IB DP Business Management: Final accounts – 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 – the IB holds copyright in its own papers. Use these alongside the official past papers available through your school or the IB store.

These questions cover section 3.4 (Final accounts) of the IB Business management guide, first assessment 2024. Questions 7 to 10 cover depreciation and are marked HL only, as the guide marks that content. The rest apply at SL and HL. Read the study guide and revision notes first. The wider unit is in the Unit 3 practice set. See also the course hub, the checklist and the diagnostics. Money figures in tables are in thousands of dollars unless stated.

Questions

1. State whether each item appears in the profit and loss account or the balance sheet: (a) sales revenue; (b) trade payables; (c) a patent; (d) interest paid. [4]

2. Explain why the final accounts are useful to (a) a bank considering a loan to a business [2] and (b) the employees of that business [2].

3. Pennyhale Preserves had sales revenue of 640. Opening inventory was 48, purchases 296 and closing inventory 56. Expenses were wages 140, marketing 38, rent 60 and other costs 22. Interest paid was 8. Tax is 25% of profit before tax. Dividends were 25.

(a) Calculate cost of sales. [2] (b) Calculate gross profit. [1] (c) Calculate operating profit. [1] (d) Calculate retained profit for the year. [2]

4. Lochmere Outdoor has equipment 310, a patent 45, inventory 64, trade receivables 41, cash 25, trade payables 58, an overdraft 12, a bank loan repayable in five years 140 and share capital 200.

(a) Calculate working capital. [2] (b) Calculate net assets. [2] (c) Calculate retained profit in equity. [2]

5. Ivelmoor Games bought Tarnfell Studio for 540. The identifiable net assets of Tarnfell were worth 360.

(a) Calculate the goodwill. [2] (b) Identify two other types of intangible asset. [2] (c) Explain one difficulty of valuing intangible assets. [2]

6. A small business has assets of 480 and liabilities of 195.

(a) Calculate its equity. [2] (b) It takes a long-term loan of 60 and spends all of it on a machine. State the new total assets, total liabilities and equity. [2]

7. (HL only) A van costs 54,000 dollars, has a residual value of 9,000 dollars and a useful life of 5 years. Using the straight line method, (a) calculate annual depreciation [2] and (b) calculate the net book value at the end of year 3. [2]

8. (HL only) A packing machine costs 180,000 dollars with a residual value of 20,000 dollars and a useful life of 8 years. It is expected to pack 800,000 units in total. It packs 150,000 units in year 1 and 90,000 in year 2.

(a) Calculate depreciation in each year using the units of production method. [3] (b) Calculate annual straight line depreciation and explain why it differs from your year 1 and year 2 figures. [2]

9. (HL only) Pennyhale Preserves owns a head office building and a bottling line. The line runs flat out at harvest and is nearly idle in winter. Justify a depreciation method for each asset. [6]

10. (HL only) The packing machine in question 8 is charged 30,000 dollars of depreciation in year 1. Analyse why this reduces profit but does not reduce the cash held. [4]

11. Hobbscroft Foods is applying to its bank for a larger loan. Extracts from its accounts:

	Year 1	Year 2
Sales revenue	900	1,080
Cost of sales	540	702
Expenses	250	262
Brand names bought (intangible)	0	150
Long-term bank loan	100	260
Cash	85	30

(a) Calculate gross profit and operating profit for each year. [4] (b) Evaluate whether these final accounts give the bank enough information to decide on the loan. [6]

Answers

1. (a) Profit and loss account [1]. (b) Balance sheet [1]. (c) Balance sheet, as a non-current intangible asset [1]. (d) Profit and loss account [1]. [4] Examiner insight: A “state” answer needs only the name of the account. Adding reasons earns nothing extra, so keep it short and move on.

2. (a) The bank wants to know whether the business can repay [1], so it reads existing loans, profit and assets that could act as security [1]. (b) Employees read profit and the strength of the balance sheet [1] to judge job security and the room for pay rises [1]. [4] Examiner insight: Answers tend to gain credit when they name a figure the stakeholder uses and link it to a decision, not when they say “it shows how the business is doing”.

3. (a) Cost of sales = 48 + 296 - 56 [1] = 288 [1]. (b) Gross profit = 640 - 288 = 352 [1]. (c) Expenses = 140 + 38 + 60 + 22 = 260, so operating profit = 352 - 260 = 92 [1]. (d) Profit before tax = 92 - 8 = 84, and tax = 25% of 84 = 21 [1]. Profit after tax = 63, so retained profit = 63 - 25 = 38 [1]. [6] Examiner insight: Working shown line by line lets an examiner give credit for a correct method even if one figure slips. A bare final figure leaves nothing to credit if it is wrong.

4. (a) Current assets = 64 + 41 + 25 = 130 [1]; current liabilities = 58 + 12 = 70, so working capital = 60 [1]. (b) Non-current assets = 310 + 45 = 355, total assets = 355 + 130 = 485 [1]. Net assets = 485 - 70 - 140 = 275 [1]. (c) Equity equals net assets, so retained profit = 275 - 200 = 75 [1] [1]. [6] Examiner insight: The overdraft belongs with current liabilities and the five-year loan with non-current liabilities. Misplacing either changes working capital, so sort each item before adding.

