IB BUSINESS MANAGEMENT

50 WORKSHEETS PACK, 2ND EDN

UNIT 3: FINANCE & ACCOUNTS (SL & HL)

Kenneth Tang
 IB BUSINESS MANAGEMENT
50 WORKSHEETS & ANSWERS PACK (2ND EDITION)
UNIT 3: FINANCE AND ACCOUNTS

Introduction

This resource aims to support students and teachers in the preparation for Unit 3: Finance and
Accounts of the IB Business Management course (first examinations 2024).

This resource pack contains 50 worksheets with practical short answer questions, case studies,
revision exercises, and exam skills building with a full set of answers for all worksheets. They are
easy to use for quick formative assessments. Students may also find this resource useful in their
preparation for end-of-unit (summative) assessments as well as their revision plans during the final
countdown to their IB Business Management exams. The worksheets are arranged in syllabus order,
but they can be used in any order at any appropriate time. Teachers will also find this resource useful
to give students to work on in lieu of your absence for personal and/or professional reasons. Each
worksheet is accompanied with fully explained answers, which can be shared with students as
appropriate.

About the Author

Kenneth Tang works at an international school in Hong Kong, where he

teaches IBDP Business Management and Economics. He is an experienced
and qualified teacher under the Education Bureau of Hong Kong SAR
Government, Ontario College of Teachers (OCT) in Canada, and has
Qualified Teaching Status (QTS) with the Ministry of Education in the United
Kingdom. He is an experienced examiner for Business Management and
have marked Paper 1 and Paper 2, and moderated the Internal Assessment.

Kenneth has an Executive Masters of Arts (EMA) in International

Educational Leadership and Change and a Bachelor of Commerce (B.Com)
degree from The Rotman School of Management at the University of
Toronto. He obtained his teaching qualification, the Postgraduate Diploma in Education (PGDE),
from the University of Hong Kong. He also holds both the IB Certificate and Advanced Certificate in
Leadership Practise and Leadership Research.

Prior to his international education career, Kenneth had various experiences in the corporate and
commercial field. This included working in the Toronto office of Ernst & Young LLP in Canada, as an
audit staff accountant, and completing the Management Trainee program with Citicorp International
Limited in Hong Kong.

Kenneth is an IB DP alumnus, having completed this IB Diploma in Hong Kong. As such, he is eager
to share his personal IB journey and support students through this challenging curriculum. He also
enjoys giving context and relevance of the theoretical concepts taught in the classroom through
stories from his work experience in the corporate world. During his spare time, he enjoys following
current affairs and strives to bring the news into the classroom setting. Kenneth has also written
subject-specific articles for IB Review, a student-centered magazine published by Hodder Education.
Kenneth was invited as a panelist speaker at the IB Global Conference – Hong Kong in March 2019
and has contributed to the IB’s Graduate Voice 2021 series.

Email: [email protected]

Organizations, products, or individuals named in this resource pack are fictitious and any similarities with actual entities
are purely coincidental.

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 IB BUSINESS MANAGEMENT
50 WORKSHEETS & ANSWERS (2ND EDITION)
UNIT 3: FINANCE & ACCOUNTS

Contents page

Page
Unit 3.1 – Introduction to Finance
Worksheet 1 3.1 Introduction to Finance (1) 5
Worksheet 2 3.1 Introduction to Finance (2) 7

Unit 3.2 – Sources of Finance

Worksheet 3 3.2 Sources of Finance (1) 9
Worksheet 4 3.2 Sources of Finance (2) 11
Worksheet 5 3.2 Sources of Finance (3) 13

Unit 3.3 – Costs & Revenues

Worksheet 6 3.3 Costs & Revenues (1) 15
Worksheet 7 3.3 Costs & Revenues (2) 17
Worksheet 8 3.3 Costs & Revenues (3) 19
Worksheet 9 3.3 Costs & Revenues (4) 21

Unit 3.4 – Final Accounts

Worksheet 10 3.4 Final Accounts (1) 23
Worksheet 11 3.4 Final Accounts (2) 26
Worksheet 12 3.4 Final Accounts (3) 28
Worksheet 13 3.4 Final Accounts (4) 31
Worksheet 14 3.4 Final Accounts (5) 33
Worksheet 15 3.4 Final Accounts (6) 36
Worksheet 16 3.4 Final Accounts (7) 38
Worksheet 17 3.4 Final Accounts (8) 40
Worksheet 18 3.4 Final Accounts (9) 43
Worksheet 19 3.4 Final Accounts (10) 45

Unit 3.4 – Depreciation (HL only)

Worksheet 20 3.4 Depreciation (Straight line method) (HL) (1) 48
Worksheet 21 3.4 Depreciation (Straight line method) (HL) (2) 50
Worksheet 22 3.4 Depreciation (Straight line method) (HL) (3) 52
Worksheet 23 3.4 Depreciation (Units of production method) (HL) (1) 54
Worksheet 24 3.4 Depreciation (Units of production method) (HL) (2) 56
Worksheet 25 3.4 Depreciation (Units of production method) (HL) (3) 58

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Unit 3.5 – Liquidity & Profitability Ratio Analysis
Worksheet 26 3.5 Liquidity & Profitability Ratio Analysis (1) 60
Worksheet 27 3.5 Liquidity & Profitability Ratio Analysis (2) 62
Worksheet 28 3.5 Liquidity & Profitability Ratio Analysis (3) 64
Worksheet 29 3.5 Liquidity & Profitability Ratio Analysis (4) 66

Unit 3.6 – Efficiency Ratio Analysis

Worksheet 30 3.6 Efficiency Ratio Analysis (HL) (1) 68
Worksheet 31 3.6 Efficiency Ratio Analysis (HL) (2) 70
Worksheet 32 3.6 Efficiency Ratio Analysis (HL) (3) 72
Worksheet 33 3.6 Efficiency Ratio Analysis (HL) (4) 74

Unit 3.7 – Cash Flow

Worksheet 34 3.7 Cash Flow (1) 77
Worksheet 35 3.7 Cash Flow (2) 79
Worksheet 36 3.7 Cash Flow (3) 81
Worksheet 37 3.7 Cash Flow (4) 83
Worksheet 38 3.7 Cash Flow (5) 85
Worksheet 39 3.7 Cash Flow (6) 87

Unit 3.8 – Investment Appraisal

Worksheet 40 3.8 Investment Appraisal (1) 89
Worksheet 41 3.8 Investment Appraisal (2) 91
Worksheet 42 3.8 Investment Appraisal (3) 93
Worksheet 43 3.8 Investment Appraisal (NPV) (HL) (1) 95
Worksheet 44 3.8 Investment Appraisal (NPV) (HL) (2) 97
Worksheet 45 3.8 Investment Appraisal (NPV) (HL) (3) 99
Worksheet 46 3.8 Investment Appraisal (NPV) (HL) (4) 101

Unit 3.9 – Budgets (HL only)

Worksheet 47 Budgets (HL) (1) 103
Worksheet 48 Budgets (HL) (2) 105
Worksheet 49 Budgets (HL) (3) 107
Worksheet 50 Budgets (HL) (4) 109

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 Worksheet 1
3.1 Introduction to Finance (1)

(a) List two reasons why a business needs finance. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Define the term capital expenditure. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Define the term revenue expenditure. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Given the following examples in the table below, identify whether they are capital or revenue
expenditure. [15 marks]

Capital expenditure or
Examples
Revenue expenditure
1. Purchase of new MacBook computers for a school.
2. Rent payment for the retail shop location.
3. Delivery costs to ship finished goods to retailers.
Research and development cost on the production of new
4.
COVID-19 vaccines.
5. Purchasing tables and chairs for the new office location.
6. A bakery shop purchases flour from its supplier.
A business purchases an insurance premium for its company
7.
car.
Spending made on refuelling the rental vehicles for a car rental
8.
company.
9. A publicly held company decides to acquire another company.
10. Interest payments on a bank loan.
11. Mortgage payment on a building purchased by the business.
12. Cost of telephone bills for directors of the company.
13. Cost of billboards to promote the launch of a new product.
Acquiring the copyright for a new textbook launched by a
14.
publisher.
A company purchases a new IT system for the business to
15.
improve its efficiency.

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 Worksheet 1
3.1 Introduction to Finance (1)
Answers

(a) List two reasons why a business needs finance. [2 marks]

• To set up a new business
• To maintain the day-to-day operations of a business, e.g., to pay for utilities and the purchase
of raw materials/supplies.
• To expand and grow a business, e.g., opening a new branch/store/outlet.
• To develop new products, e.g., through research & development (R&D).

Top tip: The command term “list” is an assessment objective AO1 in the new guide (first examinations
2024). These type of questions can be answered with a simple bullet point.

(b) Define the term capital expenditure. [2 marks]

Capital expenditure refers to spending made by a business on non-current (fixed) assets, with an
intention to use these assets for more than one year. The aim of this spending is for the long-term,
such as purchasing equipment to produce goods sold by the business.

Top tip: There is no requirement for a student to provide an example as part of a definition. Examples are
not usually credited.

(c) Define the term revenue expenditure. [2 marks]

Revenue expenditure refers to spending made by a business to support its day-to-day operations.
The aim of this spending is to meet short-term obligations, such as paying the wages/salaries.

(d) Given the following examples in the table below, identify whether they are capital or revenue
or
expenditure. [15 marks]
Capital expenditure or
Examples
Revenue expenditure
1. Purchase of new MacBook computers for a school. Capital
2. Rent payment for the retail shop location. Revenue
3. Delivery costs to ship finished goods to retailers. Revenue
Research and development cost on the production of new
4. Capital
COVID-19 vaccines.
5. Purchasing tables and chairs for the new office location. Capital
6. A bakery shop purchases flour from its supplier. Revenue
A business purchases an insurance premium for its company
7. Revenue
car.
Spending made on refuelling the rental vehicles for a car rental
8. Revenue
company.
9. A publicly held company decides to acquire another company. Capital
10. Interest payments on a bank loan. Revenue
11. Mortgage payment on a building purchased by the business. Revenue
12. Cost of telephone bills for directors of the company. Revenue
13. Cost of billboards to promote the launch of a new product. Revenue
Acquiring the copyright for a new textbook launched by a
14. Capital
publisher.
A company purchases a new IT system for the business to
15. Capital
improve its efficiency.

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 Worksheet 2
3.1 Introduction to Finance (2)

(a) Identify the statement that is the odd one out in each case below. [4 marks]

(1) Capital expenditure aims to …

 improve the longevity of a current asset.
 provide long-term benefits for a business.
 add value to a firm’s non-current assets.
 improve the operational efficiency of a firm.

(2) Revenue expenditure includes …

 maintenance costs of equipment and motor vehicles.
 the purchase of new capital equipment and motor vehicles.
 payment of salaries to the senior management team.
 purchasing office supplies for the business.

(3) The following are all reasons for capital expenditure:

 To replace non-current assets that are no longer functional.
 To increase the production capacity of the organization.
 To comply with government-imposed laws on the use of green and sustainable processes
and technologies.
 To ensure the business can function on a daily basis.

(4) The following statements relate to revenue expenditure:

 These spendings are short-term in nature.
 It aims to improve the operational efficiency of the business.
 It is shown on the statement of profit and loss.
 They are recurring.

(b) Explain one example of capital expenditure and one example of revenue expenditure for a car
rental company. [4 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Explain one example of capital expenditure and one example of revenue expenditure for a
food and beverage manufacturer. [4 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 2
3.1 Introduction to Finance (2)

Answers

(a) Identify the statement that is the odd one out in each case below. [4 marks]
(1) Capital expenditure aims to …
 improve the longevity of a current asset
Capital expenditure is related to spending on non-current assets, with the aim of
purchasing such assets for use of more than one year.

(3) Revenue expenditure includes …

 the purchase of new capital equipment and motor vehicles
The purchase of capital equipment and motor vehicles relates to capital expenditure,
not revenue expenditure (spending made to support the daily operations of a business).

(3) The following are reasons for capital expenditure:

 To ensure the business can function on a daily basis.
Spendings made to help a business operate on a daily basis are classified as revenue
expenditure rather than capital expenditure.

(4) The following statements relate to revenue expenditure:

 It aims to improve the operational efficiency of the business.
The operational efficiency of a business can be improved when there is capital
expenditure on, say, new technologies which allow the business to improve its
production efficiency.

(b) Explain one example of capital expenditure and one example of revenue expenditure for a car
rental company. [4 marks]

For a car rental company, one example of capital expenditure is the purchase of new cars/vehicles.
As the business depends on car rentals, it is important that it has sufficient cars to meet the demands
of its customers, especially during peak periods (e.g., holiday seasons). Furthermore, these cars are
purchased with the intention of using them for more than a year as they will help the car rental
company to generate rental incomes.
One example of revenue expenditure could include the spending made on insurance premiums for
these cars. As these cars will be rented out and used by many different users, it is likely that the
company will need to insure their cars in order to protect the firm from losses as a result of the misuse
of the vehicles by the car renters.

Accept any other relevant examples.

(c) Explain one example of capital expenditure and one example of revenue expenditure for a
food and beverage manufacturer. [4 marks]

One example of capital expenditure for a food and beverage manufacturer is the purchase of new
production equipment which could improve the operational efficiency of the production process. As
profit margins tend to be low for food and beverage manufacturers, it is likely that the manufacturer
will need to rely on high sales volumes to improve its profits. Hence, capital expenditure on new
production equipment could help achieve this through optimizing the manufacturer’s operational
efficiency to produce more food and beverage products for sale.
An example of revenue expenditure for a food and beverage manufacturer is the remuneration
(wages) paid to its factory workers on the production line. It is likely that many workers will need to
be hired to ensure the smooth operation within the factory. This becomes the recurring and day-to-
day costs which the food and beverage manufacturer will need to incur in order to maintain its
production and daily operations.

Accept any other relevant examples.

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 Worksheet 3
3.2 Sources of Finance (1)

(a) Define the term internal sources of finance. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Define the term external sources of finance. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Identify the correct source of finance from the following statements (answer options given
below) and identify whether they are short- or long-term sources of finance. [11 marks]

Business angels Loan capital Personal funds Share capital

Microfinance
Crowdfunding Retained profit Trade credit
providers
Leasing Overdrafts Sale of assets

Source of Short- or Long-

Statements
finance term finance
The business obtains an extension of time to pay back
1.
its suppliers, say, from 30 days to 60 days.
The issuance (selling) of shares to shareholders to
2.
raise an additional source of finance.
Money raised from the sale of non-current assets that
3.
are no longer needed by the business.
The financial surplus that remains after a company
4.
pays dividends to its shareholders.
Obtaining a large amount of money from a financial
5.
institution, usually for capital expenditure.
A service that allows a business to borrow money up
to an agreed amount (usually more money than what
6.
is deposited in the bank by the business), but with
relatively higher interest charges.
A type of finance that pools the support from a large
7. number of individuals through the use of the Internet
and/or social media platforms.
Rather than paying a large sum of money to purchase
8. a non-current asset (e.g., machinery), the business
rents the asset instead.
A financial service that offers financial assistance to
9.
those that are poor and/or on low-incomes.

10. The use of the owner’s own funds for the business.

An individual who is extremely wealthy and has the

11. funds to invest in start-up companies that may be
considered as too risky to other investors.

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 Worksheet 3
3.2 Sources of Finance (1)

Answers
(a) Define the term internal sources of finance. [2 marks]
Internal sources of finance refers to funds that are derived from within the business. The amount of
money from internal sources of finance is generally limited as they include personal savings from
the owner or selling assets that are no longer needed by the business.

(b) Define the term external sources of finance. [2 marks]

“External sources of finance” refers to finances that are obtained from outside of the business. The
amount raised from external sources of finance can vary but are often a lot more than what the firm
can derive internally as funds can be raised from individuals, businesses, or financial institutions.

(c) Identify the correct source of finance from the following statements (answer options given
below) and identify whether they are short- or long-term sources of finance. [11 marks]

Business angels Loan capital Personal funds Share capital

Microfinance
Crowdfunding Retained profit Trade credit
providers
Leasing Overdrafts Sale of assets

Source of Short- or Long-

Statements
finance term finance
The business obtains an extension of time to pay back
1. Trade credit Short
its suppliers, say, from 30 days to 60 days.
The issuance (selling) of shares to shareholders to
2. Share capital Long
raise an additional source of finance.
Money raised from the sale of non-current assets that
3. Sale of assets Short
are no longer needed by the business.
The financial surplus that remains after a company
4. Retained profit Short
pays dividends to its shareholders.
Obtaining a large amount of money from a financial
5. Loan capital Long
institution, usually for capital expenditure.
A service that allows a business to borrow money up
to an agreed amount (usually more money than what
6. Overdraft Short
is deposited in the bank by the business), but with
relatively higher interest charges.
A type of finance that pools the support from a large
7. number of individuals through the use of the Internet Crowdfunding Short
and/or social media platforms.
Rather than paying a large sum of money to purchase
8. a non-current asset (e.g. machinery), the business Leasing Short
rents the asset instead.
A financial service that offers financial assistance to Microfinance
9. Long
those that are poor and/or on low-incomes. provider
Personal
10. The use of the owner’s own funds for the business. Short
funds
An individual who is extremely wealthy and has the
Business
11. funds to invest in start-up companies that may be Short/Medium
angels
considered as too risky to other investors.

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 Worksheet 4
3.2 Sources of Finance (2)

(a) The following are statements of advantages and disadvantages of various sources of finance.
Identify each statement as an advantage or a disadvantage and identify the relevant source
of finance in each case. [10 marks]

Advantage or Source of
Statement
Disadvantage? Finance
There are limited funds that can be provided with this
1
source as they come from the owner’s own pockets.
By issuing shares through a public stock exchange, this
2
allows the company to raise a greater amount of funds.
Used as a short-term source of finance due to the high
3 interest charges for taking out more money than in the
firm’s bank account.
This external source of finance can offer a large
4 amount of money for capital expenditure but often has
a long application process with financial institution.
The business has no possession of the asset if it uses
5
this source of finance.
This method allows people to gain wide access via the
6
Internet and/or social media platforms to raise funds.
This is the profits from prior years (after taxes
7 deductions as well as dividends distributed to owners),
without the need to pay interest rate charges.
The sale of obsolete and unused equipment or
8 machines in order to raise finance without the need to
borrow money from external providers.
Investors with an appetite for risky ventures with high
9
growth potential, without any interest rate charges.
This source of finance is especially useful for those
10 who are on low income or do not have access to
traditional means of borrowing from commercial banks.

(b) State whether the following statement is true or false. [5 marks]

Statement True or False?

Microfinance providers are be regarded as unethical as they are making

1
large profit margins on loans given to low-income clients.
Through leasing as a source of finance for non-current assets, the
2
business still incurs the costs of maintaining the assets.
Overdrafts incur high interest rate charges, and the lender can demand
3
repayment of the money owed any time.
Mortgages, which are loans used to purchase commercial properties, is
4
a type of loan capital for businesses.

5 Share capital is only available to publicly held companies.

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 Worksheet 4
3.2 Sources of Finance (2)

Answers
(a) The following are statements of advantages and disadvantages of various sources of finance.
Identify each statement as an advantage or a disadvantage and identify the relevant source
of finance in each case. [10 marks]

Advantage or Source of
Statement
Disadvantage? Finance
There are limited funds that can be provided with this
1 Disadvantage Personal funds
source as they come from the owner’s own pockets.
By issuing shares through a public stock exchange, this
2 Advantage Share capital
allows the company to raise a greater amount of funds.
Used as a short-term source of finance due to the high
3 interest charges for taking out more money than in the Disadvantage Overdraft
firm’s bank account.
This external source of finance can offer a large
4 amount of money for capital expenditure but often has Disadvantage Loan capital
a long application process with financial institution.
The business has no possession of the asset if it uses
5 Disadvantage Leasing
this source of finance.
This method allows people to gain wide access via the
6 Advantage Crowdfunding
Internet and/or social media platforms to raise funds.
This is the profits from prior years (after taxes
7 deductions as well as dividends distributed to owners), Advantage Retained profit
without the need to pay interest rate charges.
The sale of obsolete and unused equipment or
8 machines in order to raise finance without the need to Advantage Sale of assets
borrow money from external providers.
Investors with an appetite for risky ventures with high Business
9 Advantage
growth potential, without any interest rate charges. angels
This source of finance is especially useful for those
10 who are on low income or do not have access to Advantage Microfinance
traditional means of borrowing from commercial banks.

(b) State whether the following statement is true or false. [5 marks]

Statement True or False?

Microfinance providers are be regarded as unethical as they are making

1 True
large profit margins on loans given to low-income clients.
Through leasing as a source of finance for non-current assets, the
2 False
business still incurs the costs of maintaining the assets.
Overdrafts incur high interest rate charges, and the lender can demand
3 True
repayment of the money owed any time.
Mortgages, which are loans used to purchase commercial properties, is
4 True
a type of loan capital for businesses.

5 Share capital is only available to publicly held companies. False

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 Worksheet 5
3.2 Sources of Finance (3)

(a) Explain two factors that may affect an organization’s decision on which source of finance to
pursue. [4 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Describe one source of finance which is not advisable for business owners who would like to
retain decision-making power and control. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Describe one source of finance that is available for a small start-up company with high growth
potential. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) A business is encountering a cash flow issue and needs to repay its suppliers within the next
month. Describe one source of finance that is appropriate for this situation. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(e) Outline one source of finance that may be affected by economic or technological factors within
the STEEPLE analysis framework. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..
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 Worksheet 5
3.2 Sources of Finance (3)

Answers

(a) Explain two factors that may affect an organization’s decision on which source of finance to
pursue. [4 marks]

One factor may include the purpose of the finance. If the organization decides to pursue capital
expenditure, which often requires a large sum of money, short-term sources of finance and internal
sources of finance may not be appropriate. By contrast, long-term sources of finance, such as loan
capital or leasing, may be more appropriate.

Another factor may be the type of organization, i.e., its size and legal status. A sole trader or
partnership may have limited access to sources of finance due to the relatively small size and scale
of its operations. However, large businesses, such as publicly held companies or even some
privately held companies, may have the ability to access more sources of finance due to their
reputation and ability to benefit from economies of scale.

Accept any other relevant factor that is appropriately and accurately explained.

(b) Describe one source of finance which is not advisable for business owners who would like to
retain decision-making power and control. [2 marks]

A source of finance that is not advisable for business owners who wish to retain decision-making
power is the use of share capital. Through issuing (selling) shares, the company is diluting the control
of its business in exchange for capital/funds. If the new shareholders accumulate sufficient shares
(e.g., a majority stake in the company), then these shareholders may be able to gain overall control
of the business.

(c) Describe one source of finance that is available for a small start-up company with high growth
potential. [2 marks]

One source of finance that a small start-up company with high growth potential may be able to get
is through a business angel. Business angels are wealthy individuals who are often looking for
business ventures to invest in (especially risky ones with high growth potential). This could allow the
start-up company to kick off its business venture without the need to go through the difficult and long
application process of applying for bank loans, for example.

(d) A business is encountering a cash flow issue and needs to repay its suppliers within the next
month. Describe one source of finance that is appropriate for this situation. [2 marks]

A possible source of finance for this situation is the use of overdrafts. Overdrafts are a short-term
source of finance which allows a business to draw up more than what it has deposited in its bank
account, but often at a very high interest rate. As such, this source of finance is flexible and would
be the best fit given the urgent need for cash as the business needs to repay its suppliers quickly.

(e) Outline one source of finance that may be affected by economic or technological factors within
the STEEPLE analysis framework. [2 marks]

Overdrafts or loan capital – If interest rates change, due to fluctuations in the business cycle, external
sources of finance like overdrafts or loan capital will become more expensive for borrowers. This
means that the business will have to pay a higher amount of interest on the borrowed money.

Crowdfunding – Changes in technology, like the launch of new social media apps, can impact the
accessibility of crowdfunding as a source of finance. Since crowdfunding relies on Internet and social
media platforms, these technological changes can affect how easily businesses can raise money
through crowdfunding.

