Question 1
SolarPulse Ltd manufactures portable solar chargers for outdoor activities. To finance a new production line, SolarPulse used a long-term bank loan rather than issuing more shares. Interest rates are expected to rise next year.
Define the term gearing ratio.
[2]
Explain one reason why a high gearing ratio may increase financial risk for SolarPulse.
[2]
Question 2
UrbanTrail is a retailer of cycling equipment. Although its sales revenue has increased, much of its cash is tied up in slow-moving stock and unpaid customer accounts. The directors are worried that the business may soon be unable to pay suppliers.
Distinguish between insolvency and bankruptcy in the context of UrbanTrail.
[4]
Question 3
BellaBean is a small chain of coffee shops that also sells packaged roasted coffee beans online. The finance manager has noticed that some varieties of beans remain in the warehouse for several months before being sold.
Explain two possible disadvantages to BellaBean of slow stock turnover.
[4]
Question 4
NexaDesign creates websites for medium-sized businesses. Most clients are allowed to pay 60 days after completion, but NexaDesign is finding it difficult to pay freelance designers on time.
State what debtor days measures.
[2]
Explain one strategy NexaDesign could use to reduce its debtor days.
[2]
Question 5
GlowWear is a fashion retailer selling seasonal clothing through stores and an app. The operations manager is concerned that last season’s clothing is taking up warehouse space and has reduced the company’s stock turnover.
Explain two strategies GlowWear could use to improve its stock turnover.
[4]
Question 6
Rivana Organics (RO) produces chilled fruit drinks for supermarkets. RO increased production after a forecast of higher summer demand, but several supermarket orders were later cancelled.
Table 1: Selected financial information for RO for 2025
Item | Amount |
|---|---|
Opening stock | $18 000 |
Closing stock | $26 000 |
Cost of goods sold | $176 000 |
Stock turnover in days in 2024 | 32 days |
Using Table 1, calculate RO's stock turnover in days for 2025. Show all your working.
[2]
Comment on the change in RO's stock turnover between 2024 and 2025.
[2]
Question 7
Blue Harbour Bakery (BHB) supplies bread and cakes to hotels. Rising ingredient prices have made BHB delay payments to some flour suppliers.
Table 1: Selected financial information for BHB for 2025
| Item | Amount |
|---|---|
| Cost of goods sold | $438 000 |
| Creditors | $72 000 |
| Supplier payment terms | 45 days |
| Creditor days in 2024 | 48 days |
Item | Value | Unit |
|---|---|---|
Cost of goods sold | 438000 | $ |
Creditors | 72000 | $ |
Supplier payment terms | 45 | days |
Creditor days in 2024 | 48 | days |
Using Table 1, calculate BHB's creditor days for 2025. Show all your working.
[2]
Comment on BHB's creditor days in 2025.
[2]
Question 8
Noma Solar (NS) installs solar panels for commercial buildings. NS borrowed to buy specialist installation vehicles, but interest rates are expected to rise next year.
Table 1: Selected financial information for NS for 2025
Item | Amount |
|---|---|
Loan capital | $320 000 |
Share capital | $450 000 |
Retained profit | $30 000 |
Industry average gearing ratio | 42% |
Using Table 1, calculate NS's gearing ratio for 2025. Show all your working.
[2]
Comment on NS's gearing ratio.
[2]
Question 9
FreshKart is an online grocery delivery business. It has negotiated longer payment terms with several vegetable suppliers, increasing its creditor days. Some suppliers are concerned that FreshKart may be using the extra time to cover cash shortages.
Explain one benefit and one drawback to FreshKart of increasing its creditor days.
[4]
Question 10
Koto Fit (KF) manufactures exercise equipment and sells mainly to gyms on credit. Some new gym customers have been slow to pay invoices.
Table 1: Selected financial information for KF for 2025
Item | Value |
|---|---|
Sales revenue ($) | 720 000 |
Debtors ($) | 108 000 |
Normal credit terms offered to customers (days) | 30 |
Debtor days in 2024 (days) | 38 |
Using Table 1, calculate KF's debtor days for 2025. Show all your working.
[2]
Suggest two strategies KF could use to improve its debtor days.
[4]
Question 11
Arda Cycles (AC) is a retailer of electric bicycles. AC increased its range of models, but several expensive bicycles are selling slowly.
