Finance

Topical Questions

1.​ D2G is a driving school. Mattan started D2G 3 years ago to teach people to drive a car.
As the business has been successful Mattan plans to buy a new vehicle. He has been
analysing D2G’s income statement. An extract is shown in Table 3.1. Mattan wants to
understand the difference between profit and cash. He also wants to know how an
increase in competition and changes in the business cycle might affect D2G.

Table 3.1

Extract from D2G’s income statement for the year ending 31 December 2021 ($)

Revenue 20 000

Gross profit 12 000

Profit for the year 2000

a.​ Calculate D2G’s gross profit margin. Show your working. ​ ​ ​ [2]
b.​ Outline, with reference to D2G, the difference between profit and cash.​ [4]
c.​ Do you think leasing is the best source of finance for a small business to use for
a new vehicle? Justify your answer​ ​ ​ ​ ​ ​ [6]

2.​ VCG manufactures high-quality briefcases and travel bags. VCG has 50 skilled
production workers in its factory. VCG is planning to expand by building a second
factory. Different locations are being 3 considered. The Managing Director is reviewing
VCG’s financial statements. An extract is shown in Table 3.1. Both internal and external
stakeholder groups of VCG are interested in this information.

Table 3.1

Extract from VCG’s 2021 financial statements ($)

Revenue 2 000 000

Current assets 300 000

Current liabilities 250 000

Shareholders’ equity (funds) 800 000

a.​ Define ‘shareholders’ equity’.​ ​ ​ ​ ​ ​ [2]

 b.​ State whether each of the following are classified as a current asset or a current
liability
i.​ Overdraft
ii.​ Trade receivables
iii.​ Trade payables
iv.​ Cash in bank​ ​ ​ ​ ​ ​ ​ ​ [4]

3.​ AHG is an established business as it has been operating for a long time. It sells garden
products including plants and flowers. AHG uses competitive pricing. The business has 4
managers and 30 1 other employees. All AHG’s managers use delegation. The Finance
Manager is analysing AHG’s statement of financial position as she is interested in its
liquidity. An extract is shown in Table 1.1.

Table 1.1

Extract from AHG’s statement of financial position at 30 March 2022 ($000)

Non-current assets 800

Current assets 660

Current liabilities 600

a.​ Define ‘current liabilities’.​ ​ ​ ​ ​ ​ ​ [2]

b.​ Identify two examples of non-current assets. ​ ​ ​ ​ [3]
c.​ Outline two possible reasons why liquidity is important to AHG. ​ ​ [4]

4.​ Tom wants to leave his job to become an entrepreneur. He and his sister plan to start a
window cleaning business. Tom has been told that new businesses are at a greater risk
of failure than 4 established businesses. Tom has to decide whether a partnership is a
suitable form of business organisation for the new business. He has calculated the
business will need $700 as start-up capital. Tom knows that every decision he makes will
have an opportunity cost.

a.​ Explain two suitable sources of start-up capital Tom’s business might use.​[4]
b.​ Define ‘profit’.​ ​ ​ ​ ​ ​ ​ ​ ​ [2]
c.​ Do you think making a profit is more important for a growing business than
managing cash flow? Justify your answer.​ ​ ​ ​ ​ [6]

5.​ TJM is a private limited company. It is a food retailer and has 450 shops. In 2021 TJM’s
revenue increased by $500 million. The Finance Director is analysing TJM’s financial
statements. An extract 2 is shown in Table 2.1. The directors are planning to expand
TJM by opening 20 new shops. TJM will have to carry out a recruitment and selection
process for 400 new employees.
 Table 2.1

Extract from TJM’s financial statements for 2021 ($m)

Non-current assets 400

Current assets 300

Current liabilities 240

Profit for the year 200

a.​ Define ‘revenue’.​ ​ ​ ​ ​ ​ ​ ​ [2]

b.​ Define ‘working capital’.​ ​ ​ ​ ​ ​ ​ [2]
c.​ Calculate working capital. Show your working​ ​ ​ ​ [2]
d.​ Explain two possible reasons why profit might be important to TJM.​ [6]

6.​ RJJ manufactures women’s shoes. It sells the shoes to a niche market using
e-commerce. RJJ is a public limited company and its shareholders benefit from limited
liability. The Managing Director 1 is planning to expand the business. RJJ could take
over a competitor. Last year profit decreased by $50 000. The Finance Director has to
decide on a source of finance to fund the expansion.

a.​ Explain two factors RJJ’s Finance Director should consider when deciding on a
source of finance for the expansion.​ ​ ​ ​ ​ ​ [6]
b.​ Do you think the amount of money needed is the most important factor for a sole
trader to consider when deciding on an appropriate source of finance? Justify
your answer. ​ ​ ​ ​ ​ ​ ​ ​ ​ [6]

7.​ SMR produces snack food using batch production. The snacks are sold to people
watching sporting events in city Y. SMR pays bonuses to motivate its 3 part-time
employees. SMR has received 3 complaints from customers about the quality of the
snacks. The business has forecast cash-flow problems in the coming months. An extract
from this cash-flow forecast is found in Table 3.1.

