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Question 1 Report
Read the information in Table 1 about Northfield Cycles, a small business repairing and selling electric bicycles. The owner has prepared a simplified statement of financial position at 30 June. She is meeting her bank to discuss a loan for a new repair bay. All values are shown in $.
| Item | Value ($) |
|---|---|
| Workshop equipment | 32,000 |
| Inventory of bicycles and parts | 14,500 |
| Cash at bank | 3,500 |
| Trade payables | 8,000 |
| Bank loan | 20,000 |
The business had sales of $96,000 during the year. The owner wants to use the financial account to show the bank what the business owns and what it owes. The loan manager is particularly interested in the value left for the owner after liabilities are paid.
(a) Define the term liability. [2]
(b) Calculate the total assets of Northfield Cycles at 30 June. [4]
(c) Analyse how the statement of financial position could help the bank decide whether to lend to Northfield Cycles. [8]
(a) A liability is an amount owed by a business to another person or organisation. [2 marks]
(b) Total assets include everything the business owns or controls with value:
\[\$32,000+\$14,500+\$3,500=\$50,000\]
Northfield Cycles has total assets of $50,000. [4 marks]
(c) The statement of financial position helps the bank because it identifies the assets owned by the business, totalling $50,000. It also identifies liabilities: trade payables of $8,000 and a bank loan of $20,000.
\[\text{Total liabilities}=\$8,000+\$20,000=\$28,000\]
\[\text{Net assets}=\$50,000-\$28,000=\$22,000\]
The $22,000 net assets suggest that some value would remain for the owner after the stated liabilities were paid. The bank can use this information to assess the business's existing debt and possible security for lending. However, a statement of financial position is a snapshot at one date. It does not show whether bicycles are selling now or whether future cash receipts will be enough to make loan repayments. The bank should also consider sales, profit and cash-flow forecasts. [8 marks]
(a) A liability is an amount owed by a business to another person or organisation. [2 marks]
(b) Total assets include everything the business owns or controls with value:
\[\$32,000+\$14,500+\$3,500=\$50,000\]
Northfield Cycles has total assets of $50,000. [4 marks]
(c) The statement of financial position helps the bank because it identifies the assets owned by the business, totalling $50,000. It also identifies liabilities: trade payables of $8,000 and a bank loan of $20,000.
\[\text{Total liabilities}=\$8,000+\$20,000=\$28,000\]
\[\text{Net assets}=\$50,000-\$28,000=\$22,000\]
The $22,000 net assets suggest that some value would remain for the owner after the stated liabilities were paid. The bank can use this information to assess the business's existing debt and possible security for lending. However, a statement of financial position is a snapshot at one date. It does not show whether bicycles are selling now or whether future cash receipts will be enough to make loan repayments. The bank should also consider sales, profit and cash-flow forecasts. [8 marks]
Question 2 Report
A report for the national trade department examines a small company called PPS Games. The business designs board games in a studio and sells 40% of its output to shops in other countries. The government is considering reducing import tariffs on card, ink and electronic timers used by PPS Games. At the same time, it is considering export support to help small firms attend overseas trade fairs. The government wants economic growth and a stronger balance of payments, but it must decide how best to use limited public funds.
(a) Define a tariff. [1]
(b) State two ways export support could help PPS Games. [2]
(c) Analyse how lower import tariffs on materials could affect PPS Games' profit. [2]
(d) Assess whether export support is a better policy option than lower import tariffs for PPS Games. [3]
(a) A tariff is a tax on imported goods. [1]
(b) Export support could help PPS Games pay for attending overseas trade fairs. It could also raise awareness among overseas customers or help the business find foreign distributors and new markets. Any two valid ways are credited. [2]
(c) Lower import tariffs reduce the cost of imported card, ink and electronic timers. PPS Games could lower prices to compete more strongly, or keep prices unchanged and increase its profit margin. [2]
(d) Export support may directly increase overseas sales and foreign-currency earnings by helping PPS Games reach customers abroad. Lower import tariffs reduce production costs, benefiting games sold both abroad and in the domestic market. Export support is the better policy if lack of overseas awareness is the main barrier; lower tariffs are better if expensive materials are the main constraint on profit. [3]
(a) A tariff is a tax on imported goods. [1]
(b) Export support could help PPS Games pay for attending overseas trade fairs. It could also raise awareness among overseas customers or help the business find foreign distributors and new markets. Any two valid ways are credited. [2]
(c) Lower import tariffs reduce the cost of imported card, ink and electronic timers. PPS Games could lower prices to compete more strongly, or keep prices unchanged and increase its profit margin. [2]
(d) Export support may directly increase overseas sales and foreign-currency earnings by helping PPS Games reach customers abroad. Lower import tariffs reduce production costs, benefiting games sold both abroad and in the domestic market. Export support is the better policy if lack of overseas awareness is the main barrier; lower tariffs are better if expensive materials are the main constraint on profit. [3]
Question 3 Report
Fig. 1 shows information from the statement of financial position of CycleFix, a mobile bicycle repair business. Azeem owns the business and is considering the option of buying a second repair van. He has been advised that the current ratio should be checked before cash is used for the van. All values are in £000.