Table 1: Selected financial information for AC for 2025
Item | Amount (US$) |
|---|---|
Opening stock | 40 000 |
Closing stock | 80 000 |
Cost of goods sold | 300 000 |
Industry average stock turnover | 8 times per year |
Annual warehouse costs | 24 000 |
Using Table 1, calculate AC's stock turnover in times per year for 2025. Show all your working.
[3]
Suggest one strategy AC could use to improve its stock turnover.
[2]
Question 12
MedHome Ltd supplies specialist beds to private hospitals. It wants to expand into another region. The finance director is considering issuing more shares instead of taking another long-term loan because MedHome already has a high gearing ratio.
Analyse the possible impact on MedHome of issuing more shares rather than using a long-term loan to finance the expansion.
[6]
Question 13
HarbourBite operates restaurants near a city harbour. It expanded rapidly using long-term loans. Recently, customer numbers have fallen, more corporate customers are paying late, and the restaurants are holding large stocks of food and drinks that are not selling.
Analyse how efficiency ratios could provide early warning signs of possible insolvency for HarbourBite.
[6]
Question 14
Mira Office Supplies (MOS) sells printers and paper to schools. MOS is profitable, but its bank has warned that its overdraft account is close to the agreed limit. The $12 000 cash-at-bank balance is held in a separate account from the overdraft account.
Table 1: Selected financial information for MOS for 2025
Item | Amount / US$ |
|---|---|
Sales revenue | 900 000 |
Debtors | 150 000 |
Cost of goods sold | 540 000 |
Creditors | 45 000 |
Cash at bank | 12 000 |
Overdraft limit | 10 000 |
Using Table 1, calculate MOS's debtor days for 2025. Show all your working.
[2]
Using Table 1, calculate MOS's creditor days for 2025. Show all your working.
[2]
Comment on the possible insolvency risk for MOS.
[2]
Question 15
Lexi Robotics (LR) manufactures warehouse robots. LR is considering issuing new shares and using all the cash raised to repay part of its long-term loan.
Table 1: Current financial information and proposed change for LR
Item | Amount ($) |
|---|---|
Current loan capital | 500,000 |
Current share capital | 300,000 |
Current retained profit | 200,000 |
Proposed new share issue | 200,000 |
Amount of loan to be repaid using the share issue | 200,000 |
Using Table 1, calculate LR's current gearing ratio. Show all your working.
[2]
Using Table 1, calculate LR's gearing ratio after the proposed share issue and loan repayment. Show all your working.
[2]
Comment on LR's proposed change in finance.
[2]
Question 16
LumaStage Ltd (LS) designs lighting systems for music festivals and theatres. LS is profitable in its latest accounts, but it has very little cash available. Large festival organizers are taking longer to pay LS after events, while LS must pay freelance technicians and equipment suppliers before the events take place. LS’s debtor days have increased from 41 days to 78 days, while creditor days are only 29 days. Its stock turnover in days has also increased because several expensive lighting units bought for cancelled events remain in storage.
Some suppliers have threatened to stop providing trade credit unless overdue amounts are paid immediately. The managing director has told employees that “LS cannot be bankrupt because it made a profit last year”. The finance manager disagrees and believes that the efficiency ratios show a possible risk of insolvency.
Discuss the usefulness of efficiency ratios in assessing whether LS is at risk of insolvency.
[10]
Question 17
Tala Kitchens (TK) manufactures fitted kitchen units. TK has received several large orders, but customers are paying late and a major supplier is demanding payment.
Table 1: Selected financial information for TK for 2025
Item | Amount ($) |
|---|---|
Cash | 4 000 |
Debtors | 96 000 |
Stock | 140 000 |
Creditors due within 30 days | 82 000 |
Loan capital | 150 000 |
Share capital | 100 000 |
Retained profit | 50 000 |
Monthly loan interest payable | 2 000 |
Using Table 1, calculate TK's gearing ratio. Show all your working.
[2]
Using Table 1, comment on whether TK is insolvent or bankrupt.
[4]
Question 18
PulseCare Diagnostics Ltd (PCD) operates mobile health screening units for employers. PCD wants to buy additional scanning equipment. The directors are considering issuing new shares to existing shareholders and using part of the proceeds to repay long-term debt. Some shareholders are concerned about dilution of control, while the operations director argues that more borrowing would allow faster expansion.
