Analysing Published Accounts (A Level) (Cambridge International A-Level Business): Exam Questions

Explain one limitation of published accounts.

[case-study] Quality Furniture (QF) QF is a public limited company in country S. It manufactures furniture for cafés. The number of cafés in country S has increased by more than 50% over the last 5 years. This has meant that QF has been able to expand and achieve internal economies of scale. However, the growth of the café market has attracted new firms supplying café furniture and increased competition for QF.

An extract from QF’s income statement is shown in Table 1.1

Table 1.1: Extract from QF’s income statement for 2020

	$m
Revenue	300
Cost of sales	120
Gross profit	180
Expenses	150

Although QF has been successful so far, Javid, the Managing Director, has identified two problem areas: inventory and human resources.

Inventory

QF’s inventory includes raw materials, work in progress and finished tables and chairs. QF buys 80% of its materials from country T and there is a long delivery lead time. This means that QF holds a high level of buffer inventory which has a high value.

Human resources

QF’s production employees are unhappy that they have not received any benefit from the company’s expansion. Profit has doubled over the past three years but employees have not received any pay increases or bonuses. The employees have all been trained by QF and have specialist skills which had ensured that customer expectations were met. However, customers are starting to complain about a fall in the quality of the furniture, which could be the result of the low morale of the employees. Some highly trained employees have left QF to work for competitor firms.

Explain one way QF could increase its profit margin.

[case-study] Snappy Box (SB)

SB is owned by Ralph who is a sole trader. The business prints photographs. Ralph has one shop on the main street of city D. Customers bring their saved digital photographs into the shop and these are printed on high-quality paper.

SB uses a large printing machine that can print on almost any size of paper to produce different sized photograph prints. The process is very capital-intensive and most customers request a batch of photographs to be printed.

SB is the only shop in city D that prints photographs. However, recently a number of online competitors have started to offer low-priced photograph prints to customers. Ralph has noticed that his sales have decreased significantly because of this competition. Ralph estimates the demand for his photograph prints has a price elasticity of demand of –4.

SB already has a low profit margin and Ralph is struggling to compete with the online retailers. However, Ralph has an idea to introduce job production into his shop. He could stop printing photographs and instead focus on framing individual photographs for customers. These frames will be made for any sized photograph or picture and can be made from a variety of materials chosen by the customer.

Ralph will need specialised equipment to allow him to make the frames. The equipment would cost $10000. He has identified two possible sources of finance for this equipment.

The first possible source of finance is for Ralph to lease the equipment from the company that produces it. The lease would be for five years at a fixed cost of $400 per month.

The second possible source of finance is for Ralph to sell the photograph printing machine for at least $10000, to purchase the equipment to make frames.

Explain the term ‘profit margin'.

Define the term ‘gross profit margin’.

Define the term ‘liquidity ratio’.

[case-study] Rehana Recycles (RR)

Rehana is very environmentally aware. One year ago, Rehana identified a business opportunity to reuse waste products and set up Rehana Recycles (RR) as a sole trader.

A local company sells bottled drinks and reuses the empty glass bottles that are returned by customers. It cannot reuse any damaged bottles, so they are dumped as waste. Rehana asked this company if she could have the damaged glass bottles. The company agreed she could have them at no cost.

RR melts down the glass and makes unique vases and other glassware products. RR’s mission statement is ‘Make waste beautiful’. Rehana markets her products as ‘Lovely for the planet, lovely for you’. The business has a strong local brand image. Rehana has recently invested in marketing which focuses on her unique selling point of recycling waste.

To help satisfy demand, Rehana recently employed two local artists who are also very environmentally aware. They are skilled in making handmade glass jewellery. RR currently makes handmade products using job production. Rehana has a democratic leadership style.

Rehana has produced some financial data shown in Table 1.1.

Table 1.1 Financial data

	$
Current assets
Cash	2000
Inventory	12000
Total current assets	14000

	$
Current liabilities
Trade payables	3000
Overdraft	5000
Total current liabilities	8000

As demand has grown, Rehana needs to increase her output. Rehana has identified two ways of increasing output. She could either:

• keep using job production and employ more artists to create unique glassware products using the RR brand, or
• change to batch production and make a larger number of standardised glassware using the RR brand.

Explain one method Rehana may use to improve liquidity.

Explain why financial efficiency is important to a business.

Define the term 'trade receivables turnover'.

Explain why a business monitors its trade payables turnover.

