Dani opened a music shop as a sole trader. Her speciality shop sells guitars and drums. Fig. 3.1 shows an extract of financial information for the business in 2023. [Table with Cash sales: $135540, Credit sales: $77850, Cost of sales: $61390, Other expenses: $111500] [Figure 3.1] Use Fig. 3.1 to help you answer the following questions.

Mark scheme

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

1. [3] (a)(i) Answer = $40 500
2. [1] (a)(i) Method = $135 540 + 77 850 = $213 390
3. [1] (a)(i) $213 390 – $61 390 = $152000 – $111500
4. [2] (a)(i) OR $152 000 – $111500
5. [1] (a)(ii) Payment is guaranteed/secure
6. [1] (a)(ii) Immediate/instant payment/faster/direct payment / no credit
7. [1] (a)(ii) No bad debts
8. [1] (a)(ii) Reduces paperwork
9. [1] (a)(ii) Security / prevents theft of cash
10. [1] (a)(ii) Minimises cash handling
11. [1] (a)(iii) Sale of goods on credit / goods bought on credit / payment is received later / buying now, pay later / in instalments / sales made through credit cards
12. [1] (b) A shop that sells a narrow/restricted/limited range of goods/specific goods/niche goods/one kind of goods/one type of goods
13. [3] (c) Up to 3 marks for justified reasoning of yes and/or no responses
14. [1] (c) Yes - Dani will have full ownership
15. [1] (c) be in complete control
16. [1] (c) makes all business decisions
17. [1] (c) no need to gain the approval of others
18. [1] (c) can input own ideas
19. [1] (c) receives all the profits
20. [1] (c) no legal requirements when setting up
21. [1] (c) has flexibility
22. [1] (c) e.g. can take holidays when they like
23. [1] (c) can adapt to changes quickly
24. [1] (c) music shop is small, so can offer a personal service
25. [1] (c) No - Has unlimited liability
26. [1] (c) liable for all debts
27. [1] (c) can lose personal possessions
28. [1] (c) may find it difficult to raise finance
29. [1] (c) to expand
30. [1] (c) as sole traders considered risky to lend money to
31. [1] (c) may have to work long hours / no holidays
32. [1] (c) due to size unable to exploit economies of scale
33. [1] (c) no continuity
34. [1] (c) as business dies with owner
35. [1] (c) might be better as a partnership/limited company
36. [1] (c) more capital can be raised
37. [1] (c) has more status than a sole trader
38. [1] (c) can share losses/risks with
39. [1] (c) shared decision-making
40. [1] (c) more ideas
41. [8] (d) Level 3 (7-8 marks): The candidate is able to offer a thorough evaluation, with a recommendation, of whether Dani should be using a loan or an overdraft to invest in new facilities.
42. [8] (d) Level 2 (5-6 marks): Candidate offers a satisfactory analysis of the advantages and/or disadvantages of using a loan and/or overdraft to invest in new facilities without evaluation.
43. [8] (d) Level 1 (1-4 marks): Candidate demonstrates some knowledge and understanding, with application to investing in new facilities, by a loan or an overdraft.
44. [8] (d) Loan is a medium to long-term source of finance provided by banks with fixed interest charged on the sum borrowed.
45. [8] (d) Overdraft is a short-term form of flexible borrowing up to an agreed limit using a bank current account.
46. [8] (d) Loan: Would usually be repaid by monthly instalments over a set period of time, with a fixed rate of interest.
47. [8] (d) Loan: It is a long-term source of finance usually for a large amount. Dani would receive a fixed amount.
48. [8] (d) Loan: Normally used for a specific purpose, such as buying equipment, i.e. an asset such as fixtures and fittings because the bank will use it as security/collateral, but Dani might still need a deposit.
49. [8] (d) Overdraft: Would enable Dani to spend more than she has in the bank, up to an agreed limit. Interest is charged on the amount overdrawn.
50. [8] (d) Overdraft: Overdrafts tend to be used in the short term for working capital requirements – such as buying stock.
51. [8] (d) Overdraft: The interest charged is likely to be higher than for a loan.
52. [8] (d) Overdraft: Does not require much paperwork to complete.
53. [8] (d) Overdraft: The overdraft can be received quickly and repaid at irregular intervals – when Dani has the money.
54. [8] (d) Overdraft: Interest will be charged until she has repaid the overdraft in full.
55. [8] (d) Evaluation: Dani needs finance for a specific project – for a guitar testing booth - so a loan seems most appropriate if she doesn't have enough cash available, but it will depend on how much the booth will cost. If it is a large amount of money, which would have to be repaid over a longer time, then a loan is again the recommended option, but if this facility costs a relatively small amount of money, Dani might just use her overdraft.