Table 1: Current and proposed financial information for PCD
Item | Current position | Proposed position after share issue and debt repayment |
|---|---|---|
Loan capital ($) | 900,000 | 600,000 |
Share capital ($) | 500,000 | 850,000 |
Retained profit ($) | 250,000 | 250,000 |
Annual interest payable ($) | 72,000 | 48,000 |
Forecast annual profit before interest and tax ($) | 180,000 | 195,000 |
Industry average gearing ratio (%) | 45% | 45% |
Expected market growth in employer health screening (% per year) | 12% | 12% |
Using Table 1, discuss whether PCD should issue new shares and use part of the proceeds to repay long-term debt.
[10]
Question 19
VeloTech Components (VTC) manufactures specialist braking systems for electric scooters. VTC grew quickly after winning contracts with several scooter brands, but most of its expansion was financed by long-term loans. Its gearing ratio has increased from 38% to 64% in three years. Interest rates are expected to rise and one lender has asked VTC to reduce its dependence on loan capital before it will approve any further borrowing.
VTC’s directors are considering two options. Option 1 is to issue new shares to existing and new shareholders and use part of the funds raised to repay long-term debt. Option 2 is to avoid issuing shares and finance the larger factory entirely with an additional long-term loan from an alternative lender, if one is willing to lend. This would increase VTC’s loan capital and gearing ratio; the lender that requested reduced dependence on loan capital would not approve further borrowing unless VTC first reduced it. The operations director believes the new factory is essential to meet demand. The finance director is concerned that high interest payments will reduce retained profit and make VTC vulnerable if scooter demand falls.
Evaluate whether VTC should issue new shares to reduce its gearing ratio rather than use another long-term loan to finance expansion.
[10]
Question 20
Orenda Home (OH) is a medium-sized retailer selling sustainable furniture online and through two showrooms. OH offers hotels and office designers 60 days of credit, but many now pay later than agreed. At the same time, OH imports some furniture in large batches to reduce unit costs. Several designs have sold slowly, increasing warehouse costs and reducing available cash.
OH’s management team wants to improve its efficiency ratios. The marketing director wants to offer discounts on slow-moving furniture and stop giving credit to new business customers. The operations director wants to reduce the product range and order smaller quantities more frequently. The finance director wants to negotiate longer credit terms with suppliers and use retained profit to repay part of OH’s long-term loan, because the gearing ratio is close to 50%. The managing director is concerned that aggressive action could damage customer relationships, supplier trust and future growth.
Recommend which strategies OH should use to improve its efficiency ratios.
[10]
Question 21
Mercato Furnishings Ltd (MF) imports mid-priced office furniture and sells it to small businesses on credit. MF used a long-term bank loan to open a second warehouse in 2025. Demand was lower than forecast and some customers have been slow to pay. The finance director is considering two options: offering discounts to clear slow-moving stock, or tightening credit terms for customers.
Table 1: Selected financial information for MF
Item | 2024 | 2025 |
|---|---|---|
Sales revenue ($) | 1,200,000 | 1,350,000 |
Cost of goods sold ($) | 720,000 | 850,000 |
Opening stock ($) | 120,000 | 180,000 |
Closing stock ($) | 180,000 | 310,000 |
Debtors ($) | 140,000 | 245,000 |
Creditors ($) | 90,000 | 155,000 |
Loan capital ($) | 300,000 | 520,000 |
Share capital ($) | 400,000 | 400,000 |
Retained profit ($) | 200,000 | 230,000 |
Interest rate on long-term loan | 6% | 8% |
Industry average debtor days (days) | 40 | 40 |
Industry average stock turnover (days) | 85 | 85 |
Using Table 1 and relevant efficiency ratios, evaluate whether MF should prioritise reducing stock turnover days or reducing debtor days.
[10]
Question 22
ReCircle Bikes (RC) – a social enterprise
Read the resources and answer the questions that follow.
Resource 1 — Background
ReCircle Bikes (RC) repairs donated bicycles and sells low-cost refurbished bicycles to commuters and schools. RC also trains unemployed young people as bicycle mechanics. Its founder, Maya, says: “Every bicycle we sell should reduce waste, create skills and still leave enough cash to keep the workshop open.” RC wants to open a second workshop in another city.
Resource 2 — Selected financial information for RC for 2025
Resource 3 — Expansion finance options
A bank has offered RC a variable-rate long-term loan of 120 000 USD. A local ethical investment group has suggested raising 100 000 USD through a community share issue and 20 000 USD through pre-orders from supporters.
