IB Business Management HL 3.4 Final Accounts Questions

Evaluate final accounts and financial statements to interpret profitability, financial position and decisions in IB Business Management HL cases.

Exam points

Define and identify the key concepts and tools in 3.4 Final accounts.
Apply 3.4 Final accounts to business calculations, case evidence or management decisions where relevant.
Analyse and evaluate 3.4 Final accounts using case context, stakeholder impacts and business trade-offs.

Covered syllabus points

3.4.1—Purpose of accounts 3.4.2—Final accounts 3.4.3—Intangible assets 3.4.4 (HL)—Depreciation methods 3.4.5 (HL)—Depreciation method suitability

[Maximum number: 2]

Recruiting a new CEO
A company can spend a large amount of money to recruit a well-known and successful Chief Executive Officer (CEO) from outside the organization. However, recently published research suggests that recruiting externally is not only costly, but it is also risky, disruptive and demotivating.
Two long-term studies of 36 large public limited American companies found the following:
- The companies that promoted CEOs internally performed better than those that recruited externally.
- "Outsider" CEOs (recruited externally) have a significantly higher failure rate than "insider" CEOs (recruited internally). 40 % of "outsider" CEOs stayed for two years or less.
- The average financial reward package for "outsider" CEOs, including salary, bonuses and profit-related incentives, was 65 % higher than for those appointed internally.
- "Outsider" CEOs feel empowered to impose rapid change and to assert their authority on the company, even before they really understand the organizational culture. The arrival of an "outsider" CEO is often quickly followed by the departure of senior managers.
- "Outsider" CEOs are very good at rapid cost-cutting and eliminating unprofitable products/ activities, a skill that is very valuable when a competitive advantage needs to be gained or restored in a competitive environment.
Apple, Dell ${ }^{\mathrm{TM}}$ , Microsoft ${ }^{\circledR}$ , Intel ${ }^{\circledR}$ , McDonalds ${ }^{\circledR}$ and Nike ${ }^{\circledR}$ are successful American companies that appointed CEOs internally between 1998 and 2007.
A comparison of average performance indicators between 1998 and 2007 is shown below:

Table for Question 1 — IB Business Management HL

Some critics of the two American studies argue that companies promoting CEOs internally usually have a strong corporate culture and are already efficient and profitable. These critics also argue that the performance indicators in the table do not measure the exact contribution of individual CEOs.
(C) The Times 04 2013]

Explain the importance of earnings per share to a shareholder.

[Maximum number: 5]

Call it Magic (CIM)

Call it Magic (CIM) is an online jewellery store that sells silver earrings. It has completed its first year of trading, during which it sold 1000 pairs of earrings. CIM's selling prices are low compared to those of other jewellery stores. The average unit cost per pair of earrings is $5, and overhead costs are already at a minimum level.

Table 1: Selected financial information for CIM for the year ended 31 December 2022

(a)

Using relevant information provided above and in Table 1:

[ 5 ]

(i)

calculate CIM's cost of goods sold, X, in 2022 (show all your working);

[ 2 ]

(ii)

calculating Y and Z, construct a profit and loss account for CIM , for 2022;

[ 3 ]

Y = Net profit before interest and tax = gross profit - expenses = $\$7000$ - $\$500$ = $\$6500$ .
Z = Sales revenue = cost of goods sold + gross profit = $\$5000$ + $\$7000$ = $\$12000$ .

Profit and loss account for CIM for the year ended 31 December 2022:

Item	$
Sales revenue	12000 (Z)
Cost of goods sold	5000
Gross profit	7000
Expenses	500
Net profit before interest and tax	6500 (Y)
Interest	0
Net profit before tax	6500
Tax	650
Net profit after interest and tax	5850
Dividends	500
Retained profit	5350

Apply own figure rule (OFR).
Award [0] if candidate presents an unrecognizable profit and loss account, or has three or more errors.
Award [1] if the candidate conveys some idea of a profit and loss account (up to two mistakes).
Award [2] if the candidate constructs a fully recognizable profit and loss account but has one mistake (either in calculation or presentation).
Award [3] if the candidate constructs an accurate profit and loss account in the IB prescribed format. No extra irrelevant figures are included.
N.B. Do not penalize for lack of $ signs in profit and loss account if signs have been included in the calculations of Z and Y.
Do not penalize lack of heading/title.

