finance examination business studies

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Student number ……...……… ..………… ………….

Penrith High School

Business Studies

General Instructions

Reading time - 5 minutes

Working time – 2 hours

Write using a blue or black

pen is preferred

Draw diagrams using a pencil

Board approved calculators may be

used Write your student number where

required

2019 Term 4

Finance Examination Section I

58 marks

Attempt Questions 1 - 58

Allow about 60 minutes for this

section Section II

90 marks

Attempt Questions 21 - 25

Allow about 1 h our and 15 minutes

for this section

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Penrith High School HSC Business Studies Finance Examination

Section I

(58 marks)

Attempt questions 1 - 58

Allow about 60 minutes for this section.

Use the separate multiple-choice answer sheet.

1. Which financial objective focuses on the extent to which businesses can meet

their financial objectives in the long term?

A) Solvency

B) Liquidity

C) Growth

D) Efficiency

2. Damien is deciding to purchase a new factory to support her expansion

following an increased demand for nail polish. Which source of finance would

be the most appropriate for him?

A) Shares

B) Bill of exchange

C) Mortgage

D) Leasing

3. Tracey’s new notebook business requires new manufacturing equipment to

produce the notebook’s spirals. Which of the following would provide leasing

for this equipment?

A) Unit trust

B) Property trusts

C) Finance companies

D) Superannuation funds

4. What is the strategic role of financial management?

A) Profit maximisation

B) Adequately distributing funds to the other key business functions

C) Cost leadership

D) Achieving friendly relations between employees and employers

5. What is the main role of the independent federal statutory body known as the

Australian Securities and Investment Commission?

A) Adhere to government regulations

B) Maintain appropriate financial information

C) Provide consumer and investor protection

D) All of the above

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6. Financial managers are responsible for:

A) Setting financial objectives

B) Sourcing finances

C) Preparing budgets and forecasting future finances

D) All of the above

7. Which type of ordinary shares are offered to existing shareholders and provides

them with an opportunity to purchase more shares without brokerage fees?

A) Placements

B) Share purchase plans

C) Rights issues

D) New issues

8. Glenn, who manages Glenn’s Toys and Co, requires funds for purchasing

additional toys for the upcoming holiday season. Which of the following are

both sources of funds appropriate for Glenn?

A) Debentures and factoring

B) Retained profits and unsecured notes

C) Debentures and bank overdraft

D) Retained profits and bank overdraft

9. Which of the following is an external source of finance?

A) Mortgage

B) Debenture

C) Ordinary shares

D) Leasing

10. A business specialises in providing smaller commercial loans as well as lease

finance. What type of financial institution is this business most likely to be?

A) A finance company

B) An investment bank

C) A superannuation fund

D) The Australian Securities Exchange

Question 11 is continued on the following page.

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11. What are the global market influences?

A) Exchange rates, derivatives, bill of exchange

B) Interest rates, global economic outlook, availability of funds

C) Availability of funds, global economic outlook, hedging

D) Interest payments, clean payment, forward exchange contract

12. Where are the most shares traded in Australia?

A) Australian Securities and Investment Commission

B) Australian Prudential Regulations Authority

C) Australian Securities Exchange

D) Australian Competition and Consumer Commission

13. A business wishes to minimise its costs and maximise its profits with the lowest

level of assets possible. What financial objective is this business trying to

achieve?

A) Efficiency

B) Liquidity

C) Growth

D) Profitability

14. What would be the best example of internal equity finance?

A) Selling shares on the ASX

B) Retained profits from the previous year

C) Internal debt finance

D) A sole trader investing $200,000 into their business

15. Liquidity is the ability of a business to:

A) Maximise its profits

B) Meet short-term financial obligations

C) Meet long-term financial obligations

D) Increase the number of stores operating

16. Investors pool their money together and invest it in the property market. What is

this an example of?

A) Finance company

B) Bank

C) Unit trust

D) Superannuation funds


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17. Where does an initial public offering occur for a public company?

A) The primary market of the Australian Securities and Investments Commission

B) The primary market of the Australian Securities Exchange

C) Secondary market of the Australian Securities and Investments Commission

D) Secondary market of the Australian Securities Exchange

18. What would be a suitable strategy to increase the level of the Gross Profit ratio?

A) Reduce overall expenses

B) Reduce stock wastage

C) Reduce the level of purchases

D) Increase the level of sales

19. A business sells its accounts receivables to a specialist firm to create cash inflows

for the business. This financial management strategy is known as:

A) Leasing

B) Sale and leaseback

C) Overdraft

D) Factoring

20. The Australian Securities and Investments Commission is governed by which

piece of legislation?

