Practice questions
Original questions written by HomiLabs in the style of the exam, with answers and mark schemes. They are not
Cambridge past paper questions and have not been reviewed by Cambridge. Try each one before opening the answer.
Q1Analysis of accounts · Core · Paper 1 style · 4 marksSana's Fabrics is a private limited company that sells cloth from two shops in Lahore. Its latest statement of financial position shows current assets of Rs 4,800,000 and current liabilities of Rs 3,000,000.
- (a) Define 'current liabilities'. [2]
- (b) Calculate the current ratio of Sana's Fabrics. Show your working. [2]
Show answer
- (a) Debts or amounts owed by the business that must be repaid within 12 months.
1 mark: amounts owed / debts of the business; 1 mark: due for payment within one year (12 months). 'Short-term debts' alone = 1 mark.
- (b) 1.6 (or 1.6 : 1)
Current ratio = current assets ÷ current liabilities (M1) = 4,800,000 ÷ 3,000,000 = 1.6 (A1).
Bright Bakes is a bakery in Karachi. Last year its revenue was $250,000, its gross profit was $95,000 and its profit for the year was $30,000.
- (a) Calculate the gross profit margin. Show your working. [2]
- (b) Calculate the profit margin. Show your working. [2]
- (c) Identify two expenses that could explain the difference between the bakery's gross profit and its profit for the year. [2]
Show answer
- (a) 38%
Gross profit margin = gross profit ÷ revenue × 100 (M1) = 95,000 ÷ 250,000 × 100 = 38% (A1).
- (b) 12%
Profit margin = profit for the year ÷ revenue × 100 (M1) = 30,000 ÷ 250,000 × 100 = 12% (A1).
- (c) Any two expenses (overheads), e.g. rent of the shop, salaries of managers, electricity, advertising, interest on loans, insurance, delivery costs.
1 mark each for any two valid expenses. Do not accept flour or ingredients (these are part of cost of sales).
Indus Cement plc is a public limited company with factories in Punjab and Khyber Pakhtunkhwa. It publishes its accounts every year.
- (a) Outline why two different users would be interested in the accounts of Indus Cement plc. [4]
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- (a) e.g. Shareholders: to see if profit is rising so they receive higher dividends and the share price may rise. Banks: to check liquidity and whether the company can repay a loan before lending.
For each of two users: 1 mark for identifying the user (shareholders, potential investors, banks/lenders, suppliers, employees, government/tax authorities, managers, competitors) + 1 mark for a reason linked to that user (e.g. suppliers check whether they will be paid for cement inputs supplied on credit; employees check job security/pay rises; government checks tax owed).
Raza Furniture makes wooden beds and wardrobes to order. It holds large stocks of timber and finished furniture. Its current assets are $620,000, of which inventory is $380,000. Its current liabilities are $400,000.
- (a) Calculate the acid test ratio. Show your working. [2]
- (b) The current ratio is 1.55. Explain why the managers of Raza Furniture should be concerned about the acid test ratio even though the current ratio is above 1. [4]
Show answer
- (a) 0.6
Acid test = (current assets − inventory) ÷ current liabilities (M1) = (620,000 − 380,000) ÷ 400,000 = 240,000 ÷ 400,000 = 0.6 (A1).
- (b) The acid test of 0.6 is below 1, so without selling inventory the business cannot pay its short-term debts. Most current assets are timber and furniture that may take a long time to sell, so it may struggle to pay suppliers or the overdraft on time.
1 mark: acid test below 1 / not enough liquid assets to cover current liabilities. 1 mark: inventory excluded because it cannot quickly be turned into cash. 1 mark application: furniture/timber is slow-moving or made to order. 1 mark development: risk of not paying suppliers/bank, losing trade credit or being forced to sell inventory cheaply.
Margalla Dairy Ltd collects milk from farmers near Islamabad and sells packaged milk and yoghurt to shops. Last year it bought new chilling equipment financed by a long-term loan. Appendix: extract from accounts (Rs).Item | Year 1 | Year 2Revenue | 18,000,000 | 21,000,000Gross profit | 7,200,000 | 7,980,000Profit for the year | 2,700,000 | 2,520,000Capital employed | 22,500,000 | 28,000,000
- (a) Using the appendix, do you think the profitability of Margalla Dairy improved between Year 1 and Year 2? Justify your answer using suitable calculations. [12]
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- (a) Calculations: Year 1: 12%; Year 2: 9%. Mostly no. Revenue rose by Rs 3 million, but profit for the year fell, the profit margin fell from 15% to 12% and ROCE fell from 12% to 9%. Gross profit margin was 40% in Year 1 and 38% in Year 2. The new equipment raised capital employed, so it is earning less per rupee invested so far; it may improve later once the equipment raises output or cuts waste.