Explain one way in which a business could improve its rate of inventory turnover.

[case-study] Charlie’s Chocolates (CC)

CC is a large public limited company that manufactures a wide range of chocolate bars. Production takes place in low wage countries so that costs can be kept low. CC has suffered recently from poor publicity due to the high levels of sugar used in the production of its chocolate. A national newspaper has recently published an article about how CC exploits employees in low wage countries. The Marketing Director, Alan, is aware of recent trends showing that consumers are becoming more ethical in their buying decisions. He thinks this might explain why sales decreased by 10% last year.

He has asked to meet with the Managing Director, Ikram, to discuss a major change towards more ethical production methods. This could mean re-locating production back to the home country. This will increase costs and involve the recruitment of additional employees. In response to recent Government guidelines to improve health, Alan wants to decrease the amount of sugar used in the chocolate bars.

Alan is also thinking about the financial accounts for this year that he received this morning from Ikram (see Table 1 and Table 2).

Table 1 – Extract from Income Statement

	$000s
Revenue	7000
Cost of sales	4150
Gross profit	2850
Profit for the year	1350
Retained earnings	565

Table 2 – Extract from Statement of Financial Position

	$000s
Non-current assets	3000
Current assets	900
Current liabilities	400
Working capital	500
Net assets	3500

With sales declining from last year, Alan has to think carefully about the next steps for marketing. He knows that the product range is of good quality – the problem is the poor image of the company. For example, he is aware that a local consumer group is trying to organise a demonstration outside one of CC’s factories in the next few weeks.

Calculate the gross profit margin of CC.

[case-study] Motorcycle Components (MC)

MC is a large public limited company that produces a range of components used by motorcycle manufacturers. MC’s mission statement is ‘to be the world leader in delivering quality motorcycle components to our customers’.

The motorcycle component industry is very competitive and MC’s customers expect high quality and a short lead time. MC operates a Just in Time (JIT) inventory control system. MC’s good relationships with its suppliers ensure that JIT operates efficiently. The production workers at MC are highly skilled and the business benefits from a low labour turnover.

Liquidity management is very important in the motorcycle component industry. The industry average for the acid test ratio is 1. A summary of some key data for MC has been prepared by the Finance Director, as shown in Table 2.1.

Table 2.1: Summary financial data as at 30 April 2022 ($ million)

Trade receivables	26
Cash	19
Inventory	1
Trade payables	30
Other current liabilities	20

The Operations Director, Jay, is proposing new capital expenditure of $4 million. Jay thinks that automation of the production process will have significant financial benefits for MC. He wishes to gain approval from the Board of Directors to implement a process innovation project. Jay believes that, with good communication and the involvement of employees, he can effectively manage the project.

Calculate MC’s acid test ratio.

Extract:

Waste To Zero (WTZ)

Making use of waste As a young boy Amandi Said supplemented his family’s income by finding waste materials and products and making new products to sell. Later, he employed other teenagers to collect waste such as card and plastics in the capital city of country R. Amandi sold these waste materials to recycling companies. In 2015, Amandi set up WTZ as a private limited company and a summary of its rapid growth is provided below. 2015 WTZ gains contract from local government to collect recyclable waste. This is sorted at the new WTZ recycling centre and then sold to local manufacturers. 2017 WTZ opens its first factory producing the innovative Hydrocamel – a water barrel made from recycled plastic waste. The Hydrocamel is sold to local communities and charities to improve access to clean water in low‑income countries. 2019 WTZ converts to a public limited company. Operations expand to other major cities in country R. Additional waste recycling centres and factories open. One centre in country R burns waste products to generate electricity. 2020 WTZ patents a process for creating bricks from waste plastic and rubber. These bricks can be used to build durable and affordable houses. 2021 WTZ takes over MR, a company that recycles metal. 2022 WTZ’s market share for collecting and recycling plastic waste in country R reaches 60%. Ownership and finance Amandi retains a controlling stake in WTZ. He has always been motivated by profit and the desire to secure a future for his children. Amandi is willing to take risks. WTZ has entered new markets and invested in research and development. Business expansion has been financed by bank borrowing and by the public offer of shares on the stock market in 2019. Table 1 and Table 2 provide selected information from the financial statements of WTZ. Table 1: Extracts from WTZ’s income statement (year ending 30 April) 2022 ($m) 2021 ($m) Revenue 60.0 50.0 Profit for the year 5.6 6.4 Dividends 4.8 4.4

