AQA A-Level Business: Financial management (7132) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover section 3.5, Decision making to improve financial performance (3.5.1 to 3.5.4), of the AQA AS and A-level Business specification text (7131/7132). All businesses and figures are invented. Learn the content first from the study guide and revision notes. The course hub and printable checklist show where this topic fits.

Questions

1. Distinguish between cash flow and profit, and explain how a profitable business can still run short of cash. [4]

2. Jarrowby Furniture spends £96,000 on a new workshop that adds £11,520 to annual profit. Its long-term funding is £150,000 of loans and £450,000 of equity.

(a) Calculate the return on investment. [2] (b) Calculate the proportion of long-term funding that is debt, before and after it borrows a further £100,000. [3]

3. Kirkmoor Bikes set a monthly budget and recorded actual results.

Item	Budget (£)	Actual (£)
Revenue	60,000	57,000
Materials	21,000	21,900
Wages	15,000	14,100
Other costs	9,000	9,600

(a) Calculate each variance and state whether it is favourable or adverse. [4] (b) Calculate the profit variance. [2] (c) Explain why the materials variance should be investigated even though it is only 4.3% of budget. [2]

4. Tidmarsh Crafts begins January with £4,000.

	Jan	Feb	Mar	Apr
Cash in (£)	18,000	15,000	21,000	24,000
Cash out (£)	19,500	17,500	16,000	18,500

(a) Calculate the net cash flow and closing balance for each month. [4] (b) Analyse whether Tidmarsh needs to arrange short-term finance. [3]

5. Lanchester Lamps sells lamps at £24. Variable cost is £14 per lamp and fixed costs are £36,000. It plans to sell 4,200.

(a) Calculate break-even output. [3] (b) Calculate the margin of safety and the profit at planned output. [3] (c) Variable cost rises to £16. Calculate the new break-even output and describe the effect on a break-even chart. [3] (d) State two limitations of break-even analysis. [2]

6. Trenwith Studios had revenue £480,000, cost of sales £288,000, operating expenses £134,400 and finance costs £9,600. Tax was 25% of profit before tax. Last year’s margins were gross profit 37.0%, profit from operations 9.0% and profit for the year 5.1%.

(a) Calculate gross profit, profit from operations and profit for the year, with each margin. [5] (b) Analyse the change in profitability. [4]

7. Fulbrook Foods sells £45,000 of goods a month to retailers who pay after 60 days. It buys £20,000 of ingredients a month and pays suppliers after 30 days. It is profitable and growing. Analyse the cash flow problems this could cause and one way to reduce them. [6]

8. (a) Define venture capital. [2] (b) Identify one internal source of finance and state one disadvantage of it. [2]

9. Redmarley Garden Rooms needs £120,000 for a showroom that should add £15,000 a year to profit before interest. It has £60,000 of loans and £240,000 of equity. A bank offers a loan at 8% a year; alternatively it could issue new shares.

(a) Calculate debt as a proportion of long-term funding after each option. [2] (b) Justify which source Redmarley should use. [8]

10. Denholme Joinery has revenue £300,000, variable costs £165,000 and fixed costs £105,000. Option A is a new supplier that cuts variable costs by 4%. Option B raises prices by 6%, which is expected to cut volume by 5%. Evaluate which option the owner should choose. [9]

11. Nunthorpe Courses sells online lessons in a market with several larger rivals. Analyse how two of technology, competition and ethical influences might shape its financial decisions. [6]

12. Explain two benefits of budgeting. [4]

Answers

1. Cash flow is the movement of money into and out of the business [1]; profit is revenue minus costs, counted when earned or incurred [1]. A sale on credit counts as profit at once but the cash arrives later [1], while wages and suppliers must be paid first, causing a shortage [1]. [4] Examiner insight: Credit is gained by showing the timing mechanism; saying cash and profit are different without a reason is a weaker answer.

