The Other Questions 22052023
The Other Questions 22052023
The Other Questions 22052023
(a) The Bank can use information contained in the business’ financial statements when
deciding whether to lend the sum of money requested in the following ways:
1. Before lenders will grant a business loan, they need to ensure that the loan will be
repaid. Every loan is a risk but banks want to take as little risk as possible.
2. When deciding whether or not to issue a loan, lenders may look at gross annual sales
for up to five (5) years, a schedule of current debts and loan balances, payment
(b) The capital market is also called the securities market. It refers to those financial
securities. These markets channel the wealth of savers to those who can put it to long-
(c) An assessment of the importance of the capital market for an expanding company
1. One of the major economic problems facing the Caribbean is the lack of capital for
businesses. Many businesses cannot realise their fullest potential because they lack
the capital to conduct research, develop their products and their markets, automate
their industries, etc. They need greater access to capital markets as a possible source
2. Globalisation has provided greater access to the world’s capital markets. This means
that Caribbean-based firms like Precious Foods Limited can source capital from
capital markets, both within and outside of the Caribbean region. Greater access to
3. Sometimes a business is unable to access loans from commercial banks, etc. because
it may be already heavily indebted (highly geared). Also, it may prefer equity
financing over debt financing for strategic purposes. In such situations, they may turn
4. Precious Foods Limited can decide to go public (if it isn’t already a public limited
liability company) and get itself listed on various Stock Exchanges in the Caribbean
and elsewhere. This will afford it the opportunity to sell its shares (equity-financing)
which will raise capital for its desired expansion. A company can also issue bonds for
sale. Bond holders will become creditors to the business (debt-financing). The funds
raised from the sale of bonds will be used for its expansion.
S2002, 5
creditors to the businesses, not owners. This means that the existing shareholders
2. It is usually cheaper to access debt financing than equity financing (going public:
administrative costs of getting listed on the stock exchange, issuing the prospectus,
printing certificates, advertising, legal fees, etc. are usually very costly).
3. When the debt gets repaid, the liabilities of the business are restored to the pre-loan
levels.
5. The gearing of the company increases with debt financing and this puts the business
in a somewhat risky position, however, a highly geared firm (ratio of debt to equity is
high) may lead to higher future returns to shareholders (high risks – high rewards).
increased as needed and loans can be repaid faster once the business is able to afford
to do so.
(b) Three possible internal sources of funds for expansion and a discussion on the relative
merits of financing the remainder by either equity or debt methods now follows:
1. Retained Profits – profits not distributed as dividends or paid out as taxes can be
retained and reinvested in the business for expansion purposes. These funds represent
assets) can be sold and the money earned from its sale can be used for expansionary
projects. Also, assets which the firm do not need to own, can be sold and leased back
when they are needed. The money earned from this can also be used for expansion of
reducing stock, getting debtors to pay the business quickly, etc.) releases capital
which can be put to other more effective uses like expanding the business’ operations.
Internal funding has no major direct cost to the business (except leasing charges when
Internal funding does not increase the liabilities or debts of the business.
It is important to note that not all businesses can source funds internally – new
businesses and unprofitable businesses will not have access to retained earnings,
businesses with none or few idle assets will not be able to dispose of them.
Depending on internal funding alone can slow down a business’ growth since it will
be strictly dependent on the business’ profitability, whether it has assets to sell and
how well it can manage its working capital. This is a limiting factor.
With equity funding the business does not have to pay interest on loans (thus its
expenses/overheads are reduced) whereas with debt financing interest must be paid on
the loan(s).
With equity financing, the invested capital becomes the permanent capital of the
business and does not have to be repaid to shareholders (it will be distributed when
the business is wound up) whereas with debt financing, the loan must be repaid in its
entirety and provision has to be made for this – the money has to be found otherwise
the assets of the business which were used as collateral to secure the loan will be sold
to repay the debt if the business fails to meet its financial obligations. Even when
profits are low or the economy is slow, the loan must be repaid.
With equity financing, gearing is low and this is less risky to the business whereas
with debt financing, gearing is high and this is a risky situation for the business
With equity financing, more shares are issued by the business for sale in order to raise
funds. Anyone can purchase these shares and thus become an owner of the business
which poses a threat to the ownership and control of the business whereas with debt
financing, there is no dilution of ownership since the funders are creditors to the
With equity financing, a lot of costs are incurred to get the business listed on the
Stock Exchange, to issue the prospectus, to advertise the sale of shares, to print share
certificates, legal fees, etc. whereas with debt financing, costs are fewer.
