Exam Questions - Section B Flashcards
The following information has been extracted from the accounts of Angus Ltd.
- Sales made during the year: £2,000,000
- Cost of goods sold: £800,000
- Selling and distribution expenses: £170,000
- Wages and salaries: £500,000
- Administrative expenses: £480,000 (which includes £15,000 for amortisation of business
goodwill, and £85,000 for depreciation of plant and equipment) - Income from sale of business premises: £350,000
- Interest paid on overdraft: £40,000.
a) Using the information above, calculate the following:
- Net profit
- Operating profit
- Earnings before interest and tax (EBIT)
- Earnings before interest, tax, depreciation and amortisation (EBITDA)
(4 Marks)
Net profit = total revenue – total expenses
= (2,000,000 + 350,000) – (800,000 + 170,000 + 500,000 + 480,000 + 40,000)
= 2,350,000 – 1,990,000 = £360,000 (1)
Operating profit = sales – (COGS + operating expenses)
= 2,000,000 – (800,000 + (170,000 + 500,000 + 480,000))
= 2,000,000 – (800,000 + 1,150,000) = 2,000,000 – 1,950,000 = £50,000 (1)
EBIT = (sales + other income excl. finance income) – (COGS + operating expenses)
= (2,000,000 + 350,000) – (800,000 + (170,000 + 500,000 + 480,000))
= 2,350,000 – (800,000 + 1,150,000) = 2,350,000 – 1,950,000 = £400,000 (1)
EBITDA = EBIT + depreciation + amortisation
= 400,000 + 85,000 + 15,000
= £500,000 (1)
The following information has been extracted from the accounts of Angus Ltd.
- Sales made during the year: £2,000,000
- Cost of goods sold: £800,000
- Selling and distribution expenses: £170,000
- Wages and salaries: £500,000
- Administrative expenses: £480,000 (which includes £15,000 for amortisation of business
goodwill, and £85,000 for depreciation of plant and equipment) - Income from sale of business premises: £350,000
- Interest paid on overdraft: £40,000.
b) Explain why EBITDA might provide a better measure of performance compared to EBIT. (2 Marks)
In comparison to EBIT, EBITDA removes the effects of depreciation and amortisation, both
of which are determined by the accounting treatment chosen by the business. (1)
Therefore, the resultant figure provides a less distorted view of business performance. (1)
Explain what a Person with Significant Control (PSC) Register is and what conditions apply in
order to identify that a person is a PSC for Inclusion in the register. (6 Marks)
Section 1 A PSC register:
Identifies/is a register of the natural persons who ultimately control the company (1), which
(the majority of) companies are required to keep (1).
Is a tool to combat terrorism, organised crime and money laundering (1)
Section 2 A PSC is a person who:
Holds, directly or indirectly more than 25% of the shares (1), or
Holds, directly or indirectly more than 25% of the voting rights (1), or
Holds the right, directly or indirectly to appoint or remove a majority of directors (1), (or)
Has the right to exercise or actually exercises significant influence or control over the
company(1), or
Has the right to exercise or actually exercises, significant influence or control over the
activities, is a trust or firm which is not a legal person, the trustees or members of which
would satisfy one of the other conditions (1).
