2 QAC uses batch production to make 70 different cleaning products including soap and polish.

To
meet increased demand for two of its products, X and Y, QAC could invest $10m in flow production
using new technology. The Finance Director is worried about QAC’s cash flow position as shown
in Table 1. He thinks it is important to have a high level of inventory but he also wants to improve
the cash flow position.

Table 1: QAC’s cash flow forecast for April – June 2017 ($000)

April May June

Cash in: 300 400 460
Cash out:
Labour costs 140 140 140
Inventory costs 120 180 180
Fixed costs 100 100 100
Total cash out 360 420 420
Net cash flow (60) (20) ?
Opening balance 30 (30) (50)
Closing balance (30) (50) ?

(d) Identify and explain two ways (other than reducing inventory) that QAC could use to improve
its cash flow position.
Reducing costs by making some employees redundant, making wage cuts or hireing part
Way 1: ………............................................................................................................................
timers instead of full timers
...................................................................................................................................................
The less workers they have, the less they have to pay, thus reducing labor costs
Explanation: ......................................................................................................................................
If they can not make employees redundant then reducing the wages of exisiting employees will
also reduce labor costs. If they can not do either, because of either worries of production speed
...................................................................................................................................................
or worries of high turnover rates, they can hire part timers instead of full timers because they can
be paid less than full timers, therefore one saves money on labor costs, and rate of production
...................................................................................................................................................
stays relativly the same, and as they are part timer there are lower chances of workers
quitting due to lower wages
...................................................................................................................................................

Get a bank loan

Way 2: ……...............................................................................................................................

...................................................................................................................................................
Taking a loan out will temporarily improve cash flow, and if the company has a solid
Explanation: ......................................................................................................................................
business plan, and good credit, the bank will be likely to give out a loan, and it should help the
..................................................................................................................................................
the business get out of negatives, and improve the cash flow, and once the cash flow has
...................................................................................................................................................
been improved, then they can replay the loan. It also ensures that they are able to pay off any
other creditors they have, and they'll be abe to purchase any nessisary items that'll help [6]
...................................................................................................................................................
increase revenue.

5: Financial information and decisions (Paper 1) Copyright © UCLES 2019 2

 3 Dipta and Ravi are friends. They want to start up a business making chocolates to sell at local
markets. Most ingredients such as cocoa beans will be imported. Ravi’s primary market research
shows that using ethical sources of supply for the ingredients will be popular with consumers. Ravi
and Dipta have no business experience, but Dipta has written a business plan. They need $500
for equipment, but they cannot decide which source of finance to use.

(e) Identify and explain two possible advantages of importing for Dipta and Ravi’s business.

Advantage 1: …Better quality & perception of quality

. ........................................................................................................................

.......................................................................................................................................................
Some local sources may not be as good as oversea sources, and importing the
Explanation: ..................................................................................................................................

high quality ingredients will result in higher quality goods, therefore better tasting chocolate,
.......................................................................................................................................................

which will atract more customers. Also, people are more likely to buy food when the ingrediants
.......................................................................................................................................................
have been imported from a well known high quality manufacturer, rather than any regular source.
.......................................................................................................................................................

Lower manifacturing costs

Advantage 2: … . ........................................................................................................................

.......................................................................................................................................................
It is cheaper for the buisness to imort the goods rather than have to create their
Explanation: .................................................................................................................................
own farms and hire extra workers to harvest the cocoa beans. The cost of importing is likely far
.......................................................................................................................................................

less than setting up all the nessisary things to create their own coca beans
.......................................................................................................................................................

....................................................................................................................................................... [6]

5: Financial information and decisions (Paper 1) Copyright © UCLES 2019 3

 2 Josh owns an office cleaning business. He has a number of large and small business customers.
Josh employs 6 full-time cleaners who are all given off-the-job training. Josh believes that using
the latest cleaning equipment increases added value. He said: ‘Customers are happy with the
service. I am always sending text (SMS) messages to workers about additional work.’ Josh has
been looking at his balance sheet. He cannot decide if a bank loan is the best source of finance to
use for new equipment. The new equipment will cost $60 000.

Table 1: Extract from Josh’s balance sheet as at 30 April 2017 ($000)

Current assets 120

Trade receivables 90

Cash X

Current liabilities Y

Net current assets 70

(e) Do you think a bank loan is the best source of finance for Josh to use for the new equipment?
Justify your answer.

A bank loan is the best source of finance as his balance sheet seems to be fine, and
...........................................................................................................................................

the business is doing well, plus the positive responses and reports from customers seem to be
...........................................................................................................................................
plenty, the bank will be likely to give out a loan and may not charge very high interest
...........................................................................................................................................

rates, as it is very likely that he would be able to pay the bank back. Plus the
...........................................................................................................................................
liquidity of the business is high, and the bank will not have to be worried over the loan
...........................................................................................................................................

being paid back as much.

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

........................................................................................................................................... [6]

5: Financial information and decisions (Paper 1) Copyright © UCLES 2019 4

 2 Paul is the Managing Director of a private limited company called PShirts. It manufactures and sells
men’s and women’s shirts in country Y. Its products are priced lower than most of its competitors.
Sales have fallen recently even though there has been an economic boom. Paul is thinking about
starting to sell shirts in other countries. One of the directors is worried about legal controls in other
countries. A summary of the accounts is shown in Table 1.

Table 1: Summary of financial statements

2016 ($m) 2017 ($m)

Revenue 500 350

Gross profit 210 120

Profit 160 60

Current assets 35 30

Current liabilities 15 15

(e) Do you think Paul should be worried about the change in the profit margins between 2016 and
2017? Justify your answer.
Paul should be worried about the change in the profit margins as it's gone down by 100
...........................................................................................................................................
million, whch may not have been a huge issue if his liablities had gone down. But he
...........................................................................................................................................
has the same amount of liabilites as the previous year, and five million less assets. He
...........................................................................................................................................
should be concerned as if the profit marigns drop the smae amount the following year,
...........................................................................................................................................
he'll end up in debt. Even if the amount of the profit margins drop halve every year,
...........................................................................................................................................
within two years he'll end up in debt
...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

........................................................................................................................................ ........... [6]

5: Financial information and decisions (Paper 1) Copyright © UCLES 2019 5