Calculations: ROCE = profit for the year ÷ capital employed × 100. Year 1: 2,700,000 ÷ 22,500,000 × 100 = 12%. Year 2: 2,520,000 ÷ 28,000,000 × 100 = 9%. Content: ROCE 12% → 9%; profit margin 15% → 12%; gross profit margin 40% → 38%; revenue up Rs 3 m but profit for the year down Rs 180,000; capital employed up because of the loan-financed chilling equipment; loan interest raises expenses; equipment may raise output or cut waste later. Mark bands (12; knowledge 2, application 2, analysis 4, evaluation 4): Level 3 (9–12): developed analysis of both sides / all options applied to Margalla Dairy, using the data, and a justified decision that explains why the rejected option(s) are weaker. Level 2 (5–8): advantages and disadvantages analysed and applied to Margalla Dairy, with a decision that is only partly justified or one-sided. Level 1 (1–4): relevant knowledge with little application or analysis; a decision with no reasoning earns no evaluation marks. Correct calculations count towards application and analysis; follow through an earlier calculation error.
PhoneHub is a mobile phone shop in Islamabad. Its current ratio has fallen to 0.8. It has a large bank overdraft and owns an old delivery van it no longer uses.
- (a) Explain two ways PhoneHub could improve its current ratio. [6]
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- (a) 1. Sell the unused delivery van for cash: cash (a current asset) rises without any rise in current liabilities, so the ratio rises; but it may get a low price for an old van. 2. Replace the overdraft with a long-term bank loan: current liabilities fall, so the ratio rises; but interest must be paid for several years. (Also accept: retain more profit as cash / owner invests more capital / issue shares.)
For each of two ways: 1 mark identify the way, 1 mark application to PhoneHub (van, overdraft, phone shop), 1 mark explain the effect on current assets or current liabilities. Do not accept 'sell more inventory for cash' unless it explains that inventory is sold at a profit (a straight swap of inventory for cash does not change current assets).
Karakoram Treks organises guided tours in Hunza. Most customers pay when they arrive, but the business pays hotels and transport in advance in spring. Last year revenue was $2,500,000 and the profit margin was 18%. Its current ratio is 0.7.
- (a) Calculate Karakoram Treks' profit for the year. [2]
- (b) Explain why Karakoram Treks could have liquidity problems even though it is profitable. [4]
Show answer
- (a) $450,000
18% × 2,500,000 (M1) = $450,000 (A1).
- (b) Profit is not the same as cash. The current ratio of 0.7 shows current liabilities exceed current assets. The business pays hotels and transport before customers pay, so cash flows out months before it comes in; it may be unable to pay bills on time even though the year's profit is high.
1 mark: profit ≠ cash / timing of payments. 1 mark: current ratio below 1 means current assets do not cover current liabilities. 1 mark application: pays in advance in spring, customers pay on arrival (seasonal). 1 mark development: consequence, e.g. needs an overdraft, pays interest, suppliers may refuse credit.
Amina has inherited $50,000 and wants to buy shares in one of two private limited companies that sell sports equipment. Appendix: extracts from the latest accounts ($).Item | Company A | Company BCurrent assets | 900,000 | 700,000Inventory | 300,000 | 450,000Current liabilities | 500,000 | 560,000Revenue | 3,000,000 | 2,500,000Gross profit | 1,200,000 | 1,150,000Profit for the year | 270,000 | 350,000
- (a) Using the appendix, which company should Amina invest in? Justify your answer using suitable calculations (for example, current ratio, acid test ratio and profit margin). [12]
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- (a) Calculations: Company A: current ratio 1.80, acid test 1.20, profit margin 9%. Company B: current ratio 1.25, acid test 0.45, profit margin 14%. Either, if justified. B is more profitable (profit margin 14% v 9%; gross margin 46% v 40%) but its liquidity is weak (acid test 0.45, current ratio 1.25), so it may struggle to pay debts. A is less profitable but much safer (current ratio 1.80, acid test 1.20). A cautious investor might choose A; one seeking higher returns might choose B, but the liquidity risk could threaten B's survival.
