Final Accounts (DP IB Business Management: HL): Exam Questions

Harmony Publishing is a small company that produces and distributes educational books for schools. The company has a steady revenue stream from annual contracts with several school districts. Recently, Harmony Publishing invested in new printing equipment worth £60,000 to improve production efficiency.

The company’s latest Statement of Profit or Loss reveals that its gross profit has increased due to lower cost of sales, but its operating expenses have risen because of higher maintenance costs for the equipment. Additionally, Harmony’s directors are concerned about its net profit margin, which has slightly decreased compared to the previous year. They are exploring whether further investment in automation could reduce operating expenses.

Harmony Publishing is a small company that produces and distributes educational books for schools. The company has a steady revenue stream from annual contracts with several school districts. Recently, Harmony Publishing invested in new printing equipment worth £60,000 to improve production efficiency.

The company’s latest Statement of Profit or Loss reveals that its gross profit has increased due to lower cost of sales, but its operating expenses have risen because of higher maintenance costs for the equipment. Additionally, Harmony’s directors are concerned about its net profit margin, which has slightly decreased compared to the previous year. They are exploring whether further investment in automation could reduce operating expenses.

Stellar Sports is a medium-sized company that designs and sells premium sports equipment. The company recently expanded its product line, which required significant investment in marketing and product development. Stellar Sports’ Statement of Financial Position reveals that its non-current assets have increased by £120,000 due to new manufacturing equipment, but its current liabilities have also risen.

The company’s directors are concerned about its liquidity, as the current ratio has dropped to 1.2:1 from 1.5:1 in the previous year. Stellar Sports is now considering selling off older inventory at a discount to improve its working capital position.

Stellar Sports is a medium-sized company that designs and sells premium sports equipment. The company recently expanded its product line, which required significant investment in marketing and product development. Stellar Sports’ Statement of Financial Position reveals that its non-current assets have increased by £120,000 due to new manufacturing equipment, but its current liabilities have also risen.

The company’s directors are concerned about its liquidity, as the current ratio has dropped to 1.2:1 from 1.5:1 in the previous year. Stellar Sports is now considering selling off older inventory at a discount to improve its working capital position.

GreenGlobe Energy is a renewable energy company that installs solar panels and wind turbines for residential and commercial clients. The company recently expanded its operations into a new region, which required significant investment in vehicles and equipment. GreenGlobe’s latest Statement of Profit or Loss shows a significant increase in sales revenue but also a rise in cost of sales due to higher material prices.

The directors are concerned about the company’s gross profit margin, which has dropped from 40% to 35% over the past year. They are also evaluating whether adopting more cost-effective suppliers could help improve profitability.

GreenGlobe Energy is a renewable energy company that installs solar panels and wind turbines for residential and commercial clients. The company recently expanded its operations into a new region, which required significant investment in vehicles and equipment. GreenGlobe’s latest Statement of Profit or Loss shows a significant increase in sales revenue but also a rise in cost of sales due to higher material prices.

The directors are concerned about the company’s gross profit margin, which has dropped from 40% to 35% over the past year.

BrightSpace Ltd. provides coworking spaces for freelancers and small businesses. The company’s financial performance has grown steadily, and its management wants to assess its net assets at the end of 2024.

SavvyStyle Ltd. is a clothing retailer specialising in affordable casual wear. In 2024, the company generated total revenue of $524,780 by selling its products through online and physical stores. The company’s cost of goods sold (COGS) includes the cost of materials and production, totalling $312,430. Additional expenses, such as marketing and rent, amounted to $62,900.

TechVision Ltd. is a well-established manufacturer of premium computer accessories, including ergonomic keyboards and high-performance mice. The company prides itself on innovation, regularly investing in research and development. Management is conducting a financial review to assess net profit for 2024.