With equity financing, dividends are paid out of ‘after-tax’ profits, i.e. they are not tax
deductible whereas with debt financing, interest is paid before tax is calculated since
it is an expense and this reduces the amount of taxes the business pays to the
government.
Both equity and debt financing has its advantages and disadvantages. A business has
to take into consideration several factors when deciding which of the two options is
(a) The differences between an Income Statement and a Balance Sheet are:
1. Income statement describes the current year performance while balance sheet
describes the overall position of company right from the starting year of business to
current year.
2. Income statement provide the current year net profit information while balance sheet
provide information about the overall assets and liabilities of company applied in the
business.
3. Income Statement, also known as a Profit and Loss Statement, details the entity’s
income and expenses for a specific period of time. The last entry on the statement or
“bottom line” is the entity’s net profit or loss for that period. The Balance Sheet is a
"snapshot" of the entity’s financial position at a specific point in time. The first
section is Assets, or things the entity owns, which includes cash and investment
accounts, fixed assets, and receivables, among others. The next section of the
Balance Sheet is Liabilities and Equity. Liabilities, or things the entity owes, may
include such accounts as vendor payables, payroll taxes due, notes and mortgages.
Equity is the book value of the entity, and equals Assets - Liabilities. What accounts
are included depends on the business form of the entity. A sole proprietor has Owner
Equity; partners have Partner Capital; corporations have Capital Stock and Retained
Earnings.
http://wiki.answers.com/Q/What_is_the_difference_between_an_income_statement_a
nd_a_balance_sheet
Balance sheets and income statements both offer valuable information on a
company’s financial health, but they differ in a few key ways. Here are five key
Time Covered: A balance sheet reports a company’s finances for a specific date, such
Owning versus Performing: A balance sheet reports what a company owns (and
What They’re Used For: A balance sheet is most often used by a company to see if
it has enough assets to satisfy its financial obligations. An income statement is used to
Determining Creditworthiness: Lenders and creditors can use a balance sheet for an
overview of a company’s total assets. An income statement can serve as proof that a
https://societyinsurance.com/blog/what-is-the-difference-between-a-balance-sheet-
and-an-income-statement.
(b) Three ways that an income statement may be of use to managers are:
1. The income statement and its analysis show the results of a business’ operations. It
shows sales/revenue and expenses and tells whether the business is making a profit or
the same industry which helps to gauge the business’ performance with that of
competitors.
standards by which their performance is judged and these ratios are derived from the
analysis of the income statement. It shows how the company is spending its money
4. Appropriation of profits.
1. The balance sheet assists the managers of businesses in making decisions regarding
purchasing of assets for the business, e.g. business managers depend on the balance
sheet to analyse whether buying certain equipment via debt financing is the right
2. Business managers need the balance sheet so as to decide the best source of credit for
3. Management uses the balance sheet for diagnostic purposes - with different managers
paying attention to different ratios. A company buyer may look closely at inventory
turnover. Too much inventory may mean excessive storage space and spoilage,
whereas too little inventory could mean loss of sales and customers due to stock
ratio reflects efficient use of money invested in plant and in other productive or
capital assets.