2. (a) 11,520 ÷ 96,000 [1] × 100 = 12% [1]. [2] (b) Before: 150 ÷ (150 + 450) = 25% [1]. After: debt 250, so 250 ÷ (250 + 450) [1] = 35.7% [1]. [3] Examiner insight: Adding new borrowing to debt only, not to the total, is a common slip; show the formula.

3. (a) Revenue £3,000 adverse [1]; materials £900 adverse [1]; wages £900 favourable [1]; other costs £600 adverse [1]. [4] (b) Budgeted profit 60,000 − 45,000 = £15,000 [1]; actual 57,000 − 45,600 = £11,400, so £3,600 adverse [1]. [2] (c) Revenue was below budget, so fewer sales should have meant lower materials use [1]; the overspend is therefore worse than it looks and may signal waste or higher supplier prices [1]. [2] Examiner insight: Labels must be judged by effect on profit; a larger cost figure is adverse even though the number is positive.

4. (a) Jan: net −1,500, closing 2,500 [1]. Feb: net −2,500, closing 0 [1]. Mar: net +5,000, closing 5,000 [1]. Apr: net +5,500, closing 10,500 [1]. [4] (b) The balance never goes negative [1], but it falls to exactly zero in February, leaving no margin if customers pay late [1]. An agreed overdraft is a cheap safeguard, so short-term finance should be arranged for February but may not be used [1]. [3] Examiner insight: Reading the numbers and then applying them to the decision earns more than restating the table.

5. (a) Contribution = 24 − 14 = £10 [1]; 36,000 ÷ 10 [1] = 3,600 lamps [1]. [3] (b) Margin of safety = 4,200 − 3,600 = 600 [1]; total contribution = 10 × 4,200 = 42,000 [1]; profit = 42,000 − 36,000 = £6,000 [1]. [3] (c) Contribution = £8 [1]; break-even = 36,000 ÷ 8 = 4,500 [1]. The total cost line is steeper and the crossing moves right, so planned output (4,200) is now below break-even, a loss of £2,400 [1]. [3] (d) Any two: it assumes all output is sold [1]; it assumes price and costs stay constant, ignoring demand reacting to price [1]. [2] Examiner insight: Each calculation needs its formula or working visible; units (lamps, £) are part of a complete answer.

6. (a) Gross profit £192,000, margin 40.0% [1]. Profit from operations 192,000 − 134,400 = £57,600, margin 12.0% [1]. Profit before tax = 57,600 − 9,600 = £48,000 [1]. Profit for the year = 48,000 × 0.75 = £36,000 [1], margin 7.5% [1]. [5] (b) All three margins improved [1]. Gross margin rose three points (37.0% to 40.0%), suggesting better pricing or purchasing [1]. Operating margin also rose three points, so operating expenses stayed about 28% of revenue [1]. Profit for the year rose only 2.4 points, so finance costs and tax absorbed part of the gain [1]. [4] Examiner insight: Comparing the three profit measures with each other, not just with last year, shows analysis.

7. Customers pay two months after sale, while ingredients are paid after one month [1]. In the first months Fulbrook pays £20,000 a month with no cash in, so it is £20,000 out of pocket by the end of month two [1]. As sales grow, the gap widens because more stock must be funded before payment arrives [1]. A profitable business can therefore run out of cash and may need an overdraft or have to refuse orders [1]. One solution is debt factoring, giving cash on invoices at once [1], though a fee reduces profit [1]. [6] Examiner insight: A numbered use of the case figures turns a general cash flow answer into an analysed one.

8. (a) Venture capital is money invested by a specialist investor in a risky or growing firm [1] in return for a share of ownership [1]. [2] (b) Retained profits [1]; limited to profit already earned and not paid out [1]. [2] Examiner insight: Only an internal source scores in (b); naming an overdraft would not.