Table 2: Extracts from WTZ’s statement of financial position (at 30 April) 2022 ($m) 2021 ($m) Non‑current liabilities 14.0 10.0 Share capital 4.0 4.0 Retained profit reserves 4.0 3.8 Inventories 4.0 3.2 Trade receivables 1.6 1.5 Cash 0.2 0.4 Current liabilities 4.2 3.6 Notes: Authorised share capital – 20 million shares @ $0.5 Number of shares issued – 8 million Current share price – $3 Operational efficiency Amandi’s focus has always been on minimising costs to maximise profit margins. Many factory employees are on flexible contracts and are paid the minimum wage for unskilled work. Many employees work long hours. Working conditions in WTZ’s factories are difficult with poor ventilation and a lack of facilities for employees to take breaks. Employees have demanded the right to join a trade union. However, unemployment in country R is high, so WTZ has refused to recognise trade unions. The new operations manager at the Hydrocamel factory, Khalid, reported the following problems to the directors: • employee absenteeism is increasing • productivity is not increasing • quality standards are below expectations with 5% of output rejected • inefficient collection of recycled materials • high inventory levels. Khalid recommends a lean approach to production including the introduction of Kaizen (continuous improvement). To be effective this change would require investment in employee training.

Marketing Hydrocamel has been a very successful product since its launch in 2017. The Hydrocamel helps families reduce the time needed to collect and transport water. The Hydrocamel can store 100 litres of water and is designed to be rolled so that it is easily movable. In 2019 a competitor brand, the Hippo Barrel, was launched and WTZ’s sales growth slowed. The marketing manager, Kofi, is planning a marketing strategy to increase sales to 50000 units per year which is the maximum capacity of the factory. He collected the following information as part of his situational analysis: • price of the Hydrocamel is $140 • price of the competitor’s Hippo Barrel was reduced by 20% to $120 in 2020 • this resulted in an 8% decrease in demand for the Hydrocamel to 40000 units in 2021 • estimated price elasticity of demand for the Hydrocamel is –1.2 • WTZ promotes the Hydrocamel through adverts in specialist magazines and by contacting charities directly • the promotional budget in 2021 was $10000 • targeted marketing spending is estimated to have promotional elasticity of demand of 1.3. Organisational structure Amandi has not changed the organisational structure of WTZ as the business expanded. The business has a hierarchical structure with functional areas of operations, human resources, marketing and finance. The business has been successful and continues to expand. Continued expansion has made it more difficult for Amandi to have effective control over the business. He thinks that managers focus too much on their functional responsibilities and this prevents them from planning strategically. Amandi considers the current organisational structure to be a weakness that is constraining growth. In discussion with other directors, Amandi commented ‘WTZ is increasingly diversified and we need a structure that can support growth and drive innovation. Changes will also be needed if we expand into other countries to process waste and generate electricity.’ An increased focus on corporate social responsibility (CSR) Kofi recommends that WTZ engages more with the local community. He reported to Amandi that ‘WTZ should be a leading supporter of sustainable development. We could use our expertise in recycling to develop a positive brand image and promote the company as protecting the future for all. Ambitious environmental objectives could be set. However, there is likely to be an impact on the costs of the business. There are, for example, operational and human resource issues we need to overcome as we focus on CSR.’ Growth strategies for the future Amandi used strategic analysis techniques to consider the strategic direction of WTZ’s continued expansion. An extract from his external environment analysis (PEST) is shown in Appendix 1. He identified two potential strategic options. Amandi plans to proceed with only one of the options. However, the Finance Director is concerned about the capital cost and the potential impact on working capital.

Option 1: Purchase a small business called Lacpac Takeover Lacpac which produces recyclable non‑plastic packaging for the food industry. It is an innovative company and a market leader in country R. Option 2: Expansion to country S Country S is a high‑income country with a large population. WTZ would build a factory for processing plastic waste. WTZ would use its core competencies to gain contracts from the government of country S. Appendix 2 provides further data on each option. Appendix 1: External environment analysis (PEST) Political • Some low‑income countries have banned processing of plastic waste from high‑income countries • There is proposed regulation in country R to reduce the use of plastics in food packaging Economic • Economic growth in country R is forecast to be 5% per year on average over the next 5 years • Global interest rates forecast to decrease in 2023 Social • Increasing environmental awareness in country R and country S • Global environmental pressure groups propose consumer boycotts against businesses which operate unsustainably Technological • Increasing use of computer controlled machinery for collecting and sorting recycled material • Innovations in processing of waste materials Appendix 2: Summary of data from strategic choice techniques over 5‑year period Option 1: Takeover of Lacpac Option 2: Expansion into country S Driving forces Rapid market growth in use of recyclable non‑plastic packaging in the food industry Builds on core competencies of WTZ Restraining forces High cost Competitive market in country S Capital cost $20m $10m Accounting Rate of Return (ARR) 15% 10% Decision tree: Expected monetary value Probability of success $9m 60% $4m 70%