Brno Manufacturing Ltd produces high-quality tractors and heavy farm machinery for agricultural businesses worldwide. Established over 20 years ago, the company is known for its reliable and precise equipment. Brno is one of the top three companies in its market and aims to increase its market share to become the leading manufacturer of farm machinery by 2026

Brno mainly sells to mid- to large-scale farming businesses that need strong and efficient machinery. The company’s products are considered premium due to their high quality and after-sales service. Brno’s prices are about 10% higher than the industry average because of its strong brand and focus on innovation. However, competitors are attracting price-sensitive customers with lower-cost options. To counter this, Brno has introduced trade-in discounts for old equipment and flexible payment plans

Brno currently holds 28% of the market, making it one of the top three companies in its industry. Its two largest competitors hold 30% and 32%, respectively, while smaller companies make up the remaining 10%. To narrow this gap, Brno’s marketing team is working to improve brand awareness by promoting the durability and efficiency of its products. Incentives, such as trade-in discounts and extended warranties, are being used to attract large-scale farming businesses. The new robotics system is expected to reduce production costs, enabling Brno to compete on price while maintaining healthy profit margins

To achieve its goals, Brno is investing $2.5m in a new flow production line that incorporates robotics. Management must decide whether to use the straight-line method or units-of-production method to depreciate the system. The finance manager has expressed concerns about both options, stating, “The straight-line method might oversimplify depreciation for such a high-use system, but the units-of-production method could complicate financial forecasting if usage varies significantly”

Brno’s leadership believes the robotics investment will be a turning point, allowing the company to produce more at consistent quality levels. However, they must assess how the investment will impact cash flow, profitability and the company’s market position

Table 1: Financial indicators (2023)

Table 2: Depreciation details for new robotics system

Appendix: Memo from the Finance Director

To: CEO, Brno Manufacturing Ltd
From: Finance Director
Subject: External concerns affecting business operations

Dear CEO,

As we continue to modernise production and work towards increasing our market share, I’d like to highlight some challenges we may face:

1. Rising raw material costs: Steel and other material costs have increased, which will affect production expenses and reduce profit margins

2. Fluctuating exchange rates: With 40% of our products exported, changes in exchange rates could make our prices less competitive in international markets

3. Environmental regulations: New government rules on emissions from farm machinery may increase costs for product development

4. Opportunities for subsidies: On the positive side, government subsidies for modernising agricultural equipment could help boost demand for our advanced products

I recommend that we conduct a detailed risk analysis to address these factors and include them in our future plans.

Yours sincerely,
Finance Director

Berry Bliss Bakery (BBB) is a small, family-run business specialising in high-quality, artisanal pastries and custom-made cakes. Located in a busy city centre, BBB is well-known for its personalised customer service and attention to detail. The bakery has built a loyal customer base over the past five years, relying heavily on word-of-mouth recommendations to attract new customers. However, competition from larger bakery chains offering similar products at lower prices has begun to put pressure on BBB’s market share

Emma and Raj, the co-owners, recognise the need to grow their business to remain competitive. They are currently exploring two options. The first option is to introduce a catering service for local events, such as weddings, corporate meetings and birthday parties. This service would allow BBB to diversify its revenue streams and target a broader customer base. However, it would require purchasing additional equipment and hiring specialised staff to manage the catering orders

The second option is to launch a subscription box service, where customers can sign up to receive a customised selection of BBB’s baked goods delivered to their homes each month. This option would enable BBB to reach customers beyond its city centre location. However, this option would involve setting up an e-commerce platform and investing in packaging and delivery logistics to ensure the freshness and quality of the products

Emma favours the catering service because it aligns with BBB’s reputation for high-quality, personalised offerings and builds on the bakery's existing strengths. Raj, on the other hand, prefers the subscription box service because it offers the potential for recurring revenue and expands BBB’s reach. Both options come with risks, including the potential for cash flow challenges and the difficulty of maintaining product quality as the business scales

To evaluate the feasibility of these options, Emma and Raj are closely reviewing BBB’s financial position. While revenue has grown steadily over the past five years, net profit margins have decreased due to rising operating costs. The bakery has limited cash reserves and relies on short-term loans to manage its working capital. Emma and Raj know that they must carefully assess the financial and operational implications of each option before making a decision

Table 1: Cost and return analysis of growth options

Table 2: Statement of financial position
As of 31 December 2024

Graph 1: Gross and net profit margins (2020–2024)