PPQ finance

Question 1

Discuss the sources of long-term finance available to a plc. (4)

Answer 1

Share issue
Shareholders become owners of plc which may mean founders lose control
Large sums of money can be raised by this method

Government grant
May take a long time to secure the grant
Must meet specific conditions to secure grant
Does not have to be paid back

Bank loan
Simple and fast way to increase finance in business
Interest charges may affect cash flow in a negative way
Repaid in instalments which aids budgeting

Commercial mortgage
Repaid with interest over long term

Debentures
Interest is charged and may affect cash flow

Venture capital/business angels
Will provide capital when banks think it is too risky; advise and support may also be provided to help improve/grow the business
Hire purchase…
Leasing…

Question 2

Describe appropriate long-term sources of finance for a large organisation. (4)

Answer 2

Bank loan which is a sum of money borrowed from a bank and is paid back with interest.
o Aids budgeting as it is paid back in instalments.

Equity is the issue of shares in return for investment.

Venture Capital is investment received in return for a share in the business.
o Investments are often given in situation which are seen as too risky by a bank.

Debenture is a long-term loan where the holder of the debenture receives annual interest.
o The loan must be repaid in full at the end of the agreed period of time.

Selling off assets which are no longer needed.

Sale and lease back is when the business sells an asset eg machinery to raise finance quickly and then rents it back from the company that bought it.

Mortgage is a loan given to purchase a property.
Interest is added to the amount borrowed and it is repaid in equal monthly instalments over a long period of time (eg 25 years).

Hire purchase allows a business to pay for an asset in instalments which is owned after the final payment.
Avoid paying for the asset upfront.

Leasing is the renting of an asset.
Overdraft allow a business to withdraw cash which it does not have in its account.

Government grant does not have to be repaid.
Owner’s investment the equity provided by the owner.
Retained profits are held within the organisation rather than paying them out to shareholders.

Question 3

Discuss the sources of finance available to a public limited company (plc). (4)

Answer 3

Share issue
shareholders become owners of a plc, which may mean founders lose control
large sums of finance can be raised by this method
profits will need to be shared among more shareholders

Government grant
may take a long time to secure the grant
must meet specific conditions to secure the grant
does not have to be paid back

Bank loan
repaid in installments, which aids budgeting
once agreed, a loan is received promptly
interest charges may affect cash flow in a negative way

Commercial mortgage
repaid with interest over a long term

Debentures
only interest is paid during the debenture period, while capital is repaid at the end of the period
repayment at the end of the debenture period may affect cash flow
interest needs to be paid, regardless of annual profit
the interest charged is listed as an expense

Venture capital/business angels
will provide capital when banks think it is too risky
may give advice and support to help improve and/or grow the business

Leasing
this is renting an asset — at the end of the lease agreement, the leaseholder can receive an updated asset
the leaseholder is responsible for servicing and maintenance of the asset
monthly payments can aid budgeting
if the organisation wants to buy the asset at the end of the lease agreement, it can make a balloon payment
the overall cost of the asset will be higher than purchasing it outright

Sale of assets
any unnecessary assets can be sold to raise cash and then leased back, if required

Hire purchase
the cost of buying assets can be spread over a period of time
fixed instalments can aid budgeting the overall cost of the asset is increased by the interest payments
the asset is not owned by the organisation until the final payment is made

Overdraft
allows flexibility, as the organisation can spend more than it has in its account
can be pre-arranged if a cash shortfall is expected
attracts high interest charges

Trade credit
it does not need to pay for goods/raw materials until after they have been received, for example, 30 days later
it may be able to sell goods on, before it has paid for them
customers may also expect to receive trade credit

Debt factoring
allows an organisation to ‘sell’ debt on, at lower than its face value/the debt is discounted, so the organisation does not receive the full value of the outstanding debt
it does not need to ‘chase up’ debt itself
reduces the likelihood of cash flow problems caused by unpaid debts.

