3. Finance and Accounts

Question 1

Variable costs

Answer 1

Variable costs are costs that CHANGE according to change in output/level of production.
PREW

Question 2

Explain one reason, other than increased sales revenue, why it is important that Gen Y generates new revenue streams.

Answer 2

Motivate workers
finance projects
pay for cop
increase output

Question 3

Explain whether an increase in total fixed costs has an impact on unit contribution.

Answer 3

unit contribution is the difference between the selling price and its variable cost, therefore an increase in fixed costs will have no impact on unit contribution

or

it will have no impact.

Question 4

A fixed cost

Answer 4

A fixed cost is a cost that does not change with the level of production/output. SIRI

Question 5

Revenue streams

Answer 5

Revenue streams refer to the different sources of sales revenue that a firm may have. Often, as firms grow, they attempt to diversify revenue streams as a way to find sales growth in saturated markets or as a way to offset risk (if sales revenue from one revenue stream declines, perhaps it can be offset by sales growth in another revenue stream).

Question 6

net profit before interest and tax calculations

Answer 6

Sales revenue
Purchases
Closing Stock
Opening Stock
ADD P,O,C TO GET COGS

Gross Profit (sales revenue - cogs)

Gross profit - expenses = net profit before interest and tax

Question 7

Current assets (fixed assets)

Answer 7

Current assets are items that are purchased for use of NOT more than one year and can easily be converted to cash. eg cash, stock, DEBTORS

Question 8

margin of safety

Answer 8

In break-even analysis, margin of safety is how much output or sales level can fall before a business reaches its break-even point.

CO - BEO

Question 9

total cost

Answer 9

TC = TFC + TVC

Question 10

BANK LOAN DFN/ADS/DIS

Answer 10

a bank loan is a form of debt financing in which a business recieves a specific amount of money to be paid back in future with interest over a certain period of time.

get money now and pay later
negociate terms of repayment

interest
collateral damage

Question 11

BUSINESS ANGEL DFN/ADS/DIS

Answer 11

this is a waelthy person who is willing to give some of their money to support risky businesses

No interest paid
can share ideas

some control is lost
cultural clashes
business angels are rare

Question 12

Sources of finance include:

Answer 12

Appropriate sources of finance include:

Personal savings
Loan from family or friends
Small business grant
Loan from a bank secured by some personal asset of value
Crowd sourcing.

Question 13

Features/ Characteristics of angel investors include:

Answer 13

Is an external source of finance,
Angel investors provide finance to early-stage / start-up companies (new ventures)

The finance is usually in exchange for equity
Angel investors typically invest in high risk ventures, ones banks are unlikely to lend to.
Angel investors typically participate in the management/decision-making of the company

Question 14

LEASING DFN/ADS/DIS

Answer 14

A source of financing where a firm is allowed to use an asset without purchasing it

Instead of spending money to purchase the asset, businesses can spread the cost over time through lease payments.
access to latest tech
can reinvest saving to business

Loss of ownership benefits
Higher total cost comapred ot purchasing it

Question 15

REVENUE EXPENDITURE VS CAPITAL EXPENDITURE DFN WITH EXAMPLES

Answer 15

Capital expenditure is income spent on fixed asssets; it could include: buildings, computers, books, equipment. Revenue expenditure could include: wages, materials, electricity, marketing, etc.

Revenue expenditure is income spent on day to day activites ie transportation
Pens, paper and other consumables are revenue expenditure even if bought in bulk.

CHECK NOTES

Question 16

Trade credit

Answer 16

Trade credit is a source of short-term finance that allows a business to make purchases on credit

Question 16

debentures dfn/ads/dis

Answer 16

A debenture is a long-term debt usually with a fixed interest rate and doesnt usally require collateral damage.

ideal for long term goals
keep control
no collateral
usually fixed interest

interest rate
bad for issuer due to lack of colleteral

Question 17

share capital dfn/ads/dis

Answer 17

This is financing obtained by selling shares

can be used to collect large sums of income
no iterest rates

only available to companies
may lose control

Question 18

overdrafts dfn/ads/dis

Answer 18

This is when a financial institution lets a business withdraw more than whats in their current accounts

Best for day-to-day activities
interest is fixed

Interest
collateral

Question 19

Explain one advantage and one disadvantage of using a break-even analysis/charts

Answer 19

Break-even analysis is a forecasting tool used to measure when total revenue = total costs.