Calculations: A: 900,000 ÷ 500,000 = 1.80; (900,000 − 300,000) ÷ 500,000 = 1.20; 270,000 ÷ 3,000,000 × 100 = 9%. B: 700,000 ÷ 560,000 = 1.25; 250,000 ÷ 560,000 = 0.45; 350,000 ÷ 2,500,000 × 100 = 14%. Content: B more profitable (profit margin 14% v 9%, GPM 46% v 40%); B's liquidity weak (current ratio 1.25, acid test 0.45 — heavy inventory); A safer (1.80, 1.20); profit v risk for an investor; other information needed (trends over several years, dividends, share price). Mark bands (12; knowledge 2, application 2, analysis 4, evaluation 4): Level 3 (9–12): developed analysis of both sides / all options applied to Amina's choice between the two companies, using the data, and a justified decision that explains why the rejected option(s) are weaker. Level 2 (5–8): advantages and disadvantages analysed and applied to Amina's choice between the two companies, with a decision that is only partly justified or one-sided. Level 1 (1–4): relevant knowledge with little application or analysis; a decision with no reasoning earns no evaluation marks. Correct calculations count towards application and analysis; follow through an earlier calculation error.
Zara Textiles exports cotton towels. It has asked its bank for a large loan. Last year its profit for the year was $1,120,000 and its capital employed was $8,000,000.
- (a) Calculate Zara Textiles' return on capital employed. Show your working. [2]
- (b) Do you think the bank should rely only on ratio analysis when deciding whether to lend to Zara Textiles? Justify your answer. [6]
Show answer
- (a) 14%
ROCE = profit for the year ÷ capital employed × 100 (M1) = 1,120,000 ÷ 8,000,000 × 100 = 14% (A1).
- (b) Ratios help: ROCE and the current/acid test ratios show whether the business earns enough and can pay interest. But ratios use past data, may not show the future (e.g. new tariffs on towels in export markets or exchange-rate changes), and say nothing about the quality of management, the business plan, the security offered or market trends. So the bank should not rely only on ratios; it should also look at cash-flow forecasts, the business plan and collateral.
Up to 2 marks knowledge: what ratios show / limitations (historical, ignore qualitative factors, can be distorted, need comparison with other years or firms). Up to 2 marks analysis: developed reasoning about lending risk. Up to 2 marks evaluation: justified judgement on whether ratios alone are enough, with reasons linked to an exporter.
Chai Corner runs tea stalls at three railway stations. In Year 1 its revenue was Rs 800,000 and gross profit Rs 320,000. In Year 2 its revenue was Rs 1,000,000 and gross profit Rs 350,000.
- (a) Calculate the gross profit margin for each year. [2]
- (b) Calculate the gross profit Chai Corner would have needed in Year 2 to keep the same gross profit margin as Year 1. [2]
- (c) Explain two possible reasons why the gross profit margin fell even though revenue increased. [4]
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- (a) Year 1: 40%; Year 2: 35%
Year 1: 320,000 ÷ 800,000 × 100 = 40% (1). Year 2: 350,000 ÷ 1,000,000 × 100 = 35% (1).
- (b) Rs 400,000
40% × 1,000,000 (M1) = Rs 400,000 (A1).
- (c) 1. The cost of tea leaves, milk and sugar rose but Chai Corner did not raise its prices, so cost of sales rose faster than revenue. 2. It cut prices or offered discounts to attract more passengers; revenue rose but each cup earned less gross profit. (Also: more waste of milk; sold a higher share of low-margin items; supplier ended a bulk discount.)
For each reason: 1 mark identification (higher cost of sales / lower selling price / more waste / change in product mix), 1 mark explanation linked to Chai Corner and showing why the margin falls.
Bilal plans to open a bicycle repair shop in Faisalabad. He needs money to buy tools and to rent a shop.
- (a) Define 'start-up capital'. [2]
- (b) Identify two internal sources of finance for an existing business. [2]
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- (a) The finance needed to set up a new business, e.g. to buy equipment and pay initial costs before it starts trading.
1 mark: finance/money needed; 1 mark: to start a new business / before trading begins (e.g. buying tools, first month's rent).
- (b) Any two of: retained profit, sale of existing assets, owner's savings put into the business (for a sole trader).
1 mark each. Do not accept bank loan or overdraft (external).
Noor General Store is a grocery shop in Multan. Before Ramadan it needs to buy extra stock of dates, flour and cooking oil but will not receive the extra sales revenue until later in the month.
- (a) Outline one suitable source of short-term finance for Noor General Store, and explain why a long-term bank loan would not be suitable for this need. [4]
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- (a) Suitable source: e.g. trade credit – suppliers deliver the dates, flour and oil now and are paid in about 30 days, after the Ramadan sales have come in (also accept bank overdraft, short-term loan). A long-term loan is unsuitable because the need lasts only a few weeks; the shop would pay interest for years on money it no longer needs, and arranging it may take time and need collateral.
Source: 1 mark identify (trade credit, overdraft, short-term loan) + 1 mark outline linked to buying stock before Ramadan. Long-term loan: 1 mark reason (need is short-term / temporary) + 1 mark development (interest paid for years on unneeded money / collateral / time to arrange).