Explain the role of the judiciary in making and interpreting law. (6 Marks)
Award up to six marks from the following:
The traditional constitutionally accepted role of the judges is to interpret and apply the law, (1) not to create new law. (1)
Despite this, it is generally accepted that judges do make new law, especially where there is no legislative guidance. (1)
Even where there is legislation the judges can still create law through statutory interpretation (1) When interpreting statutes the judiciary has three main rules of statutory interpretation to assist them, the literal rule, the golden rule and the mischief rule. (1)
Judges can make law through the doctrine of precedent, which means that certain cases are decided based upon principles derived from prior cases. (1) A court is bound by the ratio decidendi of the court above it or by a court of equal standing in the hierarchy. (1)
The ratio decidendi is the legal reasoning on which a case is decided, not the actual the decision itself. (1)
The judiciary makes law through establishing case law (1)
Explain the benefits of producing an integrated report alongside the financial statements of a
business. (6 Marks)
Award up to six marks from the following:
Integrated reporting incorporates a range of relevant information both financial and nonfinancial for the benefit of stakeholders.(1)
It encourages business’s to recognise interconnectivity in terms of how non-financial impacts are related to financial impacts.(1)
Integrated reporting improves the quality of information available to the providers of capital for organisations.(1)
By drawing on different reporting aspects, it promotes a more cohesive and efficient approach to corporate reporting. (1)
Integrated reporting can communicate all of the factors that lead to value creation of the organisation.(1)
Integrated reporting promotes accountability and stewardship through the interdependence of financial and non-financial aspects of the organisation.(1)
It can lead to better integration of the information systems that support internal and external reporting. (1)
Identify and explain three areas of law that a new business needs to be aware of. (6 Marks)
Award up to six marks from the following:
Contract Law (1)
Contract law establishes rules regarding when a contract is created, what terms may be used, what will cause the termination of a contract and the remedies for breach of contract. (1)
Employment law (1)
As employers, a new business will need to enter into contracts of employment with their employees and should be aware of the employment rights afforded to employees, (1) such as unfair and wrongful dismissal rules, the prevention of discrimination in the workplace, the right to a minimum wage and health and safety legislation. (1)
Intellectual property law (1)
New businesses may wish to prevent others from stealing or copying their names or inventions and may do this through the intellectual property laws, including patents, trademarks copyright and design rights. (1)
Tort law (1)
Employers should also be aware of their obligations under the law of tort, especially the tort of negligence, under which liability can be imposed on persons who engage in certain negligent acts or omissions. (1)
Commercial law (1)
A knowledge of commercial law is also important for anyone setting up in business. (1) Commercial law concerns the body of laws that seek to regulate and facilitate the commercial dealings of businesses. (1)
Consumer law (1)
A knowledge of consumer law is equally important for new businesses. The aim of consumer law is to protect consumers (1)
Environmental law (1)
The dominant purpose of environmental law is the protection of the environment and as the activities of businesses can clearly impact the environment it is an area of law that has increased in importance in recent years (1)
Cyber-security and data protection (1)
Businesses need to be aware of the risks surrounding cyber-attacks, such as fraudulent emails, malware and ransomware (1)
Competition law (1)
Businesses should also be aware of competition law, which prohibits businesses from engaging in activity that can prevent, restrict or distort competition. (1)
Describe the advantages of a centralised workforce structure for a large organisation. (6 Marks)
Award up to six marks from the following:
As decision making rests with senior leadership, control is retained at the centre (1)
Standard policies and practices decided at the top help ensure consistency, customer experience is standardised across the organisation (1)
It is easier to show strong leadership (1)
Decision making can be undertaken quickly as authority rests in one place (1) Reporting is easier as information is centrally controlled (1)
Coordinating and controlling aspects of the business (e.g. budgeting) is easier if they are centralised (1)
Where a business is run by a single individual, this facilitates control over all areas of the business which may be important. (1)
Explain the operation of tribunals as alternatives to the courts, outlining the benefits of the tribunal system. (6 Marks)
Tribunals usually hear cases in panels, consisting of a legally qualified chairperson and laypersons who are not legally qualified, but have expertise in the relevant subject matter.(1)
The advantages of tribunals are that:
- They are often cheaper (1)
- Disputes are decided more quickly than court proceedings (1)
- They are more informal and less intimidating than courts (1)
- Tribunals are not subject to the mass of rules that courts are subject to (1)
- They are not bound by precedent, meaning that they can operate in a more flexible manner (1)
- Tribunals tend to attract less publicity than court cases. (1)
The UK’s tribunal system underwent a significant overhaul in 2007 as a result of the passing of the Tribunals, Courts and Enforcement Act 2007, which largely unified the system and the rules, which govern it (1). It now operates in two generic tiers. Cases are initially heard in the First Tier in a Chamber dedicated to the relevant jurisdiction, for example Finance and Tax. Appeals are
heard in the Upper Tier (1). There are also a number of specialist tribunals that are separate from the First-Tier
Tribunal and Upper Tribunal, of which the most notable are the Employment Tribunal and the Employment Appeal Tribunal. (1)
Explain how executive directors (EDs) and non-executive directors (NEDs) are different and what each brings to the Board of directors. (6 Marks)
EDs are employees of the company (1), working at a senior level/within the executive team (1) and often responsible for a functional area or an area of strategic importance (1). They bring that knowledge and expertise to the Board (1).
NEDs are not part of the Executive team of the company/do not engage in the day-to-day management of the company (1). They may have some connection with the company, for example a business relationship or been a consultant (1) or may be independent non-
executive directors (1). They may be appointed to bring particular specialist advice to the Board (1) or strategic guidance (1).