Question 4

Discuss sources of finance available to a large organisation. (5)

Answer 4

Bank loan
a sum of money borrowed from the bank which is paid back in installments
interest is charged on the loan
Debt factoring
selling unpaid customer invoices to a factoring company who keep the debts they collect
saves time and effort collecting debts
the business loses out on potential debt owed to it as debts are sold for less than they are worth
Trade credit
purchasing goods from suppliers and paying for them at a later date
allows a business to make sales before having to pay for purchases
can miss out on cash/prompt payment discounts
Share issue
large sum of finance can be gained
when parts of the company are sold to individuals/other organisations
o dividends are paid
Mortgage
a sum of money borrowed from the Bank/Building Society secured on property/land
may be repossessed eventually if payments are not made
Grant
a sum of money obtained from the government which does not have to be paid back
o may have conditions attached
Crowd funding
appeals made to the public to fund a project

Question 5

4. Describe the sources of finance that a public limited company (plc) may use to expand. (3)

Answer 5

bank loan − a sum of money borrowed from the bank paid back over a number of years with interest
mortgage – a sum of money borrowed against property/land paid back over a long period with interest

venture capitalists – invest in an organisation if a more risky venture is undertaken
may request a share in the organisation in return

shareholders invest in the organisation/issue new shares

local/national government grants which do not have to be paid back

sale and leaseback of any assets
sell off unwanted assets

debentures − issued to investors and interest payments are made yearly
with the lump sum paid back at the end
reinvestment of retained profits

Question 6

Describe the benefits to Santander’s business customers of each of the financial products shown in Exhibit 1. (4)
Current Account
Comercial morgages
Asset finance
Loans

Answer 6

Current Account
can instantly access funds
can earn interest on current account balance
overdraft can allow quick borrowing/improve liquidity

Commercial Mortgages
longer terms loans may have lower interest rate
used to purchase property or land which allows for growth

Asset Finance
avoid a one-off large cost to purchase equipment or vehicles
after the final payment the asset will be owned by the business
can be offered with zero interest

Loans
may be paid back in instalments
aids budgeting/cash flow

Question 7

Describe the following financial terms: Revenue (Sales); Gross Profit. (2)

Answer 7

Revenue (sales): The amount of money received for selling goods or services during the year
Gross Profit: The profit made from buying and selling
GP is calculated by deducting cost of sales from sales revenue

Question 8

Describe the reasons why a competitor may be interested in the financial information of an organisation. (2)

Answer 8

To measure the organisation’s market share ​​
To compare costs eg expenses
To compare GP%/NP%
To find out if they may be a target for takeover
To help their own decision making
To compare prices
To offer better salaries

Question 9

Gross Profit has decreased possibly due to:

Answer 9

Sales revenue has decreased eg sales price has fallen/less customers purchasing
Wet summers reduce ice cream sales
Suppliers prices increasing
Economic recession
Competitive market

Question 10

Profit For The Year has decreased in 2012 possibly due to:

Answer 10

Wage costs may have risen
Marketing costs increased
Other income could have decreased

Question 11

Profit For The Year has increased in 2013 possibly due to:

Answer 11

Cheaper supplier
Cheaper/reduced energy
Less borrowing
Reduced wages
More automation
Cheaper advertising methods eg social media

Question 12

Describe the purpose of preparing a Statement of Financial Position. (4)

Answer 12

To state the value/net assets of the organisation.
Informs decision making.
Compare with previous years/competitors.
Shows the working equity figure.
Shows the equity of the business/total value of shares.
Used by creditors/suppliers to determine the risk of lending to the organisation/likelihood of repayment.
Used by investors and potential investors to determine the possible return on their investment.
It is a legal requirement.
Can be used to calculate ratios.
Shows the value of:
Current assets/trade payables/inventory. − 1 max
Non-current assets/property/fittings/vehicles. − 1 max
Current liabilities/trade payables. − 1 max
Non-current liabilities/long term loans. − 1 max

Question 13

Describe how the Statement of Financial Position may be used by the following NHS Health Scotland’s stakeholders. * Scottish Government * Suppliers * Managers (3)

Answer 13

Scottish Government
to value the organisation
to monitor the risk of debt which might increase the Scottish Government’s borrowing
to predict future funding needs
Suppliers
will want to see if they can pay for goods and services
Managers
to monitor and measure performance
to evaluate decisions

Question 14

Describe the reasons a profitable organisation may experience cashflow problems. (4) S 3a

Answer 14

Too much money tied up in unsold stock.
Customers being given too long a credit period.
Customers being given too high a credit limit.
Owners taking excessive cash drawings.
Suppliers not allowing a trade credit period.
Sudden increase in an expense, eg heat and light.
High capital expenditure outlay in one month instead of spreading payments over a period of time.