GreenGlass plc makes glass bottles in Hyderabad. It needs $60,000 to buy a new furnace. A bank offers a loan at 8% simple interest per year, repaid in full after 3 years.
- (a) Calculate the total amount GreenGlass plc would repay to the bank (loan plus interest). [2]
- (b) Explain one advantage and one disadvantage of a bank loan compared with issuing new shares to finance the furnace. [6]
Show answer
- (a) $74,400
Interest = 60,000 × 8% × 3 = $14,400 (M1). Total = 60,000 + 14,400 = $74,400 (A1).
- (b) Advantage: the existing shareholders keep control because no new shares are sold, and the interest is a known cost. Disadvantage: interest of $4,800 a year must be paid even if profits fall, and the loan may need security such as the factory; shares would not have to be repaid.
Advantage: 1 mark identify, 1 mark application (furnace/GreenGlass), 1 mark development. Disadvantage: same. E.g. advantage: no loss of control / no dilution / interest may be lower than expected dividends. Disadvantage: interest must be paid regardless of profit / must be repaid / collateral needed / raises gearing.
Shazia lives in a village in Sindh. She wants to start a business making hand-embroidered shawls to sell in the city. She has no savings and no property.
- (a) Define 'microfinance'. [2]
- (b) Explain why Shazia may find it difficult to get a bank loan, and why microfinance may help her. [6]
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- (a) Small loans (and other financial services) provided to people on low incomes, often without collateral, so they can start or grow a small business.
1 mark: small loans / financial services; 1 mark: to poor people or those who cannot get normal bank loans / no collateral needed.
- (b) Banks usually want collateral and a trading record; Shazia has no property or savings and a new business is risky, so the bank may refuse or charge high interest. Microfinance providers lend small amounts suited to buying thread and fabric, often without collateral, sometimes to groups of women who support each other, so she can start trading and repay from her sales.
Up to 3 marks for why a bank loan is difficult (no collateral, no credit history/business record, high risk of a new business, amount too small to be worthwhile for a bank) with application. Up to 3 marks for how microfinance helps (small amounts, no/low collateral, group lending, advice/support) with application to Shazia.
AppNest is a new business in Nairobi, Kenya, developing a mobile app that helps farmers check crop prices. The two owners need $25,000 to finish the app. They are considering crowdfunding or a bank overdraft.
- (a) Explain two factors AppNest should consider when choosing a source of finance. [8]
- (b) Recommend whether AppNest should use crowdfunding or a bank overdraft. Justify your answer. [12]
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- (a) 1. What the money is for and for how long: finishing the app is a long-term need, so short-term finance such as an overdraft is unsuitable; using the wrong type could mean repaying before the app earns any revenue. 2. The cost and control: interest or fees reduce the owners' limited cash, while some sources (e.g. investors taking a share) mean giving up ownership and future profit.
For each of two factors (max 4 each): 1 mark identify (purpose/time period, amount, cost, legal structure, risk/gearing, control, availability); 1 mark apply to AppNest (new app business, $25,000, no revenue yet); 2 marks develop the consequence for AppNest.
- (b) Crowdfunding is likely better: an overdraft is for short-term needs, is expensive and can be withdrawn, and a new firm with no profit may not get one. Crowdfunding raises the money from many people online, needs no interest payments and also tests demand and publicises the app. However, the campaign may fail or reveal the idea to rivals.
Content: overdraft — short-term, flexible but expensive, can be withdrawn, hard for a new firm with no profit to obtain; crowdfunding — raises $25,000 from many people online, no interest, tests demand and publicises the app, but campaign may fail and the idea is revealed to rivals; possible rewards owed to backers. Mark bands (12; knowledge 2, application 2, analysis 4, evaluation 4): Level 3 (9–12): developed analysis of both sides / all options applied to AppNest, using the data, and a justified decision that explains why the rejected option(s) are weaker. Level 2 (5–8): advantages and disadvantages analysed and applied to AppNest, with a decision that is only partly justified or one-sided. Level 1 (1–4): relevant knowledge with little application or analysis; a decision with no reasoning earns no evaluation marks.
Shandur Hotels Ltd owns three hotels in northern Pakistan and wants to build a fourth costing Rs 50,000,000. Appendix:• Retained profit available: Rs 20,000,000• Bank loan offered: up to Rs 30,000,000 at 12% interest per year for 5 years• Option of selling new shares to a wealthy investor, who would then own 30% of the company• Profit for the year (latest): Rs 15,000,000
- (a) Using the appendix, recommend how Shandur Hotels Ltd should finance the new hotel. Justify your answer using suitable calculations. [12]
Show answer
- (a) Calculations: Rs 3,600,000; 24% of profit. e.g. Use the Rs 20 m retained profit plus the Rs 30 m loan. Retained profit has no interest and keeps control. The loan interest of Rs 3.6 m is about 24% of current profit, which is affordable if the new hotel adds profit, and the owners keep full control. Selling 30% of the company would avoid interest but permanently gives away control and future profits. Risk: tourism is seasonal, so cash flow must cover repayments; using all retained profit leaves little for emergencies.
