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GCE JAN 2008 : (A2 7) Finance

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Centre Number 71 Candidate Number ADVANCED General Certificate of Education January 2008 GCE Applied Business assessing Finance A6B11 Assessment Unit A2 7 [A6B11] WEDNESDAY 16 JANUARY, MORNING TIME 1 hour 30 minutes. INSTRUCTIONS TO CANDIDATES Write your Centre Number and Candidate Number in the spaces provided at the top of this page. Write your answers in the spaces provided in this question paper. Answer all three questions. INFORMATION FOR CANDIDATES The total mark for this paper is 80. Quality of written communication will be assessed in questions 1(d) and 3(d). Figures in brackets printed down the right-hand side of pages indicate the marks awarded to each question or part question. ADVICE TO CANDIDATES You are advised to take account of the marks for each part question in allocating the available examination time. If you do not have sufficient space to complete your answers, you may use the additional pages at the back of the booklet. For Examiner s use only Question Number 1 2 3 Total Marks A6B1W8 2905 Marks Study the information below and answer the questions that follow. 1 Matt has been operating as a sole trader for many years, trading as Pretty Tulips , selling fresh and dried flower arrangements to customers in Fivemiletown. The Trial Balance for his business, for the year ended 31 December 2007, is shown below. Pretty Tulips Trial Balance as at 31 December 2007 Capital Purchases and Sales Opening Stock Advertising Wages Fixed Assets Fixtures Debtors and Creditors Bank Rent Telephone expenses Heat and Lighting Expenses 19 000 1 000 3 000 20 000 24 000 4 000 1 000 1 000 1 000 ______ 74 000 ______ ______ 20 000 40 000 5 000 9 000 ______ 74 000 ______ ______ Notes: 1. Advertising paid in advance amounted to 1 000. 2. Closing stocks were valued at 0. Matt is satisfied with the performance of the business so far. However, he is beginning to suffer from the strain of operating as a sole trader. To make matters worse, a local 24-hour filling station has just started to sell flowers and are undercutting Matt s prices. Matt had started to prepare the financial statements in respect of the last financial year, but had left them unfinished due to business commitments. Matt wonders if he should try to sell the business in the near future. A6B1W8 2905 2 [Turn over (a) Using the appropriate information, complete the draft Trading, Profit and Loss Account for the business for the year ended 31 December 2007. Clearly show the financial results of trading activities. [5] Examiner Only Marks Remark Pretty Tulips Trading, Profit and Loss Account for the year ended 31 December 2007 Sales Opening Stock 40 000 1 000 Add Purchases 19 000 ______ 20 000 Less Closing Stock Cost of Sales Gross Profit Less Expenses: Advertising Less Prepayment Wages Rent Heat and Light Expenses Telephone Expenses 20 000 1 000 1 000 1 000 ______ Net . . . . . . . . . . . . . . . . . . . . You should use this space for your calculations: A6B1W8 2905 3 [Turn over (b) Using the appropriate information, complete the Balance Sheet for the business as at 31 December 2007. Clearly show the relevant information. [5] Examiner Only Marks Remark Pretty Tulips Balance Sheet as at 31 December 2007 Fixed Assets Fixtures Current Assets Debtors Advertising Prepaid 24 000 4 000 1 000 ______ Current Liabilities Creditors Bank Overdraft 5 000 9 000 ______ .................... Net Assets Financed by: Opening Capital 20 000 .................... Capital Employed You should use this space for your calculations: A6B1W8 2905 4 [Turn over (c) Explain what is meant by the following terms: Examiner Only Marks Remark (i) Capital _____________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ___________________________________________________ [2] (ii) Current Assets _____________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ___________________________________________________ [2] (d) Evaluate the usefulness of the information (to a potential buyer) contained within the financial statements of a business such as Pretty Tulips. _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ A6B1W8 2905 5 [Turn over Examiner Only _________________________________________________________ Marks Remark _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _____________________________________________________ [12] A6B1W8 2905 6 [Turn over BLANK PAGE (Questions continue overleaf) A6B1W8 2905 7 [Turn over 2 Lough Neagh Wind Farm Limited is a newly established business set up with the aim of producing energy from renewable sources, particularly using natural resources. Within the UK, government funding is available to encourage development of energy from renewable sources. The company proposes to purchase a total of three steel monopiles (equipment which is placed on the waterbed to produce electricity) for the budget period, at the rate of one steel monopile per month. The financial information in relation to the project is summarised in the draft operating statement below. Table 1 Wind Farm Project Forecasted 2nd Quarter Operating Statement (2008) April May June m m m 2.50 3.00 3.00 Purchase cost of monopiles 1.50 1.80 2.10 Loan repayments 0.04 0.04 0.04 Overheads 1.95 1.95 1.75 0.25 0.30 0.30 Receipts Sales Revenues Energy Fund Grant Cash Expenses/Payments Non-Cash Expenses Depreciation Note: The forecasted cash balance as at 1 April 2008 is 0.75m. The company s accountant has been