4. Attract investors.
2003, 5
Working capital is your net current assets (Working capital = Current Assets –
Current Liabilities). It refers to the funds needed to meet the daily operations of a
business (to purchase stock, pay utilities, wages, etc.). Too much or too little working
you’d need to manage debtors, creditors, stock and cash. I will now discuss ways that
(b) Three criteria that Arawak Limited may use to choose among the alternatives
identified in (a) above and an explanation as to how EACH criterion may be used to make the
The journal entries to record the adjustments to the final accounts now follow:
(b) Cost of Goods Sold (COGS) = Opening Stock + Purchases – Closing Stock
Jan 0 0 0
Feb 0 0 0
Apr 0 0 0
May 0 0 0
$ $
Less: COGS
(a)(i) Prepayments – these are payments made in the current accounting period for the
upcoming accounting period. These expenses are paid before the goods and services
are used. These expenses, though paid for in the current accounting period, are not
treated as expenses of the current accounting year but of the year that they are
adjustments will have to be made to ensure that this happens. For example, rent for
(ii) Accrued expenses – these are expenses that have been incurred (the benefits have
been enjoyed in the current accounting period) but the amounts have not yet been
paid. The amounts will be paid in the following accounting period but these expenses
have to be treated as expenses for the current period since this is when they were
will have to be made to ensure that this happens. For example, rent for December
(iv)
Trading and Profit and Loss Account for the year ending 30th June 2005
$ $
Sales 21,200
Less: Expenses
(a)(i) Working capital can be defined as the funds needed to meet the daily financial
for funding its day-to-day operations. It is needed to meet the everyday expenses of a
business, for example to purchase stock, pay utilities, wages, etc. It is often described
2. Creditors
3. Debtors
(b) The most suitable source of finance for financing each of the following areas of the
store, his best option would be to seek funding from a commercial bank. This will be a long-
term business loan for investment/development purposes. The property (land and building)
He will have to seek external debt funding since his business is new and he cannot fund it
through retained earnings. Property is expensive and it is expected that the loan will be for a
significant amount and the repayment period will be for an extended period of time (greater
In order to purchase machinery and equipment, Buddy should look at external, medium-term
funding. He may not want (be able) to take a medium-term loan since he would have already
taken one to purchase property and his gearing ratios may be too high. He can choose instead
to lease or to purchase the machinery and equipment via hire purchase. In both instances,
he will be paying a monthly fee (instalment) for the items which should prove to be more
affordable to him.
With respect to leasing, Buddy will be paying a rental fee on the machinery and equipment.
The machinery and equipment will not be owned by Buddy but by the lessor. The lease can
be terminated by either party. With respect to hire purchase, he may or may not have a
down-payment to make and he makes regular instalments. He gets use of the item while it is
being paid for and becomes the owner when his final payment is made. The downside to this
is that the final price that he pays is usually significantly more than if the items were
from traders/suppliers. This will help him to better manage his working capital. He is
looking at external, short-term financing to fund the stocking of his business. Bank
overdrafts can be too expensive and he may not be able to get short-term loans because of his
gearing ratios.
Buddy will have to apply to these suppliers for credit and they will check his credit
worthiness to determine whether to extend credit to him. Not everyone will be willing to
extend credit but until he is in a better financial position, he can purchase from those
suppliers who are willing to supply him with goods and services on credit. When he can
afford to do so, he can expand his product offerings by paying cash to those suppliers that
don’t give credit. Buddy will have to ensure that he maintains his credit worthiness with his
Buddy can use a bank overdraft facility to pay his employees their wages for the first week of
necessarily take a (short-term) bank-loan for this so his best option is the bank overdraft –
gives him short-term access to funds. Once he makes sales and deposits it into the business’
account, he will be ok. Bank overdraft facilities are very expensive (high interest rates) so he
will not want to owe the bank for any great length of time, maybe just for a few days at most.
If Buddy has access to a credit card, he can use this to pay his employees via cash advances.
Of course he will want to make payments on the credit card to avoid additional expenses.
2010, 6
(a) (i) A cash flow statement reveals the cash flows generated or consumed by a firm’s
information to users about cash receipts, cash payments, and the net change in cash
resulting from operating, investing, and financing activities of a business during its
accounting year. It enables users to assess a firm’s ability to meet its obligations as
(ii) Two financial statements, other than the cash flow statement, that are used by firms
are:
1. Trading and Profit and Loss Account aka Income Statement aka Statement of
Comprehensive Income
(b) An analysis of the cash flow situation of Nigel Enterprises under each of the
(v) Financing
2011, 6
(a) One way in which the final accounts of a business serve as a major source of
Investors Profits and profitability ratios to determine whether dividends will be paid
Suppliers Working Capital, Current Ratio, Acid Test Ratio which tells them the
position the business is in to pay off its short term debts. Cash flow
statements.
Government Amount of profits to ensure that the correct amount of taxes has been paid.
Business Have to ensure that they have money to meet all their financial obligations
Managers as they become due – they’d be interested in liquidity and leverage ratios.
(b) (i) A cash flow statement reveals the cash flows generated or consumed by a firm’s
information to users about cash receipts, cash payments, and the net change in cash
resulting from operating, investing, and financing activities of a company during its
accounting year. It enables users to assess a firm’s ability to meet its obligations as
1. It helps a business to know its inflows and outflows of cash and to predict periods of
cash shortages and thus take preventative measures like overdraft facilities, etc. It can
also help to prevent cash shortages from occurring. A cash flow statement will be
2. It helps a business to predict periods of cash surpluses and to put strategies in place to
benefit from these, e.g. short-term investments. These will generate interest and grow
the business’ money until the money is needed again to purchase stock, etc.
