Analyse the benefits to a business of accurate cost information.

Mark scheme

Marking points from the official mark scheme (May/June 2021). The mark or mark type is shown in brackets.

1. [1] Clear understanding of cost information
2. [1] Reference to the benefits of cost information
3. [1] Managers need cost information to be able to assess and monitor the expenses of the business.
4. [1] Without cost information the price of products/services might be set too low and costs would not be covered by the selling price.
5. [1] The level of costs determines the level of profit.
6. [1] If the cost information is inaccurate the business might be expecting to make a profit that does not happen: the business might even make a loss.
7. [1] Inefficiencies can be highlighted by looking at the cost information for different parts of a business and actions can be taken to correct any problems.
8. [1] If the information is not available or is inaccurate the inefficiency might go unnoticed.
9. [1] Inaccurate cost data might incorrectly indicate an efficiency or inefficiency and the wrong action might be taken.
10. [1] Managers can compare trends over time and monitor any changes and take corrective action.
11. [1] The important element is that cost information needs to be accurate.
12. [1] Having lots of cost data that is not accurate will be of little use to managers and might lead them to make decisions that are damaging to the business.
13. [1] Accept any other valid response.
14. [1] Clear understanding of liquidity ratios
15. [1] Clear understanding of investors
16. [1] Reference to liquidity ratios
17. [1] Reference to the role of business investors
18. [1] Liquidity ratios measure the ability of a business to pay its current liabilities.
19. [1] Two key definitions: The acid test ratio and the current ratio.
20. [1] Acid test = (current assets – inventory) / current liabilities
21. [1] Current ratio = current assets / current liabilities
22. [1] For most businesses, the current ratio is an adequate measure of liquidity but for a business that holds a high level of inventory then a safer measure might be the acid test ratio which does not take inventory into account when calculating the value of current assets.
23. [1] If a business holds a high level of inventory, then its ability to meet current liabilities is reduced.
24. [1] Potential investors in a business need to know that the business they invest in has the ability to survive and be profitable in the longer term.
25. [1] A business that is unable to meet its current liabilities in unlikely to survive.
26. [1] Investors expect a return on their investment: that can only occur if the business is profitable and in order to do that it must be able to survive.
27. [1] A business that cannot meet its current liabilities will find that banks might recall overdrafts or that suppliers will refuse to supply the business due to lack of payment for goods supplied or fear of lack of payment.
28. [1] In a business that is fast-growing there is a danger that the business overextends itself in terms of the spending to facilitate that growth. This could be highlighted by the liquidity ratios. Has the business arranged a large overdraft? Is it taking on more employees?
29. [1] An unsatisfactory liquidity ratio could indicate poor management or poor decision-making. These factors might deter potential investors.
30. [1] Accept any other valid response.
31. [1] A candidate should make a judgement as to the usefulness of liquidity ratios to potential investors in a business.
32. [1] These judgements may be made at any point as well as in a concluding section.
33. [1] Potential investors would be interested in more than the liquidity ratios. They would analyse many aspects of the financial documents of a business. For example, the trend in profits over some years or the value of assets held by the business.
34. [1] They would also compare any financial information for this business to that of other businesses in the same industry to see how that business is performing compared to other similar businesses.
35. [1] Liquidity ratios are very useful to potential investors, but they alone would be unlikely to form the basis of their decision whether to invest.
36. [1] Accept any other valid response.