reviewing the financing arrangements for the project. She plans to advise the Board of Directors to investigate two alternative means of financing this project, in order to carefully manage the level of debt within the company. A6B1W8 2905 8 [Turn over (a) Betty, the company s accountant, had started to prepare the cash budget but had to leave to attend a board meeting in another location. You are required to assist Betty, by completing the cash budget for the 2nd Quarter of 2008, by completing the relevant information in Table 2, to show the projected closing cash balance at the end of each month of the three-month period. [11] Examiner Only Marks Remark Table 2 Cash Budget 2nd Quarter (2008) April May June m m m 2.50 3.00 3.00 Purchase cost of monopiles 1.50 1.80 Loan Repayments 0.04 0.04 0.04 Overheads 1.95 1.95 1.75 Opening Balance 0.75 Cashflows In: Sales Revenues Total Cashflows In Cashflows Out: Total Cashflows Out (3.49) Closing Balance You may use this space for your calculations: A6B1W8 2905 9 [Turn over (b) From the cash budget, identify the month/s in which the business is likely to need a bank overdraft. Examiner Only Marks Remark _________________________________________________________ ______________________________________________________ [3] (c) You are required to re-calculate the closing balance in June if the payment for the steel monopile in that month had been postponed until July. You may use this space for your calculations: _________________________________________________________ ______________________________________________________ [3] A6B1W8 2905 10 [Turn over (d) Explain how the following two potential sources of finance that a business such as Lough Neagh Wind Farm Limited could be used to finance the project: 1. Examiner Only Marks Remark Bank Overdraft _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ ______________________________________________________ [4] 2. Bank Loan _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ ______________________________________________________ [4] A6B1W8 2905 11 [Turn over Study the information below and answer the questions that follow. 3 Jo, Flo and Mo are all 18 years of age, and have just completed their exams at college in Enniskillen. All the girls live on farms in the County Fermanagh countryside. They plan to set up in business as a private company next month, producing and selling a speciality hand cream (made from goat s milk) for the local cosmetics market. Jo s brother (Adam) is an assistant bank manager, and, acting upon his advice, the girls have collected financial data enabling them to conduct a breakeven analysis. Initially, the girls found this difficult as they had little knowledge of the concepts of costs, revenues, contribution and profit. After doing some research, the girls eventually understood the basic ideas only to find that they had some practical difficulties estimating such items for the planned business venture. Jo, Flo and Mo estimated their fixed costs at 420 per week and the variable costs associated with each jar of hand cream to be 6.00. However, the girls knew that they would only be able to produce 160 jars per week, so they made a decision to sell each jar for 10.00 in order to ensure that they would make what they considered to be a reasonable level of profit each week. Examiner Only Marks Remark (a) Explain the following terms and state a formula to show how each could be calculated: (i) Total revenue _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ ___________________________________________________ [2] (ii) Contribution per unit _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ ___________________________________________________ [2] A6B1W8 2905 12 [Turn over (b) You are required to: Examiner Only Marks Remark (i) calculate the breakeven point (in terms of sales quantities of jars of hand cream): ______________________________________________________ ___________________________________________________ [3] You may use this space for your calculations: (ii) calculate the breakeven point (in terms of sales revenue of jars of hand cream): ______________________________________________________ ___________________________________________________ [3] You may use this space for your calculations: A6B1W8 2905 13 [Turn over (c) Using the appropriate information, draw a breakeven graph to show the: (1) (2) (3) (4) (5) 2905 Remark Total revenues Total costs (including Fixed Costs and Variable Costs) Breakeven point (in terms of quantity and revenue) Total Profit if 160 jars are sold per week Margin of Safety if 160 jars are sold each week (in terms of both quantity and revenue) [scale to be used: 1 cm = 100 and 1 cm = 10 jars] A6B1W8 Examiner Only Marks 14 [7] [Turn over Breakeven Graph (Jars) 1600 1400 Revenue/Costs 1200 1000 800 600 400 200 0 A6B1W8 2905 20 40 60 80 100 Output (jars) per week 15 120 140 160 [Turn over (d) Evaluate the usefulness of breakeven analysis to a business such as that proposed by Jo, Flo and Mo. Examiner Only Marks Remark _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ ______________________________________________________ [12] A6B1W8 2905 16 [Turn over (Extra page if needed) Examiner Only Marks ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ A6B1W8 2905 17 Remark A6B1W8 302-028-1 S 3/07 2905 20 [Turn over [Turn over

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Additional Info : Gce Applied Business January 2008 Assessment Unit A2 7 - Finance
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