O Level Business: Income statements and Statement of financial position (Cambridge 7115) – 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 are aligned to the Cambridge O Level Business Studies 7115 syllabus for examination in 2026, sections 5.3 (Income statements) and 5.4 (Statement of financial position). The syllabus says constructing these statements will not be assessed, so every question gives you the figures to read and use. All businesses are invented and all amounts are in dollars.

Related pages: the study guide, the revision notes, the Cambridge O Level Business hub, the printable checklist and the earlier financial information and decisions practice set.

Questions

1. Define the term retained profit. [2]

2. Ostley Bay Cafe had revenue of 210 000 and cost of sales of 84 000 last year. Its expenses were 96 000, tax was 6 000 and dividends were 8 000.

(a) Calculate gross profit. [1] (b) Calculate profit (before tax). [1] (c) Calculate retained profit. [2]

3. Identify each item as a non-current asset, current asset, current liability or non-current liability.

(a) A delivery vehicle used for five years. [1] (b) Money owed to the business by customers. [1] (c) A bank overdraft. [1] (d) A ten-year bank loan. [1]

4. Pinewick Joinery sold goods worth 54 000 in one quarter, but 36 000 of this was on credit and has not yet been paid. Its costs for the quarter were 36 000, all paid in cash. It also paid 20 000 in cash for a new saw. Its cash at the start of the quarter was 45 000.

(a) Calculate the profit for the quarter. [1] (b) Calculate the change in cash during the quarter. [2] (c) Explain why the profit and the change in cash are different. [3]

5. Explain two reasons why profit is important to private sector businesses. [4]

6. Harbour Light Lamps had revenue of 320 000, cost of sales of 176 000 and expenses of 100 000 last year. The owner proposes extra advertising costing 18 000 a year. She expects it to raise revenue by 10%, with cost of sales rising by the same percentage.

(a) Calculate the profit the business would make with the advertising. [4] (b) Evaluate whether the owner should go ahead with the advertising. [4]

7. Ferrin Print Works has the following figures at its year end.

Item	Amount
Machinery	180 000
Premises	150 000
Inventories	48 000
Receivables	27 000
Cash	3 000
Payables	35 000
Bank overdraft	20 000
Bank loan (repayable in eight years)	100 000
Share capital	120 000
Retained profit	133 000

(a) Calculate its current liabilities. [1] (b) Calculate its capital employed, taking this as equity plus non-current liabilities. [2] (c) Analyse how Ferrin Print Works is financing its activities. [4]

8. Ferrin Print Works (question 7) is considering selling 18 000 of its inventories at cost for cash. Explain one way this could help the business and one drawback. [4]

9. Explain one limitation of using a simple income statement when deciding whether to expand a business. [3]

10. Gantry Hill Candles’ income statements show these figures.

	Year 1	Year 2
Revenue	200 000	240 000
Cost of sales	110 000	144 000
Expenses	60 000	70 000

(a) Calculate profit in each year and the percentage change in profit. [3] (b) Analyse why profit fell even though revenue rose. [3] (c) Recommend what the owner should do to improve profit in Year 3. Justify your answer. [5]

11. Two potting businesses each ask a bank for a loan. Their statements of financial position show these totals.

	Kellan Pottery	Dorrow Garden Supplies
Non-current assets	300 000	220 000
Current assets	60 000	90 000
Current liabilities	70 000	40 000
Non-current liabilities	200 000	40 000

(a) Calculate the capital employed of each business (equity plus non-current liabilities). [2] (b) Justify which business is the safer one for the bank to lend to. [8]

Answers

1. Retained profit is the profit left in the business [1] after tax has been paid and dividends have been paid to the owners [1]. [2] Examiner insight: The second mark for a definition depends on saying what has been taken off. “Profit kept in the business” alone is incomplete.

2. (a) Gross profit = 210 000 − 84 000 = 126 000 [1]. (b) Profit = 126 000 − 96 000 = 30 000 [1]. (c) Retained profit = 30 000 − 6 000 − 8 000 [1] = 16 000 [1]. Examiner insight: Start retained profit from profit, not from gross profit. Show each subtraction so your method is clear.

3. (a) Non-current asset [1]. (b) Current asset (receivables or debtors) [1]. (c) Current liability [1]. (d) Non-current liability [1]. Examiner insight: The overdraft is the usual trap. It is repayable in the short term, so it is current, even though it comes from a bank like a loan.

4. (a) Profit = 54 000 − 36 000 = 18 000 [1]. (b) Cash in = 54 000 − 36 000 = 18 000, cash out = 36 000 + 20 000 = 56 000 [1]. Change = 18 000 − 56 000 = −38 000 (cash falls from 45 000 to 7 000) [1]. (c) Most of the sales were on credit, so they count as revenue but no cash has arrived yet [1]. The saw was paid for in cash but is not a cost of this quarter’s trading [1]. So the business is profitable but its cash has fallen sharply, and it could find it hard to pay bills [1]. [3] Examiner insight: Use the figures in the stem. An answer that only says “profit is not cash” without pointing to the credit sales and the saw gives no application.

5. Any two reasons, each with development. Reward for risk and enterprise [1]: owners invest money and could lose it, so profit rewards them and encourages people to start businesses [1]. Source of finance [1]: profit kept as retained profit can pay for new equipment or expansion without borrowing, so no interest is paid [1]. [4] Examiner insight: Each reason needs a development. Naming two reasons with no explanation usually leaves half the marks unclaimed.

