Unit 3 – ACCOUNTS AND FINANCE
1. Distinguish between the purpose of accounts for one internal stakeholder group of RDB and
the purpose of accounts for one external stakeholder group. (line 113)[3 marks]
managers
employees
shareholders – the purpose of accounts to shareholders is to allow them to access the financial health of the organization; ratio
analysis can be performed using data from the profit and loss account & the balance sheet to determine profitability, liquidity,
efficiency, and gearing of the company. At the present time, only family members are shareholders in RDB, but if it were to go
public, the general public could invest.
potential investors
govt – the purpose of accounts for the govt is to also access the financial health of the business and determine if it is paying
necessary taxes. The govt of three countries will be interested in RDB’s corporate taxes.
banks/financiers
2. “However, financially, gross and net profit margins were lower than previously, whichValdemar thought was
unavoidable”(line 38-39) Explain what is meant by the term “profit margin”.[2 marks]
Profit margin shows the value of profit as a percentage of total revenue. Gross profit shows the gross profit (total revenue –COGS)
as a percentage of total revenue; net profit margin shows the net profit (Gross profit – expenses BIT) as a percentage of total sales.
The net profit margin is a better measure of profitability since it accounts for both COGS and regular business expenses (BIT). Both
of RDBs profit margins have fallen recently.
3. Define the term share capital. [2 marks]
Found on bottom of balance sheet (capital and reserves); funds from shareholders used to finance organization;
permanent capital – doesn’t need to be paid back; main source of finance for many limited companies; 50% of RDB’s
needed funds for RDB 2020 would come from share capital
4. “Anna would list RDB on the Frankfurt Stock Exchange: RDB would become a public
limited company, with funds generated from the sale of newly issued shares”(line 122-124). Examine the advantages
and disadvantages of RDB raising finance by floating shares on the Frankfurt Stock Exchange. [6 marks]
huge amounts available for financing; does not have to be paid back – no interest to pay; consider anything stated above in #3
may not be able to raise as much as hoped through sale of factories due to why factories are for sale in the first place – going public
may be only option to raise enough funds for RDB 2020
However, listing on the Frankfurt Stock Exchange could be problematic due to the closing of the German factory; it goes completely
against the current CEOs wishes by diluting ownership and allowing non-family members to have a say in how the company is run. It
is also costly and time consuming to “go public”
5. Define the term working capital(line 83).[2 marks]
Money used for day-to day running of business; net current assets; CA – CL; it is necessary to pay suppliers, employee
payroll, rent/mortage expenses, utilities, insurance, and regular costs of doing business; For a business, such as RDB,
considering expansion/restructuring sufficient working capital is necessary to avoid liquidity issues.
6. “Time would be the critical factor; having factories close to customers’ locations would reduce response time and
improve logistics, including distribution and delivery. This would also shorten the working capital cycle – an
important benefit for RDB”(line 81-83).
Explain one advantage and one disadvantage for RDB of holding high levels of working capital.[6 marks]
Consider: More cash available to meet upcoming bills costs such as unexpected demand for ball bearings requiring
RDB to purchase more materials quickly; working capital is necessary for organizations increasing their scale of
operations – the more cash on hand, the less that will have to be borrowed
Consider: Cash that is available for use on hand or in the bank could have been used to invest in the business. In
RDB’s case, possibly working capital could be used for R and D or market research.