A) Competition and Consumer Act 2010 (Cth)

B) Corporations Act 2001 (Cth)

C) Fair Trading Act 1987 (NSW)

D) Work Health and Safety Act 2011 (NSW)

21. Which of the following indicates a sound financial position for a small business?

A) High expense ratio and high accounts receivable turnover ratio

B) High accounts receivable turnover ratio and a high net profit ratio

C) High net profit ratio and low gross profit ratio

D) High gross profit ratio and a low accounts receivable turnover ratio

22. Which of the following describes the removal of a one-off sale of land from the

balance sheet for a business?

A) Normalised earnings

B) Retained profits

C) Capitalising expenses

D) Debt repayments

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23. Which aspect of the financial planning cycle uses comparisons for financial

control?

A) Planning financial needs

B) Budgets

C) Record systems

D) Financial standards

24. What does a cash flow statement show?

A) Assets

B) Liquidity

C) Profitability

D) Receivables

25. The difference between the net profit ratio and the gross profit ratio is known as

the:

A) Expense ratio

B) Assets ratio

C) Current ratio

D) Accounts receivable turnover ratio

26. Hannah owns a cupcake shop and has a debt-to-equity ratio of 3:1. What will

happen if the bank increases the interest rate on her loan?

A) Gearing will improve and expenses will fall

B) Gearing will deteriorate and expenses will rise

C) Gearing will improve and expenses will rise

D) Gearing will deteriorate and expenses will fall

27. Samara receives a letter notifying her that an independent accountant will be

checking the accuracy of her company’s financial records. What is this process

called?

A) Budget Check

B) Ethical Check

C) Audit

D) Sale and leaseback

28. The Australian Securities and Investments Commission is governed by which

piece of legislation?

A) Competition and Consumer Act 2010 (Cth)

B) Corporations Act 2001 (Cth)

C) Fair Trading Act 1987 (NSW)

D) Work Health and Safety Act 2011 (NSW)

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29. A business's profitability can be measured by which ratio?

A) Net profit ratio

B) Gross profit ratio

C) Return on owner’s equity ratio

D) All of the above

30. Which planning and implementing process uses the double-entry system of

accounting as an important control measure?

A) Budgets

B) Financial needs

C) Record Systems

D) Financial risk

31. Diluted business ownership is a characteristic of what type of finance?

A) Sales revenue

B) External debt finance

C) Internal debt finance

D) External debt finance

32. Which financial statement shows net working capital?

A) Balance sheet

B) Income statement

C) Cash flow statement

D) Statement of shareholder’s equity

33. What is an accounting method where the assets listed on the balance sheet are

recorded at the value at which they were purchased?

A) Matching principle

B) Valuing assets

C) Historical cost

D) Timing issue

34. Lara Jean’s Flowers is planning to increase its market share by acquiring another

flower company. What financial objective does this best illustrate?

A) Growth

B) Liquidity

C) Profitability

D) Solvency


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35. Financial managers must ensure that the source of finance required correlates

with the economic lifetime of the asset. What principle is this based on?

A) Historical cost

B) Matching the term with the source of finance

C) Cash flow statements

D) Normalised earnings

36. When conducting comparative ratio analysis, businesses can compare their

figures with what?

A) Figures over different periods

B) Against different industry standards

C) Against similar businesses

D) All of the above

37. What is the effect of factoring a business’ accounts receivables

A) Increased profits and improvement in cash flow

B) Decreased profits and deterioration in cash flow

C) Increased profits and deterioration in cash flow

D) Decreased profits and improvement in cash flow

38. What is the benefit of factoring?

A) It improves working capital

B) The business is guaranteed to receive the full amount of payment

C) It delays cash flow coming into the business

D) It is relatively inexpensive and makes the business less liquid

39. Which of the following is a strategy that a business can use to improve its

working capital

A) Increase stock levels to increase profitability

B) Use cost centres to isolate the business’ specific costs

C) Use sale and leaseback to improve overall liquidity

D) Hedge the currency using derivatives to ensure volatility in the dollar is

minimised

40. Gearing is best described as

A) The extent to which businesses can meet their financial obligations in the long

term

B) The proportion of debt to equity that is used to finance the activities of a

business

C) The extent to which businesses can meet their financial obligations in the short

term.