Calculations: 12% × 30,000,000 = Rs 3,600,000. 3,600,000 ÷ 15,000,000 × 100 = 24%. Content: retained profit (no interest, keeps control, reduces reserves); loan (interest Rs 3.6 m a year = 24% of latest profit, repayments over 5 years, keeps control, gearing risk with seasonal tourism); new shares (no interest or repayment, but investor owns 30% and takes a share of future profits and control); combinations, e.g. Rs 20 m retained profit + Rs 30 m loan. Mark bands (12; knowledge 2, application 2, analysis 4, evaluation 4): Level 3 (9–12): developed analysis of both sides / all options applied to Shandur Hotels Ltd, using the data, and a justified decision that explains why the rejected option(s) are weaker. Level 2 (5–8): advantages and disadvantages analysed and applied to Shandur Hotels Ltd, with a decision that is only partly justified or one-sided. Level 1 (1–4): relevant knowledge with little application or analysis; a decision with no reasoning earns no evaluation marks. Correct calculations count towards application and analysis; follow through an earlier calculation error.
SwiftDrop is a courier company in Lahore. It needs 10 new delivery vans. It could lease the vans or buy them using a five-year bank loan.
- (a) Define 'leasing'. [2]
- (b) Do you think SwiftDrop should lease the vans rather than buy them with a bank loan? Justify your answer. [6]
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- (a) Paying regular amounts to use an asset owned by another firm (the leasing company), without ever owning it.
1 mark: regular payments / rent; 1 mark: to use an asset without owning it (the leasing company keeps ownership, often does maintenance).
- (b) Leasing: no large sum needed now, so cash is kept for fuel and wages; maintenance and replacement may be included, so vans stay modern and reliable. But total payments over time may cost more, and SwiftDrop never owns the vans. Buying with a loan: SwiftDrop owns the vans (an asset it can sell later) but must pay interest, needs collateral and bears repair costs. Judgement: leasing is probably better for a courier that drives vans hard and needs reliability, unless it plans to keep the vans for many years.
Up to 2 marks knowledge of leasing/loan features; up to 2 marks analysis (cash flow, total cost, ownership, maintenance, gearing); up to 2 marks evaluation with a supported judgement for SwiftDrop.
Kids' Corner sells toys in Rawalpindi. Last year: revenue $900,000, cost of sales $540,000, expenses $250,000.
- (a) Calculate the gross profit. [2]
- (b) Calculate the profit for the year (before tax). [2]
Show answer
- (a) $360,000
Gross profit = revenue − cost of sales (M1) = 900,000 − 540,000 = $360,000 (A1).
- (b) $110,000
Profit = gross profit − expenses (M1) = 360,000 − 250,000 = $110,000 (A1).
Fresh Fold Ltd runs a chain of laundry shops in Manchester, UK.
- (a) Define 'retained profit'. [2]
- (b) State two ways the managers of Fresh Fold Ltd could use its income statement. [2]
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- (a) The profit left after tax and dividends have been paid, which is kept in the business to be reinvested.
1 mark: profit after tax and dividends to shareholders; 1 mark: kept/reinvested in the business.
- (b) Any two: compare profit with previous years; compare with other laundry businesses; help decide whether to open new shops / take decisions; calculate profit margins; show to banks when asking for a loan; decide dividends.
1 mark each for any two valid uses.
Sialkot Shoes makes leather school shoes. Last year it sold 12,000 pairs at Rs 3,500 per pair. The cost of sales was Rs 1,900 per pair and expenses were Rs 11,000,000.
- (a) Calculate (i) the revenue, (ii) the gross profit and (iii) the profit for the year. [4]
- (b) Outline two reasons why making a profit is important for Sialkot Shoes. [4]
Show answer
- (a) (i) Rs 42,000,000 (ii) Rs 19,200,000 (iii) Rs 8,200,000
Revenue = 12,000 × 3,500 = Rs 42,000,000 (1). Cost of sales = 12,000 × 1,900 = Rs 22,800,000 (1). Gross profit = 42,000,000 − 22,800,000 = Rs 19,200,000 (1). Profit = 19,200,000 − 11,000,000 = Rs 8,200,000 (1).
- (b) 1. Reward for the owners' risk, encouraging them to keep running the business. 2. Source of finance: retained profit can pay for new stitching machines without borrowing. (Also: shows success to banks/investors, making loans easier; allows pay rises.)