NEDs bring constructive challenge to the Board as they are external to the day-to-day management (1). They also hold the management/executive team to account. (1)
Describe three of the four enhancing qualitative characteristics of financial information. (6 Marks)
One mark for identifying the characteristic and one mark for the description on up to three
characteristics:
Comparability (1)
The information in the financial statements is useful if one can compare it with the information for previous periods (1), or information about another entity. (1) For information to be compared it helps if there is consistency which is a major reason for the existence of accounting rules / financial reporting standards. (1)
Verifiability (1)
Means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. (1)
Timeliness (1)
Means having information available to decision-makers in time to be capable of influencing their decisions. (1) Generally, the older the information is, the less useful it is. (1)
Understandability (1)
Classifying, characterising, and presenting information clearly and concisely makes it understandable. (1)
Fairday Ltd is assessing a project and has put together the following information to help determine the cost of capital:
- Total equity = £197,000
- Cost of equity = 12%
- Total debt = £56,000
- Cost of debt = 4.5%
a) Calculate the weighted average cost of capital (WACC) (4 Marks)
(total debt + total equity)
(56,000 + 197,000) (1)
253,000
=10.34% (1)
Fairday Ltd is assessing a project and has put together the following information to help determine the cost of capital:
- Total equity = £197,000
- Cost of equity = 12%
- Total debt = £56,000
- Cost of debt = 4.5%
Explain how the cost of the equity and the cost of debt are determined. (2 Marks)
The cost of equity reflects the rate of return earned by equity investors, generally in the form of dividends and capital gains. (1)
The cost of debt is generally the interest rate on debt or the coupon rate on the company’s bonds. (1)
Explain what a ‘proxy’ is and how a proxy is appointed and revoked. (6 Marks)
A proxy is a person appointed by a member to (attend and) vote at a members’ meeting on another’s behalf. (1)
All members have the right to appoint a proxy. (1)
A proxy form making the appointment must be lodged with the company (1) not less than 48 hours before the meeting (1), although the company may accept shorter notice at its discretion. (1)
The proxy form will identify who will hold the proxy (1) although in the majority of cases, the Chair is appointed. (1)
The proxy holder will decide how to vote unless this is specified on the form. (1)
A proxy is revoked when another proxy is received (1) or by written notice of revocation being given. (1)
Explain the importance of intellectual property law for businesses and give examples of how a business can protect its products.
(6 Marks)
Intellectual property law is important for businesses because it enables a business to prevent others from stealing or copying the names or designs of their products or brands; their inventions; and other outputs, items, or images (1) It does this in a number of ways, for example:
- Patents can be used by businesses that are engaged in developing new technologies to protect any innovative technological inventions they develop. This can be done by applying for a patent over such inventions (1), a patent will prevent others from
making, using or selling the patented invention without the patent holder’s consent for a period of 20 years (the patent can be renewed). (1) - Businesses that are engaged in creative outputs, such as films, sound recordings or broadcasts may wish to protect their outputs through the use of copyright. (1) For such businesses copyright may subsist over their output for a certain period, which basically means that certain activities (e.g. copying or distributing the output) are prohibited without the copyright holder’s consent. (1)
- Businesses that produce goods may wish to prevent others from copying the design (e.g. the shape or appearance) of that product. (1) This can be done by obtaining a design right over the product, the effect of which is to prevent others from copying the product’s design for up to 15 or 25 years (depending on the type of design right obtained). (1)
- A business will wish to protect certain items, such as the name of a product, or a company name or logo. (1) This can be done by obtaining a trademark over the item in question, the effect of which is to prevent others from utilising the trademark (e.g. by
placing it on goods or services sold) without the trade mark holder’s authorisation. (1)
Explain the three main rules of statutory interpretation. (6 Marks)
The literal rule provides that the words of a statute will be given their everyday, ordinary meaning whatever the result might be. (1) The same word must be interpreted in the same way throughout the Act (1) and in the case of old statutes they should be interpreted in accordance with its contemporary meaning. (1)
The golden rule provides that if a literal interpretation produces an absurd result, which Parliament could not have intended then, and only then, the judge can substitute a reasonable meaning in the light of the statute as a whole. (1) The
advantage of the golden rule is that it can prevent an injustice created by the literal rule and help put into practice what Parliament really meant. (1)
The mischief rule interprets words based on the mischief or problem the statute was designed to remedy. (1) This is also known as the purposive approach to statutory interpretation, which focuses on giving effect to the purpose of the legislation. (1) This is a departure from the more traditional approach to statutory interpretation and takes on a more liberal approach allowing the court to look at the intention of Parliament rather than interpreting the words literally. (1)