Question 15

Describe the advantages to an organisation of using cash budgets. (4)

Answer 15

They help to highlight periods when cash flow problems may occur;
This allows the organisation to take corrective action

Cash budgets can be used to secure borrowing/show potential investors

They can be used to make comparisons between actual spending and targeted spending

They can show periods of surplus cash which could be used for capital investment

They can be used to give departments/managers a budget/target to focus on
They can be used to aid future financial planning
They can help to measure performance of organisation/departments

Question 16

Explain the benefits of preparing a cash budget (5)

Answer 16

It shows whether the business will have a surplus of cash this will allow them to plan future purchases adjustments to spending

Or arrange an injection of cash to avoid the deficit

To make comparisons between predicted and actual figures this will help monitor the performance of the business

Highlighting periods where expenses may be high will allow action to be taken to control spending

It aids decision making as it provides cash flow information for decisions to be based on

It can be used to set targets for individual departments to achieve which will allow the business to stay within budget as predicted

Targets set can also help motivate employees as they have goals to work towards
It can empower employees as each department can be set a budget which will give department managers responsibility of spending and recording their finances

Question 17

Describe the impact on an organisation of having poor cash flow (5)

Answer 17

Inability to pay suppliers
Raw materials may not be supplied
Unable to pay expenses
May need to find a cheaper supplier
May have to offer discounts to encourage customers on credit to pay early
Increased costs due to borrowing funds ie interest and bank charges
Lack of disposable funds to invest eg to purchase new technology
Low employee morale due to pressure to increase sales revenue
Restricted growth as there is no funds to invest in and support growing the businesses operations
Owner may need to reduce their drawings
May need to sell unused assets
May need to reduce prices of goods
Might lead to staff redundancies
Solvency risk/closure/administration

Question 18

6. Explain the purpose of preparing a cash budget. (3)

Answer 18

it shows whether the business will have a surplus of cash - which will allow them to plan future purchases
it shows whether the business will have a deficit - which will allow them to make adjustments to spending
can arrange an injection of cash to avoid the deficit
to make comparisons between predicted and actual figures - this will help monitor the performance of the business
highlighting periods where expenses may be high - will allow action to be taken to control spending
it aids decision making - as it provides cash flow information for decisions to be based on it can be used
to set targets for individual departments to achieve - which will allow the business to stay within budget as predicted
targets set can also help motivate employees as they have goals to work towards
it can empower employees as each department can be set a budget - which will give department managers responsibility of spending and recording their finances

Question 19

Discuss the advantages and disadvantages of using ratio analysis. (6)

Answer 19

Advantages
Good for comparing current performance with that of previous years.
Good for comparing with rival businesses.
Highlights differences in performance that will aid future decision-making/financial planning.
Good for highlighting trends over a period of time.

Disadvantages
Ratios are based on historic financial information which limits usefulness.
Comparisons only useful if made with like-for-like organisations — firms in the same industry may differ in size/product mix/objectives.
The accounting information used to calculate ratios does not take account of other internal factors, eg quality of managers/staff, staff motivation, staff turnover, location of business.
Calculations do not show the implications of product developments or declining products.
The accounting information used to calculate ratios does not include external factors — PESTEC.