D) Increasing the number of stores operating.

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41. Bronwyn owns a fruit shop and imports most of his watermelons from overseas.

Which method of payment would expose her to the least amount of risk?

A) Letter of credit

B) Bill of exchange

C) Clean payment

D) Payment in advance

42. James’ Rocky-Road has just signed a contract for the delivery of mini

marshmallows in eight months. However, during this time it is expected that the

currency will significantly depreciate. Which global financial management

strategy should the business employ to minimise financial risk?

A) Derivatives

B) Bill of exchange

C) Interest rates

D) Insurance

43. What type of derivatives could businesses use to minimise risk and exposure to

currency fluctuations?

A) Swap contracts and debentures

B) Options contracts and dividends

C) Forward exchange contracts and new issues

D) Forward exchange contracts and swap contracts

44. Which of the following groups would experience the most negative financial

impact as a result of an increase in the value of the Australian dollar?

A) Australian producers buying goods from China

B) Australian producers selling goods to China

C) Australian car makers purchasing inputs from Japan

D) Australian travel agents selling domestic holidays

45. Which of the following are examples of fixed costs for a business?

A) Leased equipment and rent

B) Rent and fuel

C) Casual labour and stock

D) Fuel and inventory

46. An upward movement of one currency against another is known as a:

A) Depreciation

B) Interest rate

C) Appreciate

D) Exchange rate

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47. Which of the following would immediately improve the working capital of a

business?

A) Preparing a cash flow statement

B) Using derivatives

C) Factoring

D) Use of sale and leaseback

48. Offering discounts for early payments is a strategy to improve:

A) Factorising

B) Cash flow

C) Efficiency

D) Gearing

49. Which of the following is likely to reduce Australia’s export volumes to the

Maldives?

A) The Australian dollar depreciates and there is a recession in the Maldives

B) The Australian dollar depreciates and there is an expansion in the Maldives

C) The Australian dollar appreciates and there is a recession in the Maldives

D) The Australian dollar appreciates and there is an expansion in the Maldives

50. How would a forward exchange contract minimise the risk associated with a

payment for a business importing goods?

A) It gives the importer the right, not the obligation to buy or sell currency at a

future date

B) It exchanges currency on the FOREX market with an ability to reverse the

transaction at a future date

C) It is a method that allows the producer to receive the payment and then arrange

for the goods to be sent at a later date.

D) It allows the exchange of one currency for another currency at an agreed

the exchange rate at a future date

51. Which of the following strategies does not directly add to profits but, aims to

minimise expenses and improve the accountability of spending?

A) Cost centres

B) Financial statements

C) Marketing objectives

D) Revenue control centres

52. When a business decides to implement a strategy which tightens their credit

policy, which financial objective are they trying to improve?

A) Liquidity

B) Profitability

C) Efficiency

D) Growth

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53. Which of the following is a variable cost?

A) Insurance

B) Salaries

C) Rent

D) Raw materials

54. Which of the following is NOT a cost control?

A) Cost centres

B) Leasing

C) Fixed and variable costs

D) Expense minimisation

55. The selling of an owned asset to a lessor and leasing the asset back through fixed

payments for a specified period is:

A) Sale and leaseback

B) Leasing

C) Hedging

D) Marketing

56. The control of current assets involves monitoring all of the following except:

A) Cash

B) Accounts payables

C) Accounts receivables

D) Inventories

57. What is the benefit of distributing payments throughout the year

A) Businesses have to pay an upfront lump-sum payment

B) It increases the risk of non-payment

C) It ensures equal cash flow each month

D) It does not allow businesses to identify periods of cash shortfalls and surpluses

58. A cash flow statement shows:

A) Whether a business can generate favourable cash flow

B) Whether a business can pay its financial obligations when they fall due

C) Whether a business has sufficient funds for the growth of expansion

D) All of the above

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END OF SECTION 1

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Penrith High School HSC Business Studies

Finance

Examination

Section II

(90 marks)

Attempt questions 21 - 29.

Allow about 1 hour and 15 minutes for this section.

Answer the questions in the spaces provided on this examination paper.