Advantages of BE include:

Charts are relatively easy to construct and interpret
Helps in decision making

charts asumme the relationship between cost and output is linear

it makes assumptions thus making it inaccurate
may lead to bad decisions being made

Question 20

Total contribution calculation

Answer 20

Total contribution is the difference between total sales revenue and total variable costs.

To calculate TVC, take total costs and subtract fixed costs, as follows
$150 000 minus $50 000 = $100 000

TOTAL REVENUE - TOTAL VARIABLE COSTS

Question 21

construct a fully labelled break even chart AND all the calculations formulas

Answer 21

Award [1] for correct labelling of both x and y axis − total costs and revenue (y) and output or units produced (x).

Award [1] for accurate total cost curve.

Award [1] for accurate total revenue curve.

Award [1] for identifying the break-even point = Do Not reward calculations of BE quantity when not accompanied by chart.

MOS = CO - BEO
BEP = FC/CONTRIBUTION
CONTRIBUTION = $ - VC

Candidates are NOT required to produce Fixed Costs FC or show the B/E Revenue line.

Accuracy of TC and TR is based on the ability to approximate the B/E quantity based on the scale chosen for the x and y axes (this allows for the cases where graph paper has not been used).

If B/E not accurate but identified DO NOT penalize if either TR and/or TC already penalized. Hence OFR applied.

Question 22

Calculate the break-even quantity

Answer 22

Average sales price per meal – average variable costs per meal = contribution

then
fixed costs divided by contribution

THEREFORE
Break-Even Point (Units) = Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit).

Question 23

margin of safety

Answer 23

In break-even analysis, margin of safety is how much output or sales level can fall before a business reaches its break-even point.

Question 24

Explain how an increase in competition may affect a business’s margin of safety.

Answer 24

An increase in competition decreases the Margin Of Safety because of reduced sales

Question 25

Limitations of the break even model

Answer 25

Some of the limitations may include:

The break-even model assumes a linear relationship between output and total variable cost, whereas in reality the costs per unit can go down due to economies of scale.

The break-even model assumes that all units produced are sold, therefore total revenue received if not all of the dolls/quantity is sold can be lower, which will have a negative impact on the break-even point.

The break-even model assumes that the price stays constant at all levels of output. In reality, price can be reduced or increased with direct impact on the break-even quantity.

Question 26

retained profit

Answer 26

Profit made by the business, calculated after all deductions

, including dividends. It is reinvested into the business as an internal source of finance.

Question 27

construct a profit and loss account with all calculations and try a past paper question

Answer 27

sales revenue
cogs (purchases+cs+os)
Gross profit= sales revenue - cogs
Gross profit - expenses
Net profit b4 int n tax
interest
tax
net profit
dividents
retained profit

Question 28

Explain one advantage and disadvantage of using the straight line balance depreciation method.

Answer 28

The straight line method is simpler and therefore easier for GD to calculate and less time consuming.

However it assumes that the non current asset with depriciate at the same price each year

• It allows for a constant expense to be accounted for in the profit and loss account. GD’s accountant might want to show a higher profit level to attract more investors. The use of a straight line depreciation method will result in lower expenses compared with reducing balance depreciation allowance. For example, 10,500 as opposed to 20,000 using the reducing balance methods.
• The use of a straight line method will result in the same figure $8000 as estimated as residual value hence make the process easier/ more accurate/ more straightforward for GD’s accountant.

Question 29

calculate equity

Answer 29

[share capital] + [retained profit] = Equity

Question 30

Explain one effect that
a long-term debt may have on TPS’ profit and loss account.

Answer 30

The $50 000 in long-term debt would have to be repaid with interest. That interest is under expenses and it would be subtracted from net profit before interest and tax, thereby lowering TPS’ net profit before tax.

Question 31

Describe one disadvantage of using the reducing/declining balance method of depreciation.

Answer 31

The value of the asset with reducing balance is never fully written off by the business.

Question 32

An intangible asset

Answer 32

An intangible asset is an asset that lacks physical substance and usually is very hard to evaluate, but it can add value to the business. It includes patents, copyrights, franchises, goodwill, trademarks and brand names with links to product positioning of a good or service that a business may offer.

