IB Business Management HL Finance and Accounts Question Bank

Retained profit is the profit remaining after all expenses, taxes and dividends are paid and that is not distributed to shareholders. It is kept as part of shareholder equity which appears on the balance sheet to provide a source of funds for possible future activities.

Accept any other relevant definition.
N.B. no application required. Do not credit examples.

Award [1] for a basic definition that conveys partial knowledge and understanding.
Award [2] for a full definition that conveys knowledge and understanding similar to the answer above. A candidate must demonstrate an understanding that retained profit is part of shareholder equity/ or belongs to shareholders and/or that it can be used as a source of funds/ reinvestment for possible future business activities.

The question is sufficiently broad to allow candidates to explain a range of possible sources of finance, but any candidate who looks at internal organic sources, such as increasing sales/profits, must be not given credit.

Possible external sources include:
- As CH is a private limited company, the decision could be taken to raise funds through an initial public offering. CH could be "floated or listed" on the appropriate local share market to raise funds targeting ethical investors.
- Angel investors who have strong ethical/CSR intent could provide funds.
- The NGO has demanded action. Given the number of deaths and injuries from snakebites, the NGO could be approached to provide new finance or governments in those countries predominantly affected. There could be the possibility of a private public partnership.
- Bank loan. If candidates uses this source of finance, it is expected that the candidate either comments on the fact that is likely to come from banks with ethical objectives or from banks which accept the risk associated with CH's mission statement or that the bank is likely to give a loan for a cause such as saving lives.

It is expected that the candidates incorporate the ethical investors/ ethical support issues given the current mission statement of 'people before profit 'as application.

Candidates do not have to use the exact words as above but to show understanding that whoever provides the finance should believe in/ support CH's mission/able to justify given the finance that might be risky due to CH's mission and the possible impact on the population.

Accept any other relevant possible source. (grant, subsidies)
Donation is not really an applicable source of finance for what has to be done. CH is not a charity
Mark as 2 + 2.
- For an identification or a description of one possible source of external finance with or without application [1].
- For explanation of one source with no application [1].
- For explanation of one source and application [2].

Application must refer to the possible sources of finance for production of anti

venom vaccines.

Outline the importance of the balance sheet to two stakeholder groups of BP.

The balance sheet shows the asset structure and the liabilities both short and long term of BP and is also a measure of a company's liquidity and as such can be important to a number of stakeholder groups:
- potential shareholders/investors - this may affect their willingness to invest in the company. They will be interested in the liquidity position as well as the current share capital of BP.
- Management - The Operation Manager may be interested in the amount of stock being held, the Finance Manager may be interested in the working capital and cash position and will pay particular attention to the amount of debtors.
- pressure groups - the asset structure may affect the amount of any fines and compensation argued for.
- local community - may be interested in liquidity as the position may affect trade and employment possibilities.
- Financial institutions / creditors - the ability of BP to payback their liabilities / loans taken.
- Accept any other relevant stakeholder group.

Mark as 2+2.

Award [1 mark] for a relevant and correct stakeholder group identified and [1 mark] for a correct outline of the importance of the balance sheet to the stakeholder group identified with application to BP, up to a maximum of [2 marks].

Balance sheet for BP as at 31 December 2009:




Apply candidate Own Figure Rule (OFR).

[0 marks]
An incorrect balance sheet and incorrect format and no title.

[1 mark]
An attempt to prepare a balance sheet, but there are a number of errors in the calculation, format or the title.

[2 to 3 marks]
A generally correct balance sheet with a number of minor errors in calculation, the format of the accounts or in the title.

[4 to 5 marks]
For [5 marks] the balance sheet is completely accurate, detailed and appropriately formatted and with the correct title. For [4 marks] there may be up to two minor errors, one in calculation, and the other may be a slight incorrect format or an incorrect title.

(ii) Explain how two of the financial consequences of the disaster will appear on BP's balance sheet as at 31 December 2010.