Table 3.1

Extract from SMR’s cash-flow forecast ($)

April May June

Total inflows 1000 900 900

Total outflows 1400 1400 1300

 Net cash flow (400) (500) Y

Opening balance 100 X (800)

Closing balance (300) (800) (1200)

a.​ Calculate the values of X and Y. ​ ​ ​ ​ ​ ​ [2]

b.​ Explain two ways SMR could overcome its cash-flow problems​ ​ [6]

8.​ PJA make fashion clothing for 16-25 year olds. Many of its competitors are multinational
companies. PJA produce new products every 3 weeks. All PJA’s products are made in a
local factory because 2 of import quotas. The Managing Director is reviewing PJA’s
financial statements using ratio analysis. An extract is shown in Table 2.1.

Table 2.1

Extract from PJA’s financial statements for 2020

Revenue ($m) 7 400

Gross profit ($m) 3 330

Profit ($m) 1 100

Current ratio 1.5

Return on Capital Employed (ROCE) 8%

a.​ Calculate PJA’s gross profit margin. Show your working. ​ ​ ​ [2]
b.​ Explain two ways PJA’s managers can use ratio analysis.​ ​ ​ [6]

9.​ NPX is an online retail business. All orders are sent directly to customers from its
warehouse. NPX employs 60 full-time workers. The Operations Manager is analysing
NPX’s cash-flow forecast. An 2 extract is shown in Table 2.1. To improve productivity, the
manager plans to introduce new technology that can select and pack all the items for
each order. This will make 35 workers redundant. The technology will cost $40 000. The
manager is considering using either internal sources or external sources to finance this
technology.

Table 2.1

NPX’s cash-flow forecast for the period July – September 2021 ($000)

July August September

 Cash inflows 100 120 140

Cash outflows 90 90 110

Net cash flow 10 30 30

Opening balance 5 15 45

Closing balance 15 45 75

a.​ Define ‘opening balance​ ​ ​ ​ ​ ​ ​ [2]

b.​ Identify four sources of internal finance a business might use.​ ​ [4]
c.​ Explain two possible effects on NPX’s cash-flow forecast of introducing the new
technology. ​ ​ ​ ​ ​ ​ ​ ​ ​ [6]

10.​WYP is a business partnership. Greg and his 3 friends started the business 7 years ago.
WYP make eyeglasses (spectacles) which are only sold through its website. The price of
each pair of 1 glasses is $95. This is $200 cheaper than its main competitor. Greg said:
‘It was difficult at the start as we could not get trade credit. We also knew it would take
time to develop customer loyalty.’ Greg thinks choosing the right method of promotion is
important to the success of any new product.

a.​ Outline two possible reasons why WYP could not get trade credit. ​​ [4]
b.​ Define ‘Return on Capital Employed’​​ ​ ​ ​ ​ [2]

11.​SBG makes a range of products including specialist paints. It has 6 factories and 700
employees. All SBG’s employees are encouraged to be involved in decision-making.
SBG’s products are 3 exported to 16 countries using wholesalers as its main channel of
distribution. The Managing Director said: ‘Our objectives are to grow and make a profit.’
He also recognises that all business activity creates externalities for SBG’s stakeholder
groups

a.​ Outline two reasons why profit might be important to SBG. ​​ ​ [4]

12.​BGR is a private limited company. It operates 6 cinemas in different towns. Effective

internal communication is important for BGR. The Finance Director has been analysing
BGR’s accounts 4 and an extract is shown in Table 4.1. BGR plans to open another
cinema and will need to recruit 10 new employees. The new cinema will cost $8m. The
Finance Director has to decide whether BGR should issue new shares or use a bank
loan to finance the expansion.

a.​ Define ‘cost of sales’. ​ ​ ​ ​ ​ ​ ​ [2]

b.​ Calculate X and Y.​ ​ ​ ​ ​ ​ ​ ​ [2]
13.​Aurelie is a sole trader. She started her small hotel 1 year ago using government
support. Aurelie knew it would be important to build good customer relationships. Aurelie
wants to analyse her 3 financial statements using ratio analysis. An extract is shown in
Table 3.1. She is worried about how the Government’s plan to introduce a new tourist tax
of $1 per tourist per night might affect her business.