Question 33

Calculate net assets (working capital)

Answer 33

Net Current Assets (Working Capital)=Current Assets−Current Liabilities

Question 34

Prepare a cash flow forecast with all the calculations

Answer 34

A cash flow forecast is a prediction of future cash inflows, cash outflows and net cash flow for a specific time period.

IT CONSISTS OF THE FOLLOWING;
Cash inflow is the amount of cash flowing into or earned by the business from sales, debtors and other activities, such as the sale of unused fixed assets or the rent from extra office space.

Cash outflow is the amount of cash paid out by the business for core operations such as raw materials, creditors and electricity and other activities such as legal fees.

Net cash flow is the difference between the total cash inflows and cash outflows. It could be positive or negative. Typically, businesses aim for a positive net cash flow, which indicates that that the company is not facing problems.

Opening balance refers to the amount of cash the business has in the bank at the beginning of the month. If a business is new, then it will not have an opening balance, so this figure would be zero.

Closing balance refers to the amount of cash that the business has at the end of the month. It is the sum of the opening balance and the net cash flow. This closing balance then becomes the opening balance for the next month. This is calculated using the following formula:

Closing balance = opening balance + net cash flow for the month

Question 35

working capital cycle

Answer 35

Working capital cycle is the period of time/interval between the actual cash paid for costs of production and the actual cash received from customers. It is the time period when net current assets is converted into cash.

Question 36

ways to improve forecasted cash flow

Answer 36

paying suppliers later
increase inflows

Get incomes earlier – possible with fees but not with the sale of crops, which is seasonal.
Delay expenditures – get credit from some suppliers

Increase inflows:
Candidates may suggest that BB should not give credit for the first months of operation. This will increase the inflow by a $1000.

Dan can possibly ask the bank to give a loan in the first months of operation instead of the 4th months. $3000 will help BB to significantly reduce the initial negative cash flow.
Increasing the price of benches will increase inflows. However, this may reduce competitiveness.

Reduce outflows:
Dan can reduce his own salary of 1500, especially in the first month or so. Own salaries and admin are the most excessive/large outflow that contributes to the negative cash inflow. A smaller self-reward can significantly reduce the outflow and therefore the net cash flow.

Dan can also negotiate his rental payments. Instead of paying a large sum of 1200 in January, monthly instalments of $400 will significantly reduce the outflow in January Dan can also ask for at least one month’s credit from his landlord.
Do not accept an option of not buying the machinery/tools.
Accept lease the machinery for a considerably lower fee per months.
Generic comments like reduce donation, utilities etc will not make a significant impact. Hence not really applicable.

Question 37

stages of the working capital cycle include

Answer 37

Typically, stages of the working capital cycle include:

purchase of materials from suppliers
production of goods
goods sold, typically on credit (unless a retail store)
payment received by debtors.

Question 38

describe two advantages for Su of using a cash-flow forecast.

Answer 38

• for use as a planning tool
• to inform stakeholders (e.g. banks when finance is needed)

Question 39

net cash flow

Answer 39

total inflows - total outflows

Question 40

Explain the difference between profit and cash flow.

Answer 40

Profit is typically calculated on an accumulative basis (when revenue or expense actually accrues to the business) but does not reflect the actual movement of funds.

Cash flow reflects the actual movement of funds – when a business receives payment and makes a payment.

Thus, a timing difference can exist between the accrual of a revenue or an expense and the actual receipt of funds.

Question 41

Strategies to improve financial positions

VIP

VIP

Answer 41

changing to a just-in-time (JIT) stock control method.

Reduce cash outflow. ie paying suppliers late

Seek alternative suppliers with cheaper raw materials

Tighter credit control. Cash payments only for the retailer will clearly reduce/eliminate debtor days.

Enhance marketing to generate more sales in cash.

Changing pricing policy. CM can possibly reduce the price of its products. While CM may be more competitive and this strategy may work well given the economic downturn and the increased competition, CM may suffer losses or a reduction in profit. However, customers may perceive the frozen organic meals as even better value for money and increase demand. Moreover, perhaps CM can withstand a reduction in profit in the short term and we can see that CM is profitable. The liquidity issue ought to be sorted. CM should prioritize its cash flow problem first, then deal with a low acid test to generate cash to survive.

Improved product portfolio. Perhaps CM should also consider non-organic meals or other types of products to enhance its portfolio and create more revenue streams. However, cannibalism can be created – CM may also have to compete more directly with the increasing number of providers of non-organic frozen meals. Market research has to be done so perhaps this option is not the most appropriate one in the short term.

