CLW makes wood furniture, including chairs and tables. Demand has risen quickly over the past 3 years and the business needs to increase the scale of production at its factory. The factory is located near the city centre in an area of low unemployment. The Finance Director has produced a business plan, including a balance sheet. The Finance Director is pleased with CLW's liquidity. Table 1: Extract of financial information | | 2013 | 2014 | | :------------------------------- | :------: | :------: | | Non-current (fixed) assets (m) | 240 | 260 | | Current assets: | | | | Inventory (stock) (m) | 180 | 330 | | Trade receivables (debtors) (m) | 320 | 240 | | Cash (m) | 100 | 90 | | Total current assets (m) | 600 | 660 | | Current Liabilities (m) | 480 | 440 | | Current ratio | 1.25:1 | ? | | Acid test ratio | 0.875:1 | ? |

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2015). The mark or mark type is shown in brackets.

1. [2] Clear understanding e.g. a document containing the business aims/objectives and important details about the operations, finance and owners of a business OR states aims/objectives and shows how business aims to achieve them
2. [1] Some understanding states one element of plan e.g. shows marketing strategy/production costs
3. [2] Clear understanding e.g. shows value of business assets and liabilities [1] at a particular point in time [+1]
4. [1] Some understanding e.g. shows assets and liabilities OR what is owned, owed and how the business is funded
5. Do not accept 'financial statement' as it is too vague
6. Knowledge [2 × 1] – award 1 mark for each relevant benefit [max 2]
7. Application [2 × 1] – award 1 mark for each relevant explanation in context of this business
8. Relevant points might include:
9. Gain economies of scale/bulk buy [k] so can increase scale of production [app]
10. Can meet orders/inventory always available [k] as demand is rising [app]
11. Production does not need to stop [k] so can keep making furniture [app]
12. Avoid supply problems [k] as some types of wood might be difficult/long time to obtain [app]
13. Application could include: use of numbers, demand risen (rapidly), furniture, factory, tables, chairs, wood.
14. Knowledge [2 × 1] – identification of relevant issues [max 2]
15. Application [2 × 1] – award 1 mark for each way if relevant reference made to this business
16. Analysis [2 × 1] – award 1 mark for each relevant explanation
17. Relevant points might include:
18. Enough workspace [k] so might have to relocate [an] away from city centre [app]
19. Access to sufficient supplies [k] if there is a shortage of wood [app] might not be able to meet orders [an]
20. Labour issues e.g. need to recruit/train more workers [k] to make furniture [app] adding to business expenses [an]
21. Market demand/increase in demand permanent [k] as demand risen quickly [app] if tastes change again could be left with unwanted inventory [an]
22. Diseconomies of scale e.g. communication issues [k] as larger scale might mean current methods do not work [an]
23. Storage issues e.g. have they sufficient storage space [k] as already have high levels of inventory [app] as may need to rent additional unit [an]
24. Quality issues e.g. are they able to check standard [k] of tables made [app]? could lead to bad reputation [an]
25. Machinery issues e.g. is condition/level of machinery sufficient [k]?
26. Application could include: use of numbers, demand risen rapidly, high level of inventory, low unemployment, near city centre, factory, furniture, tables, chairs.
27. Knowledge [1] – award 1 mark for identification of relevant point(s) [max 1]
28. Application [1] – award 1 mark if relevant reference made to this business
29. Analysis [2] – award up to 2 marks for relevant development of point(s)
30. Evaluation [2] – justified decision as to whether CLW should be pleased with its liquidity in 2014
31. Points include:
32. Current assets increased [k] by $60m [app]
33. Current liabilities fallen [k] by 8.33% [app +an]
34. Current ratio improved [k] from 1.25:1 to 1.50:1 [app + an] but only because inventory increased by $150 m so not as liquid [an]
35. Acid test value fallen [k] from 0.875:1 to 0.75:1 [app + an] so not able to pay short-term debts from its liquid assets if needed [an]
36. Cash fallen [k]
37. Trade receivables down [k] which could mean customers paying quicker [an] but could mean less sales overall therefore less trade receivables [an]
38. Note: using percentage calculation or ratio award application and analysis. Max 1 for application.
39. Application could include: calculation of relevant ratios/use of numbers, demand risen rapidly, increased scale.