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 Worksheet 6
3.3 Costs & Revenues (1)

Aaron’s Games (AG)

Aaron is the lead game designer and owner of a start-up virtual reality gaming company called
Aaron’s Games (AG). AG has operated for a year already without a finance personnel and Aaron
would like to take a look at the direct costs, indirect costs, and revenue streams since the launch
of the company’s first game.

Table 1: Fixed and variable cost information for AG in 2023

Fixed costs per year ($’000)

• Rent 50
• Maintenance 5
• Promotions 3.5
• Insurance premiums 2.5
Variable costs per game ($)
• Design materials 20
• Direct labour cost for game designers 100
• Other variable costs 50

(a) Define the term indirect costs. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Use the information in Table 1 to complete the table below. [4 marks]

Output (games) Total fixed Total variable Total costs Average costs
costs ($) costs ($) ($) ($)
0

50

100

150

200

250

(c) Define the term revenue streams. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) The average selling price for each video game is $350. Calculate the total revenue earned by
AG for a total sales volume of 300 games in one week. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 6
3.3 Costs & Revenues (1)

Answers

(a) Define the term indirect costs. [2 marks]

Indirect costs (also known as overheads) refer to costs that are not explicitly related to the production
of a particular good or the provision of a service, e.g., rent as the location or premise is associated
with all business functions rather than the production/manufacturing of a particular good.

(b) Use the information in Table 1 to complete the table below. [4 marks]

• Total fixed costs = Rent + Maintenance + Promotions + Insurance premiums

o 50,000 + 5,000 + 3,500 + 2,500 = $61,000
• Variable costs per game = 20 + 100 + 50 = $170
• As an example, for 50 games:
o TFC = $61,000 (fixed costs are the same because they do not vary with the level of output)
o TVC = Variable cost per unit × Quantity sold = $170 × 50 games = $8,500
o TC = TFC + TVC = $61,000 + $8,500 = $69,500

Apply the same method for the remaining levels of output in the table:

Output (games) Total fixed Total variable Total costs Average costs
costs ($) costs ($) ($) ($)
0 61,000 0 61,000 --

50 61,000 8,500 69,500 1,390

100 61,000 17,000 78,000 780

150 61,000 25,500 86,500 576.67

200 61,000 34,000 95,000 475

250 61,000 42,500 103,500 414

Top tip: The question does not ask you to show any working out, so it is fine to just populate the
table with the figures. The calculations are provided to show you how the answers were derived.

(c) Define the term revenue streams. [2 marks]

Revenue streams refer to the various sources in which a business derives its sales from. As a
business grows in scale, quite often they will diversify its revenue streams through offering additional
goods/services within its existing business model or from other sources.

(d) The average selling price for each video game is $350. Calculate the total revenue earned by
AG for a total sales volume of 300 games in one week. [2 marks]

• Total revenue = (P × Q) – Total Cost

• = ($350 × 500 games) – [$61,000 + ($170 × 300)]
• = $175,000 – $112,000
• = $63,000

Top tip: Expressing the correct units of measurement is extremely important with any quantitative
question in the Business Management assessments. A correctly calculated answer but without
appropriate units of measurement will usually be deducted 1 mark in the exam.

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 Worksheet 7
3.3 Costs & Revenues (2)

Troll Toys (TT)

Bryan is the owner of Troll Toys (TT), established as a sole trader. TT is known for the design and
manufacturing of “Trolls,” which are essentially figurines. TT has established its products in a niche
and premium collectible toys market and appeals specifically to young adults aged 17 to 27. TT’s
office and small manufacturing facility are both based in the Akihabara district in Tokyo, Japan. TT
sells its products in US dollars via an e-commerce website. Bryan has collated the following cost
and revenue information. Each troll toy is sold for $280.

Table 1: Sales information and shipping (delivery) costs for TT by region

Japan Asia Pacific & North Rest of the
Europe
(domestic) Australasia America world
Annual sales
volume 25,000 30,550 12,000 40,750 27,400
(number of toys)
Shipping (delivery)
$10 $25 $35 $40 $45
cost per toy

Table 2: Variable costs per toy and fixed costs

Fixed costs (per year)

• Rent of premises (office & small factory) $3,500,000
• Marketing and promotions
$2,100,500

Variable costs (per toy)

• Materials $50
• Direct labour costs (designer and craftsman) $70
• Shipping (delivery) costs See Table 1

(a) Calculate the total sales volume for TT (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Calculate the total variable costs (TVC) for TT (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Calculate the total profit or loss for TT (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Bryan’s target profit is $15m. Using the total sales volume that you have calculated in part
(a), calculate the price per toy that he must charge. (Show your working to 2 d.p.). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 7
3.3 Costs & Revenues (2)

Answers

(a) Calculate the total sales volume for TT (show all your working). [2 marks]

• Total sales volume = Sum of the annual sales volume by geographical location
• = 25,000 + 30,550 + 12,000 + 40,750 + 27,400
• = 135,700 toys

Top tip:
Many students often forget to put the units after performing a simple mathematical calculation.
Make sure you don’t forget to put the appropriate unit of measurement for your numerical value!

(b) Calculate the total variable costs (TVC) for TT (show all your working). [2 marks]

• Total variable costs (TVC) = Variable cost per unit × Quantity sold
• = ($50 + $70) × 135,700 + ($10 × 25,000) + ($25 × 30,550) + ($35 × 12,000) + ($40 ×
40,750) + ($45 × 27,400)
• = $16,284,000 + $250,000 + $763,750 + $420,000 + $1,630,000 + $1,233,000
• TVC = $20,580,750

(c) Calculate the total profit or loss for TT (show all your working). [2 marks]

• Total profit (loss) = Total revenue – (Total fixed cost + Total variable cost)
• = (Selling price × Quantity sold) – [Total fixed cost + (Variable cost × Quantity sold)]
• = ($280 × 135,700) – [($3,500,000 + $2,100,500) +$20,580,750]
• = $37,996,000 – $26,181,250
• Total profit = $11,814,750

(d) Bryan’s target profit is $15m. Using the total sales volume that you have calculated in part
(a), calculate the price per toy that he must charge. (Show your working to 2 d.p.). [2 marks]

Apply the total profit formula and let “P” represent the selling price per toy that must be charged to
achieve the target profit of $15m.

• Target profit = Total revenue – (Total fixed cost + Total variable cost)
• = (Selling price × Quantity sold) – [Total fixed cost + (Variable cost × Quantity sold)]
• $15,000,000 = 135,700P – [($3,500,000 + $2,100,500) + $20,580,750]
• $15,000,000 + 26,181,250 = 135,700P
• $41,181,250 = 135,700P
• P = $303.47

Thus, TT must charge a price of $303.47 in order to achieve a target profit of $15m with a sales
volume of 135,700 toys.

Top tip:
It is important to check which context the case is set in so you can write the appropriate and
relevant currency to the calculated figure. In this case, the unit of measurement for price is US
dollars ($).

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 Worksheet 8
3.3 Costs & Revenues (3)

Hon Bros’ Sneakers (HBS)

Jason, Dickson, and Anson Hon are brothers who see the resale market of rare sneakers as a potential
business venture. They believe the best way to kick start their business without any fixed costs is to set up an
e-commerce store. After finishing the IB Diploma Programme, they established an e-commerce store via the
use of social media platforms, including Instagram and Facebook. They purchase the most sought-after
sneakers once they are released and resell these at a mark-up.

Table 1: Sales information relating to HBS’s inventory of sneakers (per month in 2023)

Sneakers resold per month AM1 UB18 AF1-OW OG-X The AJs Easy350
Price (per pair of sneakers) $800 $1,500 $1,600 $1,200 $900 $1,890
Average number of sneakers
30 50 20 25 35 20
resold by HBS per month
Mark-up by HBS 25% 10% 70% 50% 80% 45%

Table 2: Variable costs per pair of sneakers resold (per month in 2023)

• Purchase cost (cost paid by HBS per sneaker): $150

• Shipping cost (cost paid by HBS to ship each pair of sneakers to their customers): $30
• Packaging (cost paid by HBS to package and protect the shoe box for shipping): $10

After a successful year with its current business model and having established a presence in the high-end
sneaker resale market, HBS launched its own line of clothing in 2024, under the “Hon Bros” brand. Their
unique and unconventional design allowed HBS to secure contractual agreements with three international
fashion brands, which entitles HBS to a 30% royalty fee on all the clothing items sold featuring the “Hon Bros”
logo. The following are the forecasted financial information from the three brands:

Brand A Brand B Brand C

Selling price per piece of clothing $700 $1,500 $1,950
Projected sales volume in 2024 1,700 pieces 2,050 pieces 1,980 pieces

(a) Calculate the variable cost per pair of sneakers resold in 2023. [1 mark]

………………………………………………………………………………………………………………………………

(b) Using the information in Table 1, complete the following table to determine the selling price (i.e., the
“resale price”) for each pair of sneakers resold by HBS. [2 marks]

Sneakers resold per month AM1 UB18 AF1-OW OG-X The AJs Easy350
Resale price by HBS

(c) Calculate the total revenue from the sale of all the sneakers resold by HBS in 2023 (show all your
working). [2 marks]

………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………

(d) Calculate the total profit from the resale of all the sneakers for HBS in 2023 (show all your working).
[2 marks]

………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………

(e) Calculate the projected total royalty payment for HBS in 2024 (show all your working). [2 marks]

………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………

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 Worksheet 8
3.3 Costs & Revenues (3)

Answers

(a) Calculate the variable cost per pair of sneakers resold in 2023. [1 mark]

Variable cost per pair of sneakers resold = $150 + $30 + $10 = $190

(b) Using the information in Table 1, complete the following table to determine the selling price (i.e., the
“resale price”) for each pair of sneakers resold by HBS. [2 marks]

The resale price is determined by adding the value of the mark-up (percentage) to the original retail price of
each pair of sneakers.

For example:

The resale price of AM1 sneakers = $800 × 1.25 = $1,000

Sneakers resold per month AM1 UB18 AF1-OW OG-X The AJs Easy350

Retail price per pair of sneakers $800 $1500 $1600 $1200 $900 $1890
Mark-up (%) on retail price by
25% 10% 70% 50% 80% 45%
HBS
Resale price by HBS $1,000 $1,650 $2,720 $1,800 $1,620 $2,740.50

(c) Calculate the total revenue from the sale of all the sneakers resold by HBS in 2023 (show all your
working). [2 marks]

 Total revenue = Sum of price × Quantity for each pair of sneakers sold
 = [($1,000 × 30) + ($1,650 × 50) + ($2,720 × 20) + ($1,800 × 25) + ($1,620 × 35) + ($2,740.50 × 20)] ×
12 months
 = ($30,000 + $82,500 + $54,400 + $45,000 + $56,700 + $54,810) × 12 months
 = $3,880,920

(d) Calculate the total profit from the resale of all the sneakers for HBS in 2023 (show all your working).
[2 marks]

 Total profit = Total revenue – (Total fixed cost + Total variable cost)
 = $3,880,920 – [($0 + $190 × 180 sneakers) × 12 months]
 = $3,880,920 – $410,400
 = $3,470,520

(e) Calculate the projected total royalty payment for HBS in 2024 (show all your working). [2 marks]

 Projected total sales revenue from all three (clothing) brands:

 = ($700 × 1,700) + ($1,500 × 2,050) + ($1,950 × 1,980)
 = $1,190,000 + $3,075,000 + $3,861,000
 = $8,126,000

The case study indicates HBS is eligible for a royalty fee of 30% on these three retail clothing brands:

 Thus, HBS’s share of the total revenue (i.e., its royalty payments) is:
 = $8,126,000 × 0.3
 = $2,437,800

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 Worksheet 9
3.3 Costs & Revenues (4)

(a) Using the space below, illustrate the difference between fixed costs and variable costs. Ensure
your axes are properly labelled. [4 marks]

Fixed costs Variable costs

(b) Using the diagrams above, outline the difference between fixed and variable costs. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) o oo o o efine the term average cost. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Classify the following costs for a furniture manufacturer as fixed, variable, direct, and/or indirect
(overhead) costs and provide an outline explanation for each. Note that some costs can be
classified in multiple categories. [2 marks]

Fixed Variable Direct Indirect

Cost Explanations
costs costs costs costs
Wages of furniture
factory workers.
Repair expense for
woodwork machines
Annual recruitment
expense for office
workers
Management salaries

Rent of the premise

Electricity bills for the

factory
Packaging cost for the
furniture

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 Worksheet 9
3.3 Costs & Revenues (4)

Answers

(a) Using the space below, illustrate the difference between fixed costs and variable costs. Ensure
your axes are properly labelled. [4 marks]

Fixed costs Variable costs

(b) Using the diagrams above, outline the difference between fixed and variable costs. [2 marks]

Fixed costs are costs that do not vary with the level of output/production of the business. As shown
in the diagram, the fixed costs stay constant at every output level.
Variable costs are costs that do change with the level of output/production of the business. As shown
in the diagram, the variable costs increase as greater outputs are produced.

(c) Define the term average cost. [2 marks]

Average cost refers to the cost per unit of output/production. Hence, it is also known as cost per unit.
It is calculated by the formula: Average cost = Total costs / Quantity of output.

(d) Classify the following costs for a furniture manufacturer as fixed, variable, direct, and/or indirect
(overhead) costs and provide an outline explanation for each. Note that some costs can be
classified in multiple categories. [2 marks]

Fixed Variable Direct Indirect

Cost Explanations
costs costs costs costs
Wages of
Depends on the number of hours worked by
furniture factory ✓ ✓
the factory workers.
workers.
Repair expense
Depends on the number of machines that
for woodwork ✓ ✓
breaks down.
machines
Annual Firm budgets a fixed amount for recruitment
recruitment every year, but this can vary depend on the
expense for office ✓ ✓ number of staff who leaves the organization.
workers The cost has no association with the
production of the furniture.
Management Salaries are paid on a monthly basis at a fixed
salaries amount. The work of the management is not
✓ ✓
directly related to the production of the
furniture.
Rent of the A fixed amount of rent paid by the firm each
premise ✓ ✓ month. It is not directly related to the
production of the furniture.
Electricity bills for This depends on the electricity usage and it is
the factory ✓ ✓ needed to produce the furniture (e.g., to
operate the machines).
Packaging cost Packaging will depend on how many furniture
✓ ✓
for the furniture products are made.

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 Worksheet 10
3.4 Final Accounts (1)

Sewlyn Clothing (SC)

Sewlyn Clothing (SC) is a publicly held company, listed on the Singapore stock exchange market. It
operates a large chain of clothing retail stores across Singapore and Malaysia, selling clothing
primarily for infants and toddlers. SC’s production plants are based in Bangladesh and Vietnam.

The board of directors at SC has announced a total dividend distribution to its shareholders of
$2,000,000. Table 1 provides the lates financial information for SC for the period ending 30 June.

Table 1: Selected financial information for SC

($’000)
Bank overdrafts 8,000
Borrowings (long-term) 60 000
Cash 2 000
Cost of sales 9 000
Creditors 20 000
Debtors 3 000
Dividends 9 600
Interest 1 500
Overheads 3 000
Property, Plant, Equipment 140 000
Retained earnings 21,000
Sales revenue 47 500
Share capital 36,800
Stock 800
Tax 3 400

(a) List two features of a publicly held company. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) o oo o o efine the term dividends. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Using a separate piece of paper, construct a fully labelled statement of financial position for
SC as of 30 June. [4 marks]

(d) Using a separate piece of paper, construct a fully labelled statement of profit and loss for SC
for the period ending 30 June. [4 marks]

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 Worksheet 10
3.4 Final Accounts (1)

Answers

(a) List two features of a publicly held company. [2 marks]

• Shares in the company can be bought and sold on a public stock exchange / stock market.
• The business must go through a process called ‘initial public offering’ (IPO) in order to have its
shares sold to the general public.
• The final accounts must be disclosed to the public and scrutinized by an external auditor.
• The board of director take responsibility for the success or failure of the company, whilst the
senior management team are in charge of the daily operations of the business.

(b) Define the term dividends. [2 marks]

Dividends refer to an amount of money that is distributed by a limited liability company to its
shareholders within a given trading period. The amount of dividends paid to the shareholders
depends on the decision of the board of directors.

(c) Using a separate piece of paper, construct a fully labelled statement of financial position for
SC as of 30 June. [4 marks]

Statement of financial position (profit making entity) for Sewyln Clothing as at 30 June

Non-current assets ($’000) ($’000)

Property, Plant, Equipment 140,000
Total non-current assets 140,000

Current assets
Cash 2,000
Debtors 3,000
Stock 800
Total current assets 5,800

Total assets 145,800

Current liabilities
Bank overdraft 8,000
Creditors 20,000
Total current liabilities 28,000

Non-current liabilities
Borrowings (long-term) 60,000
Total non-current liabilities 60,000

Total liabilities 88,000

NET ASSETS 57,800

Equity
Share capital 36,800
Retained earnings 21,000

TOTAL EQUITY 57,800

© Level7 Education Provided by pirateIB · https://pirateib.xyz Page 24
 Worksheet 10
3.4 Final Accounts (1)

Top Tip: Make sure you understand the difference between the presentation of a for-profit entity
and a non-profit entity. Be on the look out in the case to find out whether the business is for-profit
or non-profit.

(d) Using a separate piece of paper, construct a fully labelled statement of profit and loss for SC
for the period ending 30 June. [4 marks]

Statement of profit or loss for Sewyln Clothing for the year ended 30 June

($’000)

Sales revenue 47,500

Cost of sales (9,000)
Gross profit 38,500

Expenses (Overheads) (3,000)

Profit before interest and tax 35,500

Interest (1,500)

Profit before tax 34,000

Tax (3,400)

Profit for period 30,600

Dividends 9,600
Retained profit 21,000

Top Tip: Ensure you use the appropriate wording when giving the title for the final accounts.
Statement of profit and loss should be dated as “for the year ended …”, whilst statement of
financial position should be dated as “as at …”

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 Worksheet 11
3.4 Final Accounts (2)

Cheesy Pizza Ltd. (CPL)

Cheesy Pizza Ltd. (CPL) is a small pizza chain in Hong Kong operated as a privately held company.
Table 1 below shows information about CPL’s revenue and expenses for the year 2023, plus balance
sheet items as at 31 December 2024.

Table 1: Select financial information for CPL for 2024

Items ($’000)
Cash 240.5
Oven 330
Share capital X
Overdraft 50
Equipment 150
Stock 480
Retained earnings 55.2
Short-term loans 40.4
Debtors 125.3
Equity 475.2
Long-term liabilities 550
Loan capital 120
Accumulated depreciation 80
Creditors 130.2

(a) Define the term creditors. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) State two internal sources of finance. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Using information from Table 1, calculate the value of CPL’s share capital (figure X) (show all
your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Using a separate piece of paper, construct a fully labelled statement of financial position for CPL
as at 31 December 2024. [4 marks]

© Level7 Education Provided by pirateIB · https://pirateib.xyz Page 26

 Worksheet 11
3.4 Final Accounts (2)

Answers

(a) Define the term creditors. [2 marks]

Creditors refer to the suppliers that a company has purchased goods and/or services from but
has not yet paid for them. Creditors are classified as a current liability on the balance sheet.

(b) State two internal sources of finance. [2 marks]

• Personal funds (or personal withdrawals)
• Sale/disposal of assets
• Retained profits

(c) Using information from Table 1, calculate the value of CPL’s share capital (figure X) (show all
your working). [2 marks]
• Equity = Share capital + Retained profit
• 475,200 = X + 55,200
• X = $420,000

(d) Using a separate piece of paper, construct a fully labelled statement of financial position for CPL
as at 31 December 2024. [4 marks]
Statement of financial position for Cheesy Pizza Ltd., as at 31 December 2024

Non-current assets ($) ($)

Oven 330,000
Equipment 150,000
Accumulated depreciation (80,000)
Non-current assets 400,000
Current assets
Cash 240,500
Debtors 480,000
Stock 125,300
Total current assets 845,800
Total assets 1,245,800
Current liabilities
Overdraft 50,000
Creditors 130,200
Short-term loans 40,400
Current liabilities 220,600
Non-current liabilities
Long-term liabilities 550,000
Non-current liabilities 550,000
Total liabilities 770,600
NET ASSETS 475,200
Equity
Share capital 420,000
Retained earnings 55,200
TOTAL EQUITY 475,200

© Level7 Education Provided by pirateIB · https://pirateib.xyz Page 27

 Worksheet 12
3.4 Final Accounts (3)

Bruno’s Wholesale Co. (BWC)

Jules Bruno is the CEO of a wholesale company called Bruno’s Wholesale Co. (BWC) which
operates as a publicly held company. BWC acts as an intermediary between the farmers who
produce potatoes and the local supermarket retailers within the city of Lyon in France. BWC is
planning to expand its current facility and intends to secure a bank loan for this. The bank manager
requires Jules to produce the most recent balance sheet as part of the loan application process.

Table 1: Select financial information for BWC (figures in Euros €), as on 31 December 2024

Items (€)
Accumulated depreciation 78,200
Borrowings (long-term) 130,000
Cash 150,000
Cost of sales (COS) 352,000
Debtors 330,600
Expenses 122,000
Overdraft 87,800
Property 706,400
Retained profits 289,800
Sales revenue 700,000
Share capital 750,000
Short-term loans 120,300
Stock (inventory) 262,700
Total current assets Y
Trade creditors 150,000

BWC needs to pay corporate tax at a rate of 25%. For the long-term liabilities in Table 1, BWC pays
6% interest per year.

(a) Identify two possible external stakeholders other than the bank that may be interested in the
final accounts of BWC. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Using the information in Table 1, calculate the amount of interest that BWC needs to pay on its
non-current liabilities. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Calculate the profit after interest and tax for BWC (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Using the information in Table 1, calculate the value of Y (total current assets). [2 marks]

…………………………………………………………………………………………………………………..

(e) On a separate piece of paper, construct a statement of financial position for BWC as of 31st
December 2024. [4 marks]

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 Worksheet 12
3.4 Final Accounts (3)

Answers

(a) Identify two possible external stakeholders other than the bank that may be interested in the
final accounts of BWC. [2 marks]

Possible external stakeholders other than the bank include:

• Farmers who sell the potatoes or fresh produce to BWC.

• The government will be interested in knowing the profits earned by BWC which will help
reveal the amount of corporate tax that BWC owes to the government.
• Local supermarket retailers will be interested in knowing BWC’s profits and the price they
charge to understand whether they are exploiting their customers or abusing their market
power.

(b) Using the information in Table 1, calculate the amount of interest that BWC needs to pay on its
non-current liabilities. [2 marks]

Interest repayment = 130,000 × 0.06 = €7,800

Top tip: For calculation-based questions, unless you see the words “show all your working”,
normally you are not expected to show any working out for your response. Simply stating the
answer will earn you the full mark. Also, look at the number of marks allocated. If you see [1
mark], then this generally means you don’t need to show any working out for your written
responses.

(c) Calculate the profit after interest and tax for BWC (show all your working). [2 marks]

• Profit before interest and tax = Sales revenue – COS – Expenses

• = 700,000 – 352,000 – 122,000
• = €226,000

• Tax = 0.25 × (Profit before interest and tax – Interest)

• = 0.25 × (226,000 – 7,800)
• = €54,550

• Profit after interest and tax

• = Profit before interest and tax – Interest – Tax
• = 226,000 – 7,800 – 54,550
• = €163,650

(d) Using the information in Table 1, calculate the value of Y (total current assets). [2 marks]

• Total current assets

• = Cash + Debtors + Stock (Inventory)
• = 150,000 + 330,600 + 262,700
• = €743,300

or

• Net current assets = Total current assets – Total current liabilities

• 385,200 = Y – (Creditors + Short-term borrowing + Overdraft)
• 385,200 = Y – (150,000 + 120,300 + 87,800)
• 385,200 + 358,100 = €743,300

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 Worksheet 12
3.4 Final Accounts (3)

(e) On a separate piece of paper, construct a statement of financial position for BWC as of 31st
December 2024. [4 marks]

Bruno’s Wholesale Co. (BWC)

Statement of financial position as at 31st December 2024
Non-current assets ($m) ($m)
Property 706,400
Accumulated depreciation 78,200
Non-current assets 784,600
Current assets
Cash 150,000
Debtors 330,600
Stock (inventory) 262,700
Current assets 743,300
Total assets 1,527,900
Current liabilities
Overdraft 87,800
Trade creditors 150,000
Short-term borrowings 120,300
Current liabilities 358,100
Non-current liabilities
Borrowings - long term 130,000
Non-current liabilities 130,000
Total liabilities 488,100
Net assets 1,039,800

Equity
Share capital 750,000
Retained profits 289,800
Total equity 1,039,800

Top tip: Make sure you are fully aware of whether or not the firm in the case study is a profit-
making entity or a non-profit making entity as the two types of organizations have slightly
different presentation requirements for both the balance sheet (statement of financial position)
and profit & loss account (income statement).

