Edexcel International A Level Business: Financial planning and Managing finance (YBS11) – 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 sections 2.3.2 Financial planning and 2.3.3 Managing finance of Unit 2 in the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (YBS11), Issue 1, September 2017. Command words follow the specification’s list: define, calculate, construct, explain, analyse, discuss and assess. Money is in dollars and all businesses are invented. Calculators may be used.

Links: study guide, revision notes, Edexcel A Level Business hub, printable checklist, free diagnostics.

Questions

1. Define the term “contribution”. [2]

2. Calder Vale Kayaks sells a kayak for 120. Variable costs are 70 a kayak and fixed costs are 45,000 a year. It expects to sell 1,200 kayaks. Calculate the break-even output and the margin of safety. [4]

3. Ladywell Cafe opens a month with 2,500 in the bank. Expected inflows for months 1 to 3 are 18,000, 16,000 and 21,000. Expected outflows are 17,500, 19,500 and 20,000. Construct a cash-flow forecast showing the closing balance each month. [4]

4. Explain one difficulty Ladywell Cafe may face in forecasting its sales. [4]

5. Wyndham Cross Joinery has revenue of 250,000, cost of sales of 150,000, other operating expenses of 70,000 and interest of 6,000. Calculate its profit for the year margin. [4]

6. Northgate Cellars budgeted sales revenue of 90,000, materials of 30,000 and wages of 28,000 for a quarter. Actual figures were 96,000, 33,000 and 27,000. Calculate each variance, stating whether it is favourable or adverse, and the profit variance. [4]

7. Wethersby Wholesale made a profit of 50,000 on revenue of 240,000. Customers take 60 days to pay, but suppliers want payment within 30 days. The firm also bought extra inventory early in the year. Its bank balance has fallen. Analyse why profit and cash have moved differently. [6]

8. Wethersby Wholesale has inventory of 45,000, trade receivables of 18,000, cash of 7,000, trade payables of 30,000 and an overdraft of 20,000. Calculate its current ratio and acid test ratio. [4]

9. Wethersby Wholesale plans to cut inventory from 45,000 to 27,000 using just in time methods, holding the released money as cash. Analyse how this would affect its liquidity. [6]

10. Ladywell Cafe’s owner says a cash-flow forecast is the most useful planning tool for a new business. Discuss this view. [8]

11. Barrowmere Foods sells a snack at 6.00 with variable costs of 2.40 a unit and fixed costs of 14,000 a month. A year ago the owner forecast 5,000 sales a month and bought inventory and hired staff to match. Actual sales are 3,200 a month. The currency has also weakened, raising imported ingredient costs by 12%, and the bank loan interest rate has risen. The business is short of cash. Assess the main cause of Barrowmere Foods’ difficulties. [10]

Answers

1. Contribution is selling price minus variable cost per unit [1], the amount each unit sold adds towards fixed costs and then profit [1]. [2] Examiner insight: a definition scores better when it gives the formula and says what the amount is used for, rather than repeating the word.

2. Contribution = 120 − 70 = 50 [1]. Break-even = 45,000 ÷ 50 [1] = 900 kayaks [1]. Margin of safety = 1,200 − 900 = 300 kayaks [1]. [4] Examiner insight: the command word calculate asks for workings, so show the contribution step; a wrong figure can then still show correct method.

3. Month 1: 2,500 + 18,000 − 17,500 = 3,000 [1]. Month 2: 3,000 + 16,000 − 19,500 = −500 [1]. Month 3: −500 + 21,000 − 20,000 = 500 [1]. Clear layout with opening balance, inflows, outflows and closing balance each month [1]. [4] Examiner insight: carry each closing balance forward as the next opening balance and keep the minus sign; the negative month is the point of the forecast.

4. The cafe is new, so it has no sales history to base figures on [1]. Without past data, the owner must guess how many customers will come [1], so the forecast could be too high or too low [1]. Too high a forecast would lead to wasted food and staff cost, which would strain cash [1]. (Credit other applied difficulties, such as a rival cafe cutting prices.) [4] Examiner insight: name the difficulty, then trace its effect on this business; a general statement that forecasting is hard stops short of the explanation.

5. Gross profit = 250,000 − 150,000 = 100,000 [1]. Operating profit = 100,000 − 70,000 = 30,000 [1]. Profit for the year = 30,000 − 6,000 = 24,000 [1]. Margin = 24,000 ÷ 250,000 × 100 = 9.6% [1]. [4] Examiner insight: name the profit measure you use as the numerator; operating profit over revenue is a different margin and answers a different question.

6. Revenue: +6,000 favourable [1]. Materials: +3,000 adverse, since cost is above budget [1]. Wages: −1,000 favourable, since cost is below budget [1]. Budgeted profit = 90,000 − 30,000 − 28,000 = 32,000; actual = 96,000 − 33,000 − 27,000 = 36,000; profit variance +4,000 favourable [1]. [4] Examiner insight: the sign of a variance does not decide its label; a positive cost variance is adverse, so state favourable or adverse every time.