Resource 4 — Social-media statistic
RC has 18 400 followers. In an online poll, 64% said they would consider paying a deposit for a refurbished bicycle if the money helped fund training places for young mechanics.
Item | 2025 value (USD / days) |
|---|---|
Opening inventory | 42 000 |
Closing inventory | 78 000 |
Cost of goods sold | 360 000 |
Sales revenue | 520 000 |
Trade receivables | 104 000 |
Trade payables | 80 000 |
Loan capital | 270 000 |
Share capital | 180 000 |
Retained profit | 90 000 |
Sector average stock turnover | 38 |
Target debtor days for RC | 45 |
Supplier payment terms | 60 |
Using Resource 2, calculate RC's gearing ratio for 2025. Show all your working.
[2]
Using Resource 2 and other relevant information from the stimulus, analyse two possible financial risks facing RC.
[6]
Using all the resources provided and your knowledge of business management tools and theories, recommend a plan of action for RC to finance the second workshop while improving its efficiency ratios and protecting its social mission.
[17]
Question 23
NourishNet (NN) – a social enterprise
Read the resources and answer the questions that follow.
Resource 1 — Background
NourishNet (NN) prepares subsidized meal kits using vegetables bought from local farmers. It sells to schools, community centres and low-income families. Any surplus is reinvested into nutrition workshops. The chief executive says: “We are not here to maximize dividends, but if we cannot pay farmers on time, the mission will fail.”
Resource 2 — Selected financial information for NN for 2025
| Item | Quantity / unit |
|---|---|
| Sales revenue | 640 000 USD |
| Cost of goods sold | 410 000 USD |
| Trade receivables | 160 000 USD |
| Trade payables | 92 000 USD |
| Cash at bank | 6 000 USD |
| Loan capital | 220 000 USD |
| Share capital | 120 000 USD |
| Retained profit | 40 000 USD |
| Normal credit period offered to schools | 45 days |
| Farmers' payment terms | 35 days |
| Bank overdraft limit | 10 000 USD |
Resource 3 — Stakeholder quotations
- A farmer: “NN is important to our community, but last month it paid us nearly three weeks late.”
- A school administrator: “Our public funding arrives slowly, so 60-day payment terms from NN would help us continue buying the meal kits.”
- A volunteer nutrition coach: “Families trust NN because it keeps prices low.”
Resource 4 — Possible actions being discussed by NN's board
These include debt factoring for school receivables, tighter credit control for new customers, renegotiating payment terms with farmers, applying for a social-impact grant and reducing the number of subsidized meal kits.
Item | Quantity / unit | Scope / basis |
|---|---|---|
Sales revenue | 640 000 USD | All customers |
Cost of goods sold | 410 000 USD | All meal-kit sales |
Trade receivables | 160 000 USD | Aggregate: all customers; not school-specific |
Trade payables | 92 000 USD | Aggregate: all suppliers; not farmer-specific |
Cash at bank | 6 000 USD | NN total |
Loan capital | 220 000 USD | NN total |
Share capital | 120 000 USD | NN total |
Retained profit | 40 000 USD | NN total |
Normal credit period offered to schools | 45 days | School-specific term |
Farmers' payment terms | 35 days | Farmer-specific term |
Bank overdraft limit | 10 000 USD | NN total; current usage not stated |
Distinguish between insolvency and bankruptcy in the context of NN.
[2]
Using Resource 2 and Resource 3, explain two ways in which NN's efficiency ratios may indicate a risk of insolvency.
[6]
Using all the resources provided and your knowledge of business management tools and theories, recommend a plan of action for NN to reduce the risk of insolvency while continuing to meet its social objectives.
[17]
Question 24
KiriCraft Ltd (KC) designs and imports educational craft kits for schools. KC is profitable on paper, but it has a large number of unpaid invoices from schools and high levels of unsold seasonal stock. A supplier has threatened to stop deliveries unless KC pays overdue amounts. The managing director is considering whether KC should negotiate longer payment terms with suppliers, use debt factoring for its debtors, or begin formal corporate insolvency proceedings, such as administration or liquidation.
