Business

1. 1.

   Fictional case: a wholesaler records a credit sale today but receives cash next month. Explain why profit and cash flow can differ this month.

   [2 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Accrual accounting records the sale in the period earned. Cash accounting for the forecast tracks receipt timing, so the wholesaler must still finance its current payments.

   Marking points

   • Revenue can be recognised when the sale occurs before cash receipt.
   • The sale increases receivables rather than current cash, so reported profit can rise without an immediate cash inflow.

   Examiner tip: Name the receivable created by the credit sale.

2. 2.

   Fictional case: opening cash is 8000, receipts 22000 and payments 27000. Calculate net cash flow and closing cash.

   [2 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. First compare period receipts with payments; then add that net movement to the opening stock of cash. Negative flow does not imply negative closing cash if the opening balance is sufficient.

   Marking points

   • Net cash flow = 22000 - 27000 = -5000.
   • Closing cash = 8000 - 5000 = 3000.

   Examiner tip: A cash balance is a stock; net cash flow is a period movement.

3. 3.

   Fictional case: current assets are 150000, including inventory of 60000; current liabilities are 75000. Calculate current and acid-test ratios, excluding only inventory for the acid test. Explain one limitation of the current ratio.

   [4 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. The stricter measure removes inventory before division. Even a strong ratio is a snapshot: collection timing, stock quality and payment deadlines still determine liquidity.

   Marking points

   • Current ratio = 150000/75000 = 2.0:1.
   • Quick assets = 150000 - 60000 = 90000.
   • Acid-test ratio = 90000/75000 = 1.2:1.
   • Accept an explained limitation: inventory may not sell quickly or at recorded value; alternatively, late receivables or a snapshot that ignores payment timing can make the ratio misleading.

   Examiner tip: Subtract inventory from assets, not from liabilities.

4. 4.

   Fictional case: revenue is 500000, cost of sales 300000, operating expenses 120000 and capital employed 400000. Calculate gross profit margin, operating profit margin and ROCE using operating profit; explain why comparison needs context.

   [4 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Remove cost of sales to obtain gross profit, then operating expenses for operating profit. Margins use revenue as denominator; ROCE instead measures operating profit relative to capital committed.

   Marking points

   • Gross profit = 200000; gross margin = 40%.
   • Operating profit = 80000; operating margin = 16%.
   • ROCE = 80000/400000 * 100 = 20%.
   • Industry, accounting policies and prior performance affect whether these ratios are strong.

   Examiner tip: Keep margin denominators distinct from the ROCE denominator.

5. 5.

   Fictional case: a fast-growing profitable wholesaler faces late customer payments and expanding inventories. Evaluate factoring receivables rather than a long-term bank loan to relieve cash pressure.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. If pressure mainly comes from slow collection, factoring targets that source quickly. If inventory growth requires permanent working capital, longer-term funding may be more suitable alongside better credit control.

   Marking points

   • Indicative: factoring can accelerate cash from credit sales and may provide collection services.
   • Fees reduce the net return and terms may retain some bad-debt risk.
   • A long-term loan supplies stable funding but adds interest and repayment commitments.
   • A justified judgement matches funding duration and cost to recurring working-capital needs.

   Examiner tip: Match the funding instrument to the cause and duration of the cash gap.

6. 6.

   Fictional case: a retailer improves its current ratio by borrowing long-term cash and holding it unused. Evaluate the claim that its underlying operating performance has therefore improved.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. A ratio improvement can be financially engineered without improving the business model. Assess operating cash flows, profitability and debt service rather than treating one liquidity ratio as proof of stronger operations.

   Marking points

   • Indicative: added cash raises current assets without raising current liabilities in the stated case.
   • Immediate liquidity improves but sales efficiency or margins need not change.
   • Interest and leverage can increase future financial risk.
   • A justified judgement separates balance-sheet presentation from sustainable operating cash generation.

   Examiner tip: A healthier liquidity snapshot is not necessarily a more productive business.

Original, unofficial practice questions from SubjectScout — not official past-paper questions.