Table 3.1
Extract of Aurelie’s Income statement for 2020 ($)

Revenue 5 600

Cost of sales 1 800

Gross profit X

Expenses 2 400

Profit Y

a.​ Calculate X and Y. ​ ​ ​ ​ ​ ​ ​ ​ [2]

b.​ State four financial ratios a business can use.​ ​ ​ ​ [4]

14.​Asmaa used a government grant to set up a small car repair business 4 years ago.
Asmaa now has 3 full-time employees. Keeping her employees well-motivated is
important to Asmaa. She thinks her business has benefited from a low rate of
unemployment in the economy. Asmaa is reviewing her cash-flow forecast. An extract is
shown in Table 2.1. She wants to know how the closure of a competitor and an increase
in the minimum wage rate might affect her forecast.

Table 2.1

Extract of Asmaa’s cash-flow forecast ($000’s)

January February March

Cash outflow 40 55 40

Cash outflow 50 35 35

Net cash flow (10) 20 5

Opening balance 50 40 60

Closing balance 40 60 65

a.​ Identify one cash inflow and one cash outflow a business might have.​ [2]
 b.​ Outline one advantage and one disadvantage to Asmaa of using a government
grant as a source of finance.​ ​ ​ ​ ​ ​ ​ [4]
c.​ Explain how the following changes might affect Asmaa’s cash-flow forecast.
i.​ Closure of a competitor
ii.​ Increase in the minimum wage rate​ ​ ​ ​ ​ [6]

15.​Elton is a sole trader. He sells specialist clothing and equipment for sports, including
baseball and hockey. It is a niche market. Elton started his business 5 years ago and it
has remained small. A 3 wide range of inventory is important. Elton has been looking at
the financial performance of his business. The profit margin for 2018 was 35%. An
extract of the accounts is shown in Table 3.1.

Revenue and cost information for Elton’s business for 2018 and 2019 ($)

2018 2019

Revenue ($) 24 000 25 000

Cost of sales ($) 7 200 Y

Gross profit ($) 16 800 18 000

Expenses ($) 8 400 10 000

Profit ($) X 8 000

a.​ Calculate X and Y.​ ​ ​ ​ ​ ​ ​ ​ [2]

b.​ Do you think Elton should be pleased with the financial performance of his
business? Justify your answer using appropriate ratios.​ ​ ​ [6]

16.​Veronique is bored with her work in a large factory. As a creative person, she would like
to leave and start up a flower shop. Veronique has asked about micro-finance and
prepared a cash flow 3 forecast. An extract is shown in Table 3.1. Veronique has also
carried out some market research and found out that the demand for flowers is likely to
be high during festivals. She thinks she has the right characteristics to be a successful
entrepreneur.

Table 3.1

Extract from the cash flow forecast for Veronique’s flower shop for the first 3 months ($)

Month 1 Month 2 Month 3

Cash in 500 1200 2000

 Cash out 1500 1400 1200

Net cash flow (1 000) (200) 800

Opening balance 0 (1 000) (1 200)

Closing balance (1 000) (1 200) (400)

a.​ Define ‘microfinance’.​​ ​ ​ ​ ​ ​ [2]

b.​ Veronique now thinks that the cash inflow in month 3 will be $1 500. Calculate
the:
i.​ New net cash flow in month 3​​ ​ ​ ​ ​ [1]
ii.​ New closing balance in month 3​ ​ ​ ​ ​ [1]
c.​ State six reasons why a business might have cash flow problems. ​​ [6]

17.​CLN is a public limited company. It sells a range of electrical products such as

televisions and computers. The Managing Director has been analysing CLN’s accounts.
An extract is shown in 3 Table 3.1. He said: ‘ We need more finance. Last year CLN
made a loss of $250m. I blame increased competition from e-commerce.’ CLN plans to
close 30 of its 120 shops. This decision will affect many of its stakeholders including the
local communities. The number of sales from each shop will be used to decide which
shops to close.