Question 20

Describe the ratios which could be calculated from the financial information in Exhibit 4. (3)

Answer 20

Gross Profit Ratio
Gross Profit/Sales Revenue × 100 OR amount of gross profit made from every £ of sales
Percentage of profit made on sales before expenses are deducted/from buying and selling inventory
Profit For The Year Ratio
Profit For The Year/Sales Revenue × 100 OR Amount of net profit made from every £ of sales
 Percentage of profit made on sales after expenses are deducted

Question 21

Justify the use of spreadsheets within the finance department. (4)

Answer 21

Performs “What if” scenarios eg IF statement
Produces graphs and charts
Formulae calculations are carried out instantly and accurately
Formulae are amended automatically when the spreadsheet is amended
Formulae can be replicated
Easy to edit/amend
Conditionally format data
Can secure data with passwords
Can use templates for financial statements

Question 22

Other than spreadsheets, describe how modern technology can be used by the finance department. (6)

Answer 22

Database – can be used to sort large quantities of information on suppliers and customers
Word Processor – can be used to send letters and invoices to customers
Preparing financial reports
PowerPoint – used to present information to staff
Internet – used to check share prices/exchange rates
Online banking saves travelling to the bank
Video-conferencing – finance manager can hold meetings with other managers without leaving their office
E-mail – messages can be sent to more than one employee at a time
Attachments - can be sent to customers eg invoices
Network (LAN/4G/Cloud) – can share files with all staff members
Smartphone – allows for teleworking/remote meetings
Apps – allow for portable accounting software eg Sage and Quickbooks
Electronic Point Of Sales (EPOS)…
Electronic Funds Transfer Points Of Sale (EFTPOS)…

Question 23

Justify the use of software such as spreadsheets to record financial information. (2)

Answer 23

Formulae can be entered to carry out calculations.
o Minimising human error.
o Replication automates calculations.
Charts/graphs can be created.
IF statements can be used to check whether a condition has been met.
Templates can be setup.
o Data input may be done by a less-skilled employee.
Can be password protected.
Award 1 mark for each justification.

Question 24

Describe the advantages to Santander’s customers of providing online banking services. (4)

Answer 24

Advantages
banking becomes portable by using the smartphone app
can access online account from abroad
secure login reduces the chance of theft
saves time travelling to a local branch
no travel expenses
payments and transfers are often instant online
available 24/7
online support available

Question 25

Shareholders are one of the company’s stakeholders. Explain why shareholders are interested in an organisation’s financial information. (4)

Answer 25

Are they receiving sufficient dividends in relation to the profit figure?
How much profit is the organisation keeping in reserve and why?
What is the correct share value?
What value of assets does the organisation hold?
Can the organisation meet its debts?
Does the firm have any other investments?
They may wish to consider selling shares or purchasing more

Question 26

Explain the role of the Finance Department in an organisation (4)

Answer 26

Control costs – the finance department will help control costs of an organisation which should help it be more profitable
Monitor cash flow – will closely monitor cash flow and take corrective action if any problems arise to ensure proper liquidity
Plan for the future – by analysing past and future trends the departmentwill hopefully make decisions which will improve the organisation’s efficiency
Monitor performance – use the final accounts to analyse how theorganisation has performed and help improve any areas of weakness identified
Make decisions – the department will make use of the information it has to plan budgets and make financial decisions, this should help an organisation’s performance and profitability

Question 27

Loans are required to purchase the fishing boats. Descibe and justify 2 other sources of finance available to organisations who wish to make large capital investments (4)

Answer 27

Leasing
Renting of vehicles or equipment
More expensive in the long term than buying the asset
Asset is replaced when obsolete
Spread payments

Share issue
Dividends have to be paid to shareholders
Loss of control possible

Debentures
A long term loan to plcs
Debenture holders receive fixed interest
Debenture holders receive the money lent back

Venture Capital
Venture capitalists lend money when banks think it is too risky
Large amounts lent but interest is high
Part ownership often needed in exchange for finance

Hire purchase
A deposit is required and the rest of the price is paid in instalments
Ownership remains with the finance company until the last instalment is made

Mortgage
A large sum of money borrowed from a bank or building society to purchase property
Monthly repayments required (interest)
Long term borrowing eg 25 years

Grants
Some of the money paid by eg Local Authority or Government
No need to repay a grant
May be given if organisation is creating jobs in an area of high unemployment etc

Sale of asset
Equipment or property which is no longer required is sold off to raise cash

Retained profits
Profits made are not distributed to the owners but kept back for reinvestment

Question 28

Identify 2 sources of funding for a public sector organisation (2)

Answer 28

Taxation.
Council Tax.
Charging for some services, eg, leisure centres.
Business Rates.
Grants from lottery.