Read the following extract ( Table 1 and Table 2) before answering

Calculate the gearing ratio for 2022.

[case-study] Refer to Table 2.

Table 2: Extracts from TK’s financial data 2021

	$m
Revenue	25.40
Operating profit	3.98
Profit for the year	3.18
Total annual dividends	1.50
Non-current liabilities	15.00
Capital employed	30.00
	$
Share price at year end	14.00
Dividend per share	1.20

Calculate the return on capital employed (ROCE) for 2021.

Table 3: Extracts from UBH’s financial statements

Calculate the dividend cover for 2021.

[case-study] Hannah’s Handbags (HH)

Hannah started HH six years ago. HH operates in a niche market providing unique bags. The bags are made using job production. As demand grew for the bags, Hannah took on a partner, her brother Kwom. They both agreed to keep the name ‘Hannah’s Handbags’ as it is an established, reputable and widely recognised brand.

HH operates from a small workshop and showroom. Customers are encouraged to visit the showroom to discuss design and materials with either Hannah or Kwom.

HH employs four highly skilled specialist production staff. Table 2.1 shows an extract from the latest income statement.

Table 2.1: Extract of financial data for HH (year ended 30 October 2019

	$000
Revenue	980
Cost of sales	588
Expenses	245

A new product

Hannah and Kwom would like to expand the business by producing a limited number of batch produced bags to sell online. Hannah has noticed other bag producers do this successfully. The new market has many more competitors, with 15 large businesses and many small ones. The bags would have to be priced competitively. Kwom estimates that this new venture would require additional finance of $350000. HH would also require a specialist IT provider to set up a website and a marketing agency to run a viral marketing campaign.

Calculate the gross profit margin.

Extract:

KOPARA BEVERAGES (KB)

Background

Kopara Beverages (KB) is a private limited company based in country P. It manufactures and sells premium fruit juices and plant-based drinks, including cold-pressed juices, coconut water blends, and protein smoothies. Founded 15 years ago by entrepreneur Lily Sato, KB now employs 400 workers in one large production facility in country P.

KB sells its products domestically and has recently begun exporting to country Q, where demand for healthy, natural drinks is growing rapidly. KB's mission is 'to bring nutritious, sustainably produced beverages to customers across the world'.

Organisational Structure

Two years ago, KB moved from a centralised management structure to a decentralised one, giving production and marketing managers greater autonomy over day-to-day decisions. Lily believes the change has increased innovation and improved employee morale.

However, KB's Finance Director has raised concerns about inconsistent financial decisions being made across departments and a lack of coordinated budgeting.

Investment Projects

To meet growing demand from country Q, KB is evaluating two investment projects. Table 1 shows data for Project A. Table 2 shows projected annual net cash flows and discount factors for Project B.

Table 1: Project A — New Production Line

Table 2: Project B — Automated Bottling System

Financial Performance

KB's Finance Director has produced financial data for 2022 and 2023 to allow comparison of the business's performance. Table 3 shows selected financial data.

Table 3: KB selected financial data

Competitive Pressures

The domestic market for beverages in country P has become increasingly competitive. Several large multinational companies (MNCs) have entered the market with similar healthy drink products, often at significantly lower prices than KB. KB's share of the domestic market has fallen from 18% to 14% over the past two years.

KB's Marketing Director is recommending that KB invests in product innovation — developing new flavours, new formats, and stronger branding — to differentiate its products from MNC rivals and justify its premium price.

The Finance Director disagrees, believing that KB must reduce prices to remain competitive and maintain market share.

KB's export revenue from country Q has grown by 35% in the past year. Country Q has a growing middle-class population with rising health awareness and disposable income. Lily is considering whether KB should seek additional long-term finance to accelerate its expansion into country Q.

Read the insert before answering questions.