For each of two reasons: 1 mark identify + 1 mark outline linked to Sialkot Shoes.
Saeed Pharma plc makes medicines. Its profit after tax this year was $6,000,000. The directors plan to pay dividends of $2,500,000 to shareholders. The managers want to build a new research laboratory.
- (a) Calculate Saeed Pharma's retained profit for the year. [2]
- (b) Explain why the shareholders and the managers of Saeed Pharma may disagree about how much of the profit to pay out as dividends. [6]
Show answer
- (a) $3,500,000
Retained profit = profit after tax − dividends (M1) = 6,000,000 − 2,500,000 = $3,500,000 (A1).
- (b) Shareholders want a high dividend now as a return on their investment. Managers want to retain more profit to fund the laboratory, which avoids interest on a loan and could lead to new medicines and higher profits later. Paying higher dividends reduces retained profit, so the lab may be delayed or need borrowing; paying low dividends may make shareholders sell, lowering the share price.
Up to 3 marks for the shareholders' view with application/development; up to 3 marks for the managers' view with application/development (internal finance for the laboratory, long-term growth, avoiding interest).
Lina owns a café in Amman, Jordan. Extract from her income statements ($):Item | Year 1 | Year 2Revenue | 1,200,000 | 1,500,000Cost of sales | 660,000 | 870,000Expenses | 360,000 | 480,000
- (a) Calculate the profit for the year for Year 1 and Year 2. [2]
- (b) Calculate the percentage change in profit from Year 1 to Year 2. Give your answer to 1 decimal place. [2]
- (c) Do you think Lina should be worried about these results? Justify your answer. [4]
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- (a) Year 1: $180,000; Year 2: $150,000
Year 1: 1,200,000 − 660,000 − 360,000 = $180,000 (1). Year 2: 1,500,000 − 870,000 − 480,000 = $150,000 (1).
- (b) -16.7% (a fall of 16.7%)
(150,000 − 180,000) ÷ 180,000 × 100 (M1) = -16.7% (A1).
- (c) Partly. Revenue rose by 25%, so the café is attracting more customers, but cost of sales rose faster (gross margin 45% → 42%) and expenses rose by a third, so profit fell by about 17%. She should check whether higher costs are temporary (e.g. refurbishment, extra staff for a new menu) or permanent; if permanent she needs to raise prices or control costs.
1 mark: uses data on revenue growth. 1 mark: identifies rising costs/margins as the cause. 2 marks: justified judgement (e.g. depends on whether cost rises are one-off; growth may lead to future profit).
Tariq runs a small printing business in Peshawar. His bank manager has asked him for a cash-flow forecast.
- (a) Define 'cash-flow forecast'. [2]
- (b) State two examples of cash inflows for Tariq's business. [2]
Show answer
- (a) An estimate of the future cash inflows and cash outflows of a business, usually month by month.
1 mark: estimate/prediction of future; 1 mark: cash inflows and outflows (over a period, e.g. monthly).
- (b) Any two: cash sales of printing; payments from credit customers (trade receivables); a bank loan received; owner's capital put in; sale of an old printer.
1 mark each.
Blue Lagoon Pools installs swimming pools in Dubai. It has current assets of AED 350,000 and current liabilities of AED 210,000.
- (a) Calculate Blue Lagoon Pools' working capital. [2]
- (b) Explain why it is important for Blue Lagoon Pools to have enough working capital. [4]
Show answer
- (a) AED 140,000
Working capital = current assets − current liabilities (M1) = 350,000 − 210,000 = AED 140,000 (A1).
- (b) Working capital pays day-to-day costs such as wages, tiles and pumps. If it is too low the firm may not pay suppliers or workers on time, lose trade credit, or be unable to start new pool jobs before customers pay; in the worst case it could fail even if profitable.
1 mark: pays day-to-day/short-term costs. 1 mark application (materials, workers, customers paying after installation). Up to 2 marks for developed consequences of too little (cannot pay suppliers, lose discounts/credit, higher overdraft interest, insolvency).
Hina's Kitchen makes frozen samosas for supermarkets in Karachi. Cash-flow forecast ($):Item | July | August | SeptemberCash inflow from sales | 20,000 | 18,000 | 25,000Wages | 8,000 | 8,000 | 8,000Raw materials | 12,000 | 14,000 | 10,000Rent | 3,000 | 3,000 | 3,000Opening balance in July: $5,000
- (a) Calculate the net cash flow and the closing balance for each month. [3]
- (b) Identify the first month in which Hina's Kitchen will need an overdraft. [1]
- (c) Outline two ways Hina's Kitchen could improve its cash flow. [4]
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- (a) Net cash flow: July −3,000, August −7,000, September 4,000. Closing balance: July 2,000, August −5,000, September −1,000.
