Identify and explain one reason why TT will need short-term finance and one reason why TT will need long-term finance.

Mark scheme

Marking points from the official mark scheme (May/June 2017). The mark or mark type is shown in brackets.

1. Knowledge [2 × 1] - award one mark for each reason
2. Analysis [2 × 1] - award one mark for a relevant explanation for each reason
3. Application [2 × 2] – award two application marks for each reason
4. Award one mark for each reason (maximum of two), such as:
5. Short-term finance – needed on a day-to-day basis to keep the business running:
6. Working capital /cover expenses/pay wages
7. Pay for materials/Inventories of T-shirts
8. Cash flow problems
9. Long-term finance – needed over a long period of time to support expensive business development. Will need to be repaid in many instalments:
10. Investment in equipment/machinery/fixed assets
11. Take over another company/expand
12. Award a maximum of three additional marks for each explanation – 2 of which must be applied to this context - of each reason.
13. Indicative response: Short-term finance will be needed to pay for inventory (k) in this case it will be the T-shirts that are to have prints on them (app). The T-shirts will need to be purchased from abroad and paid for long before they have designs printed on them (app) and sold so working capital will be needed to allow this to take place. (an)
14. Possible application marks: Private limited company; set up 15 years ago; in country P; buys ready-made plain white T-shirts; T-shirts imported from country Q, a developing country; 50 different designs; batches production of various sizes; sold to small retailers in country P; share capital $2 m; increased to $8 m by 2015; expand the company; exporting T-shirts; take over DesOwn, a competing company; sells online; raise $10 m to buy out the existing shareholders; buying new computer controlled equipment for $500 000; sell directly to large retailers; use an agent or a joint venture.
15. There may be other examples in context that have not been included here.
16. Relevant points might include:
17. 2015 GPM = 80% (L2) GP = $8 m (L1)
18. NPM = 10% (L2) NP = $1 m (L1)
19. ROCE = 10% (L2)
20. 2016 GPM = 73% or 73.3% (L2) GP = $11 m (L1)
21. NPM = 13% or 13.3% (L2) NP = $2 m (L1)
22. ROCE = 14% or 14.2% (L2)
23. Between 2015 and 2016:
24. The revenue increased (by $5 m) (L1)
25. The gross profit increased (by $3 m) (L1)
26. The net profit increased (by $1 m) (L1)
27. Note: Do not accept APP for use of data already provided in Appendix 3 (non-calculated figures).
28. Knowledge/Analysis/Evaluation – award up to 10 marks using the levels-based mark scheme below.
29. Level 3: At least 2 x Level 2 + 9-10 marks for well justified conclusion as to whether the directors should be pleased with the company performance.
30. 7-8 marks for some limited conclusion as to whether the directors should be pleased with the company performance/recommend action for improvement or future development of the business.
31. Level 2: 4-6 marks Correct calculation of profitability ratios.
32. Level 1: 1-3 marks Outline of the differences between the years.
33. Level 1 - 1 mark for each L1 statement (max of 3 marks).
34. Level 2 - 1 x L2 calculation can gain 4 marks and a further mark can be awarded for each additional L2 calculation (max 6 marks) e.g. The net profit margin for 2016 was 13%. (L2).
35. Level 3 - For L3 to be awarded there needs to be at least two L2 marks awarded and then a conclusion whether the directors should be pleased with the company performance.
36. Award up to 2 additional marks for relevant application.
37. Possible application marks: Private limited company; set up 15 years ago; in country P; share capital $2 m; increased to $8 m by 2015; expand the company; raise $10 m to buy out the existing shareholders; buying new computer controlled equipment for $500 000.
38. There may be other examples in context that have not been included here.