O-LevelBusiness StudiesFinancial information and decisions7115/22 · May/June 2017 · Q120 Marks

Identify two financial statements the directors will need to see before expanding CC. Explain why they will want to see each of these statements.

(a)Identify two financial statements the directors will need to see before expanding CC. Explain why they will want to see each of these statements.[8]
(b)Consider the following three factors that affect CC when importing all of its ingredients. Which is the most important factor when deciding whether to import ingredients? Justify your answer.[12]

Mark scheme

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

[2 × 1] - award one mark for each financial statement
[2 × 1] - award one mark for a relevant explanation for each financial statement
[2 × 2] - award two application marks for each financial statement
Award one mark for each relevant named financial statement (max 2) and one mark for explanation of why the directors will want to view these statements before expanding.
Examples might include: income statement/Profit and loss account - to assess profitability/availability of retained profit/ need for loan/ability to repay loan
balance sheet/Statement of financial position – assess liquidity position/ assets for security against loan/assess value of assets that could be sold
cash flow forecast/statement – shows cash position/ability to cover expenses of expansion/liquidity position/ability to repay loans
Award a maximum of three additional marks for each explanation – 2 of which must be applied to this context - of the financial statement.
Indicative response: Balance sheet (k) to see if the business will be able to borrow $500 000 (app). The balance sheet will show the liabilities of the company and will show if the bank is likely to give CC a loan for the purchase of the new automated equipment (app). The directors will want to see if there are sufficient assets to be used as security for the loan (an).
Possible application marks: Already operating in a niche market; high quality ingredients; chocolates/high quality chocolates/luxury chocolates; hand-made chocolates; factory; private limited company; set up 15 years ago in country X; labour-intensive production techniques; 100 production workers; on-the-job training for new workers; developing a new brand of chocolate bar; targeted at the mass market; purchase a new automated production line; output is expected to be high; borrow $500 000.
Relevant points might include: Exchange rate: May fluctuate and this will affect the import prices of ingredients - affects costs – difficult to plan for – may result in having much higher costs than budget.
Exchange rate is already low – higher cost of imported ingredients - raise prices – lower sales - reduce profit.
If exchange rate increased/high – lower cost of imported ingredients - lower prices – increase sales – increase profit.
Import tariffs: Increased cost of imported materials – need to raise prices of finished chocolates or reduce profit. Note: Do not award fixed quantity i.e. quota
Delivery time: Perishable ingredients – need for quick delivery - urgent orders may need quick delivery.
Delivery may be slow – may cause production delays – reduced sales/customer demand not fully met.
If delays in delivery – may need to buy locally produced ingredients - lower quality – lose reputation/lose brand image. Note: Do not award if only about delivery time to the customer.
Knowledge/Analysis/Evaluation – award up to 10 marks using the levels-based mark scheme below.
Level 3: 9-10 marks for well justified conclusion of the most important factor and why it is more important than the other two factors.
Level 3: 7-8 marks for limited conclusion of the most important factor.
Level 2: 4-6 marks Detailed discussion of each factor.
Level 1: 1-3 marks Outline of each factor.
Level 1 - 1 mark for each L1 statement (max of 3 marks) e.g. A tariff will increase the cost the company pays for imported raw materials.
Level 2 – 1 x L2 explanation can gain 4 marks and a further mark can be awarded for each additional L2 explanation (max 6 marks) e.g. Exchange rate fluctuations will affect the cost of imported ingredients. If the exchange rate appreciates then import prices will be lower and costs will be less or if the exchange rate depreciates then import costs will rise. (L2)
Level 3 - For L3 to be awarded there needs to be at least two L2 marks awarded and then a conclusion which justifies which is the most important factor.
Award up to 2 additional marks for relevant application.
Possible application marks: chocolates/high quality chocolates/luxury chocolates; hand-made chocolates; country X already has a low exchange rate; located in country X; fillings made with luxury ingredients; batch production; 100 production workers; skilled workers in factory; employed at CC since it started; objective of expansion; developing a new brand of chocolate bar; targeted at the mass market; reduce variable costs by using lower quality ingredients; purchase a new automated production line; output is expected to be high; borrow $500 000.