Table 3.1

Extract from Statement of financial position as at 30 September 2020 ($m)

Non-current assets 48

Current assets 60

of which: Inventories 40

Current liabilities 30

a.​ Current liabilities​ ​ ​ ​ ​ ​ ​ ​ [2]

b.​ Calculate the acid test ratio. Show your working.​ ​ ​ ​ [2]
c.​ State four factors that can affect the source of finance a business might use.​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ [4]

18.​DGC is a public limited company. It has a reputation for selling high quality branded
clothes and shoes to women. It is a multinational company and owns shops in 10
countries. Each shop operates 4 with a short chain of command between the shop
manager and sales employees. DGC is planning to expand into country Z for the first
time. DGC has carried out some secondary market research and has found that country
 Z has different cultural and social trends to its existing markets. The Managing Director
thinks DGC should open the shops in country Z as a franchise. However, the Finance
Director thinks DGC should buy its own shops using a suitable source of finance.

a.​ Identify and explain two factors that DGC should consider when choosing a
source of finance for expansion.​ ​ ​ ​ ​ ​ [6]
b.​ Identify two reasons why obtaining finance may not be easy for a new business.​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ [2]

19.​BVC makes a range of paints. It exports 60% of its products. The Managing Director has
been looking at BVC’s cash-flow forecast shown in Table 2. He said: ‘Success is not just
about our return on capital employed.’ The Managing Director is worried about the
introduction of new legal controls to protect the environment. This will mean BVC will
have to reduce the number of chemicals that are used to make paint. He thinks these
new legal controls will be bad for business.

Table 2: Extract of cash flow forecast for the period July–September 2019 ($000)

July August September

Cash inflow 600 560 620

Cash outflow 560 540 580

Net cash flow 40 20 Y

Opening balance X 60 80

Closing balance 60 80 120

a.​ Calculate the following values:

i.​ X
ii.​ Y​ ​ ​ ​ ​ ​ ​ ​ ​ [2]

b.​ Identify and explain two reasons why a cash flow forecast might be important for
BVC. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ [6]

20.​REW has won many awards for the design and style of its carpets and rugs. All the wool
it uses is from local suppliers. REW’s objective for this year is to survive and remain in
business. The Managing Director is concerned that the country’s Gross Domestic
Product has been falling for some time. During the recession the Managing Director
plans to start selling REW’s products in other countries. Market research suggests
demand would be high.

Table 2: Extract from REW’s accounts

 2017 2018

Current ratio 1.5 2

Acid test ratio 1.2:1 1:1

Profit margin 20% 16%

a.​ Identify and explain the effect on REW of the changes in the following ratios.
i.​ Change in acid test ratio
ii.​ Change in profit margin​ ​ ​ ​ ​ ​ [6]​

21.​George has worked in a small flower shop for 10 years. He does not like the autocratic
leadership style of his manager and wants to leave. He will decide whether to start up his
own business or buy a BunchesRUs franchise. The franchise would cost him $5 000 but
BunchesRUs would offer training and support. For either option, George will need both
finance and to recruit 2 part-time employees. George knows building customer
relationships will be important to the success of his business.

a.​ Identify five possible sources of finance George could use​​ ​ [5]

22.​Hashim is an entrepreneur. He plans to start up as a sole trader by opening a small gift

shop next to a popular tourist site. His market research shows that October to June are
the months when 3 sales are likely to be highest. His first business failed within 6 months
of start up because of poor financial planning. This time, Hashim has produced a
cash-flow forecast, shown in Table 1, as part of his business plan. His parents have
agreed to give him an interest free loan for the shop rent. He is hoping to arrange trade
credit from suppliers.

Table 1: Cash-flow forecast for Hashim’s business for the period July – October 2019 ($)

July August September October

Cash inflow 80 180 140 240

Cash outflow 300 180 180 180

Net cash flow (220) (40) Y 60

Opening balance 0 (220) (260) (220)

Closing balance X (220) (220) (200)

a.​ Calculate values for:

i.​ X
ii.​ Y ​ ​ ​ ​ ​ ​ ​ ​ ​ [2]
 b.​ Identify and explain two factors that Hashim’s suppliers might consider before
deciding to offer him trade credit.​ ​ ​ ​ ​ ​ [6]

23.​BFF makes a range of computer screens that it sells to other manufacturers. The
Managing Director has been looking at BFF’s income statement. She is worried about
the effects of an increase in the 1 cost of materials. She said: ‘Changes in technology
have improved our production methods. BFF needs to remain competitive as imports of
computer screens are increasing.’ The Managing Director has to decide whether BFF
should increase its prices.

a.​ What is meant by ‘income statement’?​ ​ ​ ​ ​ [2]

b.​ Identify the effect of an increase in the cost of materials on each of the following:
i.​ Cost of sales
ii.​ Gross profit​ ​ ​ ​ ​ ​ ​ ​ [2]
c.​ Identify and explain two ways in which BFF’s managers could use information
contained in the income statement. ​ ​ ​ ​ ​ ​ [6]

