Financial Information and Decisions Solutions Paper 1

Business Finance: Needs and Sources Solutions ✍🏽

Dika is a sole trader in Country A. He provides removals services to business customers. His business does not benefit from any economies of scale because it is small. Dika uses an old truck he has borrowed from his father to travel between his customers’ offices and shops. As the truck often breaks down, Dika is thinking of buying a new truck. The government of country A has recently increased interest rates.

(c) Outline two factors Dika should consider when choosing a source of finance for the new truck. [4]

Factor 1:             Size of his business

may be viewed as a higher risk for loans as he is a sole trader.

Factor 2:             Cost of repayments

As interest rates have recently increased.

Cash-Flow Forecasting and Working Capital Solutions ✍🏽

Abdul is an entrepreneur. He plans to start up as a sole trader by opening a bicycle shop. His market research shows that January to March are the months when sales are likely to be highest. Abdul has to pay his suppliers within 1 month. However, he gives customers 3 months to pay.  Abdul has produced a cash-flow forecast, shown in Table 1, as part of his business plan.

Table 1: Cash-flow forecast for Abdul’s business for the period Jan – April 2021($)

Cash Inflow50120150220
Cash Outflow280270170140
Net Cash Flow(230)(150)Y80
Opening Balance0(230)(80)(400)
Closing BalanceX(380)(400)(320)

Calculate values for:

X:                          (230)

Y:                           (20)

Outline two ways Abdul could improve his cash flow[4]

Factor 1:              Ask customers to pay more quickly

Explanation:       So he can increase cash inflow in January.

Factor 2:              Ask suppliers for more time to pay

Explanation:       So he can reduce cash outflows in February.

Income Statements Solutions ✍🏽

LGG makes a range of smart phone screens that it sells to other manufacturers. The Managing Director has been looking at LGG’s income statement. She is worried about the effects of an increase in the cost of materials.

She said: ‘Changes in technology have improved our production methods. LGG needs to remain competitive as imports of smart phone screens are increasing.’

(c) Outline two ways in which LGG’s managers could use information contained in the income statement. [4]

Way 1:                 Helps assess efficiency

Explanation:       to see the benefit from advances in technology.

Way 2:                 Able to calculate the profitability ratios

Explanation:       to see the effect of the increase in material costs.

Statement of Financial Position Solutions ✍🏽

Delishjuice is a small business and produces a range of fruit juice made from fruit using batch production. Delishjuice uses specialisation in its factory. The business has grown quickly over the last two years. Delishjuice has increased the number of production workers from 10 to 20 . This has increased the span of control for each manager. It has been difficult for Delishjuice to keep workers motivated.

Table 1: Extract from Delish Juice Accounts ($)

Current Assets1400
Trade Receivables700
Current LiabilitiesY
Net current assets400

(a) Define ‘trade receivables’:     [2]

Payments not yet received from customers who have bought goods on credit

(b) Calculate values for: [2]

X:                          700

Y:                           1000

Analysis of Accounts Solutions ✍🏽

Mary owns a small flower shop restaurant. Mary has been looking at the financial performance of his business. An extract is shown in Table 1.1.

Table 1.1 Extract from income statements ($000)

Last YearCurrent Year
Cost of Sales8090
Gross Profit 120150
Profit 4030

(e) Do you think the profitability of Mary’s flower shop has improved since last year? Justify your answer using appropriate ratios. [6]

Gross profit margin has increased from 60% to 62.5%

Profit margin has decreased from 20% to 12.5%

Although in absolute terms profit has increased the increase in expenses means that there is a lower conversion of revenue to profit. Mary needs to better control expenses to improve her profit margin.

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