Net cash flow = inflow − total outflows; closing = opening + net cash flow; next month's opening = this month's closing. July: 20,000 − 23,000 = −3,000, closing 2,000. August: 18,000 − 25,000 = −7,000, closing −5,000. September: 25,000 − 21,000 = +4,000, closing −1,000. 1 mark per correct month (net and closing).
- (b) August
August (closing balance negative, −$5,000).
- (c) e.g. 1. Ask supermarkets to pay sooner (shorter credit period), bringing inflows forward. 2. Negotiate longer trade credit from flour and meat suppliers, delaying outflows. (Also: delay buying equipment, cheaper supplier, sell unused assets, cut raw-material waste.)
For each way: 1 mark identify + 1 mark outline linked to the business. Do not accept 'increase sales' without explaining cash timing.
Sweet Delights makes traditional mithai in Lahore. Sales are very high before Eid and at wedding season, and low in other months. Its cash-flow forecast shows a negative closing balance of Rs 400,000 in the two months before Eid, when it buys large amounts of sugar, milk and ghee and pays extra workers.
- (a) Explain two ways Sweet Delights could finance this cash shortfall. [8]
- (b) Recommend which of your two ways is better for Sweet Delights. Justify your answer. [12]
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- (a) 1. Bank overdraft: borrow up to an agreed limit only when needed and repay from Eid sales; flexible because the shortfall changes day to day, but interest is high. 2. Trade credit from suppliers of sugar and ghee: pay after Eid when cash comes in, so no interest is paid, but early-payment discounts may be lost and suppliers may refuse at their own busy time. (Also: short-term loan, owner's savings, ask wedding customers for deposits.)
For each way (max 4 each): 1 mark identify; 1 mark apply to the seasonal Eid shortfall of Rs 400,000; 2 marks explain how it solves the shortfall and its cost or drawback for Sweet Delights.
- (b) e.g. An overdraft, because the shortfall is short-term and its size may change from day to day; Sweet Delights only pays interest on the amount used and repays it from Eid sales. Trade credit depends on suppliers agreeing, and suppliers are also busy before Eid. But if suppliers will give 60 days' credit, it is cheaper than an overdraft.
Content: short-term and seasonal nature of the Rs 400,000 shortfall; overdraft — interest only on the amount used, repaid from Eid sales, but expensive; trade credit — no interest, but depends on suppliers agreeing and they are busy before Eid; cheaper if suppliers give 60 days' credit. Mark bands (12; knowledge 2, application 2, analysis 4, evaluation 4): Level 3 (9–12): developed analysis of both sides / all options applied to Sweet Delights, using the data, and a justified decision that explains why the rejected option(s) are weaker. Level 2 (5–8): advantages and disadvantages analysed and applied to Sweet Delights, with a decision that is only partly justified or one-sided. Level 1 (1–4): relevant knowledge with little application or analysis; a decision with no reasoning earns no evaluation marks.
Aqua Clear sells water filters to offices in Islamabad. At present all customers pay cash and sales are $40,000 a month. From April it plans to give customers one month's credit. It expects sales to rise to $48,000 a month, but each month's sales will be paid for in the following month. Cash outflows will be $38,000 every month. The opening balance in April is $6,000. (All March sales were paid in cash in March.)
- (a) Do you think Aqua Clear should offer one month's credit to customers? Justify your answer using suitable calculations (for example, the closing balances for April, May and June). [12]
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- (a) Calculations: April −$32,000; May −$22,000; June −$12,000. For: sales and the monthly net cash flow rise (+$10,000 a month from May compared with +$2,000 now), offices expect credit, so it may win customers from rivals. Against: April has no cash inflow, so the balance falls to −$32,000 and stays negative until July (−$2,000) and only becomes positive in August (+$8,000); it needs an overdraft and pays interest, and some customers may pay late or not at all (bad debts). Judgement: offer credit only if the bank agrees an overdraft of at least $32,000 and customers are checked for credit-worthiness; otherwise the cash-flow risk is too high.
Calculations: April: inflow 0 (April sales paid in May); 6,000 + 0 − 38,000 = −32,000. May: −32,000 + 48,000 − 38,000 = −22,000. June: −22,000 + 48,000 − 38,000 = −12,000. Content: closing balances April −$32,000, May −$22,000, June −$12,000 (July −$2,000, August +$8,000); net monthly cash flow rises from +$2,000 to +$10,000 from May; higher sales and competitiveness (offices expect credit); overdraft needed and interest cost; bad debts and late payers; credit checks. Mark bands (12; knowledge 2, application 2, analysis 4, evaluation 4): Level 3 (9–12): developed analysis of both sides / all options applied to Aqua Clear, using the data, and a justified decision that explains why the rejected option(s) are weaker. Level 2 (5–8): advantages and disadvantages analysed and applied to Aqua Clear, with a decision that is only partly justified or one-sided. Level 1 (1–4): relevant knowledge with little application or analysis; a decision with no reasoning earns no evaluation marks. Correct calculations count towards application and analysis; follow through an earlier calculation error.