[Maximum number: 6]

Chips to Go (C2G) produce potato chips for the British market. C2G’s Chief Executive Officer (CEO) is Charles Chip who is a dynamic entrepreneur famous for taking risks with chip flavours such as “banana and sour cream” and “chocolate fudge” and promoting them with humour especially appealing to British culture. C2G has created a number of successful snack products under the C2G family brand. Charles uses intuitive rather than scientific decision-making. He rarely consults with senior managers or considers financial data. C2G’s value as a company in terms of goodwill, brand value and other intangible assets is tied very closely to the personality and lifestyle of Charles. He is the company’s most valuable intangible asset and is very popular among the younger generation. He is constantly in the news trying to travel around the world in a canoe, or taking risks by parachuting off high buildings to gain free publicity and word-of-mouth promotion. Current and potential investors have contacted the finance department as to what may happen to the value of these intangible assets if Charles were to have a serious accident.

Chips to Go (C2G)

Chips to Go (C2G) produce potato chips for the British market. C2G's Chief Executive Officer (CEO) is Charles Chip who is a dynamic entrepreneur famous for taking risks with chip flavours such as "banana and sour cream" and "chocolate fudge" and promoting them with humour especially appealing to British culture. C2G has created a number of successful snack products under the C2G family brand. Charles uses intuitive rather than scientific decision-making. He rarely consults with senior managers or considers financial data.
C2G's value as a company in terms of goodwill, brand value and other intangible assets is tied very closely to the personality and lifestyle of Charles. He is the company's most valuable intangible asset and is very popular among the younger generation. He is constantly in the news trying to travel around the world in a canoe, or taking risks by parachuting off high buildings to gain free publicity and word-of-mouth promotion. Current and potential investors have contacted the finance department as to what may happen to the value of these intangible assets if Charles were to have a serious accident.
C2G is looking for ways to increase market share in an increasingly competitive domestic snack market. One long-time aim for Charles has been the creation of a potato chip with all the taste of regular chips but without any fat. The marketing department of C2G is very excited with this idea but the Production Manager has indicated to Charles that it cannot be produced. Charles has been told and was furious.
A second strategic option could be to launch the potato chips into a new international market. One of Charles's closest advisers has argued that C2G would need to be careful with its product and promotion, as overseas customers may not share British tastes in potato chips, or British humour in promotion. He urges Charles to take time to carry out extensive market research of the new international market.

Explain two reasons why it may be difficult to value C2G's intangible assets.

From the stimulus, it appears that the intangible value of C2G as a company in the form of goodwill, brand value, reputation and so on is tied to the personality and lifestyle of Charles, as he is very popular with the younger generation. It appears that Charles is responsible for creating some of the innovative flavours, which have made the company so successful.

The difficulties of this for C2G's intangible assets is that it can be hard to objectively value the contribution of Charles's personality and lifestyle as well as his innovative attitude while the company is still operating. This can have a true positive impact on the brand value and effectively brand loyalty of customers, but the value can either be estimated or proven when the company is sold for a price above its tangible assets. Until then, the intangible assets can only be estimated if at all. Perhaps C2G can research the value of family branding more easily measured in terms of research on brand recognition, but the effects on personality factors can be very difficult to accurately measure.

Moreover, the success of the brand (and hence intangible asset) could also be down to very good promotion or targeting. Other companies without personality cults also have successful brands.

Innovation as a contributor to C2G's tangible assets can also be very difficult to measure due to the fact that one factor can be difficult to isolate in terms of its contribution to the intangibles.

Moreover inconsistencies of reporting systems between companies exist. Current financial statements provide very little information about these assets and there is not a standardized / unified method of valuation of the intangible assets. Therefore, the Financial Manager is unlikely to insert a figure that is no more than estimated.

Accept any other relevant explanation.

Mark as a 3+3.
N.B. the question is about the difficulties of the measurement - the difficulties of the process and methods of measuring. The question is not about if and how Charles is an intangible asset.

Award [1] for identifying a relevant difficulty in valuing intangible assets. Award an additional [1] for development of this point. Award an additional [1] for the application of the difficulty directly to C2G. Award up to a maximum of [3].

For [6] two difficulties of valuing intangible assets must be linked and explained with reference to C2G.
N.B. it is expected that apart from the personality / lifestyle of the CEO, one more issue is identified, explained and applied.

All question bank results loaded

Covered syllabus points

Question 1

Question 2

Question (a)

Question (i)

Question (ii)

Question 3