6. (a) New revenue = 320 000 × 1.10 = 352 000 [1]. New cost of sales = 176 000 × 1.10 = 193 600 [1]. New expenses = 100 000 + 18 000 = 118 000 [1]. Profit = 352 000 − 193 600 − 118 000 = 40 400 [1]. (b) Current profit is 320 000 − 176 000 − 100 000 = 44 000, so profit would fall by 3 600 [1]. The extra gross profit is 158 400 − 144 000 = 14 400, which does not cover the 18 000 cost [1]. At the current gross profit margin of 45%, revenue would have to rise by 40 000 (12.5%) just to cover the cost [1]. The owner should not go ahead on a 10% forecast, unless she is confident the advertising will raise revenue by more than 12.5% or will build lasting customer loyalty [1]. [4] Examiner insight: For “evaluate”, a calculation alone is not enough. State the decision and give a condition under which it would change.

7. (a) 35 000 + 20 000 = 55 000 [1]. (b) Equity = 120 000 + 133 000 = 253 000 [1]. Capital employed = 253 000 + 100 000 = 353 000 [1]. (c) The loan provides 100 000 of 353 000 of long-term finance, 28.3% [1]. Equity provides 71.7%, so the business is mostly financed by its owners [1]. Retained profit (133 000) is larger than share capital (120 000), which shows profits have been kept in the business [1]. It also has a 20 000 overdraft, so there is interest to pay on short-term borrowing as well as on the loan [1]. [4] Examiner insight: Analysis answers gain credit for using percentages or figures from the table. “It uses a loan and equity” with no numbers stays at description.

8. Help: selling 18 000 of inventories at cost raises cash from 3 000 to 21 000 [1], enough to clear the 20 000 overdraft [1], which reduces current liabilities and interest [1]. Drawback: the business would have less stock to sell and might lose sales or delay customer orders [1]. [4] Examiner insight: Link the benefit to a figure in the data, such as what the cash could pay off.

9. It covers only a past period [1], so conditions such as demand, costs and competition may be different after expansion [1]. It also does not show cash, so a profitable business could still lack the cash to pay for the expansion [1]. [3] Examiner insight: One limitation, explained fully, scores better than three limitations named in a list.

10. (a) Year 1: gross profit 90 000, profit 30 000. Year 2: gross profit 96 000, profit 26 000 [1]. Change = −4 000 [1]; −4 000 ÷ 30 000 × 100 = −13.3% [1]. (b) Cost of sales rose by 30.9% (110 000 to 144 000), faster than revenue (20%) [1]. Expenses rose by 16.7% (60 000 to 70 000) [1]. Costs grew faster than revenue, so gross profit rose by only 6.7% and was more than cancelled by higher expenses [1]. (c) Options: negotiate cheaper materials or change supplier to cut cost of sales [1]; at the Year 1 gross profit margin of 45%, Year 2 gross profit would have been 108 000, not 96 000 [1]. Cut or hold expenses [1]. Raise prices, but this may reduce sales [1]. Recommend cutting cost of sales first, because that is where the profit was lost, and justify it with the figures [1]. [5] Examiner insight: Recommend one main action and say why it beats the alternatives. A list of every possible idea with no choice does not show evaluation.

11. (a) Kellan Pottery: net assets = 300 000 + 60 000 − 70 000 − 200 000 = 90 000, so capital employed = 90 000 + 200 000 = 290 000 [1]. Dorrow: net assets = 220 000 + 90 000 − 40 000 − 40 000 = 230 000, so capital employed = 230 000 + 40 000 = 270 000 [1]. (b) Kellan has negative working capital (60 000 − 70 000 = −10 000), so its current assets do not cover its current liabilities [1]. Dorrow has working capital of 50 000 [1]. Kellan is financed 69% by loans (200 000 of 290 000), so it has heavy interest to pay [1]. Dorrow is only 14.8% loan-financed [1]. Dorrow’s equity is 230 000 against 90 000 for Kellan, a bigger cushion if the business does badly [1]. This matters to a lender, because a weaker business may not repay on time [1]. A caution is that one statement shows a single date and no profit, so the bank should also look at the income statement [1]. Judgement: Dorrow Garden Supplies is the safer borrower [1]. [8] Examiner insight: A justified judgement needs the comparison point-by-point with figures, then a clear choice. Saying “Dorrow” with no weighing does not meet the command word.

Where marks are usually lost

• Defining retained profit without saying that tax and dividends have been taken off.
• Starting retained profit from gross profit or revenue.
• Treating profit and cash as the same, or ignoring credit sales when explaining the gap.
• Putting a bank overdraft in non-current liabilities.
• Putting a new cost into cost of sales when it belongs in expenses.
• Giving a decision with no figures, or with no assumption stated.
• Describing financing without percentages or amounts from the data.
• Listing several recommendations and never choosing one.

Frequently asked questions

Are these Cambridge O Level Business Studies 7115 past paper questions? No. They are original practice questions written for Marlbridge on sections 5.3 (Income statements) and 5.4 (Statement of financial position). Use them alongside the official past papers.

Where does a new cost such as advertising go in an income statement calculation? A new running cost such as advertising belongs in expenses, not in cost of sales. Putting it in the wrong line changes gross profit and loses marks.

What should an “evaluate” answer on an income statement proposal include? The calculation, a clear decision and a condition under which the decision would change, such as how customers react to a price rise. A calculation alone is not enough.

How do you answer a “justify” question comparing two businesses’ statements? Compare the two point by point using figures or percentages from the data, then make a clear choice. Naming one business with no weighing does not meet the command word.

Is it better to give several recommendations or one? Recommend one main action and say why it beats the alternatives. Listing every possible idea without choosing does not show evaluation.

Next steps

• Review the revision notes and the study guide.
• Visit the course hub and the printable checklist.
• Take one of the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Cambridge O Level Business Studies 7115 syllabus for examination in 2026, published by Cambridge University Press & Assessment, sections 5.3 and 5.4.