Trading and Profit and Loss Account for the period ended May 31, 2010
$ $
Sales 55,000
Less: Expenses
Electricity 1 020
Stationery 250
Rent 1 830
Advertising 1 490
Insurance 1 090
(a)(i) Current assets are assets that are expected to be converted to cash within a year.
Examples of current assets include cash in hand, cash at bank, debtors, stock,
prepayments, etc.
Current assets represent assets that can easily be converted into cash, sold or
consumed within a one-year period. These assets appear in the balance sheet in the
order of liquidity, starting with least liquid and moving to most liquid.
(c)
Beautiful Flowers
Balance Sheet as at December 31, 2016
$ $ $
Fixed Assets
Building 62,660
Equipment 20,000 82,660
Current Assets
Stock 8,360
Debtors 28,000
Cash 8,500 44,860
Current Liabilities
Bank overdraft 24,720
Creditors 26,200 50,920
Working Capital (6,060)
76,600
Finance by:
Capital 76,600
2019, 3 (CXC)
(a) Two sources of short-term financing available to Country Farmhouse Soy Products
1. Bank overdraft - The Pearts can enter into an arrangement with their bank to allow
them to withdraw money in excess of their account balance over a short period of
time. This is a very good option for The Pearts since they would only pay interest on
2. Credit card - A credit card allows the Pearts the facility to use funds from the bank up
to the agreed limit on the card. There is no penalty if the amount used on the credit
card is repaid within the month. This can provide opportunities for the Pearts to hold
the bank’s money for an extended time without repaying the full amount early.
3. Trade credit – The Pearts can purchase goods and services from various suppliers on
credit. They will be able to produce and sell their goods and use the sales generated
to pay for the goods and services purchased from the suppliers at a later agreed upon
date.
(b) Three benefits to Country Farmhouse Soy Products of investing in the country’s stock
exchange are:
1. Dividend income: Most stocks provide income in the form of dividends. Dividends
are paid to investors quarterly, semi-annually or annually. The Pearts do not have to
take the dividends right away. They can reinvest it to keep increasing their earnings
over time. Even though dividend payment is usually small, over time it can grow into
significant gains for the Pearts. (1) This income can help fund expansion or assist with
yields on investment. Overtime, the stock market tends to rise in value though there
is some fluctuation. The Pearts can also invest in different stocks as a way of hedging
the risks. This is a safe and sure form of investment especially since they do not
3. Investment gain/capital gain: Investing in the stock exchange will give Country
Farmhouse the chance to grow the money invested. The value of stocks is increasing
over time; therefore the stock can be sold at a greater price. The Pearts stand to
receive higher returns on the original amount invested over time. Investments in
stable companies that are able to grow tend to make huge profits for investors over
4. Ownership: When one invests in the stocks of a firm, he or she becomes part owner.
This provides opportunities for the Pearts to attend annual general meetings and get
an insight into how the company is operating including its secret to success. This
kind of information can assist the Pearts in getting ideas as to how to grow their small
business over time. The Pearts would also get the opportunity to vote on business
decisions and leadership changes within the firm in order to assist the firm to become
even more profitable. The more profitable the firm is, the more earnings the Pearts
will receive.
(ii)
$’000
Current Assets
Inventories 500
1,900
1,600
Financed by:
(a)(i) Fixed assets are tangible pieces of property that a firm owns and uses in its operations
to generate income. Fixed assets are not expected to be consumed, sold or converted
into cash within a year. They are bought for production or supply of goods or
services, for rental to third parties, or for use in the organization. The term fixed
refers to the fact that these assets will not be used up or sold within the accounting
year. Examples of fixed assets are property, plant, furniture and equipment.
(ii) Owner’s equity is defined as the proportion of the total value of a company’s assets
that can be claimed by the owners. It is calculated by deducting all liabilities from
(b) One reason why Mrs Greenleaf should prepare each of the following Financial
Statements is as follows:
Comprehensive Income to find out which areas of their business are over or under
budget. This statement will allow her to pinpoint specific items that are causing
2. Facilitates comparisons: Mrs Greenleaf should prepare the Income Statement so she
can measure and compare the performance of her business overtime (trend analysis)
or with other businesses of a similar nature or in the same industry. They could
compare various expected levels. This will enable her to see if she has improved areas
of her business such as sales revenue/less expenses. These comparisons will also
allow her to make informed decisions with the aim of improving the operations of the
profit/loss and the net profit/loss the canteen could be generating during a reporting
period.