(a) Calculate the working capital of CycleFix. Show your working. [2]
(b) Calculate the current ratio of CycleFix. Give your answer in the form x:1. [2]
(c) State one reason why a lender may use the current ratio when deciding whether to lend money to CycleFix. [1]
(d) Analyse one possible effect on CycleFix if Azeem uses all of the cash shown in Fig. 1 as a deposit for the new van. [3]
(a) Working capital is current assets minus current liabilities:
\[\pounds36\,000-\pounds24\,000=\pounds12\,000\]
CycleFix has working capital of £12,000. [2 marks]
(b) Current ratio:
\[\frac{\pounds36\,000}{\pounds24\,000}=1.5:1\]
The current ratio is 1.5:1. [2 marks]
(c) A lender uses the current ratio to assess whether CycleFix is likely to be able to pay its short-term debts, or current liabilities, when due. [1 mark]
(d) Using all the cash as a deposit reduces cash by £8,000. Current assets and working capital will therefore fall. This may make it harder for CycleFix to pay suppliers, wages, and other current liabilities on time, reducing liquidity. [3 marks]
(a) Working capital is current assets minus current liabilities:
\[\pounds36\,000-\pounds24\,000=\pounds12\,000\]
CycleFix has working capital of £12,000. [2 marks]
(b) Current ratio:
\[\frac{\pounds36\,000}{\pounds24\,000}=1.5:1\]
The current ratio is 1.5:1. [2 marks]
(c) A lender uses the current ratio to assess whether CycleFix is likely to be able to pay its short-term debts, or current liabilities, when due. [1 mark]
(d) Using all the cash as a deposit reduces cash by £8,000. Current assets and working capital will therefore fall. This may make it harder for CycleFix to pay suppliers, wages, and other current liabilities on time, reducing liquidity. [3 marks]
Question 4 Report
The manager of HTL Boutique Hotel is recruiting a night receptionist. The hotel has received applications from people with different experience. The manager plans to use application forms, references and interviews. One applicant has worked in a hotel before but has no experience using the hotel booking software. Another applicant has strong IT skills but has never worked with guests. The business aims to maintain good service for overseas visitors while controlling the cost of training. The manager must select one option by Friday because the current receptionist leaves next week.
(a) What is meant by a reference in the recruitment process? [2]
(b) State two qualities that the manager should include in the person specification for a night receptionist. [2]
(c) Analyse one reason why checking references may be useful before offering the job. [3]
(d) Calculate the training cost for Applicant 1 if booking-software training lasts 18 hours at $14 per hour and a training manual costs $28. [3]
(e) Justify which applicant the manager should select. [4]
(a) A reference is information or a statement about an applicant supplied by a previous employer or another suitable referee. [2 marks]
(b) Two suitable qualities are, for example, communication skills and honesty and reliability. Customer-service skills, IT skills, problem-solving and ability to work at night are also valid. [2 marks]
(c) Checking references can confirm claims made on the application form, such as attendance, reliability or customer-service performance. This reduces the risk of recruiting an unsuitable or unreliable employee. [3 marks]
(d) Training wages:
\[18\text{ hours}\times\$14=\$252\]
\[\$252+\$28=\$280\]
Applicant 1's training cost is $280. [3 marks]
(e) Applicant 1 has previous hotel experience, so is likely to understand guest service and hotel routines. Although software training costs $280, booking software can be taught. Applicant 2 has strong IT skills but may need more extensive and costly training in customer service. Applicant 1 is therefore the stronger choice because direct guest experience is important for a night receptionist and the software gap can be addressed through training. [4 marks]
(a) A reference is information or a statement about an applicant supplied by a previous employer or another suitable referee. [2 marks]
(b) Two suitable qualities are, for example, communication skills and honesty and reliability. Customer-service skills, IT skills, problem-solving and ability to work at night are also valid. [2 marks]
(c) Checking references can confirm claims made on the application form, such as attendance, reliability or customer-service performance. This reduces the risk of recruiting an unsuitable or unreliable employee. [3 marks]
(d) Training wages:
\[18\text{ hours}\times\$14=\$252\]
\[\$252+\$28=\$280\]
Applicant 1's training cost is $280. [3 marks]
(e) Applicant 1 has previous hotel experience, so is likely to understand guest service and hotel routines. Although software training costs $280, booking software can be taught. Applicant 2 has strong IT skills but may need more extensive and costly training in customer service. Applicant 1 is therefore the stronger choice because direct guest experience is important for a night receptionist and the software gap can be addressed through training. [4 marks]
Question 5 Report
A small graphic-design business has sent a $7 500 invoice to a national retailer. Fig. 1 shows an invoice factoring option offered by a finance company. The retailer is reliable but will pay in 75 days. The studio needs cash this week for specialist software and freelance employees. The owner is considering the option because the business has no retained profit available after moving to a new office. The finance company will collect the invoice from the retailer.