Top tip: When constructing a balance sheet, you are highly encouraged to start this on a new
piece of paper. Many students make minor errors or calculation mistakes because they have
constructed half of the balance sheet on one side of paper and the other half on another side.
Flipping between two sides of the paper will increase your chances of making a mistake.

© Level7 Education Provided by pirateIB · https://pirateib.xyz Page 30

 Worksheet 13
3.4 Final Accounts (4)

Watch Me Flex (WMF)

Watch Me Flex (WMF) is a watch retailer based in Singapore. It operates as a partnership between
three owners, Eric, Nicolas, and Alvin. WMF specializes in the distribution of luxury branded watches,
such as Rolex, Patek Phillipe, and Audemars Piguet.
WMF has been facing declining sales revenue during the past year. The tax authorities are looking
into reviewing WMF’s final accounts. To prepare for this review, the owners hired a new finance
manager to prepare the final accounts.

Table 1: Selected financial information for WMF for 2024 (figures in Singaporean dollars)

Items ($)
Cost of sale (COS) 10,500,000
Depreciation 77,200
Equity X
Interest 123,500
Long-term bank loan 970,500
Non-current assets 1,350,500
Promotion expenses 30,780
Rent 155,000
Salaries Y
Sales revenue 12,000,000
Total current assets 2,570,500
Total current liabilities 2,880,780
Total expenses 1,218,400
Utilities 95,320

The corporate tax rate is 25%. WMF has issued 5,000 shares. The board of directors announced a
distribution of $5 per share for the fiscal year ending on June 30, 2024.

(a) Using the financial information provided in Table 1, calculate the value of X (equity) for WMF
(show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Using the financial information in Table 1, calculate the value of Y (salaries) for WMF (show all
your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) On a separate piece of paper, construct a statement of profit and loss for WMF for the period
ending 2024. [4 marks]

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 Worksheet 13
3.4 Final Accounts (4)

Answers

(a) Using the financial information provided in Table 1, calculate the value of X (equity) for WMF
(show all your working). [2 marks]
• Net assets = Equity
• (Total current assets + Non-current assets) – (Total current liabilities + Non-current
liabilities) = Share capital + Accumulated retained profits
• (2,570,500 + 1,350,500) – (2,880,780 + 970,500) = X
• X = $69,720

Top tip: Remember to put the correct currency (unit of measurement) for your answer!

(b) Using the financial information in Table 1, calculate the value of Y (salaries) for WMF (show all
your working). [2 marks]
From Table 1, the total expense figure is given as $1,218,400. Therefore, solve for Y by:
• Total expenses = Utilities + Rent + Promotion + Depreciation + Salaries
• 1,218,400 = 95,320 + 155,000 + 30,780 + 77,200 + Y
• Y = $860,100

(c) On a separate piece of paper, construct a statement of profit and loss for WMF for the period
ending 2024. [4 marks]

Watch Me Flex (WMF)

Statement of profit or loss for the year ended 30 June 2024
($)
Sales revenue 12,000,000
Cost of sales 10,500,000
Gross profit 1,500,000
Expenses:
Utilities 95,320
Rent 155,000
Promotion 30,780
Depreciation 77,200
Salaries 860,100
Expenses 1,218,400
Profit before interest and tax 281,600
Interest (123,500)
Profit before tax 158,100
Tax (25%) (39,525)
Profit for period 118,575
Dividends ($5 × 5,000 shares) (25,000)
Retained profit 93,575

Top tip: You can lose 1 full mark for simply excluding the heading of the profit and loss
account. Don’t forget to include the heading!

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 Worksheet 14
3.4 Final Accounts (5)

Truhol’s Yacht Club (TYC)

James Truhol is the owner of Truhol’s Yacht Club (TYC). It operates as a privately held company
between three friends who all met at high school. TYC is looking to acquire a nearby abandoned
yacht club. To support the application for a long-term loan, the local bank manager has asked James
to submit the final accounts for the period ending 31st December 2024.

Table 1: Financial information for TYC (all figures in $)

Items ($)
Accumulated depreciation 2,750,000
Advertising 130,000
Cash 1,050,000
Cost of sales 2,150,000
Creditors 446,000
Debtors X
Depreciation (in 2024) 700,000
Instructor's salaries 530,000
Interest 10% of short-term borrowings
Membership fees 5,000,000
Overdrafts 350,000
Rent 1,500,000
Retained earnings 1,529,000
Share capital 2,175,000
Short-term borrowings 350,000
Total assets Y
Total current assets 2,350,000
Utilities 200,000
Yachts 5,250,000

The Inland Revenue Department (the tax authority) requires businesses that earn a profit before tax
of over $2 million to be charged at a tax rate of 16.25%. Profit below this amount is charged at the
standard tax rate of 8.25%.

(a) Using the financial information provided above, calculate the value of X (debtors) for TYC (show
all your working). [2 marks]

…………………………………………………………………………………………………………………..

(b) Using the financial information provided above, calculate the value of Y (total assets) for TYC.
(show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(c) On a separate piece of paper, construct a statement of profit and loss for TYC for the period
ending 31st December 2024. [4 marks]

(d) On a separate piece of paper, construct a statement of financial position for TYC for the period
ending 31st December 2024. [4 marks]

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 Worksheet 14
3.4 Final Accounts (5)

Answers

(a) Using the financial information provided above, calculate the value of X (debtors) for TYC (show
all your working). [2 marks]
• Total current assets = Cash + Debtors + Stocks
• $2,350,000 = $1,050,000 + Debtors + 0
• Debtors = $1,300,000

(b) Using the financial information provided above, calculate the value of Y (total assets) for TYC.
(show all your working). [2 marks]
• Total assets = Non-current assets + Total current assets
• = (Yachts – Accumulated depreciation) + Total current assets
• = ($5,250,000 – $2,750,000) + $2,350,000
• = $4,850,000

(c) On a separate piece of paper, construct a statement of profit and loss for TYC for the period
ending 31st December 2024. [4 marks]

Truhol Yacht Club

Statement of profit or loss for the year ended 31 December 2024

($m)
Membership fees 5,000,000
Cost of sales (2,150,000)
Gross profit 2,850,000
Expenses
Rent 1,500,000
Utilities 200,000
Advertising 130,000
Instructor salaries 530,000
Expenses 2,360,000
Profit before interest and tax 490,000
Interest (35,000) Note 1
Profit before tax 455,000
Tax (at 8.25%) (37,538) Note 2
Profit for period 417,463

Note 1:
• Interest = 10% of short-term borrowings (as stated in the stimulus material)
• = $350,000 × 0.1 = $35,000

Note 2:
• As the profit before tax is $455,000 (which is less than $2m threshold), the 8.25% profit tax rate is
applied. Thus, tax = $455,000 × 0.0825 = $37,538

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 Worksheet 14
3.4 Final Accounts (5)

(d) On a separate piece of paper, construct a statement of financial position for TYC for the period
ending 31st December 2024. [4 marks]

Truhol Yacht Club (TYC)

Statement of financial position as at 31st December 2024

Non-current assets ($m) ($m)

Yachts 5,250,000

Accumulated depreciation (2,750,000)

Non-current assets 2,500,000

Current assets

Cash 1,050,000

Debtors 1,300,000

Current assets 2,350,000

Total assets 4,850,000

Current liabilities

Overdraft 350,000

Trade creditors 446,000

Short-term borrowings 350,000

Current liabilities 1,146,000

Total liabilities 1,146,000

NET ASSETS 3,704,000

Equity

Share capital 2,175,000

Retained earnings 1,529,000

TOTAL EQUITY 3,704,000

Top tip: Since this question does not contain any information regarding non-current liabilities, there
is no need to present or include this in the statement of financial position. It would be meaningless
to write “non-current liabilities” as zero when there is no such financial information provided.
Therefore, in this case, the current liabilities will be the same as total liabilities.

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 Worksheet 15
3.4 Final Accounts (6)

One Kindness Care (OKC)

One Kindness Care (OKC) is a social enterprise that is engaged in the provision of childcare services
for underprivileged women who are on low incomes. To fund its operations, OKC sells a variety of
childcare accessories in variety packs, with an average price of $30 per pack.
Table 1: Selected financial information for 2024

Number of packs sold 750

Direct costs of each pack $10
Administrative expenses $5,300
Depreciation expenses $1,500
Marketing expenses $2,200
Interest on bank loans 20% of cost of sales

(a) List two features of a non-profit social enterprise. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Using the space below, construct a statement of profit and loss for OKC for the period ending
31st December 2024 (show all your working). [4 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 15
3.4 Final Accounts (6)

Answers

(a) List two features of a non-profit social enterprise. [2 marks]

• Any financial surplus made is directly reinvested back into the social enterprise to support
its social cause.
• It still operates like a commercial business in the private sector by selling goods/services to
earn sales revenues.

(b) Using the space below, construct a statement of profit and loss for OKC for the period ending
31st December 2024 (show all your working). [4 marks]

One Kindness Care (OKC)

Statement of profit or loss for the year ended 31st December 2024

Sales revenue ($30 × 750) 22,500

Cost of sales ($10 × 750) 7,500
Gross surplus 15,000
Expenses
Administration 5,300
Depreciation 1,500
Marketing 2,200
Expenses 9,000
Surplus before interest 6,000
Interest (0.2 × 7,500) (1,500)
Surplus for period 4,500
Retained surplus 4,500

Top tip: The word “profit” is not used for a non-profit entity. This word is replaced with the term
“surplus” instead.

Top tip: It is possible that some non-profit social enterprise will have taxes that they need to pay
to the government as they may not be registered as a charity (which exempts them from paying
taxes) in their local jurisdictions. To be eligible as a charity depends on the laws and regulations
in each country.

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 Worksheet 16
3.4 Final Accounts (7)

Yau & Associates Architects (YAA)

Dickson Yau worked relentlessly to realize his dream to become a professional architect. After
graduating from university, Dickson and a few university friends started their own non-profit company
called Yau & Associates Architects (YAA). The firm offers architectural services and works with
property developers to build affordable housing for low-income households. To support their
expansion plans, the local bank manager requires YAA to present its most recent final accounts for
the year ended 31st December 2024. YAA pays interest on the loan of $300,000 at 9% per year.

Table 1: Final accounts information for YAA (2024)

Items ($’000)
Accumulated retained profit (end of 2024) 5,225
Administration 115
Cash 3,000
Cost of sales 1,230
Creditors 890
Debtors 2,450
Electricity 230
Equity 6,125
Long-term liabilities 300
Non-current assets 1,200
Overdraft 215
Rent 345
Sales revenue 3,150
Short-term borrowings 220
Stock 1,100

(a) Outline one stakeholder group of YAA that may find the statement of financial position
(balance sheet) important. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Using Table 1, calculate the value of net assets for YAA. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) On a separate piece of paper, construct a profit and loss account for YAA for the year ending
31st December 2024 based on the figures in Table 1 and the additional information in the case
study (show all your working). [4 marks]

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 Worksheet 16
3.4 Final Accounts (7)

Answers

(a) Outline one stakeholder group of YAA that may find the statement of financial position
(balance sheet) important. [2 marks]
Possible stakeholders could include:

• The local bank manager may be interested to know YAA’s financial position in order to
assess the firm’s ability to pay back loans that it has borrowed.
• Trade creditors / suppliers may be interested to find out if YAA has sufficient liquidity to
meet its short-term debts.
• Potential shareholders/investors may want to have knowledge of the financial position of
YAA to enable them to assess whether or not they should invest in the business.

(b) Using Table 1, calculate the value of net assets for YAA. [2 marks]
• Net assets = Non-current assets + Total current assets – Current liabilities – Non-current
liabilities
• = $1,200 + $6,550 – $1,325 – $300
• = $6,125 (i.e., $6,125,000)

(c) On a separate piece of paper, construct a profit and loss account for YAA for the year ending
31st December 2024 based on the figures in Table 1 and the additional information in the case
study (show all your working). [4 marks]

Yau & Associates Architects (YAA)

Statement of profit or loss for the year ended 31st December 2024
($)
Sales revenue 3,150,000
Cost of sales 1,230,000
Gross surplus 1,920,000
Expenses
Administration 115,000
Electricity 230,000
Rent 345,000
Expenses 690,000
Surplus before interest 1,230,000
Interest (9% of $300,000) (27,000)
Surplus for period 1,203,000
Retained surplus 1,203,000

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 Worksheet 17
3.4 Final Accounts (8)

Café Bon (CB)

Café Bon (CB) is a local restaurant that operates as a for-profit social enterprise. The firm hires
workers who are diagnosed with autism and donates 10% of each month’s sales revenue to the local
Autism Foundation to help support its social objectives and initiatives.
CB wants to broaden its impact through diversification by opening its first clinic to help autistic
individuals. To achieve its growth strategy, CB is planning to obtain a long-term loan from the local
bank. The bank manager has requested CB to prepare a projected statement of profit and loss to
support its application for the loan. Below is the financial information from the fiscal year ending 31st
March 2024, along with the forecasted projections for 2025.

Table 1: Statement of profit and loss information for CB

Financial information for Café Bon, for the year ended 31st March, 2024
Items ($m) Projections for 2025
Sales revenue 72 Grow by 10%
Marketing expenses 5 Increase to $8m to advertise for the new clinic
Salaries 12 No change as the clinic will recruit volunteers
Gross surplus 59
Depreciation expense 8 No change
Interest charges 2 Forecasted to increase by 20% due to the new loan
Retained surplus 8
Utility bills 7 Increase to $10m due to the new clinic
Rent 15 Increase by an additional $10m due to the new clinic
Cost of sales X Forecasted to increase by 5%
Tax 3

Additional information:
• In 2025, the tax authority has offered a ‘no tax policy’ for registered for-profit social enterprises.

(a) Identify the type of expenditure required for the opening of CB’s first clinic. [1 mark]

…………………………………………………………………………………………………………………..

(b) Using the financial information provided in Table 1, calculate the value of X (cost of sales) for
CB (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) On a separate piece of paper, construct a statement of profit and loss for TYC for the period
ending 31st March 2024. [4 marks]

(d) On a separate piece of paper, construct a projected statement of profit and loss for TYC for
the period ending 31st March 2025. [4 marks]

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 Worksheet 17
3.4 Final Accounts (8)

Answers

(a) Identify the type of expenditure required for the opening of CB’s first clinic. [1 mark]
Capital expenditure (spending on new property)

(b) Using the financial information provided in Table 1, calculate the value of X (cost of sales) for
CB (show all your working). [2 marks]
• Gross surplus = Sales revenue – Cost of sales
• $59m= $72m – Cost of sales
• Cost of sales = $13m

(c) On a separate piece of paper, construct a statement of profit and loss for TYC for the period
ending 31st March 2024. [4 marks]

Café Bon (CB)

Statement of profit or loss for the year ended 31st March 2024
($m)
Sales revenue 72
Cost of sales (13)
Gross surplus 59
Expenses
Rent 15
Salaries 12
Marketing expenses 5
Utility bills 7
Depreciation expense 8
Expenses 47
Surplus before interest 12
Interest (2)
Surplus before tax 10
Tax (3)
Surplus for period 7
Retained surplus 7

Answers continued on next page...

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 Worksheet 17
3.4 Final Accounts (8)

(d) On a separate piece of paper, construct a projected statement of profit and loss for TYC for
the period ending 31st March 2025. [4 marks]

Café Bon (CB)

Projected statement of profit and loss for the year ended 31st March 2025

($m) Working out

Sales revenue 79.20 = $72m × 1.1

Cost of sales (13.65) = $13m × 1.05

Gross surplus 65.55

Expenses

Rent 25 = $15m + $10m

Salaries 12 No change

Marketing expenses 8 Increases to $8m for the new clinic

Utility bills 10 Increases to $10m for the new clinic

Depreciation expense 8 No change

Expenses 63

Surplus before interest 2.55

Interest (2.40) Increases by 20% due to new loan

Surplus before tax 0.15

Tax 0 Eligible for 'no tax policy'

Surplus for period* 0.15

Retained surplus 0.15

*Hence, surplus for the period is $150,000.

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 Worksheet 18
3.4 Final Accounts (9)

Les Mills (LM)

Les Mills (LM) is a social enterprise operating as a privately held company in Paris, France. LM is
run by the Garnet family and is in the business of recycling drink cartons and paper packaging. The
firm aims to reduce paper waste and to create a more sustainable world for future generations.
Max Garnet, who graduated with a degree in environmental science, recently developed a
sustainable education programme and obtained a copyright for it. In addition to the donations that
LM gives to the local IB World Schools in Paris (which amounts to 20% of its annual surplus), Max
plans to work with these schools to roll out his programme to increase the awareness of recycling
and sustainability priorities.
The company was recently approached by an interested green investor who sees potential in LM’s
business model and is considering investing €10 million. However, the potential investor has asked
LM to prepare a statement of financial position for his review.

Table 1: Statement of financial position information for LM,

for the year ending 31st December 2024

Item (€m)
Accumulated depreciation 3
Bank overdraft 2.75
Cash 2.50
Current liabilities 4.68
Debtors 1.00
Factory 12
Mortgage 6.00
Net assets 2.12
Other short-term loans 0.60
Stock 0.30
Retained earnings 2.12
Total assets 12.80
Trade creditors 1.33

(a) Define the term copyright. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Using the data in Table 1, explain one reason why the equity value for LM should be the same
value as its net asset. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) On a separate piece of paper, construct a statement of financial position for LM for the period
ending December 31, 2022. [4 marks]

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 Worksheet 18
3.4 Final Accounts (9)

Answers

(a) Define the term copyright. [2 marks]

Copyright is a type of intangible asset which is a form of legal protection for the works of the
registered creator, such as an author, artist, musician, or photographer.

(b) Using the data in Table 1, explain one reason why the equity value for LM should be the same
value as its net asset. [2 marks]
One reason why the equity value for LM should be the same as its net asset in the statement of
financial position (balance sheet) for a non-profit entity is because the business does not have any
share capital.

Top tip: Sole traders and partnership, as forms of business entities, do not have “share capital”
presented in their statement of financial position (balance sheet).

(c) On a separate piece of paper, construct a statement of financial position for LM for the period
ending December 31, 2022. [4 marks]

Les Mills (LM)

Statement of financial position as of 31st December 2024

Non-current assets (€m) (€m)

Factory 12.0
Accumulated depreciation (3.0)
Non-current assets 9.0
Current assets
Cash 2.5
Debtors 1.0
Stock 0.3
Current assets 3.8
Total assets 12.8
Current liabilities
Bank overdraft 2.75
Trade creditors 1.33
Other short-term loans 0.60
Current liabilities 4.68
Non-current liabilities
Mortgage 6.00
Non-current liabilities 6.00
Total liabilities 10.68
NET ASSETS 2.12

Equity
Retained earnings 2.12
TOTAL EQUITY 2.12

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 Worksheet 19
3.4 Final Accounts (10)

Jo Clinic (JC)
After graduating from her medical degree from Oxford University, Joanne To opened a local clinic,
offering psychiatry services in Oxford, UK. Jo Clinic (JC) is currently a partnership between Joanne
To and three additional psychiatrists. JC operates as a for-profit social enterprise and is committed
to improving the mental health and wellbeing of individuals. Originally from Hong Kong, Joanne To
is aware of the diminishing mental health of many of her friends and family members back home as
a result of the prolonged quarantine measures and lockdowns brought about by the COVID-19
pandemic.
Joanne To would like to contribute and extend her medical knowledge and expertise in psychiatry
by setting up a new clinic in Hong Kong next year. In preparation for this, she will need to prepare
the final accounts for a local bank in Hong Kong so that she is able to obtain a long-term loan.
Table 1: Financial information for JC, for the period ending 31st December 2024

Item (£’000)
Accumulated depreciation X
Bank overdraft 22
Borrowings - long term 12
Cash 70
Clinic 500
Current assets 105
Debtors 25
Depreciation expenses 20
Equity 593
Gross surplus 470
Interest W
Medical equipment 300
Non-current assets 550
Promotion expenses 10
Rent 50
Salaries 230
Sales revenue 670
Stock Y
Surplus before tax 144
Surplus for period 115.2
Tax 20% of surplus before tax
Trade creditors Z

(a) State the value of net assets for JC as of 31st December 2024. [1 mark]

…………………………………………………………………………………………………………………..

(b) On a separate piece of paper, calculate the figures X, Y, and Z by constructing a statement of
financial position for JC as of 31st December 2024. [4 marks]

(c) On a separate piece of paper, construct a statement of profit and loss for JC for the period
ending 31st December 2024. [4 marks]

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 Worksheet 19
3.4 Final Accounts (10)

Answers

(a) State the value of net assets for JC as of 31st December 2024. [1 mark]
• The value of net assets should be the same as the value of equity in order for the balance
sheet to actually balance.
• Thus, net assets as of 31st December 2024 for JC is £593,000

(b) On a separate piece of paper, calculate the figures X, Y, and Z by constructing a statement of
financial position for JC as of 31st December 2024. [4 marks]

Jo Clinic (JC)
Statement of financial position as of 31st December 2024

Non-current assets (£’000) (£’000)

Clinic 500
Medical equipment 300
Accumulated depreciation X = (250)
Non-current assets 550
Current assets
Cash 70
Debtors 25
Stock Y = 10
Current assets 105
Total assets 655
Current liabilities
Bank overdraft 22
Trade creditors Z = 28
Current liabilities 50
Non-current liabilities
Borrowings - long term 12
Non-current liabilities 12
Total liabilities 62
NET ASSETS 593

Equity
Retained earnings 593
TOTAL EQUITY 593

Figure X calculations:
• Non-current assets = Clinic + Medical equipment – Accumulated depreciation
• £550,000 = £500,000 + £300,000 – Y
• X = £250,000

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 Worksheet 19
3.4 Final Accounts (10)

Figure Y calculations:
• Current assets = Cash + Debtors + Stock
• £105,000 = £70,000 + £25,000 + Z
• Y = £10,000

Figure Z calculations:
• Net assets = (Non-current assets + Current assets) – (Current liabilities + Non-current liabilities)
• £593,000 = (£550,000 + £105,000) – (Current liabilities + £12,000)
• Current liabilities = £50,000
• Thus, £50,000 = £22,000 (bank overdraft) + X (trade creditors)
• Z = £28,000

(c) On a separate piece of paper, construct a statement of profit and loss for JC for the period
ending 31st December 2024. [4 marks]

Jo Clinic
Statement of profit or loss for the year ended 31st December 2024

(£'000)
Sales revenue 670
Cost of sales (200)
Gross surplus 470
Expenses
Rent 50
Salaries 230
Promotion expenses 10
Depreciation expenses 20
Expenses 310
Surplus before interest 160
Interest W = 16
Surplus before tax 144
Tax (28.8)
Surplus for period 115.2
Retained surplus 115.2

Tax calculation:
• 20% of surplus before tax = £144,000 × 0.2 = £28,800

Top tip: You are expected to list out the specific items under each of the sub-sections in the
final accounts. In this case, it include sub-sections like “current assets” and “current liabilities.”

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 Worksheet 20
3.4 Depreciation – Straight Line Method (HL) (1)

Super-me Fashion (SF)

Super-me Fashion (SF) is a clothing manufacturer based in Surabaya, Indonesia. SF has purchased
two new machines as part of its factory-wide lean production initiative. The finance manager has
provided the following financial information pertaining to the machines:

• The first machine was purchased on 1 January 2024.