24.​NBV is a multinational company. It makes building products such as bricks. Last year
NBV’s financial accounts showed capital employed as $144 billion. NBV has operations
in 18 countries and a total workforce of 400 000. NBV experiences some diseconomies
of scale. All raw materials are purchased from the countries it operates in to avoid
problems with exchange rates. NBV plans to open a factory in Country B for the first
time. Some people think this decision will only bring drawbacks for other businesses in
country B.

a.​ Identify and explain two ways NBV’s managers could use its financial accounts to
help make decisions. ​​ ​ ​ ​ ​ ​ ​ [6]

25.​PBG makes cars in country A. The Managing Director has been looking at PBG’s
financial accounts. He is worried about PBG’s liquidity position. An extract from the
balance sheet is shown in Table 4 2. The Managing Director said: ‘New legal controls
mean that all cars sold in country A will have to be electric by 2025. PBG has to find new
markets for its existing cars while we develop new models.’ One option for PBG is to
form a joint venture with a car manufacturer in another country.

Table 2: Extract from PBG’s balance sheet

2018 2019

Current assets $m 320 390

Current liabilities $m 256 300

Non-current liabilities $m 480 520

 Acid test ratio 0.4 0.3

a.​ What is meant by ‘non-current liabilities’? ​ ​ ​ ​ ​ [2]

b.​ Calculate PBG’s current ratio for 2019. ​ ​ ​ ​ ​ [2]
c.​ Identify and explain one way each of the following stakeholder groups might use
PBG’s financial accounts.
i.​ Trade Payables (Creditors)
ii.​ Shareholders​ ​ ​ ​ ​ ​ ​ ​ [6]

d.​ Do you think the Managing Director is right to be worried about PBG’s liquidity
position? Justify your answer by referring to appropriate ratios.​ ​ [6]

26.​Paul is the Managing Director of a private limited company called PShirts. It

manufactures and sells men’s and women’s shirts in country Y. Its products are priced
lower than most of its competitors. 2 Sales have fallen recently even though there has
been an economic boom. Paul is thinking about starting to sell shirts in other countries.
One of the directors is worried about legal controls in other countries. A summary of the
accounts is shown in Table 1.

Table 1: Summary of financial statements

2016 ($m) 2017 ($m)

Revenue 500 350

Gross profit 210 120

Profit 160 60

Current assets 35 30

Current liabilities 15 15

a.​ Calculate the current ratio in 2017.​ ​ ​ ​ ​ ​ [2]

b.​ Do you think Paul should be worried about the change in the profit margins
between 2016 and 2017? Justify your answer.​ ​ ​ ​ [6]

27.​IBH is a family-owned private limited company. It makes a range of shoes for children,
using batch production. It is a competitive market. Like many businesses, IBH needs
finance for a number of 3 reasons. The Finance Director has been looking at some
financial data. An extract is shown in Table 1. Some of the directors would like to expand
into the women’s shoe market and want to know whether IBH’s performance is
improving.

Table 1: Extract from financial data for IBH ($000)

 2016 2017

Revenue 400 480

Gross profit 240 320

Profit 120 120

Non-current liabilities 100 200

a.​ Identify six reasons why a business might need finance.​ ​ ​ [6]
b.​ Do you think IBH’s performance has improved in 2017? Justify your answer using
profit margins. ​ ​ ​ ​ ​ ​ ​ ​ [6]

28.​Adele started a dance school five years ago. Every year Adele pays herself a salary and
makes $1000 profit. The school offers a range of dance and exercise classes for
children. It is a sole trader 1 business. Adele believes using the right pricing method is
important. Adele wants to expand the business by opening a second dance school.
Based on her business plan, she forecasts that this will cost $8000. Adele cannot decide
whether a bank loan is the best source of finance for this expansion.

a.​ Do you think that a bank loan is the best source of finance for Adele to use to
expand the business? Justify your answer. ​ ​ ​ ​ ​ [6]

29.​JSF is a business in the private sector. It has 50 production workers who operate
machines. JSF makes a range of household products including towels and bed sheets.
Most of the products are 2 sold to retail businesses that take two months to pay JSF. The
business is given two weeks’ credit to pay its suppliers. The Finance manager has just
prepared a cash flow forecast. He said: ‘Cash outflows are too high. I have already
reduced the budget for market research to zero. Training costs are $1000 per month and
cannot be reduced as training is important.’ The Finance manager is thinking of other
ways to improve cash flow.

