IB Business Management HL 3.4 Final accounts Question Bank

1. Deep Sea Catch (DSC)
Deep Sea Catch (DSC) operates as a sole trader on an island popular with tourists. DSC specializes in supplying fresh fish to local hotels on a daily basis.
The local government has given D S C a permit to catch a maximum of 70 kilograms of fish per day. However, there has been an increase in illegal fishing (without permits), in addition to overfishing by DSC's other competitors (with permits), which has reduced fish stocks in the area. Given the increasing competition among fish suppliers on the island, hotels will only pay a fixed price of $ 10 per kilogram of fish.
DSC's cost of operation and the quantity of fish caught varies depending on factors such as weather conditions, the availability of fish, and the number of competitors.
Local hotels demand that:
- the fish they buy meet strict national health and safety standards, to ensure the quality of the fish for tourists
- fish are caught ethically without endangering other sea creatures, such as sea turtles or dolphins.
An environmental pressure group is also pressuring the government for:
- more strict regulations on the fishing industries, targeting suppliers without permits
- a reduction in the quantity of fish that each supplier can sell
- new legislation for a compulsory installation of new and sophisticated technological equipment for ethical fishing.
DSC is well known for fishing responsibly and within government legislation. However, the owner is worried about the possible high costs of some of the new legislation.
Unsold fish is stored and kept in a refrigerator for up to two days. After two days, the stored fish is sold to a processing factory for $ 4 per kilogram. For example, fish caught on Monday, but still not supplied to the hotels by Tuesday evening, will be sold on Wednesday to the processing factory.
DSC uses the system of last-in-first-out (LIFO) for the stock valuation. The table below shows a typical week's supply of fish at DSC:

1. The Pie Store (TPS)
The Pie Store (TPS) bakes pies and sells them in its three retail stores. When developing its brand, TPS used the mathematical symbol pi ( $\pi$ ). In 2020, each store made a profit.

At the end of 2020, the balance sheet for TPS (the three stores combined) showed $ 200000 in assets and $ 120000 in liabilities. $ 50000 of the liabilities was long-term debt.

1. 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.

1. Easy E Booking (EEB)
Easy E Booking ( E E B ) is a small, well-known, reputable and financially stable online hotel reservation service. E E B employees are highly motivated and take great pride in their work. E E B has received recognition for their high quality customer service. Due to an increase in global demand, greater competition and changes in technology, the finance director, Maia, has decided to upgrade E E B 's computers and/or software.
Maia has two options: manufacturer abroad.

[C International Baccalaureate Organization, 2013]
The estimated return/total revenue in $ per year is shown below:

The average rate of return (ARR) of Option A is 46.25 %.
Maia is considering using a straight line method of depreciation.
E E B employees favour Option A, even though some of their competitors using "Book-Fast" have reported problems with the software, including security issues. However, Maia has chosen Option B, which will provide more up-to-date, sophisticated and secure reservation system software. It will also give E E B a competitive advantage and an ability to handle a large global volume of hotel reservations.

1. Scoot Fun (SF)
Scoot Fun ( S F ) is a family-owned private limited company specializing in scooter rentals to a student market segment. Most of the scooters will need replacement in January 2014. SF will purchase 20 new scooters at a total cost of $ 80000. They are expected to have a useful life of four years and the total residual value (scrap value) of the 20 scooters is estimated at $ 4000.
SF's Finance Manager currently uses a straight line method of depreciation, but she has now decided to adopt a reducing balance method of depreciation. However, she is still considering the percentage rate at which the assets (scooters) should be depreciated. The Finance Manager is also looking for various sources of finance for the purchase of the new scooters.
S F 's shareholders would like to receive higher dividends in the coming year. One way to do this is to find a legal way to reduce S F 's tax expense in the coming year.

1. AH Ltd
Jose owns A H Ltd, a private limited company, that provides climbing and adventure tourism opportunities for children in Ecuador. AH Ltd is partly financed by a non-governmental organization (NGO), which promotes outdoor and other healthy activities in Ecuador. An increase in tourism has meant that A H Ltd has been working at full capacity. However, some issues have begun to emerge.
In a meeting with Jose, an NGO representative expressed concern over the quality of the climbing equipment being used. Several minor accidents involving children had occurred. In addition, the NGO representative had not been kept up-to-date on the financial position of AH Ltd. After the meeting, Jose showed the following financial figures to his accountant, Marco.
Selected financial information from A H Ltd's accounts as at 31 March 2014 (all figures in US$m).

Marco is concerned that the information from A H Ltd's accounts does not show a true reflection of AH Ltd's financial position. For example, Jose has not made any provisions for depreciating the value of the equipment since purchasing it three years ago. Marco has informed Jose that the equipment should be depreciated using the reducing balance method at a rate of 40 % per year.

Jose wishes to expand the business to offer more climbing opportunities. Marco, however, warns that the current equipment needs to be replaced to meet international quality standards. Additional funding from the NGO is not possible, and banks in Ecuador give few loans to small businesses such as AH Ltd.

1. Pelican Pies (PP)
Pelican Pies (PP) produces high-quality pies that have limited brand loyalty outside of their local market. The prices of the pies are higher than those of PP's competitors.

For 2018, PP's owner, Austin, is looking to increase sales beyond the local market by lowering prices and spending a greater proportion of PP's promotional budget on above-the-line methods such as regional newspaper advertisements. To finance this type of promotion, Austin will have to increase his loan amount by $ 10000.

1. Visionary Toys (VT)
Visionary Toys (VT) produces highly innovative toys for children. VT began operation in January 2017 and its unique selling point/proposition (USP) is producing toy parts with a 3D printer. VT uses the reducing balance method of depreciation. 3D technology changes rapidly and the financial directors are also considering ways of reducing VTs tax liabilities in 2018. The financial director presented financial information for V T at the end of 2017.

1. Joyce Trucking (JT)
Joyce Trucking (JT) is a small transport company that operates in Kent, United Kingdom (UK). JT currently has ten trucks and operates at high-capacity utilization. The company plans to buy one more truck, at a cost of £ 120000, on 1 January 2024.
J T must decide on which depreciation method to use for the new truck: the straight-line method or the reducing/declining balance method. The new truck has an expected life of four years, and its residual value is expected to be £ 20000.
JT anticipates very high revenue and profitability in 2024 and 2025, because of several major construction projects that are due to take place in Kent. When those projects are completed, JT anticipates a fall in sales revenue and profits.

1. PB Ltd
Phoebe Bowen, a young entrepreneur, started her own clothing company, PB Ltd, on 1 January 2019. On the same day, PB Ltd purchased fixed assets for $ 20000. The estimated useful life of the assets is six years.
At the end of 2020, Phoebe's newly appointed accountant said that Phoebe had omitted the depreciation of the firm's fixed assets from the accounts. Table 1 shows selected financial information from the final accounts of PB Ltd for the years ending 31 December 2019 and 31 December 2020.