• The additional machine was purchased on 1 July 2024.
• SF paid $125,000 for each machine.
• The anticipated residual value for each machine is $12,000.
• The machines have an expected useful life of 5 years.

(a) State two reasons why an asset depreciates in value. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) o oo o o efine the term residual value. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) State two other terms that are synonymous with residual value. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Using the straight-line depreciation method, calculate the annual depreciation expense for the
machine purchased on 1 January 2024. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(e) For the machine purchased on 1 July 2024, calculate the net book value (NBV) on 31
December 2026 using the straight-line depreciation method (show all your working). [4 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 20
3.4 Depreciation – Straight Line Method (HL) (1)

Answers

(a) State two reasons why an asset depreciates in value. [2 marks]

• Wear and tear (usage).
• Obsolescence (outdated).

Both of these terms could be used synonymously with “depreciation” to describe the fall in the
value of non-current assets, such as technological products, machinery, equipment, or motor
vehicles.

(b) Define the term residual value. [2 marks]

Residual value refers to the resale value of a non-current asset at the end of its lifespan or useful
life. It is uncommon for a non-current asset to have a residual value of zero at the end of its
lifespan as there ought to be some value which the asset could be sold for.

(c) State two other terms that are synonymous with residual value. [2 marks]
• Salvage value
• Scrap value

(d) Using the straight-line depreciation method, calculate the annual depreciation expense for the
machine purchased on 1 January 2024. [2 marks]
• Annual depreciation expense using straight-line method = (Cost of non-current asset –
Residual value) / Lifespan
• = ($125,000 – $12,000) / 5 years
• = $22,600 per year
• Thus, the annual depreciation expense for the machine is $22,600.

Top tip: It is important to show all your working out for 2-mark calculation questions, even if
the question does not explicitly ask you to.

(e) For the machine purchased on 1 July 2024, calculate the net book value (NBV) on 31
December 2026 using the straight-line depreciation method (show all your working). [4 marks]

• Time between the purchase date of the machine (1 Jul 2024) and 31 December 2026 =
2.5 years
• As the cost of the machinery and residual value are the same, the annual depreciation
expense is also $28,500.

Depreciation Net book value

Year Working
expense (NBV)
1/7/2024
-- -- $125,000
1/7/2024 – 31/12/2024 = $22,600 / 2 $11,300 $113,700
1/1/2025 – 31/12/2025 -- $22,600 $91,100
1/1/2025 – 31/12/2026 -- $22,600 $68,500

• Hence, the NBV as on 31 December 2026 is $68,500.

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 Worksheet 21
3.4 Depreciation – Straight Line Method (HL) (2)

Aaron’s Entertainment (AE)

Aaron’s Entertainment (AE) is a South Korean entertainment company. AE is in the business of

music production and a record label for large Korean pop (Kpop) artists. To remain competitive in
the Kpop industry, AE has decided to purchase “Rosé,” a new music production software with
artificial intelligence capabilities. AE’s accounts are reported in US dollars. AE purchased the
software on 1 January 2023 at $580,000. Due to fast-changing technology, the expected usefulness
of this software is 3 years, and the likely residual value is $250,000. AE uses the straight-line method
to depreciate all of its non-current assets. The corporate tax rate is 30%.

Table 1: Selected financial information for AE, for the year ending 31 December 2023

Items Amount ($)

Sales turnover 1,250,000
Cost of sales (COS) 428,000
General expenses 388,000
Interest cost 8% of gross profit
Corporate tax expense 30% of profit before tax
Dividends 110,000

Note the above general expenses do not account for the depreciation expense for the new software.

(a) Using the straight-line method of depreciation, calculate the annual depreciation expense
(show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) On a separate sheet of paper, construct a statement of profit and loss for AE for the period
ending December 31, 2023 (show all your working). [4 marks]

Working out ….…………………………………………….……………………………………..…………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) State one limitation of using the straight-line method of depreciation for AE. [1 mark]

…………………………………………………………………………………………………………………..
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 Worksheet 21
3.4 Depreciation – Straight Line Method (HL) (2)

Answers

(a) Using the straight-line method of depreciation, calculate the annual depreciation expense
(show all your working). [2 marks]
• Annual depreciation expense = (Cost of software – Residual value) / Useful life
• = ($580,000 – $250,000) / 3 years
• = $110,000 per year
• Thus, the annual depreciation expense for the software is $110,000.

(b) On a separate sheet of paper, construct a statement of profit and loss for AE for the period
ending December 31, 2023 (show all your working). [4 marks]

Aaron’s Entertainment (AE)

Statement of profit or loss for the year ended 31 December 2023

($’000)
Sales revenue 1,250
Cost of sales (428)
Gross profit 822
Expenses:
General expenses 388
Depreciation (for the year 2023) 110
Expenses 498
Profit before interest and tax 324
Interest (65.76) Note 1
Profit before tax 258.24
Tax (@30%) (77.472) Note 2
Profit for period 180.768
Dividends 110
Retained profit 70.768

• Thus, the retained profit is $70,768

Calculation Note 1:
• Interest = 8% of gross profit
• = $822,000 × 0.08
• = $65,760
Calculation Note 2:
• Tax = 30% of profit before tax
• = $258,240 × 0.3
• = $77,472

(c) State one limitation of using the straight-line method of depreciation for AE. [1 mark]
Possible limitations include:
• It is unrealistic to assume that the value of non-current assets will fall in a linear manner.
• The depreciation expense does not factor in the need for maintenance costs over time.

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 Worksheet 22
3.4 Depreciation – Straight Line Method (HL) (3)

Sukhdeep Restaurant (SR)

Sukhdeep Restaurant (SR) is a privately held company based in Manchester, United Kingdom (UK).
The business is owned and operated by the Sukhdeep family, who migrated to the UK twenty years
ago. SR is very popular in the local community, so the firm is planning to expand. To obtain a loan
for the expansion, the local bank has requested the most recent profit and loss account from SR.
Statement of profit and loss for SR, for the year ended 31 December 2023
(£)
Sales revenue 585,300
Cost of sales 375,700
Gross profit 209,600
Expenses 100,400
Net profit before interest and tax 109,200
Interest 15,700
Net profit before tax 93,500
Tax (@10%) 9,350
Net profit after interest and tax 84,150
Dividends 3,550
Retained profit 80,600

In preparing the profit and loss account, the finance manager had forgotten to include the ten new
ovens that were purchased on 1 January 2021. The invoice for this purchase showed the following
information:
• The cost of each oven is £5,000.
• The ovens have a useful life of five years.

(a) Calculate the annual provision for depreciation of the ten ovens using the straight-line method
(show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Using your result in Question (a), with the tax rate remaining at 10%, calculate the net profit
after interest and tax to include the provision for depreciation (show all your working).
[3 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) You are given a partial statement of financial position for SR. Complete the boxes below to
account for the ten ovens as of 31 December 2023. [3 marks]
($)
Non-current assets
Ovens
Accumulated depreciation
Non-current assets

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 Worksheet 22
3.4 Depreciation – Straight Line Method (HL) (3)

Answers

(a) Calculate the annual provision for depreciation of the ten ovens using the straight-line method
(show all your working). [2 marks]

• Annual depreciation expense using straight line method = (Cost of non-current asset) /
Lifespan
• = (£5,000 × 10 ovens) / 5 years = £50,000 / 5
• = £10,000 per year
• Thus, the annual depreciation expense for the ten ovens is £10,000

(b) Using your result in Question (a), with the tax rate remaining at 10%, calculate the net profit
after interest and tax to include the provision for depreciation (show all your working).
[3 marks]

The annual depreciation expense is £10,000 using the straight-line method. Even though the
ovens were purchased a year ago, the annual depreciation expense in 2021 is still £10,000.
This should be added as an expense item in the profit and loss account as this amount was
omitted. Assuming all other figures are the same:

• Profit before tax = Gross profit – Expenses – Annual depreciation amount – Interest
• = 209,600 – 100,400 – 10,000 – 15,700
• = £83,500
• Tax to be paid = £83,500 × 0.10 = £8,350
• Profit after interest and tax = Profit before tax – Tax
• = £83,500 – £8,350
• = £75,150

(c) You are given a partial statement of financial position for SR. Complete the boxes below to
account for the ten ovens as of 31 December 2023. [3 marks]

($)
Non-current assets
Ovens 50,000
Accumulated depreciation (30,000)
Non-current assets 20,000

Accumulated depreciation calculation (not needed for working, but shown here for illustrative
purposes only):

Year Depreciation expense Net book value (NBV)

1/1/2021 -- £50,000
1/1/2021 – 31/12/2021 £10,000 £40,000
1/1/2022 – 31/12/2022 £10,000 £30,000
1/1/2023 – 31/12/2023 £10,000 £20,000
Accumulated depreciation
£30,000
(as at 31 December 2023)

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 Worksheet 23
3.4 Depreciation – Units of Production Method (HL) (1)

Team Honeybadger (TH)

Team Honeybadger (TH) is a Formula 1 racing team that competes annually in various Grand Prix
races around the world. TH’s team principal, Cameron Leung, has recently purchased a new internal
combustion engine (ICE) for its Formula 1 race car, which is due for their February 2024 car launch
for the 2024 race season.
The new ICE costs $6 million. TH has been given the following forecasted information regarding the
usage of the newly fitted ICE for the race car:
• The new ICE was purchased on January 1, 2024
• It has a lifespan of 6 years
• The ICE has an expected salvage value of $1.25 million
• Maximum laps that the ICE can take is expected to be 8,500 laps.

Table 1: Forecasted use of the ICE for the Formula 1 race car (in laps)

Year 1 Year 2 Year 3 Year 4

(2024 season) (2025 season) (2026 season) (2027 season)
1,200 1,378 1,420 1,390

(a) Using the units of production method of depreciation, calculate the depreciation expense per
lap for TH (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Using your result in Question (a) and the units of production method of depreciation, calculate
the depreciation expense for TH after using the new ICE for the 2024 race season (show all
your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Applying the same method in Question (b), calculate the annual depreciation expense of the
new ICE from 2025 to 2027 (show all your working). You may find it useful to organize your
calculations in a table format. [6 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Calculate the net book value (NBV) of the ICE by the end of the 2027 season (year 4) (show
all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..
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 Worksheet 23
3.4 Depreciation – Units of Production Method (HL) (1)

Answers

(a) Using the units of production method of depreciation, calculate the depreciation expense per
lap for TH (show all your working). [2 marks]

• Units of production depreciation rate = (Cost of asset – Salvage Value) / Estimated units
of production
• = (£6m – £1.25m) / 8,500 laps
• = £558.82 per lap

(b) Using your result in Question (a) and the units of production method of depreciation, calculate
the depreciation expense for TH after using the new ICE for the 2024 race season (show all
your working). [2 marks]

• TH forecasts that there will be 1,200 laps in the 2024 race season.
• Depreciation expense (for 2024 race season) = 1,200 laps used × £558.82 per lap
• = £670,582 depreciation expense

(c) Applying the same method in Question (b), calculate the annual depreciation expense of the
new ICE from 2025 to 2027 (show all your working). You may find it useful to organize your
calculations in a table format. [6 marks]

Year 2 Year 3 Year 4

(2025 season) (2026 season) (2027 season)
Units of use
1,378 1,420 1,390
(in laps)
Units of
£558.82 per lap
production rate
Depreciation = £558.82 × 1,378 laps = £558.82 × 1,420 laps = £558.82 × 1,390 laps
expense = £770,053.96 = £793,524.40 = £776,759.80

(d) Calculate the net book value (NBV) of the ICE by the end of the 2027 season (year 4) (show
all your working). [2 marks]

Year Depreciation expense Net book value (NBV)

1/1/2024 (purchase date) -- £6m

Year 1: 2024 season £670,582 £5,329,418

Year 2: 2025 season £770,053.96 £4,559,364.04

Year 3: 2026 season £793,524.40 £3,765,839.64

Year 4: 2027 season £776,759.80 £2,989,079.84

Hence, the NBV of the ICE is £2,989,079.84 by the end of the 2027 season (Year 4).

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 Worksheet 24
3.4 Depreciation – Units of Production Method (HL) (2)

Marin Wears Co. (MWC)

Marin Wears Co. (MWC) is a lifestyle clothing manufacturer with retail shops across California in the
United States. The company’s CEO, Marin Fortunato, was formerly a fashion model and created her
own brand shortly after her rise to fame. Marin has expanded her factory production in the past few
years as demand for her clothing line has surged amongst her teenage and young adult target
audience (aged 14 to 22). Marin recently purchased two large production machines from different
suppliers. The fiscal year for MWC ends on 31st December.

Table 1: Details for the two purchased machines

ML-175 KT-616
Purchase date January 1, 2021 March 1, 2022
Purchase cost $3,520,000 $5,500,000
Estimated lifespan 10 years 12 years
Scrap value $200,000 $425,000
Estimated total production 600,000 units 770,000 units

Table 2: Current and expected outputs from the machines

Machine 2021 2022 2023 2024

ML-175 50,000 76,000 80,000 130,000
KT-616 --- 85,000 120,500 170,000

(a) Explain one reason why the units of production method of depreciation is more appropriate
than the straight-line method of depreciation for MWC. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Using the units of production method of depreciation, complete the table below for the ML-175
machine (show all your working). [2 marks]

2021 2022 2023 2024

Units of
production (units)
Depreciate rate
(per unit)
Depreciation
expense

(c) Using the units of production method of depreciation, calculate the accumulated depreciation
expense for the KT-616 machine from 2022 to 2024. [4 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Using your result in Question (c), calculate the net book value (NBV) of the KT-616 machine
as of 31st December 2024. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 24
3.4 Depreciation – Units of Production Method (HL) (2)

Answers

(a) Explain one reason why the units of production method of depreciation is more appropriate
than the straight-line method of depreciation for MWC. [2 marks]

In the case of MWC, which operates its own production facility, it is more realistic to use this method
because the machines are depreciated based on their usage. As production levels change,
depending on the sales forecast and level of demand, it would be rather unrealistic to depreciate the
two machines by the same amount every year as this is quite arbitrary. Using the units of production
method would allow a more accurate valuation of the two machines (as non-current assets on the
statement of financial position or balance sheet).

(b) Using the units of production method of depreciation, complete the table below for the ML-175
machine (show all your working). [2 marks]

2021 2022 2023 2024

Units of production
50,000 76,000 80,000 130,000
(units)
Depreciate rate
= $5.53 per unit produced (see calculations below)
(per unit)
Depreciation = 50,000 × $5.53 = 76,000 × $5.53 = 80,000 × $5.53 = 130,000 × $5.53
expense = $276,500 = $420,280 = $442,400 = $718,900

• Units of production rate = (Cost of asset – Salvage Value) / Estimated units of production
• = ($3,520,000 – $200,000) / 600,000 units
• = $5.53 per unit produced

(c) Using the units of production method of depreciation, calculate the accumulated depreciation
expense for the KT-616 machine from 2022 to 2024. [4 marks]
• Units of production rate = (Cost of asset – Salvage Value) / Estimated units of production
• = ($5,500,000 - $425,000) / 770,000 units
• = $6.59 per unit produced

2021 2022 2023 2024

Units of production
--- 85,000 120,500 170,000
(units)
Units of production
= $6.59 per unit produced (see calculations below)
rate
Depreciation = 85,000 × $6.59
= 120,500 × $6.59 = 170,000 × $6.59
expense = $0 = $560,150 × (10/12)
= $794,095 = $1,120,300
= $466,791.67 (Note 1)

Note 1:
• The depreciation expense in 2022 is a total of $560,150. However, this is for the entire year, but the machine was
only purchased on 1st March 2022. Thus, the annual depreciation expense must be pro-rated to account for its
use (which is from 1st March 2022 to 31st December 2022, i.e., a period of 10 months).

• Therefore, the total depreciation expense = $466,791.67 + $794,095 + $1,120,300

• = $2,381,186.67

(d) Using your result in Question (c), calculate the net book value (NBV) of the KT-616 machine
as of 31st December 2024. [2 marks]
• Question (c) showed that accumulated depreciation (from 1st March 2022 to 31st December
2024) = $2,381,186.67
• The NBV as of 31st December 2023 = $5,500,000 – $2,381,186.67
• = $3,118,813.33

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 Worksheet 25
3.4 Depreciation – Units of Production Method (HL) (3)

Damien Car Rentals (DCR)

Damien Car Rentals (DCR) is a high-end car rental company based in Chicago, USA. DCR is known
for its quality and safety record. Damien Rodriguez, the CEO, has decided to add 40 new electric
sedan vehicles to DCR’s current fleet as its main client base has shifted from millennials to
Generation Z, who are more concerned with the impacts of climate change. Each electric sedan car
costs $110,000 and has a residual value of $25,000. DCR forecasts that the entire new electric
sedan car fleet will have a lifespan of 5 years, with a total mileage of 1,450,000 miles (also see Table
1). DCR signed a purchase agreement with its electric sedan provider on 1st March 2023.
Table 1: Details of mileage and related information for the electric sedan cars
Expected mileage for the entire electric sedan fleet (in miles)
Year
Optimistic projection Conservative projection
2023 375,200 210,500
2024 410,800 320,000
2025 370,750 250,780
2026 307,900 305,170
2027 405,700 364,000

(a) Calculate the total cost of purchasing the entire electric sedan fleet for DCR. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Using the units of production method of depreciation, calculate the depreciation rate per unit
(show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Calculate the total depreciation expense from 2023 to 2027 using the optimistic projections in
Table 1 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Calculate the total depreciation expense from 2023 to 2027 using the conservative projections
in Table 1 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(e) Calculate and complete the following non-current assets section of DCR’s statement of
financial position as of 31st December 2025. [2 marks]
Optimistic Conservative
Non-current assets
projection ($) projection ($)

Fleet of electric sedan cars (40 cars)

Accumulated depreciation

Non-current assets

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 Worksheet 25
3.4 Depreciation – Units of Production Method (HL) (3)

Answers
(a) Calculate the total cost of purchasing the entire electric sedan fleet for DCR. [2 marks]
• Total purchase cost = $110,000 × 40 electric sedan cars = $4,400,000

(b) Using the units of production method of depreciation, calculate the depreciation rate per unit
(show all your working). [2 marks]
• Units of production rate = (Cost of asset – Salvage Value) / Estimated units of production
• = [($4,400,000 – $25,000) × 40 cars)] / 1,450,000 miles = $2.34 per miles used

(c) Calculate the total depreciation expense from 2023 to 2027 using the optimistic projections in
Table 1 (show all your working). [2 marks]
2023 2024 2025 2026 2027
Units of production
375,200 410,800 370,750 307,900 405,700
(in miles)
Units of production
$2.34 per miles used (from question 3)
depreciation rate
Depreciation 375,200 × 2.34 410,800 × 2.34 370,750 × 2.34 307,900 × 2.34 405,700 × 2.34
expense (annual) = $877,968* = $961,272 = $867,555 = $720,486 = $949,338
*
Since the cars were purchased on March 1, 2023, that means they were only used between 1st March 2023 to 31st
December 2023 (10 months). Thus, the 2023 annual depreciation expense of $877,968 must be pro-rated for the duration
of use to reflect more accurately the depreciation expense for that year, i.e., $877,968 × (10/12) = $731,640.

• Total depreciation expense (accumulated depreciation based on optimistic projection)

• = $731,640 + $961,272 + $867,555 + $720,486 + $949,338 = $4,230,291

(d) Calculate the total depreciation expense from 2023 to 2027 using the conservative projections
in Table 1 (show all your working). [2 marks]
2023 2024 2025 2026 2027
Units of
production (in 210,500 320,000 250,780 305,170 364,000
miles)
Units of
$2.34 per miles used (from question 3)
production rate
Depreciation 210,500 × 2.34 320,000 × 2.34 250,780 × 2.34 305,170 × 2.34 364,000 × 2.34
expense (annual) = $492,570** = $748,800 = $586,825 = $714,098 = $851,760
**
The 2023 annual depreciation expense of $492,570 must be pro-rated for the duration of use (as the cars were bought
on 1st March 2023). This is calculated as $492,570 × (10/12) = $410,475.

• Total depreciation expense (accumulated depreciation based on conservative projection):

• = $410,475 + $748,800 + $586,825 + $714,098 + $851,760 = $3,311,958

(e) Calculate and complete the following non-current assets section of DCR’s statement of
financial position as of 31st December 2025. [2 marks]

Optimistic Conservative
Non-current assets
projection ($) projection ($)

Fleet of electric sedan cars (40 cars) 4,400,000 4,400,000

Accumulated depreciation (4,230,291) (3,311,958)
Non-current assets 169,709 1,088,042

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 Worksheet 26
3.5 Liquidity & Profitability Ratio Analysis (1)

Chim, Loh, & Partners Law Firm (CLPL)

Chim, Loh, & Partners Law Firm (CLPL) is a regional law firm based in Hong Kong with a wide scope
of legal services, ranging from litigation, dispute resolution, capital markets, tax laws, and intellectual
property. Their expertise is in Chinese law, which is considered a niche product in the current legal
industry. The two lead partners, Jenkin Chim and James Loh, are assessing the feasibility of opening
a new office in London, UK. They see market potential to grow their business as more European
companies want to work with Chinese companies but do not have the expertise in Chinese law.
Before approaching their bank, the partners need to conduct a ratio analysis of their current
profitability position. Selected financial information from CLPL’s profit and loss account and balance
sheet for 2023 and 2024 are shown below (all figures in $ millions):

2023 2024
Fees and billings charged to clients 1,380 1,040
Costs of client services rendered 720 810
Expenses 345 Y
Profit before interest and tax X 150
Cash 245 200
Debtors 500 470
Trade creditors 350 330
Short-term loans 40 20

(a) Calculate the total current assets for CLPL in 2024 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(b) Calculate the total current liabilities for CLPL in 2023. (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(c) Using the information from the table, calculate the figures X and Y. [2 marks]

…………………………………………………………………………………………………………………..

(d) Calculate the change in the gross profit margin from 2023 to 2024. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(e) Calculate the change in the profit margin from 2023 to 2024. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(f) Using the quantitative information in the table and your answers in part (d) and (e) above,
comment on CLPL’s profitability in 2022. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 26
3.5 Liquidity & Profitability Ratio Analysis (1)

Answers

(a) Calculate the total current assets for CLPL in 2024 (show all your working). [2 marks]
• Total current assets = Cash + Debtors + Stock
• Total current assets = $200m + $470m + $0 = $670m

(b) Calculate the total current liabilities for CLPL in 2023. (show all your working). [2 marks]
• Total current liabilities = Trade creditors + Short-term loans
• Total current liabilities = $350m + $40m = $390m

(c) Using the information from the table, calculate the figures X and Y. [2 marks]
• Profit before interest and tax = Fees and billings charged to clients – Costs of client services
rendered – Expenses
• = $1,380m – $720m – $345m
• X = $315m
• Profit before interest and tax = Fees and billings charged to clients – Costs of client services
rendered – Expenses
• $150m = $1,040m – $810m – Expenses
• Expenses (Y) = $150m + $810m – $1,040m
• Y = $80m

(d) Calculate the change in the gross profit margin from 2023 to 2024. [2 marks]
• Gross profit margin (GPM) = (Gross profit / Sales revenue) × 100
• GPM for 2023 = [(1,380m – 720m) / 1,380m] × 100 = 47.83%
• GPM for 2024 = [(1,040m – 810m) / 1,040m] × 100 = 22.12%
• Change in GPM = fallen by 25.71%

(e) Calculate the change in the profit margin from 2023 to 2024. [2 marks]
• Profit margin = (Profit before interest and tax / Sales revenue) × 100
• Profit margin for 2023 = ($315m / $1,380m) × 100 = 22.83%
• Profit margin for 2024 = ($150m / $1,040m) × 100 = 14.42%
• Change in profit margin = fall by 8.41%

(f) Using the quantitative information in the table and your answers in part (d) and (e) above,
comment on CLPL’s profitability in 2022. [2 marks]
• From the calculations, the GPM for CLPL has fallen by 25.71% whilst its profit margin has
fallen by 8.41% between 2023 and 2024. This signifies falling profitability for the law firm.
• Generally, a higher GPM and profit margin are favourable for a business and would suggest
greater growth prospects for CLPL.
• Although CLPL is still experiencing positive figures for gross profit as well as profit before
interest and tax, the fall in the GPM ratio is significant, which suggests CLPL is not very
effective in controlling costs relating to the legal services that the firm provides to its clients.
• The fall in the profit margin also suggests that CLPL is not effective in controlling its
operational costs (expenses). Thus, CLPL’s focus should be to manage the indirect costs
related to the provision of its legal services prior to pursuing growth opportunities by opening
a new office in London.