Table 1: Selected financial information for KC for 2025
Item | Amount | Unit |
|---|---|---|
Sales revenue | 960 000 | dollars |
Cost of goods sold | 600 000 | dollars |
Opening stock | 110 000 | dollars |
Closing stock | 210 000 | dollars |
Debtors | 224 000 | dollars |
Creditors | 145 000 | dollars |
Cash at bank | 8 000 | dollars |
Short-term loan due next month | 55 000 | dollars |
Loan capital | 420 000 | dollars |
Share capital | 300 000 | dollars |
Retained profit | 80 000 | dollars |
Annual interest payable on loan capital | 42 000 | dollars |
Industry average debtor days | 50 | days |
Industry average creditor days | 65 | days |
Industry average stock turnover in days | 75 | days |
Using Table 1, recommend the most appropriate action for KC to reduce the risk of insolvency.
[10]
Question 25
SafeStove International (SSI) – a social enterprise
Read the resources and answer the questions that follow.
Resource 1 — Background
SafeStove International (SSI) designs and manufactures low-smoke cooking stoves for refugee camps and rural communities. It sells some stoves commercially to outdoor retailers and uses the surplus to subsidize stoves for humanitarian projects. SSI built its small factory using long-term borrowing. The finance director says: “Demand is rising, but our debt is limiting our freedom to act.”
Resource 2 — Selected financial and operational information for SSI
| Item | Amount or figure |
|---|---|
| Current loan capital | 480 000 USD |
| Current share capital | 260 000 USD |
| Current retained profit | 60 000 USD |
| Cost of new moulding equipment / proposed additional bank loan | 220 000 USD |
| Opening inventory of components and finished stoves | 90 000 USD |
| Closing inventory of components and finished stoves | 150 000 USD |
| Cost of goods sold | 420 000 USD |
| Sales revenue | 730 000 USD |
| Trade receivables | 140 000 USD |
| Trade payables | 52 000 USD |
Resource 3 — Market and stakeholder information
- Humanitarian agencies have asked SSI to supply 9 000 subsidized stoves next year, but usually pay 70 to 90 days after delivery.
- A large outdoor retailer will pay within 30 days, but requires reliable delivery and consistent product quality.
- A supplier of metal casings has warned that it will stop offering trade credit if SSI continues to build up unpaid balances.
Resource 4 — Social-media statistic and funding possibility
SSI's videos about smoke-related health problems have reached 1.2 million views. A social-impact fund is willing to consider buying 180 000 USD of new shares if SSI provides clear ratio targets and a plan to reduce dependence on debt.
Resource | Item / information | Amount / figure | Notes |
|---|---|---|---|
Resource 2 | Current loan capital | 480,000 USD | Existing long-term borrowing |
Resource 2 | Current share capital | 260,000 USD | Equity finance |
Resource 2 | Current retained profit | 60,000 USD | Accumulated earnings |
Resource 2 | Cost of new moulding equipment / proposed additional bank loan | 220,000 USD | Equipment requires 220,000 USD; proposed loan would fund it |
Resource 2 | Opening inventory of components and finished stoves | 90,000 USD | Inventory value |
Resource 2 | Closing inventory of components and finished stoves | 150,000 USD | Inventory value |
Resource 2 | Cost of goods sold | 420,000 USD | Annual operating figure |
Resource 2 | Sales revenue | 730,000 USD | Annual operating figure |
Resource 2 | Trade receivables | 140,000 USD | Amounts owed by customers |
Resource 2 | Trade payables | 52,000 USD | Amounts owed to suppliers |
Resource 3 | Humanitarian agency order | 9,000 stoves | Payment usually 70–90 days after delivery |
Resource 3 | Outdoor retailer terms | 30 days | Requires reliable delivery and consistent quality |
Resource 3 | Metal casing supplier | Trade credit at risk | May stop credit if unpaid balances continue |
Resource 4 | Video views | 1.2 million views | Smoke-related health videos |
Resource 4 | Social-impact fund | Up to 180,000 USD of new shares | Conditional on clear ratio targets and plan to reduce debt |
Using Resource 2, calculate SSI's projected gearing ratio if it accepts the proposed additional bank loan. Show all your working.
[2]
Using Resource 2 and Resource 3, analyse two possible strategies SSI could use to improve its efficiency ratios.
[6]
Using all the resources provided and your knowledge of business management tools and theories, recommend whether SSI should finance the new moulding equipment mainly through the additional bank loan, the social-impact share issue or another plan of action.
[17]
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