INTRODUCTION TO BUSINESS FINANCE TIME CONSTRAINED ASSESSMENT

ii) Financial Reporting Period

Financial statements normally report financial information for a one-year accounting period. Correct Answer: 1-year period

iii) Sales or Revenue

Revenue is the economic benefit earned from selling goods or services during an accounting period.

Revenue = Selling Price per Unit × Units Sold

Correct Answer: Sales / Revenue

iv) Statement of Financial Position

SOFP stands for Statement of Financial Position. It reports an entity's assets, liabilities and equity at a specific date. Correct Answer: Statement of Financial Position

v) Meaning of SOFP

A Statement of Financial Position shows what an entity owns and owes, together with the owner's equity, at a specific date.

vi) Return on Capital Employed

Return on Capital Employed (ROCE) measures operating profit in relation to the capital employed by a business.

ROCE = Operating Profit ÷ Capital Employed × 100

vii) Digitisation

Digitisation can create challenges involving data protection, cybercrime, regulation and access for people with limited digital skills.

viii) Cost Driver

A cost driver is a factor that causes or influences the cost of an activity or overhead.

ix) Break-Even Analysis for CLR Ltd

CLR Ltd has fixed costs of £500, variable costs of £7 per unit and a selling price of £11 per unit.

Contribution = £11 − £7 = £4 per unit
Break-even Point = £500 ÷ £4 = 125 units

Answer: 125 units

x) Break-Even Analysis for Tesla Ltd

Raw materials cost £3 per car. Labour costs £20 per hour, and each car requires 15 minutes of labour.

Labour Cost = 15 ÷ 60 × £20 = £5
Total Variable Cost = £3 + £5 = £8
Contribution = £12 − £8 = £4
Break-even Point = £450 ÷ £4 = 112.5 cars

Answer: 113 cars to reach or exceed break-even.

xi) Annual Depreciation

The vehicle costs £20,000, has a residual value of £4,000 and a useful life of four years.

Annual Depreciation = (£20,000 − £4,000) ÷ 4 = £4,000

xii) Payment in Advance

When three months of rent is paid but only two months belong to the current accounting period, the remaining month's rent is recorded as a prepayment.

xiii) Agency Theory

Agency theory recognises that managers may prioritise their own interests rather than the interests of the organisation or its owners.

xiv) Operating Leases

Operating leases allow a business to use an asset without purchasing it outright. The accounting treatment depends on the applicable accounting standards.

xv) Secured Bonds

Secured bonds are backed by specified collateral, which can reduce the lender's risk of loss if the borrower defaults.

xvi) Flexible Budget

Fixed costs generally remain unchanged when a budget is flexed within the relevant activity range.

xvii) Beyond Budgeting

Beyond Budgeting emphasises decentralised decision-making, team responsibility, organisational vision and adaptability.

xviii) Average Rate of Return

The Average Rate of Return method uses accounting profit to assess the profitability of an investment.

xix) Average Investment

Average Investment = (Initial Investment + Scrap Value) ÷ 2
= (£10,000 + £4,000) ÷ 2 = £7,000

xx) Blockchain Records

Blockchain consensus mechanisms can help network participants agree on valid transactions and maintain consistent records.

Part B: Case Study 1 — Ratio Analysis for Amazon Ltd

a) Financial Ratio Calculations

The following table presents the financial ratios calculated using the figures provided for Amazon Ltd.

Financial Ratio	Formula	Calculation	Result
Gross Profit Margin	Gross Profit ÷ Net Sales × 100	25,200 ÷ 42,000 × 100	60%
Net Profit Margin	Net Profit ÷ Net Sales × 100	13,200 ÷ 42,000 × 100	31.43%
Current Ratio	Current Assets ÷ Current Liabilities	9,300 ÷ 3,900	2.38:1
Quick Ratio	(Current Assets − Inventory) ÷ Current Liabilities	(9,300 − 1,400) ÷ 3,900	2.03:1
Trade Receivables Turnover	Net Credit Sales ÷ Average Receivables	42,000 ÷ 7,900	5.32 times
Trade Payables Turnover	Credit Purchases ÷ Average Payables	16,800 ÷ 3,400*	4.94 times*
Inventory Turnover	Cost of Goods Sold ÷ Average Inventory	16,800 ÷ 1,400*	12 times*

The current and quick ratios suggest that current assets exceed current liabilities. However, the quality of receivables, the timing of payments and the nature of inventory should also be considered when evaluating liquidity. A receivables turnover ratio of approximately 5.32 times corresponds to around 69 days to collect receivables, assuming the input data are representative. The estimated inventory turnover of 12 times corresponds to approximately 30 days of inventory on hand. Note: The turnover calculations marked with an asterisk use the balances supplied as proxies because opening and closing balances were not provided. Actual average balances and credit purchases should be used for more reliable results.