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 Worksheet 27
3.5 Liquidity & Profitability Ratio Analysis (2)

Kaneshige Properties (KP)

Shun Kaneshige is a real estate specialist trading as Kaneshige Properties (KP). As the managing
director of KP, Shun manages a portfolio of properties across Bangkok, Thailand. The stocks
(inventory) that KP holds are the properties within the company’s real estate portfolio.

KP is planning to open its first overseas office in Singapore due to the strong upswing in the property
market. To support its expansion, the local bank in Singapore is asking KP to provide a ratio analysis
of its liquidity and profitability to complement the final accounts that will be submitted for review. The
finance director at KP has provided the following information for 2024:

Current ratio 2.80 Sales revenue $1,750m

Acid-test (quick) ratio X Stock (inventory) $190m
Total current liabilities $160m Profit before interest and tax $570m
Debtors Y Cash $100m
Expenses $500m Capital employed $800m
Total current asset $392m

The industry benchmark for the current ratio and acid-test (quick) ratio are between 1.5 to 2 and 1.0
respectively.

(a) Calculate the value of debtors (Y) for KP in 2024 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(b) Calculate the acid-test (quick) ratio (X) for KP in 2024 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(c) Comment on KP’s current ratio in 2024. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Calculate the gross profit margin (GPM) for KP in 2024 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(e) Calculate the profit margin for KP in 2024. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(f) Calculate the return on capital employed (ROCE) for KP in 2024. [2 marks]

…………………………………………………………………………………………………………………..

(g) Describe what the figure for KP’s return on capital (ROCE) in 2024 shows. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 27
3.5 Liquidity & Profitability Ratio Analysis (2)

Answers

(a) Calculate the value of debtors (Y) for KP in 2024 (show all your working). [2 marks]
• Current assets = Cash + Debtors + Stock (inventory)
• $392m = $100m + Y + $190m
• Y = $102m

(b) Calculate the acid-test (quick) ratio (X) for KP in 2024 (show all your working). [2 marks]
• Acid-test (quick) ratio = (Current assets – Stock) / Current liabilities
• Acid-test (quick) ratio = (Cash + Debtors) / Current liabilities
• = ($100m + $102m) / $160m
• = $202m / $160m
• = 1.26

(c) Comment on KP’s current ratio in 2024. [2 marks]

The current ratio measures the liquidity of a business by comparing its total current assets to its
total current liabilities. KP’s current ratio is 2.8, which is well above the industry standard of 1.5
to 2.0, suggesting that KP has sufficient liquid assets to pay off its current liabilities within the
next 12 months. However, having too much liquidity may suggest that KP is not being very
effective with its liquid assets in generating income for the real estate firm.

(d) Calculate the gross profit margin (GPM) for KP in 2024 (show all your working). [2 marks]
• Since the gross profit figure is not given, but students are given the expenses figure and the
profit before interest and tax figure, this means they can work backwards to calculate the
gross profit figure:
• Profit before interest and tax = Gross profit – Expenses
• $570m = X – $500m
• X = $1,070m
• Gross profit margin (GPM) for 2024 = (Gross profit / Total sales revenue) × 100
• = ($1,070m / $1,750m) × 100
• = 61.14%

(e) Calculate the profit margin for KP in 2024. [2 marks]

• Profit margin for 2019 = (Profit before interest and tax / Total sales revenue) × 100
• = ($570m / $1,750m) × 100
• = 32.57%

(f) Calculate the return on capital employed (ROCE) for KP in 2024. [2 marks]
• Return on capital employed (ROCE) = (Profit before interest and tax / Capital employed)
× 100
• = ($570m / $800m) × 100
• = 71.25%

(g) Describe what the figure for KP’s return on capital (ROCE) in 2024 shows. [2 marks]
The ROCE figure measures how efficient KP has used its resources in relation to the size of the
real estate firm (measured by the value of its capital employed) to bring about financial returns
and therefore, profits for the business. In this case, for every $100 invested in KP, the firm earns
$71.25 in profit before interest and tax. In general, the higher the ROCE, the better it is for the
business.

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 Worksheet 28
3.5 Liquidity & Profitability Ratio Analysis (3)

Tammer Kitchenware (TK)

Tammer Kitchenware (TK) is an exclusive distributor of the brand “KitchenForce”. TK stocks the
products in its warehouse. With TK’s strong relationship with suppliers of KitchenForce, the business
often receives discounts on its bulk purchases. This enables TK to price its products competitively.
Adrian Danisova, the finance manager at TK, has provided the following financial information.

Table 1: Financial information from TK’s statement of financial position (2023 and 2024)
2023 2024
Cash $30,000 W
Short-term loan (debt) $20,000 $24,650
Stock (inventory) $33,500 $28,700
Debtor $21,500 $25,000
Trade creditor $29,750 $31,000
Current ratio X 1.48
Acid test (quick) ratio Z Y

Table 2: Financial information from TK’s statement of profit and loss (2023 and 2024)
2023 Changes for 2024 (based on 2023 figures)
Sales revenue A Increased by 5%
Cost of sales $75,000 Decreased by 10%
Gross profit $145,000
Depreciation $15,650 Increased by $5,100
Advertising $10,000 No change
Rent $80,000 No change

(a) Calculate the current ratio for TK in 2023 (X) (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(b) Calculate the acid-test (quick) ratio for TK in 2023 (Z) (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(c) Calculate the amount of cash (W) for TK in 2024 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(d) Calculate the acid-test (quick) ratio for TK in 2024 (Y) (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(e) Calculate the sales revenue figure (A) for TK in 2024. [2 marks]

…………………………………………………………………………………………………………………..

(f) Calculate the gross profit margin for TK in 2023 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(g) Calculate the profit margin for TK in 2024 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..
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 Worksheet 28
3.5 Liquidity & Profitability Ratio Analysis (3)

Answers

(a) Calculate the current ratio for TK in 2023 (X) (show all your working). [2 marks]
• Current ratio = Current assets / Current liabilities
• = ($30,000 + $21,500 + $33,500) / ($29,750 + $20,000)
• = 1.71

(b) Calculate the acid-test (quick) ratio for TK in 2023 (Z) (show all your working). [2 marks]
• Acid-test (quick) ratio = (Current assets – Stock) / Current liabilities
• Acid-test (quick) ratio = (Cash + Debtors) / Current liabilities
• = ($30,000 + $21,500) / ($29,750 + $20,000)
• = $18,000 / $49,750
• = 1.04

(c) Calculate the amount of cash (W) for TK in 2024 (show all your working). [2 marks]
• Current ratio = Current assets / Current liabilities
• 1.48 = (W + $25,000 + $28,700) / ($31,000 + $24,650)
• W = 1.48 × ($55,650 – $25,000 – $28,700)
• W = $28,662

(d) Calculate the acid-test (quick) ratio for TK in 2024 (Y) (show all your working). [2 marks]
• Acid-test (quick) ratio = (Current assets – Stock) / Current liabilities
• = ($28,662 + $25,000) / ($31,000 + $24,650)
• = $53,662 / $55,650
• = 0.96

(e) Calculate the sales revenue figure (A) for TK in 2024. [2 marks]
• Sales revenue – Cost of sales = Gross profit
• A – $75,000 = $145,000
• A = $220,000

(f) Calculate the gross profit margin for TK in 2023 (show all your working). [2 marks]
• Gross profit margin (GPM) = (Gross profit / Total sales revenue) × 100
• = ($145,000 / $220,000) × 100
• = 65.91%

(g) Calculate the profit margin for TK in 2024 (show all your working). [2 marks]
• First calculate the changes for 2024
• Sales revenue = $220,000 × 1.05 = $231,000
• COS = $75,000 × 0.9 = $67,500
• Gross profit = $231,000 – $67,500 = $163,500
• Depreciation = $15,650 + $5,100 = $20,750
• Profit before interest and tax = ($163,500 – $20,750 – $10,000 – $80,000)
• = $52,750
• Profit margin = (Profit before interest and tax / Total sales revenue) × 100
• = ($52,750 / $231,000) × 100
• = 22.84%

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 Worksheet 29
3.5 Liquidity & Profitability Ratio Analysis (4)

Kiara’s Construction Ltd. (KCL)

Kiara’s Construction Ltd. (KCL) is a property construction company based in Los Angeles, California
in the USA. Kiara Kuczynski, as the CEO, has managed to acquire a new plot of land with
redevelopment rights for the company’s first luxury boutique apartment in downtown Los Angeles.
To support this property development, KCL will need to obtain long-term borrowing. To support the
application, she is preparing a ratio analysis for the bank manager.

Table 1: Liquidity and profitability ratios for KCL from 2023 to 2024

2023 2024 Industry average

Profit margin (%) 17 14 16
Gross profit margin (%) 10 25 20
Current ratio 1.7 1.1 1.8
Acid test (quick) ratio 0.9 1.3 1
Return on capital employed (%) 56 X 45

At the end of 2024, KCL’s profit before interest and tax was $19,570,000, non-current liabilities
were $27,550,000, and equity was $28,364,200.

(a) Calculate the return on capital employed in 2024 (figure X) (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(b) Calculate the change in both liquidity ratios and all three profitability ratios for KCL. [5 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Outline what the change in the profit margin for KCL from 2023 to 2024 shows. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Outline what the change in the current ratio for KCL from 2023 to 2024 shows. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(e) Explain one problem for a KCL of holding too many current assets. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(f) Suggest one way in which KCL can improve its return on capital employed (ROCE). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 29
3.5 Liquidity & Profitability Ratio Analysis (4)

Answers

(a) Calculate the return on capital employed in 2024 (figure X) (show all your working). [2 marks]
• ROCE = (Profit before interest and tax / Capital employed) × 100
• Capital employed = Non-current liabilities + Equity
• = [$19,750,000 / ($27,550,000 + $28,364,200) × 100 = 35%

(b) Calculate the change in both liquidity ratios and all three profitability ratios for KCL. [5 marks]
2023 2024 Change (Δ) Industry average
Profit margin (%) 17 14 - 3% 16
Gross profit margin (%) 10 25 + 15% 20
Current ratio 1.7 1.1 - 0.6 1.8
Acid test (quick) ratio 0.9 1.3 + 0.4 1
Return on capital employed (%) 56 35 - 21% 45

(c) Outline what the change in the profit margin for KCL from 2023 to 2024 shows. [2 marks]
Profit margin is a profitability ratio that measures a firm’s profit before taxes and interest as a
proportion of its sales revenue. It reflects the firm’s ability to manage its costs and earn profits from
its sales. KCL’s profit margin fell by 3% from 2023 to 2024, suggesting that for every $100 of sales
revenue, the firm makes only $14 in profit before interest and tax. As the industry average is 16%,
KCL’s profit margin has fallen below the industry benchmark.

(d) Outline what the change in the current ratio for KCL from 2023 to 2024 shows. [2 marks]
The current ratio is a profitability ratio that measures a firm’s liquidity, i.e., the ability to cover current
liabilities with the firm’s current assets. For KCL, this has worsened by 0.6, suggesting that it has
fewer current assets to cover its current liabilities. With a current ratio of 1.1 in 2024, this means for
every $1 of current liabilities, KCL has $1.1 of current assets to meet its short-term obligations. Whilst
the common benchmark for this ratio is 1.5, KCL’s current ratio is way below the industry average of
1.8, suggesting that the firm could run into liquidity problems in the near future.

(e) Explain one problem for a KCL of holding too many current assets. [2 marks]
Problems of holding too many current assets (comprised of cash, debtors, and stock), include:
• KCL may not be using its cash productively as this could be invested more profitably elsewhere
for some positive financial returns.
• Having too many debtors would suggest that KCL has given too much credit and/or extended
the credit period for too long to its customers. If the firm’s debtors default on their payments, this
could seriously impact KCL’s cash flow and profitability.
• Holding too much stock (inventories such as construction materials) could lead to increased
storage costs. As a property construction company, KCL’s stock would also include the
properties that are being sold. The longer KCL holds onto these properties, the more it is
exposed to the risks of change in the business cycle which could reduce property prices.

(f) Suggest one way in which KCL can improve its return on capital employed (ROCE). [2 marks]
Possible ways for KCL to improve its return on capital employed include:
• Increasing the selling price of the properties in its portfolio. This could improve KCL’s profit
before interest and tax, which ultimately improves its ROCE ratio. However, this could lead to
backlash from price sensitive customers and see KCL as profiteering.
• Reduce cost of sales (COS). This will require KCL having to reduce its direct costs to construct
its properties, which could be challenging if suppliers are unwilling to provide the construction
materials to build new properties at a lower price.

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 Worksheet 30
3.6 Efficiency Ratio Analysis (HL) (1)

DK Cosmetics (DKC)

DK Cosmetics (DKC) is a cosmetics manufacturer that specializes in the production of shower, hand,
body, and soap products using organic and non-animal tested ingredients. As ’ customers are
more concerned about the products they use and their impact on the environment, its production
capacity is now at its maximum. A new production facility is planned, but a large bank loan must first
be obtained. The local bank manager has asked DKC to provide a complete set of final accounts
along with a ratio analysis for the past two years of operations. Some of the financial information for
2024 is shown below:
• The opening stock is $120,000 and closing stock is $160,000 in 2024.
• Sales revenue for the year was $1,100,000, and the gross profit was $490,000.
• The industry standard for credit payments is 40 to 50 days, with ’ debtors valued at
$150,000 and its trade creditors valued at $167,000.
• ’ capital employed was $2,060,000, share capital was $460,000, accumulated retained
profit was $800,000 at the end of 2024.

Table 1 – Partial efficiency ratio analysis, for DKC (2023)

Stock turnover ratio (times) 2.61 times

Debtor days ratio (days) 44.71 days
Creditor days ratio (days) 104.84 days
Gearing ratio (%) 22.56%

(a) Calculate the average stock for DKC in 2024 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(b) Calculate the stock turnover ratio (in times) for DKC in 2024 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(c) Calculate the debtor days ratio for DKC in 2024 (show all your working).

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Comment on the change in the debtor days ratio between 2023 and 2024. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(e) Calculate the gearing ratio for DKC in 2024 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(f) Calculate the creditor days ratio for DKC in 2024. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 30
3.6 Efficiency Ratio Analysis (HL) (1)

Answers

(a) Calculate the average stock for DKC in 2024 (show all your working). [2 marks]
• Average stock for 2024 = (Opening stock + Closing stock) / 2
• = ($120,000 + $160,000) / 2
• = $140,000

(b) Calculate the stock turnover ratio (in times) for DKC in 2024 (show all your working). [2 marks]
• Cost of sales = Sales revenue – Gross profit = $1,100,000 – $490,000 = $610,000
• Stock turnover ratio (in times) for 2020 = (Cost of sales / Average stock)
• = $610,000 / $140,000
• = 4.36 times

(c) Calculate the debtor days ratio for DKC in 2024 (show all your working).
• Debtor days ratio = Debtors / (Total sales revenue) × 365
• = ($150,000 / $1,100,000) × 365
• = 49.77 days

(d) Comment on the change in the debtor days ratio between 2023 and 2024. [2 marks]
This ratio measures the number of days it takes DKC to collect debts owed by its debtors. The
debtor days ratio for DKC has increased by just over 5 days. Since the industry standard is 40
to 50 days, with a debtor days ratio of 49.77 days in 2024, the ratio has worsened meaning that
DKC may have been weak with its credit control.

(e) Calculate the gearing ratio for DKC in 2024 (show all your working). [2 marks]
• Capital employed = Loan capital (X) + Share capital + Accumulated retained profit
• $2,060,000 = X + $460,000 + $800,000
• X = $800,000
• Gearing ratio = (Loan capital / Capital employed) × 100
• = ($800,000 / $2,060,000) × 100
• = 38.83% (which is a significant improvement from 2023)

(f) Calculate the creditor days ratio for DKC in 2024. [2 marks]

• Creditor days ratio for 2022 = (Creditors / COGS) × 365

• = ($167,000 / $610,000) × 365
• = 99.93 days
• This means DKC is paying its debts almost 5 days early that previously in 2023, but still
taking far longer than the standard 40 – 50 days trade credit period.

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 Worksheet 31
3.6 Efficiency Ratio Analysis (HL) (2)

Sharp Sail Ltd. (SSL)

Sharp Sail Ltd. (SSL) is a manufacturer of medium-sized sails, which the company sells through its
own outlets. The company operates as a privately held company and is owned by the Sharp family.
The Chief Executive Officer (CEO), Samantha, was trained as a professional sailor. After she retired
from her professional sailing career, she took on the role as the CEO of SSL.
Samantha wants to develop the business further by opening a sailing training centre. To support this,
she needs to secure a bank loan of $2 million. Samantha also needs to assess the efficiency of SSL.
the Chief Finance Officer (CFO) has provided the following financial information.

2023 2024
Debtor days ratio 59.84 days 49.55 days
Sales revenue $19.52m $22.10m
Gross profit $5.62m $4.92m
Cash $8m $10.5m
Debtors $3.2m $3m
Average stock (inventory) $2.85m $1.89m
Trade creditors $2.8m $2.2m
Short-term loans (debts) 3.1 2.9

(a) Calculate the stock turnover ratio for SSL (days) in 2023 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(b) Calculate the stock turnover ratio for SSL (times) in 2023 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(c) Calculate the change in stock turnover ratio for SSL (in days) (show your working). [2 marks]

…………………………………………………………………………………………………………………..

(d) Comment on the change in the debtor days ratio for SSL. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(e) Calculate the creditor days ratio for SSL in 2023. [2 marks]

…………………………………………………………………………………………………………………..

(f) Calculate the change in the creditor days ratio for SSL (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(g) Comment on your findings in Question (f) from above. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 31
3.6 Efficiency Ratio Analysis (HL) (2)

Answers

(a) Calculate the stock turnover ratio for SSL (days) in 2023 (show all your working). [2 marks]
• Cost of sales = Sales revenue – Gross profit = $19.52m – $5.62m = $13.9m
• Stock turnover ratio (in days) = (Average stock / Cost of sales) × 365
• = ($2.85m / $13.9m) × 365
• = 74.84 (or 75) days

(b) Calculate the stock turnover ratio for SSL (times) in 2023 (show all your working). [2 marks]
• Stock turnover ratio (in times) = Cost of sales / Average stock
• = $13.9m / $2.85m
• = 4.88 times

Top tip: When calculating stock turnover ratios, ensure that you state the correct units for the
figure – either the number of times (per year) or number of days.

(c) Calculate the change in stock turnover ratio for SSL (in days) (show your working). [2 marks]
• Cost of sales = Sales revenue – Gross profit = $22.1m – $4.92m = $17.18m
• Stock turnover ratio (in days) for 2020 = (Average stock / Cost of sales) × 365
• = ($1.89m / $17.18m) × 365
• = 40.15 days
• Change = 40.15 days – 74.84 days = fallen by 34.69 (or 35) days

(d) Comment on the change in the debtor days ratio for SSL. [2 marks]
The debtor days ratio for SSL improved by 10.29 days from 2023 to 2024. This ratio measures
the number of days it takes SSL to collect its debts (owed by their debtors), i.e., it now takes
SSL less time (by around 11 days shorter) to collect the money it is owed by its debtors.

(e) Calculate the creditor days ratio for SSL in 2023. [2 marks]
• Creditor days ratio = (Creditors / Cost of sales) × 365
• = ($2.8m / $13.9m) × 365
• = 73.53 (or 74) days

(f) Calculate the change in the creditor days ratio for SSL (show all your working). [2 marks]
• Creditor days ratio = (Creditors / Cost of sales) × 365
• = ($2.2m / $17.18m) × 365
• = 46.74 (or 47) days
• Change = 73.53 days – 46.74 days = fallen by 26.79 (or 27) days

(g) Comment on your findings in Question (f) from above. [2 marks]

As the creditor days ratio has fallen quite significantly, this suggests that the ratio has worsened
for SSL because the company has less time to pay back its suppliers, which can have a negative
impact on its own cash flow (liquidity) position.

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 Worksheet 32
3.6 Efficiency Ratio Analysis (HL) (3)

Siuboy Consultancy Co. (SCC)

Siuboy Consultancy Co. (SCC) provides consultancy services to business organizations on public
relations, corporate affairs, and crisis management solutions. SCC also sells a wide collection of
corporate communication books.
Since its establishment, SCC has been highly efficient in its operations. However, this has changed
recently so the owners would like to investigate the efficiency of his company by conducting a ratio
analysis based on the financial data below.

Table 1: Financial information for SCC

2023 2024
Capital employed 112,500 147,000
Closing stock $22,000 $44,000
Cost of sales 50,300 80,700
Debtors 25,000 A
Loan capital 50,500 75,000
Opening stock $34,000 $22,000
Sales revenue 150,500 105,000
Share capital 22,000 22,000

Table 2: Partial ratio analysis for SCC

2023 2024
Stock turnover ratio (in days) W 149.26 days
Debtor days ratio (in days) X 100.81 days
Gearing ratio (in %) Y Z

(a) Calculate the average stock for SCC in 2024 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(b) Calculate the value of stock turnover ratio (in days) (W) for SCC in 2023 (show all your
working). [2 marks]

…………………………………………………………………………………………………………………..

(c) Calculate the value of debtors (A) for SCC in 2024 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(d) Calculate the debtor days ratio (X) for SCC in 2023 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(e) Calculate the gearing ratio in 2023 (Y) and 2024 (Z) (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(f) Comment on the change in SCC’s gearing ratio from 2023 to 2024. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 32
3.6 Efficiency Ratio Analysis (HL) (3)

Answers

(a) Calculate the average stock for SCC in 2024 (show all your working). [2 marks]
• Average stock = (Opening stock + Closing stock) / 2
• = ($22,000 + $44,000) / 2
• = $33,000

(b) Calculate the value of stock turnover ratio (in days) (W) for SCC in 2023 (show all your
working). [2 marks]
• Average stock = (Opening stock + Closing stock) / 2
• = ($34,000 + $22,000) / 2
• = $28,000
• Stock turnover ratio (in days) = (Average stock / Cost of sales) × 365
• = ($28,000 / $50,300) × 365
• = 203.18 days (or 204 days)

(c) Calculate the value of debtors (A) for SCC in 2024 (show all your working). [2 marks]
• Debtor days ratio is given as 100.81 days. Applying the debtor days ratio formula gives:
• 100.81 days = (Debtors / Total sales revenue) × 365
• 100.81 = (A / $105,000) × 365
• 100.81 × $105,000 = 365A
• (100.81 × $105,000) / 365 = A
• A = $29,000.14 (or $29,000)

(d) Calculate the debtor days ratio (X) for SCC in 2023 (show all your working). [2 marks]
• Debtor days ratio = (Debtors / Total sales revenue) × 365
• = ($25,000 / $150,500) × 365
• = 60.63 days (or 61 days)

(e) Calculate the gearing ratio for SCC in 2023 (Y) and 2024 (Z) (show all your working). [2 marks]
• Gearing ratio = (Loan capital / Capital employed) 100
• Y = Gearing ratio for 2023 = ($50,500 / $112,500) × 100 = 44.89%
• Z = Gearing ratio for 2024 = ($75,000 / $147,000) × 100 = 51.02%

(f) Comment on the change in SCC’s gearing ratio from 2023 to 2024. [2 marks]
The gearing ratio has increased by 6.13%. This ratio measures the amount of capital at SCC
that is financed by long-term loans or non-current liabilities. In general, a gearing ratio of more
than 50% is considered highly geared. Given SSC’s gearing ratio in 2024 has just gone above
50%, this indicates that SSC is now highly geared. Thus, this suggests any hikes in interest
rates could harm SSC’s liquidity position as the firm will need to pay a lot more interest payments
for the loans the company has taken out.