Table 1: Cash flow forecast for JSF for the period July–September 2017 ($000)

July August September

Cash inflows 120 100 90

Cash outflows 150 120 120

Net cash flow X (20) (30)

Opening balance 60 30 10
 Closing balance 30 10 Y

a.​ What is meant by a cash flow forecast?​ ​ ​ ​ ​ [2]

b.​ Calculate the values for X and Y.​ ​ ​ ​ ​ ​ [2]
c.​ Explain two ways (other than lower training costs) that JSF could improve its
cash flow position. Which way do you think JSF should use? Justify your answer​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ [6]
30.​CLG owns six airports in country L. The directors want to expand its main airport by
building another runway for aircraft to take off and land. It will cost $300m. Choosing an
appropriate source of finance will be important. The Managing Director said: ‘CLG could
offer 50 extra flights a day. There are environmental pressures including the loss of
green spaces and extra pollution. There will be external benefits as well. I hope the
Government allows the new runway to be built.’ Interest rates increased in 2017.

Table 2: Extract from financial data 2017 ($m)

Non-current assets 350

Non-current liabilities 230

Shareholders’ equity 240

a.​ Identify two reasons why a business might need short-term finance.​ [2]
b.​ Identify and explain two factors (other than interest rates) that CLG should
consider when choosing a source of finance to pay for the expansion.​ [6]

31.​AllPlay is a toyshop, set up by Vince in 2012. Each year Vince has met his business
objectives including making a profit in 2017. AllPlay imports all of its products. Vince
wants to expand by 2 opening a second shop so he can sell a wider range of products.
The cost of buying the shop is $20 000. One option for finance is a bank loan. Vince’s
bank manager will want to see AllPlay’s Income statement, and other financial
documents.

Table 1: Extract from AllPlay’s Income Statement for the year ending 30 September 2018

$ 000s

Revenue X

Less cost of sales 63

Gross profit 52

Expenses (including rent and marketing) Y

 Profit 12

a.​ Calculate X and Y.​ ​ ​ ​ ​ ​ ​ ​ [2]

b.​ Identify and explain two ways in which the bank might use AllPlay’s financial
documents.​ ​ ​ ​ ​ ​ ​ ​ ​ [6]
c.​ Do you think a bank loan is the best source of finance for Vince to choose?
Justify your answer. ​ ​ ​ ​ ​ ​ ​ ​ [6]

32.​Bakin Group (BG) is a limited company. It has 3 holiday parks that offer families holiday
accommodation and activities. BG aims to look after its customers’ needs 24 hours a
day. Customers 4 pay for the holidays when they arrive at the park. Each park has 3
managers and 40 part-time employees. BG uses a wide range of social media networks
for promotion. The Finance Director is worried about BG’s cash flow position. He cannot
decide if an overdraft is the best way for BG to solve its cash flow problem.

Table 1: Cash flow forecast for period January - March 2019 ($000)

January February March

Cash in 120 80 70

Cash out:

Interest 10 10 10

Wages and other 100 90 90

costs

Total cash outflow 110 100 100

Net cash flow X (20) (30)

Opening balance (40) (30) (50)

Closing balance (30) (50) Y

a.​ Calculate the values of X and Y​ ​ ​ ​ ​ ​ [2]

b.​ Do you think an overdraft is the best way for BG to solve its cash flow problem?
Justify your answer​ ​ ​ ​ ​ ​ ​ ​ [6]

33.​KXD is a public limited company. It has 60 shops that sell fashion clothing for 18–25 year
olds. 60% of its inventory is imported. KXD has not made a profit for three years. The
Managing Director 1 said: ‘Net cash flow is still positive but KXD has not been able to
keep up with an increase in demand. We have had problems with suppliers not providing
the inventory we need on time.’ KXD plans to fill the vacant post of Operations Director
immediately by using either internal recruitment or external recruitment.
 Table 1: Extract from Income Statement for year ending 30 September 2018

$m

Revenue 140

Cost of Sales X

Gross profit 77

Expenses Y

Profit (14)

a.​ What is meant by ‘net cash flow’?​ ​ ​ ​ ​ ​ [2]

b.​ Calculate the values of X and Y.​ ​ ​ ​ ​ ​ [2]
c.​ Identify and explain two possible problems for KXD of not making a profit​ [6]

34.​Bill has worked for a large IT company for 30 years. He likes working with computers but
he is finding it difficult to remain motivated. Bill is thinking about starting his own
business repairing 4 computers at people’s houses. Bill thinks there is demand for this
service but knows there are risks of starting up a business. His secondary market
research shows existing computer repair businesses charge high prices and do not offer
repairs at home. If Bill starts up the business he will need a vehicle. This would cost
$6000 which Bill plans to pay for using his own savings. Bill would operate as a sole
trader.

a.​ Do you think that using his own savings is the best source of finance for Bill to
use for the vehicle? Justify your answer.​ ​ ​ ​ ​ [6]

35.​QAC uses batch production to make 70 different cleaning products including soap and
polish. To meet increased demand for two of its products, X and Y, QAC could invest
$10m in flow production using new technology. The Finance Director is worried about
QAC’s cash flow position as shown in Table 1. He thinks it is important to have a high
level of inventory but he also wants to improve the cash flow position.

