IB DP Business Management Unit 3: Finance and Accounts -- Practice Questions

These are original questions written for Marlbridge, in the style and at the standard of the examination. They are not reproduced past-paper questions – the IB holds copyright in its own papers. Use these alongside the official past papers available through your school or the IB store.

Related: Unit 3 revision notes and the IB DP Business Management syllabus guide.

Section A

1. State two internal sources of finance available to a business. [2]

2. Distinguish between a fixed cost and a variable cost, giving one example of each. [2]

3. State the accounting equation. [1]

Section B

4. A start-up bakery with no trading history needs $5,000 to buy an oven, and separately needs $500 to cover one week’s flour costs while waiting for a late-paying customer.

(a) Recommend an appropriate source of finance for the oven purchase, justifying your choice. [2] (b) Recommend an appropriate source of finance for the short-term flour cost, justifying your choice. [2]

5. A business has current assets of $60,000 and current liabilities of $30,000.

(a) Calculate the current ratio. [2] (b) Explain what this ratio suggests about the business’s ability to meet its short-term obligations. [2]

6. A business is considering an investment of $40,000 that returns $10,000 per year for five years.

(a) Calculate the payback period. [2] (b) Calculate the average rate of return (ARR), assuming total profit over the five years is $10,000. [2] (c) State one weakness of using payback period alone to evaluate this investment. [1]

Section C

7. A retail business reports strong net profit margin for the year but its accountant warns the business may face a cash shortfall next quarter.

(a) Explain how a business can be profitable yet still face a cash flow problem. [2] (b) Suggest and justify one method the business could use to improve its cash flow position. [2] (c) The business is HL and has a gearing ratio of 65%. Explain one risk and one potential benefit of this level of gearing. [3] (d) Evaluate whether the business should prioritise investment appraisal methods that account for the time value of money (such as NPV) over simpler methods (such as payback) when deciding on a major new investment. [3]

Worked answers

1. Any two of: retained profit, sale of assets, reduced working capital. [2]

2. A fixed cost does not vary with output, e.g. rent. [1] A variable cost varies directly with output, e.g. raw materials. [1]

3. Assets = Liabilities + Equity. [1]

4. (a) A bank loan or leasing would be appropriate: as a start-up with no trading history, retained profit is unavailable, and the oven is a long-term asset best matched to a longer-term source of finance rather than a short-term one like an overdraft. [2] (b) An overdraft or trade credit would be appropriate: this is a short-term, temporary cash need caused by a timing mismatch (late-paying customer), which matches a flexible, short-term source rather than a long-term loan intended for capital purchases. [2]

5. (a) Current ratio = current assets / current liabilities = 60,000 / 30,000 = 2:1. [2] (b) A current ratio of 2:1 suggests the business has twice as many current assets as current liabilities, indicating it should comfortably be able to meet its short-term obligations as they fall due, though an excessively high ratio could also suggest inefficient use of working capital. [2]

6. (a) Payback period = initial investment / annual return = 40,000 / 10,000 = 4 years. [2] (b) ARR = (total profit / years) / initial investment x 100 = (10,000/5) / 40,000 x 100 = 2,000/40,000 x 100 = 5%. [2] (c) Payback period ignores any profitability or returns generated after the payback point is reached. [1]

7. (a) Profit is an accounting measure of revenue minus costs over a period, while cash flow is the actual movement of cash in and out of the business; a business can record a profit on paper (e.g. through credit sales not yet paid) while having insufficient cash on hand to pay its own bills, especially if customers pay late or cash is tied up in stock. [2] (b) Negotiating longer payment terms with suppliers would be appropriate: this delays cash outflows without requiring new borrowing, directly easing a short-term cash shortfall caused by the timing mismatch between receiving revenue and paying costs. [2] (Other valid answers, e.g. factoring or early-payment discounts, are also acceptable with justification.) (c) Risk: a gearing ratio of 65% means the majority of capital employed comes from debt, so the business faces significant interest payment obligations regardless of trading performance, increasing financial risk especially if profits fall. Benefit: if the business earns a return on the borrowed capital greater than the interest cost, high gearing can boost returns to equity holders (shareholders) without diluting ownership through issuing more shares. [3] (d) NPV accounts for the time value of money by discounting future cash flows, giving a more financially accurate picture for long-term, capital-intensive investments where returns are spread over many years and the discount rate materially affects the outcome; however, NPV depends on a chosen discount rate that itself involves judgement and is more complex to calculate and communicate than payback. For quick, lower-risk decisions, or where speed of return matters most (e.g. cash flow-constrained businesses), payback’s simplicity remains a valid consideration – a well-evaluated answer uses more than one method rather than favouring either exclusively. [3]

Why this set stays calculation-led

Every Section B and C question in this set requires at least one numerical calculation, mirroring how Paper 2’s unseen stimulus material is structured around a real (fictional) business’s financial data rather than abstract definitions. Question 7 deliberately stacks a qualitative explanation (7a), a recommendation (7b), an HL-only ratio discussion (7c), and a full evaluate-style question (7d) into one scenario, because that is exactly the format Paper 2’s final question typically takes – testing whether a student can move fluently between calculation and evaluation within a single business context, rather than treating Unit 3’s nine sub-topics as isolated calculation drills.

Official syllabus

International Baccalaureate Organization, Diploma Programme Subject Brief – Business Management, first assessment 2024 – the same source cited by the Unit 3 revision notes and the IB DP Business Management syllabus guide.