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 Worksheet 33
3.6 Efficiency Ratio Analysis (HL) (4)

(a) Define the term efficiency ratio. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) State the benchmark for each of the following efficiency ratios. [5 marks]

(i) Stock turnover ratio (in times) …………………………………….……………………………....

(ii) Stock turnover ratio (in days) …………………………………….…………………………….....

(iii) Debtor days ratios ……………………………………………….…………………......................

(iv) Creditor days ratios …………………………………………….……………………....................

(v) Gearing ratio ………………………………………………….………………..............................

(c) Given the following situations and stock turnover ratios, comment on whether or not the ratio is
realistic.

(i) A small wet market stall selling fresh vegetables has a stock turnover ratio (in times) of 2.5
times. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(ii) Tiffany & Co., a high-end luxury jewellery maker and retailer, has a stock turnover ratio (in
days) of 0.35 days. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(iii) Netflix, an online streaming service provider, has a stock turnover (in times) of 180 times a
year. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Comment on a company’s gearing ratio of 90%. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(e) Explain one stakeholder group that might be interested in the gearing ratio of a firm. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 33
3.6 Efficiency Ratio Analysis (HL) (4)

Answers

(a) Define the term efficiency ratio. [2 marks]

Efficiency ratio refers to the ability of a business to utilize its resources to bring about a financial
return. This includes the stock turnover ratio, debtor days ratio, creditor days ratio, and gearing ratio.

(b) State the benchmark for each of the following efficiency ratios. [5 marks]
(i) Stock turnover ratio (in times) The higher the ratio the better, as it means that the business is
able to sell all of its inventory (or stock) very quickly.
(ii) Stock turnover ratio (in days) The lower the ratio the better, as it means that the business takes
less time to sell all of its inventory (or stock).
(iii) Debtor days ratios The lower the ratio the better, as it means the business takes fewer days to
collect the money it is owed from debtors.
(iv) Creditor days ratios The higher the ratio the better, as it means that the business has more time
to pay its current liabilities to suppliers and trade creditors.
(v) Gearing ratio The normal benchmark is no more than 50%, as it suggests that for every $100 of
capital employed, $50 of this comes from money the firm has borrowed (e.g., loan capital and
other forms of non-current liabilities).

(c) Given the following situations and stock turnover ratios, comment on whether or not the ratio is
realistic.
(i) A small wet market stall selling fresh vegetables has a stock turnover ratio (in times) of 2.5
times. [2 marks]
This is not realistic. A wet market stall should expect to sell vegetables every day in high volumes,
so the stock turnover (in times) should be higher.

(ii) Tiffany & Co., a high-end luxury jewellery maker and retailer, has a stock turnover ratio (in
days) of 0.35 days. [2 marks]
This is not realistic. It is unlikely that a premium jewellery maker/retailer will be able to sell expensive
jewellery in less than a day. We would expect that the stock turnover (in days) will be higher as it
realistically takes a longer time for an expensive jeweller to sell its products.

(iii) Netflix, an online streaming service provider, has a stock turnover (in times) of 180 times a
year. [2 marks]
This is also not realistic. This is a rather unique situation as online streaming service providers like
Netflix or Disney+ do not really hold any inventory or stock (they don’t sell a physical product).
Instead, Netflix sells a service). In this context, the stock turnover ratios is not really a relevant
financial ratio for analysis.

(d) Comment on a company’s gearing ratio of 90%. [2 marks]

A company with a gearing ratio of 90% is considered to be very highly geared. This means for every
$100 of capital employed, $90 of this comes from non-current liabilites, such as long-term bank loans.
The business is therefore more vulnerable to changes in interest rates because when the interest
rate is increased, the firm will need to incur higher monthly interest repayments on the significant
value of its non-current liabilites (funds that it has borrowed).

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 Worksheet 33
3.6 Efficiency Ratio Analysis (HL) (4)

(e) Explain one stakeholder group that might be interested in the gearing ratio of a firm. [2 marks]

Possible stakeholder groups could include:

• Shareholders and potential Investors – Knowing the gearing ratio helps these stakeholders to
assess the level of risk of the business. A business with a high gearing ratio suggests that the
business will need to repay the bank first (interest payment) before it has any funds left to pay
to its shareholders (dividends) or used for reinvestment in the business (retained profits or
earnings).

• Creditors – Trade creditors may be worried if a business is highly geared, as the firm night not
have money left over to pay the money owed to them. There is the risk that the business may
default on the money owed to suppliers and other creditors if the geraing ratio is high (because
the business will need to pay back the bank first for the non-current liabilites (long-term
borrowing).

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 Worksheet 34
3.6 Cash Flow (1)

Kutie Pie (KP)

The owner of Kutie Pie (KP), Kutie Park, plans to open her first outlet in the tourist district of
Myeongdong in Seoul, South Korea, as a sole proprietorship. She will use her personal funds of 3
million South Korean won (₩) (around US$2,230) to start the business. To encourage more
entrepreneurs, the South Korean government is offering a one-time grant of ₩4 million (US$2,975).
To be eligible, Kutie Park will need to prepare a detailed cash-flow forecast. She anticipates the
average selling price of her pies will be ₩5,000 (US$3.75) each.

Kutie Park has forecasted the following financial information for the first four months of operation,
starting from January 2024.

Sales
• First two months = 30,000 pies per month
Quantity of pies sold
• Next two months = 45,000 pies per month
• 80% of the sales will be paid in cash
Payment methods • 20% of the sales will be paid on credit, with KP receiving the cash in
the following month

Costs (cash payments)

Rent • ₩150 million, payable every other month starting in January
Kutie’s salary • None for the first two months, ₩1 million thereafter
Ingredients • ₩2.2 million per month
Advertising • ₩1.5 million per month
Utilities • 25% of monthly total sales revenue

(a) State one appropriate external source of finance for KP other than a grant. [1 mark]

…………………………………………………………………………………………………………………..

(b) Explain one difference between cash flow and profit for a business like KP. [4 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) On a separate sheet of paper, prepare a fully labelled cash-flow forecast for KP from January
to April 2024. [6 marks]

(d) Comment on the cash flow forecast for KP. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 34
3.6 Cash Flow (1)

Answers

(a) State one appropriate external source of finance for KP other than a grant. [1 mark]

Accept any of the following:

• Bank overdrafts
• Short-term bank loans
• Loans from family and/or friends (as this is for a sole trader).

(b) Explain one difference between cash flow and profit for a business like KP. [4 marks]
Cash flow refers to the movement of physical cash within and out of the business during a given
period of time. Profit refers to the difference between sales revenue and the total costs to
operate a business. A business is able to earn a profit irrespective of whether physical cash is
received from its customers as profits can be recorded on an accrual basis. For example, a
business is able to earn a profit for both credit and cash sales made. However, a cash inflow
can only be recorded when the business is able to sell its goods and services on cash basis.

(c) On a separate sheet of paper, prepare a fully labelled cash-flow forecast for KP from January
to April 2024. [6 marks]

Kutie Pie (KP) Cash flow forecast (January to April 2024)

(South Korean Wons, ₩) Jan Feb Mar Apr

Opening balance 3,000,000 (64,200,000) 44,600,000 43,650,000
Cash inflows
Grant 4,000,000 0 0 0
Cash sales 120,000,000 120,000,000 180,000,000 180,000,000
Credit sales 0 30,000,000 30,000,000 45,000,000
Total cash inflows 124,000,000 150,000,000 210,000,000 225,000,000

Cash outflows
Rent 150,000,000 150,000,000
Kutie’s salary 0 0 1,000,000 1,000,000
Ingredients 2,200,000 2,200,000 2,200,000 2,200,000
Advertising 1,500,000 1,500,000 1,500,000 1,500,000
Utilities 37,500,000 37,500,000 56,250,000 56,250,000
Total cash outflows 191,200,000 41,200,000 210,950,000 60,950,000

Net cash flow (67,200,000) 108,800,000 (950,000) 164,050,000

Closing balance (64,200,000) 44,600,000 43,650,000 207,700,000

(d) Comment on the cash flow forecast for KP. [2 marks]

The cash flow for KP looks disappointing during its first month (with a negative closing balance
of ₩64.2m). However, this is not unexpected for a new business given it will be KP’s first month
of operation. The cash flow forecast covers the first four months of trading and in the subsequent
months, sales are expected to increase, allowing KP to generate positive net cash flows with
positive closing balances. Overall, the situation looks optimistic for KP’s business so long as the
financial forecasts are realistic.
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 Worksheet 35
3.7 Cash Flow (2)

Jenny’s Vegan Restaurant (JVR)

Jenny’s Vegan Restaurant (JVR) was opened by Jenny de Ferranti, who has a talent for culinary
arts, specifically with vegetarian-based recipes. Based in Vancouver, Canada, and riding on the fact
that Vancouverites puts a heavy emphasis on high living standards and work-life balance, Jenny
believes there is a huge market potential for vegan-based restaurants. She started JVR on 1 January
2024 using $100,000 from her personal funds.

Whilst Jenny is a talented chef, she also studied finance and accounting at university. As such, Jenny
wants to make sure her new business is on track to success and decided to construct a six-month
cash flow forecast.

JVR’s sales come from three revenue streams: dine-in sales, take-out sales, and sales made through
a strategic alliance with a local mobile application (app) delivery company called “Deliverfood”. The
agreement with Deliverfood stipulates that JVR will receive 60% of the sales made via the
Deliverfood app.

Forecasted sales information (figures in Canadian dollars $) from 1 January 2024

Jan Feb Mar Apr

Dine-in sales 40,000 42,300 45,000 41,000
Take-out sales 32,000 35,000 40,000 37,000
Deliverfood app sales 20,000 27,000 30,000 32,000

• JVR buys its ingredients from local farmers every month. The average cost of purchasing the
ingredient is $70,000 but Jenny was able to obtain a monthly 10% discount.
• The rent for the restaurant is $30,000 per month. However, the lease on the current rental
contract is due on March 31, 2024. The landlord has already informed Jenny that the new rent
starting from 1 April 2024 will increase by 40%.
• Labour costs for the restaurant amount to $15,000 per month.
• JVR mainly uses social media marketing but also advertises in local newspapers on a monthly
basis. This costs the business $3,000 per month.

(a) o oo o o efine the term revenue streams. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) State the formula to calculate the net cash flow. [1 mark]

…………………………………………………………………………………………………………………..

(c) On a separate piece of paper and using the information presented above, prepare a monthly
cash flow forecast for JVR for the first four months of operation. [6 marks]

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 Worksheet 35
3.7 Cash Flow (2)

Answers

(a) Define the term revenue streams. [2 marks]

Revenue streams are the various channels by which a business can earn sales revenues from
the goods or services that are sold. A firm could have multiple revenue streams as they grow
and to diversify the risk of having revenue coming from only one product.

(b) State the formula to calculate the net cash flow. [1 mark]
Net cash flow = Cash inflows – Cash outflows per time period.

(c) On a separate piece of paper and using the information presented above, prepare a monthly
cash flow forecast for JVR for the first four months of operation. [6 marks]

Jenny’s Vegan Restaurant (JVR) cash flow forecast (Jan to Jun 2023)

(Canadian dollars $) Jan Feb Mar Apr

Opening balance 100,000 73,000 55,500 47,500
Cash inflows
Dine-in sales 40,000 42,300 45,000 41,000
Take-out sales 32,000 35,000 40,000 37,000
Deliverfood app sales* 12,000 16,200 18,000 19,200
Total cash inflows 84,000 93,500 103,000 97,200

Cash outflows
Cost of ingredients# 63,000 63,000 63,000 63,000
Rent 30,000 30,000 30,000 42,000
Labour costs 15,000 15,000 15,000 15,000
Advertising 3,000 3,000 3,000 3,000
Total cash outflows 111,000 111,000 111,000 123,000

Net cash flow (27,000) (17,500) (8,000) (25,800)

Closing balance 73,000 55,500 47,500 21,700

*Calculations:

Deliverfood app sales (JVR has a 60% share of the revenues made on Deliverfood app sales)

Jan Feb Mar Apr May Jun

Deliverfood app 20,000 27,000 30,000 32,000 34,000 33,000
sales × 0.6 × 0.6 × 0.6 × 0.6 × 0.6 × 0.6
JVR’s portion 12,000 16,200 18,000 19,200 20,400 19,800

#Cost of ingredients:
= $70,000 × 0.9 (10% discount)
= $63,000

Top tip:
Make use of parenthesis or brackets “( )” to indicate that a number is negative in a cash flow
forecast.

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 Worksheet 36
3.7 Cash Flow (3)

Laud Music Shop (LMS)

Nicole Mahida established Laud Music Shop (LMS), selling a wide genre of music compact discs
(CDs) and vinyl. However, with innovation and technological advancements such as music
streaming websites and mobile applications, the once lucrative business of music CDs and vinyl has
been severely disrupted.
Six years ago, Nicole transformed her business to sell new and used musical instruments. With 15
years of experience in the retail and music business, Nicole has developed a strong customer base
ranging from individual amateur musicians to local orchestras and music departments at local
schools.
To help support her application for a bank loan, she is required to create a cash flow forecast for the
next four months, beginning from 1 June 2024.

Forecasted sales information (figures in US dollars $) from 1 June 2024

Cash sales ($) Credit sales ($)

June 30,000 11,700
July 32,000 18,000
August 37,500 14,000
September 28,000 13,800

Amount ($) Notes

Rent 8,000 Increases by 2% each subsequent month, starting in June
Utility bills 2,500 Payable every other month starting in July
Salaries per worker 2,000 LMS hired two salespeople in 2024
Advertising Y 10% of monthly total cash inflow

Additional information:

• The credit sales in any given month are paid fully in cash in the following month. In May 2024,
a credit sale of $10,500 was made. In June 2024, a credit sale of $11,700 was made.
• Nicole notes the cost to purchase the musical instruments is 35% of total monthly sales revenue.
• The government provides a rent subsidy of $1,500 per month in 2024 for all businesses within
the music and performing arts industry to encourage its citizens to engage in musical activities.
• The closing balance on 31 May 2024 was $5,500.

(a) State the opening balance on 1 June 2024 for LMS. [1 mark]

…………………………………………………………………………………………………………………..

(b) Identify the amount of credit sales that LMS expects to collect in June 2024. [1 mark]

…………………………………………………………………………………………………………………..

(c) Using the above information, calculate the advertising cost (figure Y) in June 2024 for LMS
(show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(d) On a separate piece of paper, prepare a fully labelled cash flow forecast for LMS from June to
September 2024 with the information presented above. [6 marks]

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 Worksheet 36
3.7 Cash Flow (3)

Answers

(a) State the opening balance on 1 June 2024 for LMS. [1 mark]
The closing balance of the previous month represents the opening of the current month. Thus,
the closing balance on 31 May 2024 becomes the opening balance on 1 June 2024, i.e., $5,500.

(b) Identify the amount of credit sales that LMS expects to collect in June 2024. [1 mark]
The credit sales from the previous month (May) will be collected in the month of June 2024. As
there is a credit sale of $10,500 in May 2024, LMS could expect to collect $10,500 in June 2024.

Top tip: An explanation is not required for the above questions as the command terms are
“state” and “identify.” The explanations shown above are for illustrative purposes only. You
will be rewarded full marks if you simply answer $5,500 and $10,500 respectively.

(c) Using the above information, calculate the advertising cost (figure Y) in June 2024 for LMS
(show all your working). [2 marks]
The monthly advertising cost is 10% of monthly total cash inflow; so for June 2024:
• Total cash inflow in June 2024
• = Cash sales ($30,000) + Credit sales ($10,500) + Government rent subsidy ($1,500)
• = $42,000
• Thus, the monthly advertising cost in June 2024 = $42,000 × 0.1 = $4,200

(d) On a separate piece of paper, prepare a fully labelled cash flow forecast for LMS from June to
September 2024 with the information presented above. [6 marks]

Laud Music Shop (LMS), cash flow forecast (June to September 2024)
(Canadian dollars $) Jun Jul Aug Sept
Opening balance 5,500.00 16,705.00 25,225.00 46,176.80
Cash inflows
Cash sales 30,000.00 32,000.00 37,500.00 28,000.00
Credit sales 10,500.00 11,700.00 18,000.00 14,000.00
Rent subsidy 1,500.00 1,500.00 1,500.00 1,500.00
Total cash inflows 42,000.00 45,200.00 57,000.00 43,500.00
Cash outflows
Purchases (see below) 14,595.00 17,500.00 18,025.00 14,630.00
Rent 8,000.00 8,160.00 8,323.20 8,489.66
Utilities 2,500.00 2,500.00
Advertising 4,000.00 4,000.00 4,000.00 4,000.00
Total cash outflows 30,795.00 36,680.00 36,048.20 33,969.66
Net cash flow 11,205.00 8,520.00 20,951.80 9,530.34
Closing balance 16,705.00 25,225.00 46,176.80 55,707.14
Calculations for purchases:

Month Cash sales Credit sales Total sales Purchase cost (35%)
June 30,000 11,700 41,700 = 41,700 x 0.35 = 14,595
July 32,000 18,000 50,000 = 50,000 x 0.35 = 17,500
August 37,500 14,000 51,500 = 51,500 x 0.35 = 18,025
September 28,000 13,800 41,800 = 41,800 x 0.35 = 14,630

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 Worksheet 37
3.7 Cash Flow (4)

Natalie’s Patisserie (NP)

Natalie Danisova owns and manages a small boutique patisserie called Natalie’s Patisserie (NP) in
Paris, France. NP has strong brand loyalty within the local area as customers return to Natalie’s
patisserie for her signature cupcakes, offered in both vegan and non-vegan flavours. Her cupcakes
have an average selling price of €8.50. Natalie wants to prepare a cash flow forecast to gain a better
understanding of her liquidity position. The following are the forecasted costs and revenue
information for the first five months of the year.

Forecasted sales (in Euros €)

January February March April

Number of days NP is opened 27 days 24 days 27 days 26 days
Number of cupcakes sold 5,000 6,500 7,750 8,000

Forecasted cash outflows:

• The cost of ingredients is 10% of the monthly sales revenue.

• The rent of the patisserie is currently €10,500.
• The lease contract for the patisserie is due to expire and the landlord has already informed
Natalie that the rent will increase by 10% starting in March for 12 months.
• Electricity and water costs amount to €3,200 per month.
• Packaging costs for the cupcakes are 5% of the monthly sales revenue.
• The shop floor staff are paid hourly, and bakers are paid a monthly salary.
• On average, shop floor staff work for 10 hours a day.

Staffing information (per month):

Shop floor staff Bakers

Payment method Wages Salary
Number of staff 2 3
Payment amount €22.70 per hour €1,620 per month

Other financial information:

• A tax refund from the previous tax year, totalling €2,300, will be paid in two equal installments in
January and March
• The opening balance on 1 January is €7,500.

(a) Describe the meaning of a firm’s “liquidity position”. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Suppose NP decides to purchase a new oven for its shop in June. Explain one impact of this
investment decision on NP’s cash flow. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) On a separate sheet of paper and using the information above, prepare a fully labelled cash-
flow forecast for NP from January to May. [6 marks]

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 Worksheet 37
3.7 Cash Flow (4)

Answers

(a) Describe the meaning of a firm’s “liquidity position”. [2 marks]

A firm’s liquidity position refers to its ability to meet its short-term financial obligations with its
available liquid assets, i.e., cash at the bank, debtors, and stocks (inventories). It is a measure
of how easily a business can convert its assets into cash to cover its immediate liabilities.

(b) Suppose NP decides to purchase a new oven for its shop in June. Explain one impact of this
investment decision on NP’s cash flow. [2 marks]

Purchasing a new oven is considered as an investment (capital expenditure) on a non-current

asset for NP. As this is likely to be a one-off expenditure (e.g., NP does not purchase a new
oven on a regular basis), NP will experience a more significant cash outflow in the month of
June compared to other months. This is likely to bring the closing balance to a lower amount or
even negative figure/balance during the month of purchase.

(c) On a separate sheet of paper and using the information above, prepare a fully labelled cash-
flow forecast for NP from January to May. [6 marks]

Cash flow forecast for Natalie Patisserie (NP), January to May 20XX

(Euros, €) Jan Feb Mar Apr

Opening balance 5,500.00 16,705.00 25,225.00 46,176.80
Cash inflows
Sales revenue 42,500 55,250 65,875 68,000
Tax refund 1,150 --- 1,150 ---

Total cash inflows 43,650 55,250 67,025 68,000

Cash outflows
Cost of ingredients 4,250.00 5,525.00 6,587.50 6,800.00
Rent 10,500.00 10,500.00 11,550.00 11,550.00
Electricity and water 3,200.00 3,200.00 3,200.00 3,200.00
Wages (shopfloor staff) 12,258.00 10,896.00 12,258.00 11,804.00
Salaries (bakers) 4,860.00 4,860.00 4,860.00 4,860.00
Packaging cost 2,125.00 2,762.50 3,293.75 3,400.00

Total cash outflows 37,193.00 37,743.50 41,749.25 41,614.00

Net cash flow 6,457.00 17,506.50 25,275.75 26,386.00

Closing balance 13,957.00 31,463.50 56,739.25 83,125.25

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 Worksheet 38
3.7 Cash Flow (5)

Roach Country Club (RCC)

The Roach Country Club (RCC) was opened by a multi-millionaire and golf player, Bryan Roach.
Located in the suburbs of Brisbane, Australia, Bryan liaises with other businesses to hold regional
and national golf tournaments at RCC. Bryan was recently able to secure a contract with a local golf
competition organizer, Golf Rocks (GR), to allow professional golf players to practise at RCC for free.
In return, GR would provide sponsorship worth $400,000 paid in equal cash installments from
September to October 2024. Club membership fees at RCC will rise for the period July to October
2024, as shown below:

Jul Aug Sept Oct

Club membership fee $200,000 $230,000 $320,000 $350,000

RCC’s merchandise sales are projected to increase by 5% month on month. The sales revenue from
merchandise in July 2024 was $150,000. Bryan started preparing the cash flow forecast from July
to Dec 2024, but had only completed the cash outflow section for July and August as shown below.
The opening balance in July 2024 was $105,000. Bryan also provided additional information below
on changes to the forecasted cash outflow items from September to December 2024.

Notes on changes to cash outflow figures from

Cash outflow July August
September to December 2024
Rent 250,000 250,000 Rent remains the same
Marketing 15,000 15,000 Increases by $5,000 every month
Administration 20,000 20,000 Increases by 20% each month, starting in August
In September 2024, RCC plans to hire 2 additional
Staff salaries 90,000 90,000
staff, each with a salary of $3,000 per month
RCC plans to buy new equipment, which will double
Maintenance 8,000 8,000
the maintenance cost starting from September 2024
Equipment 13,000 13,000 Increases to $30,000 per month and stays the same
Total outflow 396,000 396,000

(a) Distinguish between the terms opening balance and closing balance. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Calculate the monthly cash installment provided by GR to RCC beginning from September
2024 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Calculate the additional cash outflow as a result of RCC hiring 2 additional staff (no working
required). [1 mark]

…………………………………………………………………………………………………………………..

(d) Use a separate piece of paper to prepare a monthly cash flow forecast for RCC, from July to
October 2024 by using the information presented above. [6 marks]
© Level7 Education Provided by pirateIB · https://pirateib.xyz Page 85
 Worksheet 38
3.7 Cash Flow (5)

Answers

(a) Distinguish between the terms opening balance and closing balance. [2 marks]
The opening balance refers to the cash that a business has at the beginning of any month in the
year. By contrast, the closing balance represents the cash that the business has at the end of
any trading month in the year. These two figures are used to calculate the net cash flow in the
same corresponding month.