5. (a) Goodwill = 540 - 360 [1] = 180 [1]. (b) Any two of: patent, trademark or brand name, copyright, licence or franchise right [1] [1]. (c) There is nothing physical to inspect, so value rests on estimates [1]. A brand or patent can lose worth suddenly, for example if the brand is damaged or protection ends [1]. [6] Examiner insight: For “explain”, a difficulty followed by a reason is the pattern that tends to earn the second mark. Naming a difficulty alone is a statement.

6. (a) Equity = assets - liabilities = 480 - 195 [1] = 285 [1]. (b) Total assets 540 and total liabilities 255 [1]; equity stays 285 [1]. [4] Examiner insight: Show the accounting equation as a check. Candidates who confirm that assets still equal liabilities plus equity are less likely to carry an error forward unnoticed.

7. (HL only) (a) (54,000 - 9,000) / 5 [1] = 9,000 dollars a year [1]. (b) Accumulated depreciation = 3 x 9,000 = 27,000 [1]. Net book value = 54,000 - 27,000 = 27,000 dollars [1]. [4] Examiner insight: The residual value is deducted first. Using cost alone is a common slip, so write the formula before substituting.

8. (HL only) (a) Depreciation per unit = (180,000 - 20,000) / 800,000 = 0.20 dollars [1]. Year 1 = 150,000 x 0.20 = 30,000 dollars [1]. Year 2 = 90,000 x 0.20 = 18,000 dollars [1]. (b) Straight line = 160,000 / 8 = 20,000 dollars [1]. It differs because straight line charges the same each year, while units of production follows output, which was higher in year 1 and lower in year 2 [1]. [5] Examiner insight: A comparison is stronger when the reason for the difference refers to the figures in the case, here the two output levels.

9. (HL only) The head office building loses value mainly with time and age rather than with use [1], so straight line suits it, giving a simple, equal yearly charge [1]. The bottling line is worn by how much it runs [1], so units of production suits it, because the charge is high in the harvest months and low when idle [1]. A limitation is that units of production needs a reliable estimate of lifetime output, and charges vary from year to year [1]. Overall, I would use straight line for the building and units of production for the line, since each method then matches the way the asset loses value [1]. [6] Examiner insight: For “justify”, a choice backed by reasons drawn from the stem tends to do better than a general description of both methods. A judgement that mentions a limitation shows weighing.

10. (HL only) Depreciation is an expense in the profit and loss account, so the 30,000 dollars lowers profit [1]. The cash for the machine left the business when it was bought, not in year 1 [1]. The charge is therefore a book entry and no payment is made [1]. On the balance sheet the net book value falls by 30,000 dollars while cash is unchanged by the charge [1]. [4] Examiner insight: Analysis here is a chain: expense, profit lower, no payment, cash unchanged. A single statement that depreciation “is not cash” gains less than the full chain.

11. (a) Year 1: gross profit = 900 - 540 = 360 [1]; operating profit = 360 - 250 = 110 [1]. Year 2: gross profit = 1,080 - 702 = 378 [1]; operating profit = 378 - 262 = 116 [1]. (b) For: revenue rose 20% and operating profit rose from 110 to 116 [1], so the business is profitable, and the balance sheet shows 150 of brand names that may add future earning power [1]. Against: cost of sales rose 30%, faster than revenue, so gross profit grew only 5% [1]. The loan rose from 100 to 260 and cash fell from 85 to 30, which suggests the brand purchase was borrowed [1]. The accounts show the past, and brand names are estimates that are hard to sell as security [1]. Judgement: the accounts are a useful starting point, but the bank would also want cash flow forecasts and the reasons for the cost rise before lending [1]. [10] Examiner insight: An “evaluate” answer tends to gain credit when each side uses figures from the table and the ending commits to a view with a reason, not a list of positives and negatives.

Where marks are usually lost

• Leaving out opening inventory or closing inventory in cost of sales.
• Subtracting tax or dividends in the wrong order.
• Placing short-term and long-term debts in the wrong section of the balance sheet.
• Giving a balance sheet that does not balance, without a check.
• Forgetting the residual value in depreciation.
• Writing depreciation as a cash cost.
• Giving a stakeholder answer with no figure from the accounts.
• Describing both depreciation methods when the question asks you to justify one for an asset.
• Giving evaluation without a judgement.

Next steps

• Revise from the revision notes and the study guide.
• Tick off the IB Business Management checklist and visit the course hub.
• Take all free 10-minute diagnostics.
• Book a free trial class.

Frequently asked questions

Is depreciation HL only in IB Business Management final accounts? Yes. In section 3.4 of the IB Business management guide, depreciation by the straight line and units of production methods, and judging which method is appropriate, are HL only. The purpose of accounts, the profit and loss account, the balance sheet and intangible assets apply at SL and HL.

What are common mistakes on final accounts calculation questions? Frequent errors include leaving out opening or closing inventory in cost of sales, subtracting tax or dividends in the wrong order, putting debts in the wrong section of the balance sheet, and not checking that the balance sheet balances. In depreciation questions, forgetting the residual value and treating depreciation as a cash cost also lose marks.

How do you answer a question on why accounts matter to a stakeholder? Name the stakeholder group, say what it is looking for, and use a figure from the accounts in the question. A generic answer with no figure from the accounts is a common way to lose marks.

How do you justify a depreciation method for an asset? Choose one method and link it to how that asset loses value, by time or by use, rather than describing both methods. Then end with a judgement.

Official syllabus

International Baccalaureate Organization, Business management guide, first assessment 2024: section 3.4 Final accounts and the Glossary of command terms.