Question 21 (10 marks)

Sylvia is a skincare consultant whose start-up business is growing rapidly as a result

of increasing sales. As a result of this rapid growth, she needs to open a new store and

purchase additional stock worth $50,000.

a) Outline the role of financial management for Sylvia. (1 mark)

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b) Explain the interdependence between finance and other key business functions

for Sylvia. (4 marks)

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c) Explain ONE potential conflict between a short-term and long-term financial

objective for Sylvia. (4 marks)

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The creation of superannuation funds have brought forth great challenges but has

improved the lives of many hard-working Australians since its inception in 1991.

- Former Prime Minister John Howard (SMH, 2017)

a) Outline the role of superannuation funds on Australian businesses. (4 marks)

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b) Analyse the importance of the Australian Securities and Investments

Commission (ASIC) as an industry regulator.

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Question 22 is continued on the next page

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c) Distinguish between debt and equity financing and discuss its effectiveness as a

source of finance for Australian businesses. (5 marks)

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Q23)

Vanessa, an owner of a pet shop in Penrith, has decided to open another factory in Emu

Plains and requires the purchase of another factory. She is considering both her internal

and external financing options for sourcing funds.

a) Discuss the use of leasing and the use of mortgages as a source of long-term

finance for Vanessa’s business. (5 marks)

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b) Analyse the influence of company taxation on the financial management of

Vanessa’s business. (5 marks)

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c) Discuss the importance of the planning and implementing process and how this

can help sustain Vanessa’s business throughout the expansion. (5 marks)

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Balance Sheet for Jack Hammers Pty Ltd

for the period ending 30th June 2010 and 2011

2010 2011

$ $ $ $

Current Assets

Cash 5000 0

Inventory 22 000 30 000

Accounts Receivable 18 000 45 000 25 000 55 000

Non-Current Assets 252 000 275 000

TOTAL ASSETS 297 000 330 000

Current Liabilities

Overdraft 0 10 000

Accounts Payable 12 000 12 000 25 000 35 000

Non-Current Liabilities

Mortgage 85 000 120 000

TOTAL LIABILITIES 97 000 155 000

Owner’s Equity

Net Capital 165 000 160 000

Net Profit 35 000 200 000 15 000 175 000 TOTAL LIABILITIES & 297 000 330 000

OWNER’S EQUITY Additional information - industry average liquidity ratio is 3:1

a) Calculate the liquidity ratio for both 2010 and 2011. Show all working.

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a) Evaluate the trend in the liquidity position of this business during the past two

years. (2 marks)

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Question 24 is continued on the next page

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c) Explain the importance of working capital management and justify TWO

strategies this business should implement to improve its liquidity position.

(6 marks)

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Penrith High School HSC Business Studies

Finance

Examination


“Through the comparing of a business’ performance, with other competitors,

small-to-medium enterprises can increase their insight into their

performance and seek aspects of improvement, if any.”

- Alan Thomas

a) Assess the use of comparative ratio analysis as a form of improving business

performance. (3 marks)

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b) Explain why it is important for a business to control its debt-to-equity ratio. (2

marks)

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Question 26)

Tristan’s Watermelons that are imported from Brazil are sold to customers in Australia for a

profit. The business has overspent on chemicals needed to keep the watermelons fresh and of the

highest quality in comparison to local supermarkets. Due to the high demand for watermelons in

Australia and limited supply, the business’ sales have exponentially increased, and they are

tempted to understate their net profits to reduce the amount of tax payable.

A) Justify the method of payment that would be most effective in reducing the business’

financial risk. (5 marks)

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B) Tristan has decided to use a derivative. Explain the options available to her. (5 marks)

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Question 27) (10 marks)

A) Define hedging. (2 marks)

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B) Explain the use of factoring as a cash flow management strategy. (4 marks)

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C) Discuss leasing as a working capital management strategy. (4 marks)

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Michelle’s Banana Bread Bonanza is currently assessing their current assets and current liabilities

as well as their cash flow. At the end of the financial year, the business has recorded more current

liabilities than current assets. They also realise they are having large cash outflows in some

particular months while having large cash inflows in over months.

A) Recommend TWO strategies Michelle can use to improve working capital management.

(5 marks)

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B) Recommend TWO strategies Michelle can use to improve cash flow management.

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Question 29 is on the following page.

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A) Describe the importance of cost centres in managing profitability management. (3 marks)

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B) Describe the importance of expense minimisation in managing profitability management.

(3 marks)

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