(b) Calculate the monthly cash installment provided by GR to RCC beginning from September
2024 (show all your working). [2 marks]
Since GR will provide RCC with a sponsorship deal as a lump-sum amount of $400,000 paid in
equal cash installments from September to December 2024 (4 months), the monthly cash
installment received by RCC will be $100,000 (i.e., $400,000 / 4 months). This is classified as a
cash inflow for RCC when constructing the cash flow forecast.

(c) Calculate the additional cash outflow as a result of RCC hiring 2 additional staff (no working
required). [1 mark]
Each staff member will be paid a salary of $3,000 per month and there are two additional staff
who are going to be hired, so the additional cash outflow = $6,000 per month.

(d) Use a separate piece of paper to prepare a monthly cash flow forecast for RCC, from July to
October 2024 by using the information presented above. [6 marks]

Cash flow forecast for Roach Country Club, (July to Oct 2024)

(Australian dollars $) Jul Aug Sept Oct

Opening balance 105,000 59,000 50,500 199,875
Cash inflows
Club membership fee 200,000 230,000 320,000 350,000
Sponsorship 100,000 100,000
Merchandise* 150,000 157,500 165,375 173,644
Total cash inflows 350,000 387,500 585,375 623,644

Cash outflows
Rent 250,000 250,000 250,000 250,000
Marketing 15,000 15,000 20,000 25,000
Administration 20,000 20,000 24,000 28,800
Staff salaries 90,000 90,000 96,000 96,000
Maintenance 8,000 8,000 16,000 16,000
Equipment 13,000 13,000 30,000 30,000
Total cash outflows 396,000 396,000 436,000 445,800

Net cash flow (46,000) (8,500) 149,375 177,844

Closing balance 59,000 50,500 199,875 377,719

*
Merchandise (5% from the previous month, with merchandise sales revenue in July 2024 at $150,000)
Jul Aug Sept Oct
Merchandise $150,000 $150,000 × 1.05 $157,500 × 1.05 $165,375 × 1.05
After 5% increase --- $157,500 $165,375 $173,644

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 Worksheet 39
3.7 Cash Flow (6)

Caleb’s Accessories (CA)

Caleb’s Accessories (CA) is a men’s accessories and jewellery brand that operates as a partnership
between three partners, Caleb, Matthew, and Chris. CA was established in January 2023. The
partners are seeking a bank loan to launch their new accessory line. In preparation for this, Caleb,
the finance partner, has prepared a cash flow forecast for the first four months of 2024.

Cash flow forecast for CA, for the period January to April 2024
(figures in $) Jan Feb Mar Apr
Opening balance 2,000 2,170 2,820 X
Cash inflows
Cash sales 600 600 600 600
Credit sales (Note 1) --- 1,000 1,000 1,000
Total cash inflows 1,000 1,600 1,600 1,600

Cash outflows
Rent (Note 2) 9,000
Partners’ drawings 400 400 400 400
Utilities 150 150 150 150
Interest payment 30 30 30 30
Promotion 200 200 200 200
Labour cost 50 50 50 50
Raw material cost 120 120
Total cash outflows 830 950 9,830 950

Net cash flow 170 650 (8,230) 650

Closing balance 2,170 2,820 (5,410) Y

Notes:
1. CA’s credit sale accounts for 62.5% of its total sales revenue per month.
2. CA rents its current premises and has been paying its quarterly rents on time.

(a) Complete the cash flow forecast by calculating figures X and Y. [2 marks]

…………………………………………………………………………………………………………………..

(b) Comment on the cash flow for CA for the period January to April 2024. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Explain one difference between cash sales and credit sales. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Explain two possible ways to improve CA’s cash flow position. [4 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

© Level7 Education Provided by pirateIB · https://pirateib.xyz Page 87

 Worksheet 39
3.7 Cash Flow (6)

Answers

(a) Complete the cash flow forecast by calculating figures X and Y. [2 marks]
• Figure X (the opening balance for April) is the same as the ending/closing balance from the previous
month (March). Thus, Figure X = ($5,410), i.e., a negative opening balance of $5,410.
• Figure Y (the closing balance for April) = Opening balance (April) + (Total cash inflows – Total cash
outflows)
• = -$5,410 + ($1,600 – $950)
• = ($4,760), i.e., a negative closing balance of $4,760.

(b) Comment on the cash flow for CA for the period January to April 2024. [2 marks]
The cash flow forecast indicates a deteriorating trend in CA’s cash flow position with a negative closing
balance at the end of April 2024. Despite positive closing balances in January and February, the overall
trend of CA’s cash flow is worsening, particularly in March, where the net cash flow is a staggering
negative outflow of $8,230. This is mainly due to a large cash outflow for the quarterly rent payment of
$9,000. This is concerning given that CA has already been in operation for one year (since January 2023).

(c) Explain one difference between cash sales and credit sales. [2 marks]
One difference between cash and credit sales is that the former refers to the receipt of cash from the sale
of goods/services at the time the transaction occurs. By contrast, a credit sale refers to the accrual of
sales revenue for the sale of goods/services. With a credit sale, the business does not receive the physical
cash at the time of transaction; rather it receives the cash after a certain period (usually 30 to 60 days)
from when the transaction occurred.

(d) Explain two possible ways to improve CA’s cash flow position. [4 marks]
Possible ways to improve CA’s cash flow position could include:
• Method 1 = improve cash inflows
• Methods 2, 3, and 4 = reduce cash outflows

Method Evidence (reason) Explanation

1. Tighter credit • CA’s credit sales account • By tightening credit control, this encourages CA’s
control for 62.5% of its monthly customers to pay sooner, which helps the firm to
sales revenue, which is improve its cash flow position.
relatively high.

2. Renegotiate rent • The current rent payment • Given that CA has a good payment record/history
of $9,000 in March is a with the landlord, it may be possible to
significant cash outflow for renegotiate the payment of rents in equal
CA in a single month. installments. This would mean the cash outflow
per month will be $3,000 rather than a single
lump-sum payment of $9,000 in March which has
significantly drained CA’s net cash flow.

3. Limit or reduce • The current partners’ • By limiting each partner’s drawings, this could
partners’ drawings (withdrawal of reduce the cash outflow for the CA, allowing the
drawings cash) accounts for the firm to preserve the much-needed cash. CA will
second largest cash also need sufficient cash as it is planning to
outflow for CA. launch a new product line, hence it would be
sensible for the partners to reduce their drawings
to maintain the sustainability of the business.

4. Negotiate with • Currently, CA pays its • By negotiating with suppliers for preferential
suppliers for suppliers for raw materials credit terms, this could allow CA to spread its
preferential trade every other month. payments over a longer period of time.
credit terms
• This amount represents the • The success of this will depend on the
third largest outflow for CA. relationship that CA has with its suppliers.

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 Worksheet 40
3.8 Investment Appraisal (1) – Chunny’s Fitness Club (CFC)

Chunny’s Fitness Club (CFC)

Chunny’s Fitness Club (CFC) is a health and fitness company founded by Chunny. Currently, he
operates four fitness centres in Toronto, Canada. A recent report indicated that with property prices
in the Greater Toronto Area, many working professionals are moving to Calgary, Alberta where the
cost of living is lower. Chunny sees prospective market growth in Calgary and is considering pursuing
a market development strategy by opening his first fitness centre in Calgary. The estimated annual
cost of the new fitness centre includes rent ($150,000), salaries ($120,000), and miscellaneous items
($70,000). CFC wants to appeal to customers by installing new virtual reality (VR) fitness equipment
in the new centre. There are two machines that CFC is considering purchasing for this purpose:

Table 1: Cost information for the two VR machines

Machine 1: Machine 2:
PumpIt BeastMode
Cost $500,000 $570,000
$12,500 every two $13,200 every two
Maintenance
years, starting in the years, starting in the
cost
first year first year

Table 2: Estimated annual revenue per year (in $’000)

Year PumpIt BeastMode

1 430 480
2 570 590
3 640 690
4 785 730

(a) Calculate the total net returns for CFC from PumpIt (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Calculate the total net returns for CFC from BeastMode (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Calculate the payback period of PumpIt and BeastMode (show all your working). [4 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Using your results in part (a) and (b), calculate the average rate of return (ARR) of PumpIt and
BeastMode (show all your working). [4 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

© Level7 Education Provided by pirateIB · https://pirateib.xyz Page 89

 Worksheet 40
3.8 Investment Appraisal (1) – Chunny’s Fitness Club (CFC)

Answers

(a) Calculate the total net returns for CFC from PumpIt (show all your working). [2 marks]

Projected cash Annual cost Maintenance cost Annual net

Year
flow ($) ($) ($) cash flow ($)
1 430,000 340,000 12,500 77,500
2 570,000 340,000 --- 230,000
3 640,000 340,000 12,500 287,500
4 785,000 340,000 --- 445,000
Thus, the total net returns = 77,500 + 230,000 + 287,500 + 445,000 = $1,040,000

(b) Calculate the total net returns for CFC from BeastMode (show all your working). [2 marks]

Projected cash Annual cost Maintenance cost Annual net

Year
flow ($) ($) ($) cash flow ($)
1 480,000 340,000 13,200 126,800
2 590,000 340,000 --- 250,000
3 690,000 340,000 13,200 336,800
4 730,000 340,000 --- 390,000
Thus, the total net returns = 126,800 + 250,000 + 336,800 + 390,000 = $1,103,600

(c) Calculate the payback period of PumpIt and BeastMode (show all your working). [4 marks]
PumpIt BeastMode
Annual Cumulative Annual Cumulative
Year cash cash inflow cash cash inflow
inflow ($) ($) inflow ($) ($)
1 77,500 77,500 126,800 126,800
2 230,000 307,500 250,000 376,800
3 287,500 595,000 336,800 713,600
4 445,000 1,040,000 390,000 1,103,600

PumpIt BeastMode
Cost remaining to = 500,000 – 307,500 = 570,000 – 376,800
cover = $192,500 = $193,200
Number of months = 192,500 / (287,500 / 12) = 193,200 / (336,800 / 12)
= 8.03 months = 6.99 months
• Payback period (PumpIt) = 2 years and 8.03 (or 8) months; accept 2 years and 9 months
• Payback period (BeastMode) = 2 years and 6.99 (or 7) months

(d) Using your results in part (a) and (b), calculate the average rate of return (ARR) of PumpIt
and BeastMode (show all your working). [4 marks]

• ARRPumpIt = [(Total returns – Capital cost) / Years of use] / Capital cost × 100
• = [(1,040,000 – 500,000) / 4] / 500,000 × 100
• = (135,000 / 500,000) × 100
• = 27%

• ARRBeastMode = [(Total returns – Capital cost) / Years of use] / Capital cost × 100
• = [(1,103,600 – 570,000) / 4] / 570,000 × 100
• = (133,400 / 570,000) × 100
• = 23.40% (2 decimal places)

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 Worksheet 41
3.8 Investment Appraisal (2)

Freyre Fries (FF)

Freyre Fries (FF) is a snack shop, opened by Maxime Freyre in the city of Toulouse, France. FF
specializes in a variety of French snacks, such as macarons, crepes, croissants, and baguettes. As
part of its primary research, FF recently found the following from a focus group:

• Customers have complained about long queues at FF.

• The quality of the French fries has been deteriorating. One customer commented “the fries are
getting more and more soggy during my repeat purchases”.

To address these problems, Maxime has decided to upgrade the frying machines. After conducting
extensive research, he shortlisted two possible frying machines that FF could purchase.

Frying Machine 1: Fast Fryer Frying Machine 2: Quick Fry

• Cost €75,000 • Cost €88,000
• Annual repair cost of €1,500 • Bi-annual repair cost of €1,200, starting in Year 1

Table 1: Estimated annual return (total revenue) per year for each machine (in €)
Year 1 Year 2 Year 3 Year 4 Year 5
Fast Fryer 21,500 21,500 21,500 21,500 21,500
Quick Fry 26,200 28,500 34,450 35,000 39,000

(a) Define the term investment appraisal. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Using the above information, calculate the total net return from investing in the Fast Fryer
(show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Using your result from part (b), calculate the payback period of the Fast Fryer machine for FF
(show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Using the above costs information, calculate the payback period for the Quick Fry machine for
FF (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(e) Using the above information, calculate the average rate of return (ARR) of the Quick Fry
machine for FF (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

© Level7 Education Provided by pirateIB · https://pirateib.xyz Page 91

 Worksheet 41
3.8 Investment Appraisal (2)

Answers

(a) Define the term investment appraisal. [2 marks]

Investment appraisal refers to a quantitative technique used to assess the profitability of an
investment project. There are three types of investment appraisal methods, namely payback
period, average rate of return, and net present value (NPV).

(b) Using the above information, calculate the total net return from investing in the Fast Fryer
(show all your working). [2 marks]

Year Projected cash flow (€) Repair cost (€) Annual net cash flow (€)
1 21,500 1,500 20,000
2 21,500 1,500 20,000
3 21,500 1,500 20,000
4 21,500 1,500 20,000
5 21,500 1,500 20,000

Thus, the total net returns = (€20,000 × 5) = €100,000

(c) Using your result from part (b), calculate the payback period of the Fast Fryer machine for FF
(show all your working). [2 marks]
• Since the annual net cash flow is identical, the following formula can be used to calculate
the payback period:
• Payback period (PBP) = Initial investment cost / Annual cash flow from investment
• = €75,000 / €20,000
• = 3.75 years = 3 years and 9 months.

(d) Using the above costs information, calculate the payback period for the Quick Fry machine for
FF (show all your working). [2 marks]

Year Projected Repair Annual net cash Cumulative

cash flow (€) cost (€) flow (€) cash inflow (€)
1 26,200 1,200 25,000 25,000
2 28,500 --- 28,500 53,500
3 34,450 1,200 33,250 86,750
4 35,000 --- 35,000 121,750
5 39,000 1,200 37,800 159,550

• Cost remaining to cover in Year 4 = €88,000 – €86,750 = €1,250

• Number of months = €1,250 / (€35,000 / 12) = 0.4286 months
• Thus, the PBP for one Quick Fry machine is 3 years and 0.43 months (or 3 years and 1
month).

(e) Using the above information, calculate the average rate of return (ARR) of the Quick Fry
machine for FF (show all your working). [2 marks]
• ARR (%) = [(Total returns – Capital cost) / Years of use] / Capital cost × 100
• = [(159,550 – 88,000) / 5] / 88,000 × 100
• = (14,310 / 88,000) × 100
• = 16.26%

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 Worksheet 42
3.8 Investment Appraisal (3)

Andrew’s Anime Book Shop (AAB)

Andrew Kwong is an electronics engineer but also an avid anime artist. Whilst working as a full-time
engineer, Andrew continued to pursue his dream as an anime artist during his spare time. Three
years ago, with his personal savings and a bank loan, he opened Andrew’s Anime Bookshop (AAB).

A unique selling point (USP) of AAB is that the anime books are printed and bounded in the bookshop
after customers view the digital sample of the anime book. However, Andrew would now like to
replace the printing machine. After conducting some research, he is deciding between the following
two machines.

Machine A costs $450,000 Machine B costs $520,000

Table 1: Estimated annual net cash flow from each machine (in $)

Year Machine A Machine B

1 70,000 120,000
2 95,000 135,000
3 105,500 140,500
4 130,000 150,800
5 205,500 145,700

(a) Other than personal savings, state two other internal sources of finance for AAB. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Using Table 1, calculate the payback period for Machine A (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Using Table 1, calculate the payback period for Machine B (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Using Table 1, calculate the average rate of return (ARR) for Machine A (show all your
working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(e) Using Table 1, calculate the average rate of return (ARR) for Machine B (show all your
working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 42
3.8 Investment Appraisal (3)

Answers

(a) Other than personal savings, state two other internal sources of finance for AAB. [2 marks]
Other possible internal sources of finance could include:
• Sale or disposal of unused non-current assets.
• Retained profit (from the previous fiscal year) – this is possible given AAB has already been
trading for the past 3 years.

(b) Using Table 1, calculate the payback period for Machine A (show all your working). [2 marks]

Year Annual cash inflow ($) Cumulative cash inflow ($)

1 70,000 70,000
2 95,000 165,000
3 105,500 270,500
4 130,000 400,500
5 205,500 606,000
• Costs to cover (shortfall) = Cost of investment – Cumulative cash flow (as at end of Year 4)
• = $450,000 – $400,500
• = $49,500
• Number of months = Cost remaining to cover / (Annual cash inflow in Year 5 ÷ 12 months)
• = $49,500 / ($205,500 / 12)
• = 2.89 months
• Hence, the PBP for Machine A = 4 years and 2.89 months (or 4 year and 3 months).

(c) Using Table 1, calculate the payback period for Machine B (show all your working). [2 marks]

Year Annual cash inflow ($) Cumulative cash inflow ($)

1 120,000 120,000
2 135,000 255,000
3 140,500 395,500
4 150,800 546,300
5 145,700 692,000
• Costs to cover = Cost of investment – Cumulative cash flow (as at end of Year 3)
• = $520,000 – $395,500
• = $124,500
• Number of months = Cost remaining to cover / (Annual cash inflow in year 5 ÷ 12 months)
• = $124,500 / ($150,800 / 12)
• = 9.91 months
• Hence, the PBP for Machine B = 3 years and 9.91 months (or 3 years and 10 months).

(d) Using Table 1, calculate the average rate of return (ARR) for Machine A (show all your
working). [2 marks]
• ARR = [(Total returns – Capital cost) / Years of use] ÷ Capital cost × 100
• = [($606,000 – $450,000) / 5] ÷ $450,000 × 100
• = ($31,200 / $450,000) × 100
• = 6.93% (2 decimal places).

(e) Using Table 1, calculate the average rate of return (ARR) for Machine B (show all your
working). [2 marks]
• ARR = [(Total returns – Capital cost) / Years of use] ÷ Capital cost × 100
• = [($692,000 – $520,000) / 5] ÷ $520,000 × 100
• = ($34,400 / $520,000) × 100
• = 6.62% (2 decimal places)
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 Worksheet 43
3.8 Investment Appraisal – NPV (HL) (1)

Chan-san Ramen Bar (CRB)

Chan-san Ramen Bar (CRB) is a new restaurant in Toronto, Canada. Opened by Clifford Chan, this
Japanese noodle dish restaurant specializes in tonkotsu broth ramen. CRB has reached capacity in
its current location with an average of 1-hour wait time on any typical day.

Clifford wants to free up some of the current space used in his kitchen to make the noodles and
install bar tables allowing customers to eat in “tachinomi style” (a Japanese term for standing bars).
The restaurant will still make noodles in-house, but by using a specialized ramen noodle making
machine. Clifford is deciding between two different machines to invest in.

Table 1: Cost and expected net cash flows for the ramen noodle machines (in Canadian $)

Information Machine 1 Machine 2

Cost of machine $320,000 $380,000
Set-up costs $5,000 $3,500
Maintenance costs $1,000 $800
(per year) (increasing by 5% per year) (increasing by 8% per year)

Discount Factor
Year Machine 1 Machine 2
(10%)
1 80,500 105,000 0.9091
2 105,600 110,000 0.8264
3 110,000 130,000 0.7513
4 125,500 145,800 0.6830
5 138,000 149,000 0.6909

(a) Describe the meaning of discounted cash flows. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) State two key pieces of information needed when applying the net present value technique in
an investment appraisal. [2 marks]

…………………………………………………………………………………………………………………..

(c) Using Table 1 and the discount factors provided, calculate the net present value (NPV) for
Machine 1 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Calculate the net present value (NPV) for Machine 2 (show all your working). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(e) Based on quantitative grounds, identify which machine CRB should invest in. [1 mark]

…………………………………………………………………………………………………………………..

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 Worksheet 43
3.8 Investment Appraisal – NPV (HL) (1)

Answers

(a) Describe the meaning of discounted cash flows. [2 marks]

Discounted cash flows can be described as the amount of money received by a business in the
future after considering the time value of money. The process of time value of money brings the
future estimated cash flow to the value in the present day by applying a discount rate/factor.

(b) State two key pieces of information needed when applying the net present value technique in
an investment appraisal. [2 marks]
Two key pieces of information are needed:
• A discount rate (or discount factor) expressed as a percentage figure.
• The expected number of years for the project or investment.

(c) Using Table 1 and the discount factors provided, calculate the net present value (NPV) for
Machine 1 (show all your working). [2 marks]

Set-up Annual net

Projected Maintenance Discount Present
Year costs cash flow
cash flow ($) cost ($) factor value ($)
($) ($)
1 80,500 5,000 1,000.00 74,500.00 0.9091 67,727.95
2 105,600 --- 1,050.00 104,550.00 0.8264 86,400.12
3 110,000 --- 1,102.50 108,897.50 0.7513 81,814.69
4 125,500 --- 1,157.63 124,342.37 0.6830 84,925.84
5 138,000 --- 1,215.51 136,784.49 0.6909 94,504.41
415,373.01
• NPV (Machine 1) = Sum of PV – Initial cost of investment
• = $415,373.01 – $320,000
• = $95,373.01

(d) Calculate the net present value (NPV) for Machine 2 (show all your working). [2 marks]

Projected Annual net

Set-up Maintenance Discount Present
Year cash flow cash flow
costs ($) cost ($) factor value ($)
($) ($)
1 105,000 3,500 800.00 100,700.00 0.9091 91,546.37
2 110,000 864.00 109,136.00 0.8264 90,189.99
3 130,000 933.12 129,066.88 0.7513 96,967.95
4 145,800 1,007.77 144,792.23 0.6830 98,893.09
5 149,000 1,088.39 147,911.61 0.6909 102,192.13
479,789.53
• NPV (Machine 2) = Sum of PV – Initial cost of investment
• = $479,789.53 – $380,000
• = $99,789.53

(e) Based on quantitative grounds, identify which machine CRB should invest in. [1 mark]
Since the NPV for Machine 2 ($479,789.53) is greater than the NPV for Machine ($415,373.01)
CRB should invest in Machine 2. This is because the NPV for Machine 2 exceeds that of
Machine B by $4,406.52.

Top tip: When asked to identify which project the business should pursue, there is no need to
show the calculations or to explain the reasoning; these have been included above for
illustrative purposes.

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 Worksheet 44
3.8 Investment Appraisal – NPV (HL) (2)

Jacky’s Art Studio (JAS)

Jacky Lam is a renowned artist based in New York. He has won international prizes and competitions
for his artwork, which features his unique style of depicting ideas in life. Jacky’s talent and fame
allowed him to set up Jacky’s Art Studio (JAS), attracting like-minded artists who want to attend
Jacky’s master classes.

With Jacky’s master classes growing in popularity, he is considering running additional classes as
more art students from abroad travel to New York during the Christmas and summer holidays to
attend his classes. However, Jacky is restricted by the capacity of having only one paint mixer
machine, so the number of classes that he can run is also limited. He is considering whether to invest
in a new paint mixer, which will allow him to take on additional students at his art studio.

Table 1: Costs and expected cash flows for paint mixer machines (in US dollars)

Paint mixer 1 ($) Paint mixer 2 ($) Discount Discount

Year
Cost = 500,000 Cost = 650,000 factor (6%) factor (8%)
1 90,500 105,500 0.9434 0.9259
2 103,400 155,000 0.8900 0.8573
3 136,500 178,500 0.8396 0.7938
4 140,000 180,700 0.7921 0.7350
5 152,200 199,000 0.7473 0.6806

(a) Using Table 1, calculate the net present value (NPV) of Paint mixer 1 by using a discount
factor of 6%. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Using Table 1, calculate the NPV of Paint mixer 1 by using a discount factor of 8%. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) From your calculations in part (a) and (b), state the discount factor that Jacky should choose.
[1 mark]

…………………………………………………………………………………………………………………..