9. (a) Loan: debt 180 ÷ (180 + 240) = 42.9% [1]. Shares: 60 ÷ (60 + 360) = 14.3% [1]. [2] (b) The loan costs 8% × 120,000 = £9,600 a year, leaving £5,400 of the extra £15,000 [1]. Debt would rise to 42.9% and the interest is fixed whatever sales do [1], which is risky if showroom sales disappoint [1]. Shares carry no repayment or interest, so debt stays at 14.3% and cash is safer [1]. However, existing owners are diluted and may expect dividends [1], and issuing shares may not be possible for a small firm [1]. The loan keeps control, but the lower risk of shares suits an unproven showroom, particularly if the market is uncertain [1]. A balanced recommendation, such as shares or a smaller loan, backed by the figures [1]. [8] Examiner insight: A reasoned decision that weighs both options against this firm’s risk and control wins more credit than a list of advantages.

10. Base profit = 300,000 − 165,000 − 105,000 = £30,000 (10.0% margin) [1]. Option A: variable costs 165,000 × 0.96 = £158,400, profit £36,600 (12.2%) [1]. Option B: revenue 300,000 × 1.06 × 0.95 = £302,100; variable costs 165,000 × 0.95 = £156,750; profit £40,350 (13.4%) [1]. B raises profit by £10,350, A by £6,600 [1]. A depends on the supplier keeping its price and quality, and a cheaper supplier risks reliability [1]. B depends on the volume fall being no worse than 5%, and competitors may not follow [1]. B has higher potential, but a larger fall in volume would cut its advantage quickly [1]. Judgement: B if demand is not price sensitive, otherwise A [1], and both could be combined [1]. [9] Examiner insight: The calculations are the evidence; a judgement that names the assumption it depends on is what completes the evaluation.

11. Technology: online crowd funding or software lowers the cost of raising money or forecasting [1], allowing Nunthorpe to avoid a bank loan and interest [1]. Competition: larger rivals can cut prices, so Nunthorpe may need a budget for promotions or accept lower margins [1], and may be unable to match their spending [1]. Ethical influences, such as fair treatment of customers, may limit aggressive pricing or debt chasing [1]. Any two developed with a link to Nunthorpe’s finances [1]. [6] Examiner insight: Two influences developed with consequences for finance outweigh three listed ones.

12. Budgets set targets, giving managers something to aim at [1], which helps focus effort [1]. They let managers control spending by comparing actual with budget [1], so variances can be investigated early [1]. [4] Examiner insight: Each benefit needs a developed reason to receive both marks.

Where marks are usually lost

• Mixing up cash flow and profit, or using one word for both.
• Forgetting to show the formula before substituting numbers.
• Labelling variances by size of number instead of effect on profit.
• Leaving out units, such as lamps, pounds or percentages.
• Not linking a finance source to the firm’s need, risk and time horizon.
• Writing “evaluate” or “justify” answers with no judgement.
• Skipping the case figures in analysis questions.
• Rounding break-even output down.

Next steps

• Revision notes
• Study guide
• A-level business hub
• Printable checklist
• All free 10-minute diagnostics: /diagnostics/
• Book a free trial class: /trial/

Frequently asked questions

How do you tell whether a variance is favourable or adverse? Judge it by its effect on profit, not by whether the number is bigger or smaller: higher revenue or lower costs than budget are favourable, and lower revenue or higher costs are adverse. Labelling by the size of the number is a common error.

Should break-even output be rounded up or down? Round break-even output up to the next whole unit when units cannot be split, because rounding down leaves the business just short of covering its costs. Rounding down is a frequent slip.

How should you recommend a source of finance in AQA Business? Link the source to the firm’s need, its risk and the time horizon, and use the case figures, such as the debt proportion of long-term funding, to support a clear judgement.

Why should you show the formula before substituting numbers? Writing the formula first shows the examiner your method, so you can earn method marks even if an arithmetic slip affects the final answer.

Official syllabus

AQA AS and A-level Business (7131/7132), section 3.5 Decision making to improve financial performance, subsections 3.5.1 to 3.5.4, published by AQA.