Question 29

Describe methods a limited company could use to finance a successful takeover (4)

Answer 29

Share issue – shares issued on the stock market.
Bank Loan – a loan paid back over time/with interest.
Commercial Mortgage – a loan secured against property owned by the organisation.
Sell Assets/land – sell unwanted assets to raise funds.
Venture Capitalists – obtain a loan from a venture capitalist who will receive a share in the organisation in return.
Retained profits – use retained profits from previous years to fund the takeover.
Debentures – loans paid back over a period of time/with interest. (4)

Question 30

Describe 4 different sources of long term finance available to a private limited company (4)

Answer 30

Bank loan – paid back over a number of years with interest – time or interest payable

Commercial mortgage – paid back over a long
period with interest – commercial or property must be mentioned together with time or interest payable

Venture capitalists – invest in an organisation if a more risky venture is undertaken/may request a share in the organisation in return
Invite new shareholders to invest in the organisation

Local/national government grants which do not have to be paid back
Sale and leaseback of any assets will gain finance

Sell off unwanted assets to raise finance

Debentures – issued to investors and interest payments are made yearly with the lump sum paid back at an agreed time – interest or repayment at end of term needed

Retained profits of the organisation reinvested

Question 31

Describe and justify 3 sources of finance available to a partnership. (A different justification should be used each time.) (6)

Answer 31

Bring in another partner who will add their own/new capital to the organisation − no interest to be paid or repayment of funds (accept any advantage of a partnership).

Bank loan − over a period of time paid back (in instalments) with interest − allows for the payments to be spread out.

Bank Overdraft − a smaller amount for shorter period of time borrowed from bank − is useful when only needed for a short period of time and is relatively easy to arrange.

Grant − might be possible to receive a government grant under certain conditions − does not have to be paid back.

Retained profits from previous years − does not involve any re- payments or interest.

Venture capital will provide finance when banks thinks it is too risky − often good for riskier investments or ideas.
Hire Purchase.
Leasing.

Question 32

Discuss the importance of the Annual Accounts in showing whether or not an organisation has achieved its objectives (4)

Answer 32

The Trading, Profit and Loss Accounts will show if the organisation has made profits in the year of the accounts.

On their own the Accounts do not show the success of an organisation – comparison must be made with previous years and/or competitors.

Balance Sheet will show if the organisation is liquid (survival).

Cash Flow Statement shows all the money which has flowed in and out of the business over the course of a year.

Need for ratio analysis to show significance of figures.

The Accounts do not show factors such as: the morale of the workforce, the competition, the stage of the product’s life cycle, proposed developments for the future.

Question 33

Distinguish between the following financial terms a) Gross Profit and Net Profit b) Fixed Assets and Current Assets c) Debentures and shares (6)

Answer 33

Gross Profit − turnover less cost of sales.

Net Profit − profit after the firms expenses have been deducted from the gross profit.

Fixed Assets − items which the business owns and will be kept for longer than one year.

Current Assets − items which the business owns and will be kept for less than one year.

Debentures − a loan where there fixed interest is paid over the stated period of the loan and then the full amount is paid back.

Shares − investment in a company that receives a dividend each year if profits allow.

Question 34

Describe the financial information that stakeholders could use to assess an organisations financial position (5)

Answer 34

Description of appropriate ratios − 1 mark per ratio, no mark given for naming the ratio (max 2 for formulae).

Trading account shows the profit and loss made from buying and selling stock over a period of time.

Profit and loss account shows the overall profit or loss over a specified time period.
Balance sheet which shows the financial position of a business at an exact moment in time.

Cash flow statements are used to show the income and expenditure forecast over a period of time.

Share prices show the current value of the organisation.