(d) Using Table 1, calculate the NPV of Paint mixer 2 by using a discount factor of 6%. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(e) Explain two advantages of using the NPV method of investment appraisal. [4 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 44
3.8 Investment Appraisal – NPV (HL) (2)

Answers

(a) Using Table 1, calculate the net present value (NPV) of Paint mixer 1 by using a discount
factor of 6%. [2 marks]
Projected Discount Present
Year
cash flow ($) factor value ($)
1 90,500 0.9434 85,377.70
2 103,400 0.8900 92,026.00
3 136,500 0.8396 114,605.40
4 140,000 0.7921 110,894.00
5 152,200 0.7473 113,739.06
NPV (Paint mixer 1) = Sum of PV – Initial cost of investment = $516,642.16 – $500,000 =
$16,642.16

(b) Using Table 1, calculate the NPV of Paint mixer 1 by using a discount factor of 8%. [2 marks]

Projected Discount Present

Year
cash flow ($) factor value ($)
1 90,500 0.9259 83,793.95
2 103,400 0.8573 88,644.82
3 136,500 0.7938 108,353.70
4 140,000 0.735 102,900.00
5 152,200 0.6806 103,587.32
NPV (Paint mixer 1) = Sum of PV – Initial cost of investment = $487,279.79 – $500,000 =
($12,720.21)

(c) From your calculations in part (a) and (b), state the discount factor that Jacky should choose.
By using a discount factor of 6%, the paint mixer machine will yield a positive NPV figure of
$16,642.16 whilst a discount factor of 8% will yield a negative NPV figure. Hence, Jacky should
choose 6% as the discount factor if there is an intention of purchase a paint mixer.

(d) Using Table 1, calculate the NPV of Paint mixer 2 by using a discount factor of 6%. [2 marks]

Projected Discount Present

Year
cash flow ($) factor value ($)
1 105,500 0.9434 99,528.70
2 155,000 0.8900 137,950.00
3 178,500 0.8396 149,868.60
4 180,700 0.7921 143,132.47
5 199,000 0.7473 148,712.70
NPV (Paint mixer 2) = Sum of PV – Initial cost of investment = $679,192.47 – $650,000 =
$29,192.47

(e) Explain two advantages of using the NPV method of investment appraisal. [4 marks]
Possible advantages include:
• It considers the future net cash flows (earnings) expressed in today’s value, which is more
relevant for comparisons between different investment projects.
• It discounts the future value of net cash flows, which is more accurate than payback period
and average rate of return (ARR) as those methods do not consider of the time value of
money. After all, money tends to lose its value over time.
• It allows for easy and objective comparisons between projects by considering the absolute
and real value of the projected future earnings of each option/project under consideration.

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 Worksheet 45
3.8 Investment Appraisal – NPV (HL) (3)

Teddy’s Place (TP)

Teddy’s Place (TP) is a manufacturer and retailer based in Malaysia that sells stuffed teddies and
animals (plush toys). Founded by Nicholas Man, TP’s mission statement is “Commitment to building
long lasting memories for children.”

TP uses franchising to expand its network of retail shops outside of Malaysia. The firm forecasts an
increase in demand across its franchised retailers but is currently limited by the productive capacity
of its factory in Penang. As such, TP is considering the following investment options to increase the
firm’s productive capacity. For both machines, there is a mandatory annual inspection cost of 2,500
Malaysian ringgits (around US$530). The scrap value represents the estimated value of each
machine after the projected useful life of 4 years. TP uses a 10% discount factor.

Table 1: Cost and revenue data, in Malaysian ringgit (’000 MYR)

Machine A Machine B Discount

Year
Cost = 200 Cost = 235 factor (10%)
1 30 25 0.9091
2 55 57 0.8264
3 78 95 0.7513
4 92 135 0.6830
Scrap value 40 35

(a) o oo o o outline the meaning of term scrap value. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Using Table 1, calculate the net present value (NPV) for Machine A. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Using Table 1, calculate the net present value (NPV) for Machine B. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Using the NPV figures calculated in part (b) and part (c), identify which machine TP should
invest in so as to increase its productive capacity. [1 mark]

…………………………………………………………………………………………………………………..

(e) Outline two disadvantages of using the NPV method of investment appraisal. [4 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..
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 Worksheet 45
3.8 Investment Appraisal – NPV (HL) (3)

Answers

(a) Outline the meaning of term scrap value. [2 marks]

Also known as the residual value, this term refers to the net value or net worth of a physical asset
when it reaches the end of its useful life, i.e., when the asset is deemed no longer usable for
production purposes.

(b) Using Table 1, calculate the net present value (NPV) for Machine A. [2 marks]

Annual Present
Projected cash Net cash flow Discount
Year inspection cost value
flow (MYR) (MYR) factor
(MYR) (MYR)
1 30,000 2,500 27,500 0.9091 25,000.25
2 55,000 2,500 52,500 0.8264 43,386.00
3 78,000 2,500 75,500 0.7513 56,723.15
4 92,000 2,500 89,500 0.6830 61,128.50
Scrap 40,000 --- 40,000 0.6830 27,320.00

NPV (Machine A) = Sum of PV – Initial cost of investment = 213,557.90 – 200,000 = MYR 13,557.90

Top tip: When discounting the scrap (residual) value, you must use the same discount factor from
the final year of the useful life of the asset, i.e., Year 4 in this case.

(c) Using Table 1, calculate the net present value (NPV) for Machine B. [2 marks]

Annual Present
Projected cash Net cash flow Discount
Year inspection cost value
flow (MYR) (MYR) factor
(MYR) (MYR)
1 25,000 2,500 22,500 0.9091 20,454.75
2 57,000 2,500 54,500 0.8264 45,038.80
3 95,000 2,500 92,500 0.7513 69,495.25
4 135,000 2,500 132,500 0.6830 90,497.50
Scrap 35,000 --- 35,000 0.6830 23,905.00

NPV (Machine B) = Sum of PV – Initial cost of investment = 249.391.30 – 235,000 = MYR 14,391.30

(d) Using the NPV figures calculated in part (b) and part (c), identify which machine TP should
invest in so as to increase its productive capacity. [1 mark]
TP should invest in Machine B as the NPV figure (MYR 14,391.30) is positive and higher than the
NPV figure of Machine A at MYR 13,557.90 (although only by a small margin of MYR 833.40 or
around USD175).

(e) Outline two disadvantages of using the NPV method of investment appraisal. [4 marks]
Possible disadvantages of using the NPV method of investment appraisal include:
• The discount factor could be affected by changes in inflation and/or interest rates in the future;
thus, it is very difficult for TP to determine an accurate discount factor over the next 4 years.
• The projected cash flows are based on estimates and do not take into account any possible
changes in the external environment, such as changes in the demand for plush toys.
• It can be rather tedious to calculate, yet the forecasted figures may not even materialise in the
future.

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 Worksheet 46
3.8 Investment Appraisal – NPV (HL) (4)

Las Vegas Grand Prix (LVGP)

The Fédération Internationale de l'Automobile (FIA), which is the governing body of motor sports
around the world, announced in early 2022 that the Las Vegas Grand Prix (LVGP) would make its
return in the Formula 1 (F1) race season in 2023 for the first time since the 1980s. Apart from Austin
and Miami, this will be the third Grand Prix to take place in the United States.
The LVGP is a street circuit where professional motorists race at night, including the opportunity to
race along part of the famous Las Vegas Strip, which comprises of renowned landmarks, casinos,
and hotels at a staggering speed of 212 mph within a 3.8-mile track. To ensure the circuit was ready
for the race in November 2023, authorities began investment and construction for the 3.8-mile race
track. Liberty Media (LM), which is F1’s owner, recently purchased a $240 million plot of land to build
a pit lane, pit building, and a paddock complex in preparation for the race.
The cost and revenue data for this investment, which was estimated to have a lifespan of 3 years,
are shown in the table below.

Table 1: Cost and revenue data for the LVGP upgrade, in millions of US dollars.

Pit Paddock Discount

Year Land Pit Lane
Building Complex factor (8%)
Cost ($m) 240 250 210 300 ---
2023 300 100 252 177 0.9259
2024 180 80 358 153 0.8573
2025 125 50 210 130 0.7938

Other annual costs:

• An annual $10m for repairs and maintenance for the pit lane.
• Set-up costs totalling $2m for the pit building and paddock complex for the first season.

(a) Calculate the net forecasted returns from the pit lane, pit building, and paddock complex
(show all your working). [6 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Calculate the net present value (NPV) for the entire LVGP upgrade. [4 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Comment on your net present value result from Question (b). [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..
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 Worksheet 46
3.8 Investment Appraisal – NPV (HL) (4)

Answers

Sources: https://www.f1lasvegasgp.com/ and https://racingnews365.com/ f1-pays-huge-fee-for-real-estate-as-new-

grand-prix-plans-ramp-up

(a) Calculate the net forecasted returns from the pit lane, pit building, and paddock complex
(show all your working). [6 marks]

Pit Lane (figures in $m):

Est. Annual Set-up Net

Year
return repair cost cost return
2023 100 (10) (2) 88
2024 80 (10) --- 70
2024 50 (10) --- 40

Pit Building (figures in $m):

Est. Annual Set-up Net

Year
return repair cost cost return
2023 252 (10) (2) 240
2024 358 (10) --- 348
2024 210 (10) --- 200

Paddock Complex (figures in $m):

Est. Annual Set-up Net

Year
return repair cost cost return
2023 177 (10) (2) 165
2024 153 (10) --- 143
2024 130 (10) --- 120

(b) Calculate the net present value (NPV) for the entire LVGP upgrade. [4 marks]

Pit Pit Paddock Discount Present

Year Land Total
Lane Building Complex factor Value
2023 300 88 240 165 793 0.9259 734.24
2024 180 70 348 143 741 0.8573 635.26
2025 125 40 200 120 485 0.7938 384.99
Total PV 1,754.49

• Sum of the costs = $240m + $250m + $210m + $300m = $1,000m

• NPV for the Las Vegas Grand Prix upgrade = Sum of PV – Initial cost of investment
• = $1,754.49m – $1,000m
• = $754.49m

(c) Comment on your net present value result from Question (b). [2 marks]

The LVGP upgrade is a profitable investment for Liberty Media (LM) as the NPV is a positive figure.
After discounting the future cash flows and taking the initial cost of investment into account, the NPV
is +$754.49m.

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 Worksheet 47
3.9 Budgets (HL) (1)

Eu-Genius Academy (EGA)

Eu-Genius Academy (EGA) is a small private all-girls academy in Beijing, China. The academy is
authorized to run the International Baccalaureate (IB) Diploma Programme (DP) and Middle Years
Programme (MYP). EGA prides itself on academic excellence and students’ well-being. In the past
four years, the graduating cohort achieved a staggering mean average point score of 40 points for
the DP. Likewise, the girls at EGA have won gold at many inter-school sporting competitions.
Eugenia Pan, the principal, gives each head of department the autonomy to oversee their own
budgets. In addition to a fixed payment made by all parents for general tuition, departments set their
own prices for each course offered. The following data show the actual and budgeted figures for the
Science and Humanities departments for the past 12 months. All figures are expressed in yuan (¥).

Science Humanities
Budgeted Actual Budgeted Actual
Course fees 60,000 65,000 55,350 54,350
Salaries (teachers) 52,000 56,000 50,000 53,000
Course textbooks 7,300 7,000 6,500 6,300
Course materials 8,000 7,600 7,000 7,100
Allocated overheads 4,500 4,750 4,000 4,000

(a) Identify two roles of cost and profit centres. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Describe the meaning of a favourable revenue variance. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(c) Explain one reason why budgets are important for EGA in its decision-making. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(d) Complete the following table by calculating the variances at EGA. Identify whether each of the
variances is favourable or adverse. [10 marks]

Variance (¥) for humanities

Variance (¥) for science department
department
Course fees Course fees
Salaries
Salaries (teachers)
(teachers)
Course textbooks Course textbooks

Course materials Course materials

Allocated
Allocated overheads
overheads

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 Worksheet 47
3.9 Budgets (HL) (1)

Answers

(a) Identify two roles of cost and profit centres. [2 marks]

Possible roles of cost and profit centres (two of the following would be sufficient):
• Accountability of managers (or heads of department) for their costs and/or revenues.
• Financial monitoring and control.
• Improve decision-making as the managers are empowered to make their own decisions.
• Motivating managers as they are empowered with their own departmental budgets.

(b) Describe the meaning of a favourable revenue variance. [2 marks]

A favourable revenue variance refers to when the actual level of a firm’s sales revenue is higher
than the planned or budgeted amount. A favourable variance is financially good for the business
as this means it is receiving more than what it had anticipated to receive.

(c) Explain one reason why budgets are important for EGA in its decision-making. [2 marks]
One reason why budgets are important for decision-making at EGA is that they help the
academy’s principal with resource allocation (particularly the firm’s financial resources). By
comparing the forecasted and actual spendings for each department, Eugenia can identify which
one will need more resources and the reasons why. For example, the science department might
need more financial resources to purchase lab equipment and supplies for experiments whilst
the humanities department might only need additional financial resources to purchase new
teaching and learning resources when a new IB syllabus/guide is released (e.g., new course
textbooks would have been required by the humanities department as a result of the new DP
Business Management course, first exam 2024).
Other possible reasons that could be explained include:
• Measuring financial performance – to make comparisons between each of the academy’s
faculties/departments based on their ability to manage their respective budgets.
• Accountability – to ensure the heads of department are accountable for the targets set at
the beginning of the school year and to ensure they do not overspend.

(d) Complete the following table by calculating the variances at EGA. Identify whether each of the
variances is favourable or adverse. [10 marks]

Variance (¥) for humanities department Variance (¥) for science department
= 54,350 – 55,350 = 65,000 – 60,000
Course fees Course fees
= ¥1,000 adverse = ¥5,000 favourable
= 53,000 – 50,000 Salaries = 56,000 – 52,000
Salaries (teachers)
= ¥3,000 adverse (teachers) = ¥4,000 adverse
= 6,300 – 6,500 = 7,000 – 7,300
Course textbooks Course textbooks
= ¥200 favourable = ¥300 favourable
= 7,100 – 7,000 = 7,600 – 8,000
Course materials Course materials
= ¥100 adverse = ¥400 favourable
Allocated = 4,000 – 4,000 Allocated = 4,750 – 4,500
overheads =0 overheads = ¥250 adverse

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 Worksheet 48
3.9 Budgets (HL) (2)

On Fire Clothing Ltd. (OFC)

On Fire Clothing Ltd. (OFC) is a privately held company and specializes in the distribution of South
Korean-style clothing. OFC operates a warehouse that is run as a cost centre. This is used to store
the stock (inventory) of the clothing sourced from South Korea. The company also has a retail shop
that is operated as a profit centre to distribute the clothing products.
Table 1: Budget and variance calculations for OFC’s retail shop

Budget ($) Actual ($) Variance ($)

Sales revenue 195,000 205,000 10,000 favourable
Cost of sales 49,250 W 7,750 adverse
Wages and salaries X 55,000 3,500 favourable
Marketing expenses 10,000 15,500 Y
Rent 35,000 35,000 None
Utilities 4,500 Z 700 adverse

Table 2: Budget and variance calculations for OFC’s warehouse

Budget Actual Variance

Direct labour cost ($) 70,500 70,000 $500
1,000 units
Stock (inventory) 30,000 units 31,000 units
favourable

(a) o o o tate the formula used to calculate variances. [1 mark]

…………………………………………………………………………………………………………………..

(b) Using Table 1, calculate the value of Figure W. (Show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(c) Using Table 1, calculate the value of Figure X. (Show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(d) Using Table 1, calculate the value of Figure Y. (Show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(e) Using Table 1, calculate the value of Figure Z. (Show all your working). [2 marks]

…………………………………………………………………………………………………………………..

(f) Using Table 2, explain whether the variance of $500 for direct labour is favourable or adverse.
[2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

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 Worksheet 48
3.9 Budgets (HL) (2)

Answers

(a) State the formula used to calculate variances. [1 mark]

Variance = Actual figure – Budgeted figure

(b) Using Table 1, calculate the value of Figure W. (Show all your working). [2 marks]

Variable Budget ($) Actual ($) Variance ($)

W = 49,250 + 7,750
Cost of sales 49,250 7,750 adverse
W = $57,000

Hence, W = $57,000

(c) Using Table 1, calculate the value of Figure X. (Show all your working). [2 marks]

Variable Budget ($) Actual ($) Variance ($)

Wages and X = 58,500 – 3,500
58,500 3,500 favourable
salaries X = $55,000

Hence, X = $55,000

(d) Using Table 1, calculate the value of Figure Y. (Show all your working). [2 marks]

Variable Budget ($) Actual ($) Variance ($)

Wages and Y = 10,000 – 15,500
10,000 15,500
salaries Y = $5,500 adverse

Hence, Y = $5,500

(e) Using Table 1, calculate the value of Figure Z. (Show all your working). [2 marks]

Variable Budget ($) Actual ($) Variance ($)

Z = 4,500 + 700
Utilities 4,500 700 adverse
Z = $5,200

Hence, Z = $5,200

(f) Using Table 2, explain whether the variance of $500 for direct labour is favourable or adverse.
[2 marks]

Variable Budget ($) Actual ($) Variance ($)

Direct labour cost 70,500 70,000 500

Direct labour cost is a cost variance, i.e., if the actual amount is more than the budgeted
amount, then the variance is adverse.
In this case, the actual amount ($70,000) is less than the budgeted amount (70,500). Hence,
the firm’s direct labour cost has a favourable variance of $500.

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 Worksheet 49
3.9 Budgets (HL) (3)

Margaret Broadway Theatre (MBT)

Margaret Broadway Theatre (MBT) offers a 5-star venue for theatrical performances in London, UK.
After graduating from a renowned performing arts school in New York, Margaret Brownsword started
her career in the Broadway scene in New York, working in a variety of different roles including taking
on management roles of Broadway shows.
A year ago, Margaret ventured to London, another global hub for musicals and theatrical
performances, where she set up MBT. It is now the end of the first year, so Margaret would like to
complete some analysis of the budgets she had created when she first opened the theatre.

Table 1: Budgeted and actual figures for MBT (all figures in British pounds £)

Budgeted (£) Actual (£)

Ticket sales revenue 58,750 49,500
Costume purchases 5,700 5,900
Utility bills 14,350 14,400
Salaries for performers 48,000 50,000
Total variable costs 12,000 Y
Other expenses 20,000 22,000
Profit X 13,000

(a) Explain one reason why budgeting can be useful for MBT. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) Complete the following table by calculating the variance for each of the variables and identify
whether the variance is favourable or adverse. [4 marks]

Variable Budget (£) Actual (£) Variance (£)

Ticket sales revenue 58,750 49,500
Costume purchases 5,700 5,900
Utility bills 14,350 14,400
Salaries for performers 48,000 50,000

(c) Using Table 1, calculate the budgeted figure for profit (Figure X) and the actual figure for total
variable costs (Figure Y). [2 marks]

…………………………………………………………………………………………………………………..

(d) Using Table 1 and your results from Question (c) above, calculate the variance for profit and
identify whether the variance is favourable or adverse. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..
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 Worksheet 49
3.9 Budgets (HL) (3)

Answers

(a) Explain one reason why budgeting can be useful for MBT. [2 marks]
• Budgeting can be useful for MBT because the process provides a financial plan for the future
when Margaret needs to decide whether to allocate her resources to grow her theatre business,
for example.
• Budgeting also puts those who are responsible for the budget accountable for the resources
allocated to them and how to use them effectively in order to meet the objectives of the business.

(b) Complete the following table by calculating the variance for each of the variables and identify
whether the variance is favourable or adverse. [4 marks]

Variable Budgeted (£) Actual (£) Variance (£)

Ticket sales = 49,500 – 58,750
58,750 49,500
revenue = £9,250 adverse
= 5,900 – 5,700
Costume purchases 5,700 5,900
= £200 adverse
= 14,400 – 14,350
Utility bills 14,350 14,400
= £50 adverse
Salaries for = 50,000 – 48,000
48,000 50,000
performers = £2,000 adverse

(c) Using Table 1, calculate the budgeted figure for profit (Figure X) and the actual figure for total
variable costs (Figure Y). [2 marks]
• Figure X
• Profit = Sales revenue – (Total fixed costs + Total variable costs)
• = £58,750 – (£20,000 + £12,000)
• = £26,750*
• Figure Y
• Profit = Sales revenue – (Total fixed costs + Total variable costs)
• £13,000 = £49,500 – (Y + £22,000)
• Y = £14,500

(d) Using Table 1 and your results from Question (c) above, calculate the variance for profit and
identify whether the variance is favourable or adverse. [2 marks]

Variable Budgeted (£) Actual (£) Variance (£)

= 13,000 – 26,750
Profit 26,750* 13,000
= £13,750 adverse

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 Worksheet 50
3.9 Budgets (HL) (4)

Zee’s Spinner (ZS)

Zee’s Spinner (ZS) is a spinning studio, which offers a range of spinning classes. The company’s
customers range from high school students, young professional adults, and retired couples. Each of
the four departments at ZS is responsible for their own budget and are run as either cost centres or
profit centres.

Department Type of centre

Coach & training Profit centre
Sales & marketing Profit centre
Facilities management Cost centre
Administration (including human resources and finance) Cost centre

An extract from the budget for the Coach & training department is shown below. All figures are in
$’000.

Item Budgeted ($’000) Actual ($’000)

Coach’s salary 450 480
Training revenue 530 510
Material costs 230 190
Allocated overheads 310 300

(a) Define the term budgeting. [2 marks]

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………..

(b) State one feature of a profit centre. [1 mark]

…………………………………………………………………………………………………………………..

(c) State one difference between a profit centre and a cost centre. [1 mark]

…………………………………………………………………………………………………………………..

(d) Complete the following table by calculating the variance for each of the variables in the Coach
& training department at ZS, identifying whether they are adverse or favourable. [4 marks]

Variable Budgeted ($’000) Actual ($’000) Variance ($’000)

Coach’s salary 450 480
Training revenue 530 510
Material costs 230 190
Allocated overheads 310 300

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 Worksheet 50
3.9 Budgets (HL) (4)

Answers

(a) Define the term budgeting. [2 marks]

Budgeting is the process of financial planning for a business, whereby managers plan for various
costs and revenues in order to achieve the organization’s objectives, be they the overall
objectives of the business or departmental objectives that align with the organization’s
objectives. Budgeting is an ongoing process, usually created and reviewed for one full year.

(b) State one feature of a profit centre. [1 mark]

A profit centre could be a department, division, or a function of a business that is responsible
and held accountable for the generation of revenues and management of its costs.

(c) State one difference between a profit centre and a cost centre. [1 mark]
One difference is that a cost centre only generates costs and does not strive to earn a profit,
whereas a profit centre aims to generate profits and incurs costs as well as earns revenues.

(d) Complete the following table by calculating the variance for each of the variables in the Coach
& training department at ZS, identifying whether they are adverse or favourable. [4 marks]

Item Budgeted ($’000) Actual ($’000) Variance ($’000)

= 480 – 450
Coach’s salary 450 480
= 30 adverse
= 510 – 530
Training revenue 530 510
= 20 adverse
Allocated = 300 – 310
310 300
overheads = 10 favourable
= 190 – 230
Material costs 230 190
= 40 favourable

Working out:
• For the coach’s salary, ZS had budgeted to spend $450,000 but actually spent $480,000.
This means that the firm spent $30,000 more than what was budgeted (planned). Thus,
there is an adverse variance of $30,000 for the coach’s salary.
• For training revenue, ZS budgeted (planned) to receive $530,000 but actually only received
$510,000. In reality, this means that the firm received $20,000 less than what was budgeted.
Thus, there is an adverse variance of $20,000 in training revenue for ZS.
• For the allocated overheads, ZS budgeted (planned) $310,000 to the Coach & training
department of ZS, but actually allocated $300,000. This means that the department was
allocated $10,000 less in overhead costs than what was budgeted. Hence, there is a
favourable variance of $10,000.
• For the material costs, ZS budgeted (planned) to spend $230,000 but actually only spent
$190,000. This is significantly less in reality than what was planned, by $40,000. Hence,
the department has a favourable variance of $40,000 for material costs.

Top tip: When determining whether a variance is favourable or adverse, always ask
yourself if the variable is a revenue/profit variance or a cost variance. Then, ask yourself
whether the business spent or received less or more than it had budgeted (planned).

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