TT Wholesalers purchased 600 pairs of boots from Shoeee Ltd, a manufacturer. The invoice included cash and trade discount. Shoeee Ltd wants TT Wholesalers to make an online payment by debit card.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2024). The mark or mark type is shown in brackets.

1. [1] Limited / limited company / private / public limited company / private/public limited / limited liability
2. [1] Cash discount is a deduction from the invoice price (1) trade discount is a reduction on the catalogue / list price (1)
3. [1] Cash discount is given to encourage people to pay within a period / for early payment / quick payment / or example 5%, 30 days (1) trade discount is given to encourage repeat orders / bulk buying / quantity buying / encourage sales from retailers / other traders (1)
4. [1] Cash discount may assist the buyer's cash flow / working capital (1) trade discount enables the retailer to make a profit to traders (1)
5. [1] Cash discount is usually low, or e.g. 2 – 5% (1) trade discount is usually higher or e.g. 20-40% (1)
6. [1] Cash discount as a separate accounting entry as an expense (1) trade discount are calculated on the final invoice / not a separate entry. (1)
7. [1] Yes - Convenient / easy (1) can transfer funds immediately / instant payment/fast / direct (1) no chance of debt (1) no interest to pay / interest-free (1) can be used to pay large amounts (1) will save the TT Wholesalers time / money (1) less cash handling (1) compared to posting cheques / visiting Shoeee (1) payment is guaranteed / secure / safe / no theft (1) will have proof/record/ evidence of payment (1) if there are any disagreements (1) no need for credit (1) no fees / charges than using a credit card (1) no need to visit the bank (1) saves transport costs (1) no need to carry cash around (1) cash can be stolen / risky to carry. (1)
8. [1] No - Cannot be used if there is no money in the account (1) large amount of money to be paid (1) may affect cash flow (1) increase overdraft fees (1) may be subject to fraud (1) by hacking (1) lose money (1) may prefer to use credit (1) pay back over a period of time / buy now, pay later (1) other competitors may offer a wider range of payment methods, which would be more suitable to buy boots (1) less protection of fraud (1) than credit cards. (1)
9. [1] Mobile banking is accessed through an app. (TRUE)
10. [1] ATM's can be used at any time. (TRUE)
11. [1] Savings accounts allow customers to have an overdraft limit. (FALSE)
12. [8] Level 3 (7-8 marks): The candidate is able to offer a thorough evaluation, with a recommendation, of whether Shoeee should be using hire purchase or retained earnings to buy machines.
13. Level 2 (5-6 marks): Candidate offers a satisfactory analysis of the advantages and / or disadvantages of using hire purchase and/or retained earnings to buy machines, with or without a recommendation.
14. Level 1 (1-4 marks): Candidate demonstrates some knowledge and understanding, with application to using hire purchase and / or retained earnings to buy machines.
15. Level 0 (0 marks): No creditable response.
16. [1] Hire purchase is an arrangement / agreement which involves a third party in the purchase of goods. The third party can be banks or finance houses
17. [1] Retained profits is profit kept back for use in the company and not paid as dividend to shareholders.
18. Hire purchase:
19. [1] Using hire purchase – Shoeee will pay a deposit/down-payment to purchase the machines and then make regular monthly instalments / repayments, usually over a one to five-year period, until the total is paid.
20. [1] The cost of repayments is fixed. This will help with its cash flow/ budgeting as it means that the cost of buying the machines is spread. It also reduces the initial outlay
21. [1] Shoeee can buy the machines which might otherwise been unaffordable
22. [1] Shoeee can use the machines, but the machinery will not belong to / be owned by Shoeee until the final / last instalment is paid
23. [1] The machines will be repossessed if they do not make the regular repayments
24. [1] The machines cannot be sold until the payments have been completed but the buyer has right to end the contract if over 50% of payments have been made
25. [1] Interest will be added to the selling price of the machines to cover the length of time Shoeee will take to pay the total amount. So, hire purchase is more expensive than paying in cash.
26. [1] By using the machines, it will allow Shoeee to cater for the increased demand whilst making regular monthly payments.
27. Retained earnings (retained profit):
28. [1] Do not have to find a financial institution to provide finance so time / cost is saved
29. [1] Using retained profit gives Shoeee Ltd immediate finance to buy the new machines and can use the machines straightaway
30. [1] There are no repayments and there is no interest to be paid so cheap form of finance
31. [1] The retained profit would allow Shoeee to increase its output immediately
32. [1] The retained profits may be insufficient to pay for the machines
33. [1] There is the opportunity cost that the retained earnings cannot be used for something else
34. [1] If unexpected costs occur, such as the machines break down, it could leave Shoeee without the finance to correct such problems
35. [1] If retained profit has been used to purchase new machines shareholders may not get the dividends they expected and be unhappy with the management / reluctant to invest more money.
36. Evaluation: It depends whether Shoeee has enough retained profits to pay for the machines outright immediately, if so Shoeee should buy it because it becomes an asset of the business. If not, Shoeee will have to use hire purchase or some form of leasing or borrowing. Shoeee may not like the fact that it does not own the machines but at least it can increase output to meet increased demand with potential of increased profits.