims at once

4. (a) Explain five factors which necessitate localization of firms . (10mks)

 A well developed infrastructure such as roads, electricity and telephone lines in an area which attracts
 firms into that area.
 Availability of a large population which may provide both labour and a market for its products.
 Need for interdependence among various firms in areas such as training of personnel.
 Government policy which requires firms to be located in a certain area.
 Availability of raw materials in a certain area.
 Availability of support industries in such areas as banks / insurance / warehouses.(Any 5x2 = 10mks)

Business Studies Paper 2 Pg.4

(b) Tanzania a member state of East African Community has been experiencing deteriorating terms of trade.
Explain five factors that could have contributed to this. (10mks)(
 Higher prices of her imports compared to prices of the exports.
 Lower prices of her exports compelled to those of inputs.
 High demand for her imports in the world market leading to high import prices.
 Low demand for her exported goods in the world market hence leading to lower export prices.
 High supply of exported goods in the world market leading to lower export prices.
 Low supply / shortage of imported goods in the world market leading to high import prices.
 Appreciation of a local currency – making exports expensive to reduce demand and making
imports cheaper to increase their demand.
 Appreciation of local currency which will make the imports more expensive.
 Increased / high demand for imports making their prices to go up.
 Devaluation of local currency making imports expensive and exports cheaper.
(Any 5x2 = 10mks)
5. (a) Required:
Enter the above in the appropriate books of original entry and thereafter post them to the relevant ledger account.

PURCHASES JOURNAL / DAYBOOK

DATE DETAILS INVOICE NO. LF AMOUNT
2010 February 2 Kibet 020 60,000
13 Joram 071 130,000
16 Njoroge 042 150,000

28 Totals transferred/posted to the

purchases Account (Dr) 340,000

SALES JOURNAL / DAYBOOK

DATE DETAILS INVOICE NO. LF AMOUNT
2010 February 3 Kibet 001 60,000
5 Joram 002 125,000

28 Totals transferred/posted to the

Sales Account (Cr) 185,000

SALES RETURNS / RETURNS INWARDS JOURNAL

DATE DETAILS INVOICE NO. LF AMOUNT
2010 February 6 Muhindi 001 5,000
14 Mary 002 10,000

28 Totals transferred/posted to the

Sales Return Account (Dr) 15,000

CREDITORS / PURCHASES LEDGER

DR KIBET A/C CR DR NJOROGE A/C CR

2010 Shs. 2010 Shs.

Feb 2 Purchases 60,000  Feb 16 Purchases 150,000
DR JORAM A/C CR

2010 Shs.
Feb 13 Purchases 130,000

Business Studies Paper 2 Pg.5

NOTE: Date and details should be there and correct and also titles for marks to be awarded e.g. title of the book of
original entry / journal must be there to test understanding on some documents and journals.

DEBTORS / SALES LEDGER

R MUHINDI A/C CR DR MARY A/C CR

2010 Shs. 2010 Shs. 2010 Shs. 2010 Shs.

Feb 3 Sales 60,000 Feb 6 Sales Returns 5,000 Feb 8 Sales 125,000 Feb 14 Sales returns 10,000

GENERAL/NOMINAL LEDGER

DR PURCHASES A/C CR DR SALES RETURNS A/C CR

2010 Shs. 2010 Shs.

Feb 28 Total Creditors (TPJ) 340,000 Feb 28 Total Debtors 15,000 

DR SALES A/C CR

2010 Shs.
Feb 28 Total Debtors (F.S.J) 185,000 

(20 x ½ = 10mks)

(b) In relation to current practices in banking, explain five features of current accounts. (10mks)

 Bank statements are usually issued on monthly basis or on request by the account holder at anytime at a fee.
 They offer overdraft facilities, that is they can withdraw more than what they have in their accounts leading to
a negative balance repayable with an interest.
 Money in account is always withdrawn by use of a cheque either by the account holder or can send someone
with the cheque signed at the back to withdraw.
 No minimum balance is required to be maintained in a current account.
 Current accounts do not earn interest and the Banks charges ledger fee and cheque clearance fee for services
rendered – some banks nowadays pay interest to current account holders.
 With current accounts, holders an withdraw any amount anytime without giving notice provided that the
account balance allows.
 They issue cheque books to all account holders.

6. (a) Explain five reasons why devolved funds like constituency development funds (CDF) have not
been fully successful in Kenya. (10mks)
 Poor / lack of proper project feasibility studies.
 Policies on developed funds are not clear.
 Lack of involvement of the people at the grassroot level leading to resistance on some projects.
 New projects started before the initial ones are completed.
  Political interference in projects – due to change in political leadership some projects may be ignored.
 Lack of expertise at the grassroot level such that expert opinion may not be injected into the initial and
implementation stages.
 Corruption – leading to loss or misappropriation of devolved funds.
 Red tape / difficult government procedures – leading to delayed release of funds or delayed implementation
of projects.

Business Studies Paper 2 Pg.6

(b) Required:
Prepare a three column Cashbook and balance it off. (10mks)

CASH BOOK

Date Details Disc. Al Cash Bank Date Details Disc. Al Cash Bank
2009 2009
June 1 Bal. b/d 155,000 June 1 Bal b/d 65,000

3 Sales 145,000 4 Wilson 400 9,600

(creditor)
12 Joyce 3,000 27,000 9 500
9 Stationery 5,000
14 Bank (C1) 35,000 MV Repair

15 Kiprono 800 15,200 11 25,500

14 Office computer 35,000
Cash (C1)
31 Cash (C2) 150,000 31 150,000
Bank (C2)
31 9,000 227,600
Bal. c/d 
3,800 190,000 337,200 400 190,000 337,000

20 x ½ = 10mks
Business Studies Paper 2 Pg.7