Candidates should consider the impact of two of the following events directly on the balance sheet:
- The loss of the oil drilling platform - depreciation of assets/loss of assets will increase under fixed assets. Net fixed asset will therefore be lower.
- The costs of stopping the leak 250 metres below the sea - increase in expenses on the P\&L therefore a fall in retained profits for 2010 on the P / L and hence a smaller transfer to retain profit on the B / S, also possibly an increase in creditors, or any types of short-term debt as they have to pay for the extra expenses.
- The cost of the clean-up operations - increase in expenses on the P\&L therefore a fall in retained profits for 2010, or possibly an increase in creditors as they have to pay for the extra expenses. Cash may also fall as BP might use cash to start with.
- The fall in share price - this would have no impact on the balance sheet. The balance sheet records the share capital raised by selling the shares initially. Any future share price movements affect the shareholder - not the business.
- The loss of brand image - a fall in intangible fixed assets balanced.
- Compensation to regional businesses - increased current liabilities and/or reduction in cash available.
- Compensation to the families of the workers killed - increased current liabilities and/or reduction in cash available.

Accept any other relevant effect and explanation.
N.B. Do not reward a response that refers to the P/L only without linking it to the B / S.

Mark as 2+2.

Award [1 mark] for a relevant and correct consequence identified on the balance sheet and [1 mark] for a relevant and correct description of why the item appears as it does on the balance sheet for BP, up to a maximum of [2 marks] per consequence.

Using relevant information and the ratios above, analyse the likely impacts
of the disaster on BP's future financial performance.

Liquidity:
It is clear that given the ratio, BP is having a financial crisis. The acid test ratio is very low as it should be around 1 . One may argue that liquidity crisis is the main cause of financial ruin and the priority of the management should be on solving the liquidity crisis. The company is likely to see a further decline, especially if the downward trend continues, which could lead to further cash

flow problems in the future. Overall the business is in danger if a further untoward event happens.

However, one may argue that given the nature of the organization, the current ratio is perhaps more significant as oil is stocked and is likely to be sold even if demand falls. Moreover, the low acid test ratio may force the management to take more immediate action to solve the problem now. Given the low gearing ratio and the fact that it is still profitable, BP is likely to be able to secure a loan from the bank.

Gearing:
Gearing indicates that whilst the amount of borrowing compared to issuing shares is almost double that of 2008 some banks may be reluctant to lend funds to BP given the pressures from the media and pressure groups. However, BP is still a low geared organization. The management will need to monitor this ratio carefully.

Shareholder:
The fall in dividends can be attributed to the loss of assets and would worry future investors as well as existing shareholders. BP may lose out especially in the long term as the loss of potential in particular US investors may harm the growth of the business. Also it may encourage institutional investors to sell BP shares, pushing BP's share price downwards and would also make a possible "rights issue" less attractive.

However, with the appropriate PR and possibly through holding a shareholders’ meeting, the CEO and other top management could explain the reasons for the zero dividend and reassure investors of the future direction of the organization.

Profitability:
There appears to be a major decline in profitability as BP is likely to see a sharp fall in custom - particularly from US customers. Also the writing off of assets will have a major impact on expenses and therefore net profit, thus leaving less funds for reinvestment. Whilst this sharp rise in expenses is likely to be short term, the fall in sales may reflect a significant change in consumer buying patterns and so should worry BP.

Nevertheless, BP is still profitable and with the right financial and marketing strategy to pacify investors, pressure groups and the media, the fall in demand for such a price elastic good might not be as large as expected. Still, one may argue that the dangerously low acid test ratio is much more significant for BP and highly likely to negatively affect their financial performance.

Marks should be allocated according to the markbands on page 3.
To reach the top markband all four ratios (liquidity, gearing, shareholder and profitability) should be analysed.
N.B. If a candidate only describes the changes in the ratios award a maximum of [3 marks].