Part B: Case Study 2 — Investment Appraisal for Vipers Ltd

Investment Cash-Flow Information

Cash Flow	Proposal 1 (£)	Proposal 2 (£)	Proposal 3 (£)
Initial Investment	120,000	95,000	80,000
Year 1	80,000	10,000	30,000
Year 2	60,000	40,000	40,000
Year 3	40,000	40,000	30,000
Year 4	20,000	60,000	30,000
Year 5 Operating Cash Flow	40,000	50,000	20,000
Scrap Proceeds	4,000	5,000	8,000

a) Average Rate of Return (ARR)

ARR measures average annual accounting profit as a percentage of the investment amount. The calculations below use initial investment as the denominator.

Annual Depreciation = (Initial Investment − Scrap Value) ÷ 5
Average Annual Profit = Average Annual Operating Cash Flow − Annual Depreciation
ARR = Average Annual Profit ÷ Initial Investment × 100

Calculation	Proposal 1	Proposal 2	Proposal 3
Total Operating Cash Inflows	240,000	200,000	150,000
Average Annual Cash Flow	48,000	40,000	30,000
Annual Depreciation	23,200	18,000	14,400
Average Annual Profit	24,800	22,000	15,600
Initial Investment	120,000	95,000	80,000
ARR	20.67%	23.16%	19.50%

Proposal 2 has the highest ARR at approximately 23.16% when initial investment is used as the denominator. ARR conventions vary, so the denominator required by the course should be confirmed.

b) Payback Period

The payback period measures how long it takes for cumulative cash inflows to recover the initial investment.

Payback Period = Full Years Before Recovery + (Unrecovered Investment at Start of Year ÷ Cash Inflow During Recovery Year)

Period	Proposal 1 (£)	Proposal 2 (£)	Proposal 3 (£)
Year 1 Cumulative	80,000	10,000	30,000
Year 2 Cumulative	140,000	50,000	70,000
Year 3 Cumulative	180,000	90,000	100,000
Year 4 Cumulative	200,000	150,000	130,000
Year 5 Cumulative (excluding scrap)	240,000	200,000	150,000
Payback Period	1.67 years	3.08 years	2.33 years

Proposal 1 has the shortest payback period, at approximately 1.67 years. Proposal 3 recovers its investment in approximately 2.33 years, while Proposal 2 takes approximately 3.08 years.

c) Net Present Value (NPV) at 15%

NPV discounts future cash flows to their present value and deducts the initial investment. Year 5 cash flow includes the relevant scrap proceeds.

NPV = Sum of [Cash Flow in Year t ÷ (1 + 0.15)^t] − Initial Investment

Year	Discount Factor	Proposal 1 PV (£)	Proposal 2 PV (£)	Proposal 3 PV (£)
1	0.869565	69,565	8,696	26,087
2	0.756144	45,369	30,246	30,246
3	0.657516	26,301	26,301	19,725
4	0.571753	11,435	34,305	17,153
5 (including scrap)	0.497177	21,876	27,345	13,921
Total PV of Inflows	—	174,546	126,893	107,132
Initial Investment	—	(120,000)	(95,000)	(80,000)
NPV	—	54,546	31,893	27,132

d) Investment Recommendation

Based on ARR, Proposal 2 performs best, with an estimated return of 23.16%. Based on payback, Proposal 1 is preferred because it recovers the initial investment fastest. Proposal 1 also has the highest NPV, approximately £54,546, compared with £31,893 for Proposal 2 and £27,132 for Proposal 3. Assuming the projects are mutually exclusive and the cash-flow estimates are comparable, Proposal 1 is the preferred choice because it is expected to create the greatest value at a 15% cost of capital.

References

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