(a) Calculate the cash paid immediately to the studio. [2]
(b) State three reasons why the studio may need short-term finance. [3]
(c) Analyse whether invoice factoring is likely to be a suitable option for this studio. [5]
(a) Immediate cash is 85% of the invoice:
\[0.85\times$7500=$6375\]
Cash paid immediately = $6375 [2 marks].
(b) The studio may need short-term finance to buy specialist software [1], pay freelance employees [1], and bridge delayed customer payments [1]. Rent, utilities and materials are also valid short-term needs. [3 marks]
(c) Factoring provides $6375 immediately [1], allowing the studio to pay for software and freelancers rather than waiting 75 days for the retailer [1]. The factor collects the invoice payment, reducing administration [1]. However, the studio does not receive the full invoice value immediately and factoring involves a fee [1]. This reduces cash received and potentially profit, so the owner should compare the fee with the value of receiving cash now [1]. [5 marks]
(a) Immediate cash is 85% of the invoice:
\[0.85\times$7500=$6375\]
Cash paid immediately = $6375 [2 marks].
(b) The studio may need short-term finance to buy specialist software [1], pay freelance employees [1], and bridge delayed customer payments [1]. Rent, utilities and materials are also valid short-term needs. [3 marks]
(c) Factoring provides $6375 immediately [1], allowing the studio to pay for software and freelancers rather than waiting 75 days for the retailer [1]. The factor collects the invoice payment, reducing administration [1]. However, the studio does not receive the full invoice value immediately and factoring involves a fee [1]. This reduces cash received and potentially profit, so the owner should compare the fee with the value of receiving cash now [1]. [5 marks]
Question 6 Report
Fig. 1 shows how FrameForge Studio records information from a weekend film workshop. The studio gives customers an invoice when a booking is made. It then uses the documents to prepare its monthly profit loss account. The manager is considering whether to buy new editing software costing $3,000.
The supplier bills include camera-hire and tutor costs. Other monthly expenses are $5,900. The workshop is part of a competitive market, so the manager needs reliable information before changing prices.
(a) State what an invoice tells FrameForge Studio about a customer booking. [2]
(b) Calculate the gross profit from the workshop bookings shown in Fig. 1. [4]
(c) Analyse whether the studio should use the monthly profit loss account when deciding to buy the new editing software. [6]
(a) An invoice tells the business the amount the customer has been charged or owes and gives details of the goods or services supplied, such as the workshop booking. [2 marks]
(b) Gross profit is sales revenue minus cost of sales.
\[\text{Gross profit}=\$12,500-\$4,800=\$7,700\]
Sales revenue is $12,500 and the supplier bills of $4,800 are the cost of sales. Therefore gross profit is $7,700. [4 marks]
(c) A monthly profit and loss account is useful because it shows whether sales cover the business's costs and result in a profit. It includes supplier bills and other expenses, so it is more informative than looking at sales alone. The gross profit of $7,700 is reduced by other monthly expenses of $5,900:
\[\$7,700-\$5,900=\$1,800\]
This leaves only $1,800 profit before considering the proposed software. Since the software costs $3,000, buying it could put pressure on profit and cash. However, the software might improve video quality or enable future sales. The manager should therefore use the account, but also prepare forecasts of future demand and cash flow before deciding. [6 marks]
(a) An invoice tells the business the amount the customer has been charged or owes and gives details of the goods or services supplied, such as the workshop booking. [2 marks]
(b) Gross profit is sales revenue minus cost of sales.