Table 1: QAC’s cash flow forecast for April – June 2017 ($000)

April May June

Cash in: 300 400 460

Cash out:
Labour costs 140 140 140
Inventory costs 120 180 180
Fixed costs 100 100 100
 Total cash out 360 420 420

Net cash flow (60) (20) ?

Opening balance 30 (30) (50)

Closing balance (30) (50) ?

a.​ Calculate the following values in June.

i.​ Net cash flow
ii.​ Closing balance​ ​ ​ ​ ​ ​ ​ [2]
b.​ Identify and explain two ways (other than reducing inventory) that QAC could use
to improve its cash flow position.​ ​ ​ ​ ​ ​ [6]

36.​Dipta and Ravi are friends. They want to start up a business making chocolates to sell at
local markets. Most ingredients such as cocoa beans will be imported. Ravi’s primary
market research shows that using ethical sources of supply for the ingredients will be
popular with consumers. Ravi and Dipta have no business experience, but Dipta has
written a business plan. They need $500 for equipment, but they cannot decide which
source of finance to use.

a.​ Explain two sources of finance Dipta and Ravi could use. Recommend which
source Dipta and Ravi should choose. Justify your answer.​​ ​ [6]

37.​Josh owns an office cleaning business. He has a number of large and small business
customers. Josh employs 6 full-time cleaners who are all given off-the-job training. Josh
believes that using 2 the latest cleaning equipment increases added value. He said:
‘Customers are happy with the service. I am always sending text (SMS) messages to
workers about additional work.’ Josh has been looking at his balance sheet. He cannot
decide if a bank loan is the best source of finance to use for new equipment. The new
equipment will cost $60 000.

Table 1: Extract from Josh’s balance sheet as at 30 April 2017 ($000)

Current assets 120

Trade receivables 90

Cash X

Current liabilities Y

Net current assets 70

a.​ What is meant by ‘trade receivables’? ​ ​ ​ ​ ​ [2]

 b.​ Calculate the following values.
i.​ X
ii.​ Y ​ ​ ​ ​ ​ ​ ​ ​ ​ [2]
c.​ Do you think a bank loan is the best source of finance for Josh to use for the new
equipment? Justify your answer.​ ​ ​ ​ ​ ​ [6]

38.​LWM uses batch production to make car tyres in 15 different sizes. Last year LWM sold
60 million tyres including 40 million tyres of its best-selling size. The Finance Director
has been looking at 2 the financial data shown in Table 1. She said: ‘Liquidity is
important. I need to do some ratio analysis to measure business performance. In the
previous year our Return on Capital Employed was 33%.’ The directors are worried
about increased competition but they cannot decide on the best way for LWM to
respond.

Table 1: Extract of financial data for 2016 ($m)

Revenue 3000

Profit 1000

Non-current liabilities 2000

Capital employed 4000

a.​ What is meant by ‘liquidity’?​ ​ ​ ​ ​ ​ ​ [2]

b.​
i.​ Calculate the Return on Capital Employed (ROCE) for 2016.​ [2]
ii.​ Explain what this result shows about LWM’s performance. ​ ​ [2]

39.​PCB is a public limited company. It makes a well-known brand of mobile (cell) phones.
Pricing is important as it sells in a competitive market. PCB wants to increase its product
range. It plans to 2 make luxury headphones as the demand for these is growing fast.
The Operations Director has to decide whether PCB should develop its own brand of
headphones or take over an existing producer. For both options, the source of finance
would be a share issue

Table 1: Information on the 2 options

Option 1: Develop own Option 2: Buy existing

headphones producer of headphones

Cost $12m – $15m $45m

Time needed before 12 – 18 months 3 months

product launch
 Other information Need to recruit 1 Existing producer has different
experienced designer leadership style and
organisational structure

a.​ Identify and explain one advantage and one disadvantage to PCB of issuing new
shares as a source of finance. ​ ​ ​ ​ ​ ​ [6]

40.​C&P Designs is a business partnership between Cory and Phoebe. They make
handmade jewellery. Phoebe works from home making all the jewellery such as
necklaces and bracelets. C&P pays for 3 materials when they are ordered, but allows
their customers one month to pay. Cory manages the accounts and the shop. He is
worried about cash flow, as shown in Table 2. Cory said: ‘The bank will not increase our
overdraft. We should ask customers to pay more quickly.’ Phoebe thinks advertising
would increase sales but is worried about legal controls on marketing.