Question 35

Describe the final accounts that would be produced by an organisation (3)

Answer 35

Trading account – shows the gross profit over a period of time
Is the difference between the cost of goods sold and sales

Profit and loss account – shows the net profit or loss over a specified period of time and takes into account all expenses

Appropriation account – shows what has been done with the total funds available to a company. It shows the division of total funds between tax payments, investment, external loans, retention of cash balances and the distribution to shareholders

Balance sheet – shows the value of a business at a specific date
Contains items such as fixed and current assets, liabilities and capital

Question 36

Describe the reasons why a competitor would make use of another organisation’s final accounts (2)

Answer 36

To check to ensure they are making a similar percentage profit. GP% or NP%
To look at costs eg expenses
To see if they are ripe for a takeover
To measure the other organisations market share
To aid decision making

Question 37

Describe financial information that potential shareholders could use to decide whether to invest in a company (6)

Answer 37

Description of appropriate ratios − no mark given for naming the ratio (max 2 for formulae).

Trading account shows the profit and loss made from buying and selling stock over a period of time.

Profit and loss account shows the overall profit or loss over a specified time period.
Balance sheet which shows the financial position of a business at an exact moment in time.

Cash budgets show projected income and expenditure for the following year.
Share prices show the current value of the organisation

Question 38

Distinguish between the following financial terms: * Gross Profit and Net Profit, * Fixed Assets and Current Assets, * Debentures and Shares. (3)

Answer 38

Gross Profit − turnover less cost of sales whereas Net Profit – profit after the firms expenses have been deducted from the gross profit

Fixed Assets − items which the business owns and will be kept for longer than one year whereas Current Assets − items which the business owns and will be kept for less than one year

Debentures − a loan where there fixed interest is paid over the stated period of the loan and then the full amount is paid back whereas Shares − investment in a company that receives a dividend each year if profits allow

Question 39

Distinguish between the following financial terms: * Fixed Assets and Current Assets, * Gross Profit and Net Profit, * Debtors and Creditors. (3)

Answer 39

Fixed Assets are possessions that last longer than one year whereas Current Assets are possessions that will change in value within a year
Current Assets are more liquid than Fixed Assets
Gross Profit is the profit made from trading only whereas
Net Profit is the final profit made at the end of the period
Gross Profit only takes in the cost of purchasing or manufacturing the good whereas Net Profit takes into consideration all overheads/expenses
Debtors owe the business money whereas Creditors are owed money by the organisation
Debtors are an asset to the business whereas Creditors are liabilities

Question 40

Describe the final accounts that would be produced by a public limited company. (4)

Answer 40

Trading account – shows the gross profit over a period of time

. is the difference between the cost of goods sold and sales

Profit and loss account – shows the net profit or loss over a specified period of time and takes into account all expenses

Appropriation account – shows what has been done with the total funds available to a company. It shows the division of total funds between tax payments, investment, external loans, retention of cash balances and the distribution to shareholders

Balance sheet – shows the value of a business at a specific date
contains items such as fixed and current assets, liabilities and capital

Cash Flow Statement (FRS1) – shows the movement of cash in and out of the business over the financial year.

Question 41

Identify 4 sources of cash flow problems and suggest a solution for each source you have identified (8)

Answer 41

Sources of cash flow problems:
too much money tied up in stock
allowing customers too long to pay
debtors not paying on time
high levels of borrowing along with high interest rates
high drawings
low sales
high expenses
purchasing capital equipment

Solutions
introduce JIT
offer discounts to encourage prompt payment
offer discounts/promote cash sales
sell any unused assets
reduce loans by eg increasing number of investors
debt factoring
sale and leaseback
extended credit
arrange overdraft/loan
cut costs
promote product or service
deferred payment (HP, leasing)
reduce waste/economise

Question 42

Explain why firms can have a healthy profit but experience cash flow problems (4)

Answer 42

Too much money tied up in stock.

Unwillingness to borrow due to high interest rates.
Owners take large drawings from profits.

Customers taking too much time to pay.

Customers allowed too much time to pay.

Allowing customers to have a high credit limit.