\[\text{Gross profit}=\$12,500-\$4,800=\$7,700\]
Sales revenue is $12,500 and the supplier bills of $4,800 are the cost of sales. Therefore gross profit is $7,700. [4 marks]
(c) A monthly profit and loss account is useful because it shows whether sales cover the business's costs and result in a profit. It includes supplier bills and other expenses, so it is more informative than looking at sales alone. The gross profit of $7,700 is reduced by other monthly expenses of $5,900:
\[\$7,700-\$5,900=\$1,800\]
This leaves only $1,800 profit before considering the proposed software. Since the software costs $3,000, buying it could put pressure on profit and cash. However, the software might improve video quality or enable future sales. The manager should therefore use the account, but also prepare forecasts of future demand and cash flow before deciding. [6 marks]
Question 7 Report
The diagram shows the ownership structure of Rojaz Furniture Ltd, a small company making desks for home offices. Rojaz has received an order from a new market and needs to recruit two staff for production. The founder wants to keep most shares but is considering selling a small number to a former colleague. The company is not quoted on a stock exchange. Use Fig. 1 when selecting your answer about the type of organisation.
(a) What is meant by the word limited in the name Rojaz Furniture Ltd? [1]
(b) State three characteristics of a private limited company. [3]
(c) Analyse why Rojaz Furniture Ltd may be more suitable than a partnership for this expansion. [4]
(a) In the name Rojaz Furniture Ltd, limited means the owners’ liability for business debts is limited to their investment or the value of their shares [1 mark].
(b) A private limited company is owned by shareholders [1], has a separate legal identity [1], and cannot sell shares to the general public [1]. Shareholders have limited liability and the business uses Ltd in its name. [3 marks]
(c) Limited liability protects Maya’s personal assets if the new order fails or creates debts [1]. Selling shares to the colleague can raise finance for staff or materials without borrowing [1]. The company continues to exist if an owner leaves, which can give suppliers confidence [1]. However, Maya may lose some control and company reporting requirements add cost. It is most suitable if expansion needs finance and lower personal risk [1]. [4 marks]
(a) In the name Rojaz Furniture Ltd, limited means the owners’ liability for business debts is limited to their investment or the value of their shares [1 mark].
(b) A private limited company is owned by shareholders [1], has a separate legal identity [1], and cannot sell shares to the general public [1]. Shareholders have limited liability and the business uses Ltd in its name. [3 marks]
(c) Limited liability protects Maya’s personal assets if the new order fails or creates debts [1]. Selling shares to the colleague can raise finance for staff or materials without borrowing [1]. The company continues to exist if an owner leaves, which can give suppliers confidence [1]. However, Maya may lose some control and company reporting requirements add cost. It is most suitable if expansion needs finance and lower personal risk [1]. [4 marks]
Question 8 Report
Azeem owns a new business making refillable pens for local school and office markets. He currently produces 4 000 pens each month in a small workshop. An option to buy a faster moulding machine would allow the business to produce 12 000 pens each month. The machine costs $18 000, but Azeem expects that less plastic will be wasted and that each worker will make more pens per hour. He wants to increase profit without causing cash flow problems. Azeem has asked a business adviser whether the lower unit cost from expansion would be an economy of scale.
(a) Define economies of scale. [2]
(b) State one way that the faster moulding machine could reduce the average cost of making pens. [2]
(c) Calculate the percentage increase in monthly output if production rises from 4 000 to 12 000 pens. Show your working. [2]
(a) Economies of scale are a fall in average, or unit, cost as the output or size of a business increases. [2 marks]
(b) The faster machine could reduce average cost by spreading fixed costs over more pens, increasing worker productivity so labour cost per pen falls, or reducing plastic waste and therefore material cost per pen. Any one explained method is valid. [2 marks]
(c) Increase in output:
\[12,000-4,000=8,000\text{ pens}\]
\[\frac{8,000}{4,000}\times100=200\%\]
Monthly output increases by 200%. [2 marks]
(a) Economies of scale are a fall in average, or unit, cost as the output or size of a business increases. [2 marks]
(b) The faster machine could reduce average cost by spreading fixed costs over more pens, increasing worker productivity so labour cost per pen falls, or reducing plastic waste and therefore material cost per pen. Any one explained method is valid. [2 marks]
(c) Increase in output:
\[12,000-4,000=8,000\text{ pens}\]
\[\frac{8,000}{4,000}\times100=200\%\]
Monthly output increases by 200%. [2 marks]
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