Table 2: Cash flow forecast for C&P ($)

june July August

Cash inflow 480 440 460

Cash outflow:

Raw materials 240 260 240

Shop rent and other 200 200 220

costs

Total cash outflows 440 460 460

Net cash flow 40 (20) Y

Opening balance (60) (20) (40)

Closing balance X (40) (40)

a.​ What is meant by an ‘overdraft’?​ ​ ​ ​ ​ ​ [2]

b.​ Calculate the following values.
i.​ X
ii.​ Y​ ​ ​ ​ ​ ​ ​ ​ ​ [2]
c.​ Cory thinks asking customers to pay more quickly is the best way to improve
cash flow. Do you agree? Justify your answer​ ​ ​ ​ [6]

41.​NMBJ makes a range of cookies (biscuits) using batch production. Last year profit
increased by $1.5million. The directors think this is because of an increase in
productivity and better management 2 of working capital. NMBJ has a low level of
 inventory. NMBJ plans to increase the wages of all 300 employees by $50 per month
from March. The Finance Director is worried: ‘This decision will add $15 000 to wages
each month. Many employees are leaving. Is paying higher wages the best way to
improve motivation?’

Table 2: Cash flow forecast for the period January - March 2018 ($ 000)

January February March

Cash inflow 560 520 600

Cash outflow:

Wages 60 60 X

Other costs 500 480 520

Total cash outflows 560 540 595

Net cash flow 0 (20) Y

Opening balance 5 W (15)

Closing balance 5 (15) Z

a.​ Identify six reasons why a business might need working capital.​ ​ [6]
b.​ Calculate the following values shown on the cash flow forecast.
i.​ W
ii.​ X
iii.​ Y
iv.​ Z ​ ​ ​ ​ ​ ​ ​ ​ ​ [4]

42.​Yanis owns a busy restaurant in the city centre. He employs 4 skilled chefs and 6
workers to serve in the restaurant. All employees are on part-time contracts. The chefs
are paid a high hourly wage 3 rate, but receive no bonuses. Yanis is worried that too
many chefs leave. He is thinking of other ways in which he could motivate the chefs.
Yanis wants to open another restaurant but is worried about problems linked to growth.
He has prepared a balance sheet as part of his business plan. An extract is shown in
Table 2. The current ratio was 1.2:1 in 2016.

Table 2: Extract from balance sheet as at 30 September 2017 ($ 000)

Non-current assets 160

Current assets 60
 Current liabilities 40

Non-current liabilities 120

a.​ What is meant by ‘non-current assets’?​ ​ ​ ​ ​ [2]

i.​ Calculate the current ratio as at 30 September 2017.​ ​ [2]
ii.​ Explain what the two current ratio results show about Yanis’s business.​
​ ​ ​ ​ ​ ​ ​ ​ ​ [2]
b.​

43.​ZumGo is a business partnership between two brothers Richie and Justin. It provides
bus tours for people wanting to go on holiday. After two successful years, Justin wants to
expand the business 3 by buying another bus. This will cost $28 000. When Richie
produced the cash flow forecast as part of ZumGo’s business plan he forgot to include
the $6000 for advertising in March. They cannot decide whether to lease the bus or use
all their retained profit to buy one. Leasing would cost $1000 per month for 2 years.

Table 3: Cash flow forecast for 3 months ending 31 March 2018 ($)

January February March

Cash inflow 36 000 36 000 30 000

Cash outflow:

Advertising 12 000 0 6000

Other costs 24 000 25 000 22 000

Total cash outflows 36 000 25 000 W

Net cash flow 0 11 000 X

Opening balance (15 000) (15 000) Y

Closing balance (15 000) (4000) Z

a.​ Identify two financial documents (other than a cash flow forecast) that a business
might use.​ ​ ​ ​ ​ ​ ​ ​ ​ [2]
b.​ Calculate the values of W, X, Y and Z.​ ​ ​ ​ ​ [4]
c.​ Which source of finance do you think ZumGo should use for the new bus? Justify
your answer​ ​ ​ ​ ​ ​ ​ ​ ​ [6]
44.​
45.​
46.​
47.​
48.​
49.​
50.​a