Calculate the return on capital employed (ROCE) for KB in both 2023 and 2022.

[case-study] Solaris Energy Solutions (SES)

SES was founded in 2009 in country T by engineer and entrepreneur Marco Santos. Using $200,000 of personal savings and a $300,000 bank loan, Marco set up the business designing and installing solar panels for residential customers. The bank loan was fully repaid by 2013.

Timeline of SES's strategy for growth

2009–2014	- SES grew organically by reinvesting all profit - Operations expanded from residential solar installation into small commercial projects - All decisions made by Marco
2015	- SES converted to a private limited company — SES Limited — through a share issue to raise additional capital - Marco holds 60% of shares and becomes CEO
2016	- SES wins a major government contract to install solar panels on 5,000 homes across region Y (see Appendix 1)
2018	- SES acquires EcoGrid, a specialist energy storage company, for $8m - Financed by a new bank loan and a further share issue (see Appendix 2)
2020	- SES invests $2.5m in developing AI-powered energy management software, funded from retained profit (see Appendix 3)
2022	- SES shareholders review the company's financial performance at the annual general meeting (AGM) (see Appendix 4)

Developing a new strategic direction

The domestic solar panel market in country T is becoming increasingly competitive. Several large multinational companies (MNCs) have entered the market in recent years, competing aggressively on price. Marco believes SES must change direction to secure its long-term future.

Two strategic options are being considered:

• Option A: Expand internationally into country U, where government incentives have created rapid growth in solar energy demand.
• Option B: Diversify within country T into electric vehicle (EV) charging infrastructure — a market that is growing rapidly as EV adoption increases.

SES's Finance Director has warned that the company's financial position has weakened and that any new strategy must be carefully costed and phased. Marco would like advice on which strategic direction SES should pursue.

Appendix 1: The renewable energy market in country T (2016)

• The government of country T has committed to generating 50% of its electricity from renewable sources by 2030.
• Solar energy is the fastest-growing renewable energy source in country T, with installations rising by 22% per year.
• Growing public awareness of climate change is driving strong demand from residential and commercial customers.
• Government subsidies for residential solar installations are generous but are scheduled to be reduced from 2021.
• Competition for government contracts is intense; however, profit margins on public sector contracts are higher than on private sector work.
• MNCs from Europe and Asia are beginning to establish operations in country T, benefiting from economies of scale and established brand recognition.

Appendix 2: HR Director's report following SES's acquisition of EcoGrid (2018)

EcoGrid was a family-run business of 45 employees. It had a flat organisational structure, a culture of autonomy and flexible working, and a strong reputation for technical innovation in energy storage systems.

SES operates with a more hierarchical management structure. Following the acquisition, SES standardised HR practices across both companies. EcoGrid employees were moved from flexible contracts to fixed-hours annualised contracts. A third of EcoGrid's specialist engineers chose to leave within twelve months.

Recruiting qualified energy storage engineers in country T is difficult. Training new engineers to the required standard takes an average of 18 months. Productivity in the EcoGrid division has fallen significantly since the acquisition. Several planned product development projects have been delayed.

Appendix 3: SES AI energy management software (2020)

• Software is integrated into all new SES solar systems and is compatible with EcoGrid storage units.
• Optimises energy use in real time, reducing customer energy bills by an estimated 15–20%.
• Revenue model: customers pay an annual subscription fee of $120 per year.
• 12,000 customers are currently subscribed to the platform; subscription revenue is growing at 8% per year.
• Development cost: $2.5m, funded entirely from SES's retained profit.
• The platform is widely regarded within the industry as technically advanced, but requires ongoing investment to maintain and update.

Appendix 4: Analysis of SES's financial accounts between 2018 and 2022

	2018	2019	2020	2021	2022
Current ratio	1.8 : 1	1.6 : 1	1.4 : 1	1.3 : 1	1.2 : 1
Acid test ratio	1.2 : 1	1.0 : 1	0.8 : 1	0.7 : 1	0.6 : 1
Return on capital employed (%)	18	15	13	11	9
Gearing (%)	12	22	28	32	38
Profit for the year ($m)	2.1	1.8	1.6	1.4	1.2

Evaluate SES's strategy for growth between 2009 and 2022.

Discuss the view that profitability ratios are more important than liquidity ratios to a business that sells expensive jewellery.

Discuss whether the published accounts of a luxury hotel provide a good measure of the performance of the business.