Difficulty in raising finance.

Purchasing large amounts of Fixed Assets (high capital expenditure).

Question 43

Describe 4 causes of cash flow problems (4)

Answer 43

Too much money tied up in stock.
Customers being given too long a credit period or too high a credit limit.
Owners taking out too much money through drawings.
Having high borrowings with increased rates of interest.
Suppliers not allowing credit or very short credit period.
Sales revenue not high enough.
Sudden increase in expenses (1 expense only).
Capital expenditure.

Question 44

Describe the actions that could be taken to overcome cash flow problems (5)

Answer 44

Use marketing measures to move unwanted stock (max 1)
Reduce the length of time given to customers to pay for goods
Have a maximum amount owners can withdraw/reduce drawings
Try to get increased credit terms
Find a cheaper supplier
Reduce wages/any other expenses (max 1)
Take out a short term overdraft
Increase owners own capital
Reduce repayment of loans

Question 45

Outline the reasons for preparing budgets (5)

Answer 45

Monitoring and control – comparison of actual performance with the budget
Allows the firm to take corrective action, eg increase production to meet forecast sales
Allows managers to organise resources
Sets targets for management and employees to reach
Individual managers/departments can be allocated budgets so that control is tighter
Cash budgets highlights periods when a negative bank balance is expected so finance can be arranged in advance
Forecasting cash surpluses allows a firm to invest money in assets
Allows managers to identify problems
Offer solutions
Allows development
Plan for the future

Question 46

Describe how an organisation could make use of a) a production budget b) a sales budget (4)

Answer 46

To plan ahead for production/sales.
Provides targets for sales.
Actual figures can be compared to target figures.
Allows co-ordination of production quantities to match anticipated sales.
Budgets have to be adhered to which helps control expenditure.
May highlight areas of high costs which can be reduced.
Targets from budgets can be used as motivational tools for sales staff.

Question 47

Explain why mangers use cash budgets (5)

Answer 47

Managers can compare actual budgets with planned budgets and if there are managers can compare actual budgets with planned budges and if there are any deviations make corrective action where required

Highlights periods where negative cash flow is expected

allows for appropriate finance to be arranged for that period

allows for investment to be made in times of excess cash flow

corrective action can be planned in advance of cash deficits

allows managers to control expenditure

used to set targets for workers and managers

can be motivational for employees

Question 48

Describe reasons why an organisation would use cash budgets (5)

Answer 48

To highlight periods when cash flow will be a problem.
This will allow corrective action to be put in place.
Can be used to secure loans or to show investors (1 only).
Is used to make comparisons between actual expenditure and targeted.
Can show periods that the organisation will have cash available for major investment or purchases of fixed assets.
Is used to give departments a budget to focus on (targets).
Used to monitor spending throughout the organisation.
Planning.
Delegating responsibility to junior managers.
Measuring performance.

Question 49

Identify 2 ratios which can be used to measure the profitability/performance of an organisation and explain why they should not be the only measure of its success. (6)

Answer 49

Gross Profit Ratio – GP/Net Sales x 100

Net Profit Ratio – NP/Net Sales x 100

Mark Up – Gross Profit/Cost of Goods Sold x 100

Return on Capital – NP/Opening Capital x 100

Information is historical
Comparison has to be made with similar firms in the same industry
Does not take external factors into account
Does not consider the implications of new products or products facing decline
Does not take staff morale/staff turnover into account
Explanation of why liquidity ratios should also be used
Explanation of why efficiency ratios should also be used

Question 50

Describe the reasons for using ratios to analyse performance (2)

Answer 50

Used to compare performance with previous years.
With competitors of similar size.
Highlights trends.
Shows areas where corrective action can be taken.

Question 51

Explain the limitations of ratio analysis (3)

Answer 51

Information is immediately historical.
Findings do not take into account external factors.
New products or product development is not taken into account.
Staff morale or turnover is not taken into account.
Recession

Question 52

Describe ratios which could be used to ensure appropriate levels of profitability and liquidity are maintained (5)

Answer 52

Gross Profit % measures the gross profit, on each sale, from buying and selling.