Ali's Hardware is a shop in Gujranwala. Its accountant is preparing the statement of financial position.
- (a) Define 'current assets'. [2]
- (b) Classify each of these items as a non-current asset, a current asset, a current liability or a non-current liability: (i) a delivery van, (ii) money owed to suppliers, (iii) a bank loan repayable in 8 years, (iv) money owed by customers. [4]
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- (a) Items owned by the business that are expected to be turned into cash or used up within 12 months, e.g. inventory, trade receivables and cash.
1 mark: owned by the business; 1 mark: will be turned into cash within 12 months (or example list if linked to the time limit).
- (b) (i) non-current asset (ii) current liability (trade payables) (iii) non-current liability (iv) current asset (trade receivables)
1 mark each.
Kiran Crafts Ltd makes pottery in Multan. Its statement of financial position shows: non-current assets Rs 1,200,000; current assets Rs 400,000; current liabilities Rs 250,000; non-current liabilities Rs 500,000.
- (a) Calculate total assets and total liabilities. [2]
- (b) Calculate total equity (shareholders' equity). [2]
- (c) Explain how a bank could use Kiran Crafts' statement of financial position when deciding whether to lend to it. [4]
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- (a) Total assets Rs 1,600,000; total liabilities Rs 750,000
1,200,000 + 400,000 = Rs 1,600,000 (1). 250,000 + 500,000 = Rs 750,000 (1).
- (b) Rs 850,000
Total equity = total assets − total liabilities (M1) = 1,600,000 − 750,000 = Rs 850,000 (A1).
- (c) It shows what the company owns and owes. The bank can check assets that could be used as security (e.g. kilns and premises), how much the company already borrows (Rs 750,000 liabilities, Rs 500,000 long-term), and its liquidity (current assets 400,000 v current liabilities 250,000) to judge whether it can repay.
1 mark: shows assets and liabilities at a point in time. Up to 3 marks for specific uses with data/application: collateral, existing debt/gearing, liquidity (working capital or current ratio = 1.6), equity/owners' stake.
Pak Electricals Ltd sells fans and air coolers. The owner says, "We hold more stock than ever, so the business must be in a stronger position." Appendix: extract from the statements of financial position ($).Item | Year 1 | Year 2Inventory | 120,000 | 210,000Trade receivables | 80,000 | 95,000Cash | 60,000 | 5,000Trade payables | 90,000 | 130,000Bank overdraft | 10,000 | 70,000
- (a) The owner says, "We hold more stock than ever, so the business must be in a stronger position." Do you agree? Justify your answer using suitable calculations (for example, working capital and the acid test ratio for each year). [12]
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- (a) Calculations: working capital Year 1 $160,000, Year 2 $110,000; acid test ratio Year 1 1.4, Year 2 0.5. No. Working capital fell from $160,000 to $110,000 and the acid test fell from 1.4 to 0.5. Cash fell to only $5,000 while the overdraft rose to $70,000 and payables rose. The extra inventory ties up cash; fans and coolers are seasonal and may not sell quickly. Unless the stock is for a coming summer peak, liquidity is much weaker.
Calculations: Year 1: current assets 260,000 − current liabilities 100,000 = $160,000. Year 2: 310,000 − 200,000 = $110,000. Year 1: (260,000 − 120,000) ÷ 100,000 = 1.4. Year 2: (310,000 − 210,000) ÷ 200,000 = 0.5. Content: working capital $160,000 → $110,000; acid test 1.4 → 0.5; cash $60,000 → $5,000; overdraft $10,000 → $70,000; payables up $40,000; inventory ties up cash; fans and coolers are seasonal (stock may be a planned build-up before summer) but risk of being unable to pay debts. Mark bands (12; knowledge 2, application 2, analysis 4, evaluation 4): Level 3 (9–12): developed analysis of both sides / all options applied to Pak Electricals Ltd, using the data, and a justified decision that explains why the rejected option(s) are weaker. Level 2 (5–8): advantages and disadvantages analysed and applied to Pak Electricals Ltd, with a decision that is only partly justified or one-sided. Level 1 (1–4): relevant knowledge with little application or analysis; a decision with no reasoning earns no evaluation marks. Correct calculations count towards application and analysis; follow through an earlier calculation error.