1. Reveal the financial status of the restaurant: Mrs Greenleaf should prepare the
Statement of Financial Position in order to determine the financial status and health of
the business as of a specific point in time. The statement shows what an entity owns
(assets) and how much it owes (liabilities), as well as the amount invested in the
business (equity). This statement will give Mrs Greenleaf an idea of how much debt
between current assets and current liabilities. Mrs Greenleaf should prepare a
Statement of Financial Position to determine if the cash and/or other assets that can be
easily converted into to cash, can adequately cover its current or pressing obligations
1. Predict future Cash flows: Mrs Greenleaf will be interested to know the ability of the
business to generate positive cash flows in future. The Statement of Cash Flow
enables these parties to understand how company manages cash and to anticipate the
impact of current cash receipts and cash disbursements on future cash flows of the
business.
2. Provides an explanation for the changes in cash: Mrs Greenleaf should prepare the
Statement of Cash Flow to ascertain the reasons why cash fluctuated during the
accounting period. She can examine the details of cash generated and cash used to
perform operating, investing and financing activities of the business. This will allow
(c)
Caribbean Eatery
Statement of Comprehensive Income for the year ended 31st December 2020
$ $ $
Sales 56,900
Less: COGS
Opening Stock 0
Add Purchases 17,215
Add Freight in 1,295 18,510
Less Purchase returns 1,585
Less Closing Stock 2,000 14,925
Gross Profit 41,975
Add Discounts received 1,891
Total Revenue 43,866
Less: Expenses
Rent paid 3,600
Electricity 23,000
Insurance 2,460
Telephone (1,230 + 270) 1,500
Cooking gas bill 3,500
Water rates (4,986 – 1,000) 3,986
Delivery to customers 1,260
Advertisements 1,684 40,990
Net Profit 2,876
2022, Q3
(a)(i) Short-term financing is a way of meeting the financial requirements of a business for
a short period (for periods no more than 1 year). Short-term financing means that the
Short-term usually refers to a period of time of one year or less. Funding that is
sourced on a short-term basis is not normally used for long-term financing in the
organisation. It may be used for financing day-to-day activities. These funds might
o Bank overdraft
o Debt factoring
o Trade credit
(ii) Equity (aka owner’s equity) is defined as the proportion of the total value of a
company’s assets that can be claimed by the owners. It is calculated by deducting all
(b) Three reasons why the loans officer at the commercial bank needs to see the income
1. Identifies revenue streams: The loans officer will want to be able to identify the
various revenue streams of the business. For most businesses, the major revenue
comes from sales but there can be secondary sources of revenue. The loans officer
will want to compare revenue over time. If revenue streams are increasing, it may
suggest that the business will be able to afford the loan payments. Of course,
identify the specific expenses of the firm and to see if these are increasing or
decreasing over time. If expenses are excessive or increasing, it may become difficult
for the firm to meet its loan repayments. The managers of the firm will be advised to
4. Ratio analysis: The loans officer will be able to calculate several profitability and
liquidity ratios (among others) that will provide great insight in the business’
performance. These ratios can be used to compare the business over time or to
= (50,000+35,000+12,000+25,000) – (17,000+5,000+2,000)
= 122,000 – 24,000
= 98,000
(ii) Two ways in which Paul and Peta Estate’s working capital as at December 2020 can
assist the Peters in making informed decisions about the future of their business are:
1. The business will want to ensure it has adequate levels of working capital to meet its
doom for a business. A healthy supply of working capital suggests a healthy business,
one that can survive and thrive. They can use their calculations of working capital to
determine whether they are in a favourable position or not. The can also calculate the
acid-test/quick ratio and the current ratio to help them decide if their working capital
2. The business has to ensure it has a healthy amount of working capital. If there is a
short-fall, the business managers will have to make decisions/come up with strategies
to increase their working capital so that they can meet their short-term financial
obligations as they become due. Having too much working capital in the business is a
sign of inefficiency. The business will have to decide on the optimal level of working
capital and if there is any surplus of working capital, some of it can be invested in
short-term investment instruments until the funds are needed by the business. Proper
management of all the elements of working capital (debtors, creditors, stock and cash)