Seeking alternative short term sources of finance. Accept relevant applicable suggestions like the use of overdraft and short-term loans, to deal with CM’s short-term liquidity crisis. However, these options are more of first aid rather than solution to some ongoing problems and are likely to be more theoretical given the lack of information in the stimulus.

Question 42

Payback period

DO MAnY EXAMPLES AND EXERCISES FROM 3.7 AND PAST PAERS AND KOGNITY

Answer 42

initial investment
DIVIDED by
net cash flow per year

cashflow= inflows - outflows

Question 43

Explain one disadvantage of using the payback period method of investment appraisal.

Answer 43

Also, the payback analysis fails to consider cash inflows beyond the payback period

One disadvantage is that the payback method fails to take into account the time value of money and adjust the cash inflows accordingly.

Question 44

Explain one disadvantage of using the NPV method of investment appraisal.

Answer 44

the method relies on the use of a realistic discount factor.

Question 45

Explain one advantage and one disadvantage of changing from function-based cost centres to the cost centres

Answer 45

Advantages of change include:

Easier to monitor and control production of products
Easier to see which products to drop, or modify
Easier to set targets – difficult for large functional areas
This is because functions are not directly related to products.
Disadvantages of change include:

Costs of implementing change
Disruption
Lack of continuity
Possible unwanted competition between products or projects.

Question 46

prepare a variance analysis

Answer 46

A tool used to compare a business’s budgeted sales revenue and costs with the actual figures over a period of time.

A favourable variance occurs when the actual budget situation is better than the forecast and can happen when:
the actual costs are lower than the budgeted costs
the actual income is higher than the budgeted income

An adverse variance. This occurs when the actual budget situation is worse than the forecast and can happen when:
the actual costs are higher than the budgeted costs
the actual income is lower than the budgeted income

No variance. This means that the actual budget situation was the same as the forecasted budget.

the horizontal table would have
1.Budgeted figures 2. Actual figures 3. Variance

The vertical would have
total income, total cost, net income

Question 47

Profit centres dfn and advantages of having three separate profit centres.

Answer 47

A profit centre is a section of a business that calculates profit and generates revenue and costs.

you can compare the three
identify ways to reduce cost and increase profit

The capacity of the function room may be limited in terms of revenue hence the management can concentrate on costs reduction to increase profit. It gives the function room the flexibility to make a decision and outsource their costs somewhere else which in turn, is likely to encourage the
restaurant to stay more competitive.

The real advantage is that senior management, the centre managers and employees know which segments/centres/ activity/ parts of TH are profitable and which are not. In addition, the directors are able to evaluate which centre contributes most to the business’s profits and this helps to inform decision-making.

By using profit centres it makes the managers of each profit centre more responsible and accountable for the costs they incur and the sales they make – their positions in the business may be dependent on making a profit. Changes in the profits made by each centre may be used to judge the efficiency of each part of the hotel. Also, the
efficiency of all parts of the hotel can be monitored and compared. Creative competition may increase efficiency and act as a driver to generate more revenue which may act as a motivator.

Senior management could easily realize that a decision in the past to delay and offer flexible contracts clearly reduced costs and improved profitability of the function rooms. Hence, financially an effective decision. Moreover, the impact of the recent problems of demotivation are likely to become more evident in the near future when
profitability is likely to decrease.

TH’s mission is to be the best employer and offer the highest quality of customer service. By utilizing profit centres, incentives could be created for managers striving to offer the highest levels of customer service.

Question 48

Explain the usefulness of the variance analysis

Answer 48

helping future budgeting and identifying problems.

The calculations show lower than expected fees. This helps plan for teachers and other resources.

Higher than expected salaries. This helps questions such as “Have we recruited too many teachers”? and “Could we afford a pay increase?”.

Higher cash purchases suggests looking at the value to MSS of cash purchases made. The overall profit figure has changed a great deal so considerable need for concern.

Question 49

factors affecting choice of finance

stage pc

PACTS

Answer 49

Purpose of Finance
Amount Required
Cost of Finance; Interest, control
Timeframe; long/ short term
Size and status of firm

Size and status of firm
Timeframe
Amount Required
Gearing
External Factors
Purpose of Finance
Cost of Finance

stage pc