Net profit % measures the profit after expenses, on each sale.

Mark Up – measures how much has been added to the cost of the goods as profit.

Return on capital employed – measures the return on investment in the business.

Current ratio – shows how able a business is to pay its short term debts.

Acid test ratio – ability to pay short term debts after stock is deducted.

Question 53

Describe the limitations of using ratio analysis (3)

Answer 53

Information is historical.
Does not take into account external factors eg recession.
Does not show the staff morale.
Does not take into account recent investments.
Does not take into account new products launched.
Can only compare like organisations with like eg size, market etc.

Question 54

Describe the actions an organisation could take to improve the following ratios; Net Profit Percentage and Current Ratio (6)

Answer 54

Profit for the year Ratio
Increase selling price
Find cheaper suppliers
Negotiate discounts with suppliers
Try to reduce theft
also reduce staff wages/redundancies
reduce any particular expense
improve their gross profit margin

Current Ratio
decrease current liabilities
increase current assets such as bank or cash
if current ratio is too high reduce bank balance to invest in longterm investment

Question 55

Describe accounting ratios managers could use (6)

Answer 55

Current ratio: – current assets/current liabilities shows the ability to pay short term debts,

answer of 2:1 is the accepted ratio
Acid test ratio: – current assets – stock/current liabilities shows the ability to pay short term debts quickly, 1:1 is the accepted ratio

Gross profit ratio: – gross profit/sales x 100 measures the percentage profit made from buying and selling stock
Net profit ratio: – net profit/sales x 100 measures the percentage profit after expenses have been paid

ROCE: – net profit/opening capital x 100 measures the return on capital for investors in a business, can be compared to other organisations or a safe investment such as a building society

Mark Up: – gross profit/cost of good sold x 100 measures how much is added to the cost of goods for profit

Question 56

Explain the reasons managers use accounting ratios (4)

Answer 56

To compare current performance with previous years to see if there is any improvement.
To make comparisons with similar size organisations in similar industry which allows them to analyse if the organisation is making appropriate GP% or NP%.
To measure an organisation’s profitability which allows for better control of expenses.
To show if an organisation has the ability to pay short term debts which gives warnings to managers of the problems that could happen with higher than average debt ratios.
To measure an organisation’s efficiency which allows for action to be taken against inefficient areas to improve on them.
Highlight trends so managers can be aware of profitable periods or problem periods, ie, seasonal demand.

Question 57

Describe 3 accounting ratios and justify their use.

Answer 57

Current ratio: current assets/current liabilities, answer of 2:1 is the accepted ratio. Allows managers to monitor liquidity levels of the business and shows the ability to pay short term debts
Acid test ratio: current assets – stock/current liabilities, 1:1 is the accepted ratio. Allows managers to know that they can pay off debts quickly
Gross profit ratio: gross profit/sales x 100 measures the percentage profit made from buying and selling stock. Can be used by managers to compare to the industry standard.
Net profit ratio: net profit/sales x 100 measure the percentage profit after expenses have been paid. Can be used by managers to control expenses or analyse expenses
ROCE: net profit/opening capital x 100 measures the return on capital for investors in a business. Can be compared to other organisations or a safe investment such as using a building society to invest in.
Mark Up: gross profit/cost of goods sold x 100 measures how much is added to the cost of goods for profit. Used to ensure a satisfactory level of profit is made
Rate of stock turnover: Cost of goods sold/average stock. Used to analyse how quickly the stock is sold. Useful for sales of perishable items

Question 58

Discuss the use of ratios to analyse financial data. (6)

Answer 58

Compare current performance with previous years to see if there is any improvement
To make comparisons with similar size organisations in similar industry
To measure an organisation’s profitability
Allows for better control of expenses
To show if an organisation has the ability to pay short term debts
To measure an organisation’s efficiency
Allows for corrective action to be taken against inefficient areas
Highlight trends so managers can be aware of profitable periods or problem periods eg seasonal demand
Ratios can be historic and therefore not always accurate
Different financial calculations can alter the ratio