7. Profit counts the sales when earned, but cash arrives only after 60 days [1]. Suppliers are paid after 30 days, so for 30 days the firm has paid out before it has received [1]. Extra inventory was paid for early, so cash is tied up in goods not yet sold [1], and that cash does not return until the stock sells [1]. Growth in sales makes the gap larger, because more must be bought and paid for before customers pay [1]. The result is a profitable firm with a falling bank balance and a risk of overtrading [1]. [6] Examiner insight: link each point to the data in the case, such as the 60 days against 30 days; a chain of cause and effect is what analyse asks for.

8. Current assets = 45,000 + 18,000 + 7,000 = 70,000; current liabilities = 30,000 + 20,000 = 50,000 [1]. Current ratio = 70,000 ÷ 50,000 = 1.4 [1]. Acid test = (70,000 − 45,000) ÷ 50,000 [1] = 0.5 [1]. [4] Examiner insight: the overdraft is a current liability, so include it; leaving it out raises both ratios wrongly.

9. The firm releases 18,000, so cash rises from 7,000 to 25,000 [1]. Current assets stay at 70,000, so the current ratio is unchanged at 1.4 [1]. Inventory falls to 27,000, so the acid test rises to (70,000 − 27,000) ÷ 50,000 = 0.86 [1]. The firm can pay more short-term debts from liquid assets, for example reducing the 20,000 overdraft [1]. However, 0.86 is still below 1 [1], and just in time needs reliable suppliers, or stock-outs may lose sales [1]. [6] Examiner insight: explain why one ratio moves and the other does not; the shift is from inventory to cash within current assets.

10. For: it shows when cash will run short, so the owner can arrange an overdraft before it is needed [1]. It gives a lender evidence of the repayment plan [1]. A new cafe has little cash, so timing of payments is critical [1]. It helps decide when to buy stock or equipment [1]. Against: it depends on a sales forecast that is uncertain for a new business [1], so an error in sales will distort every month [1]. It does not show profit, so the owner also needs break-even and budgets [1]. Judgement: it is highly useful for survival in the first months, but is only as reliable as its forecast and should be updated and used with other tools [1]. [8] Examiner insight: a discuss answer needs both sides in context and a short, reasoned view; a list of advantages alone leaves the other side missing.

11. Sales are 36% below forecast: (5,000 − 3,200) ÷ 5,000 [1]. At 3,200 units the contribution is 3.60 a unit, giving 11,520 against fixed costs of 14,000, a monthly loss of 2,480 [1]. Break-even is 14,000 ÷ 3.60, about 3,889 units, so even before other changes the plan could not break even at 3,200 [1]. The overestimate led to extra inventory and staff, tying up cash [1]. The 12% rise lifts variable cost to 2.688, contribution falls to 3.312 and break-even rises to about 4,227 units [1]. The loss at 3,200 units becomes about 3,402 a month [1]. This is real, but it adds to a problem that already existed [1]. Higher loan interest adds a fixed cost but its size is not given [1]. The overestimate is an internal cause the owner controlled; the currency and interest rate are external [1]. Judgement: overestimating sales is the main cause, as the firm would have lost money without the external changes, which made things worse [1]. [10] Examiner insight: use the figures to show the order of importance; a verdict supported by the 2,480 loss before the external changes is stronger than an unsupported opinion.

Where marks are usually lost

• Dividing fixed costs by selling price rather than contribution.
• Writing a variance with no favourable or adverse label.
• Dropping the minus sign in a cash-flow forecast.
• Leaving the overdraft out of current liabilities.
• Describing profit and cash as the same thing.
• Giving a list of advantages when the question says discuss or assess.
• Using general statements instead of the figures in the case.
• Ending an evaluative answer with no judgement.

Next steps

• Re-read the study guide for any section where you lost marks.
• Learn the formulas in the revision notes.
• Check progress with the free diagnostics.
• Book a free trial class at /trial/.
• Return to the course hub or the printable checklist.

Frequently asked questions

What do these financial planning practice questions cover? They cover sections 2.3.2 Financial planning and 2.3.3 Managing finance of Unit 2 in Pearson Edexcel International A Level Business (YBS11): revenue and costs, sales forecasting, break-even, cash flow, budgets, profit, liquidity and business failure.

What is the most common break-even mistake? Dividing fixed costs by the selling price instead of by contribution per unit. Break-even output is total fixed costs divided by (selling price − variable cost per unit).

Should an overdraft be included in current liabilities? Yes. An overdraft is a current liability, so leaving it out overstates the current and acid test ratios.

How should you label a budget variance? State whether each variance is favourable, meaning it raises profit, or adverse, meaning it lowers profit. A variance with no label loses marks.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (YBS11), Issue 1, September 2017, Unit 2, sections 2.3.2 and 2.3.3 and Appendices 6 and 9, published by Pearson Education Limited.