Accounting and Finance | OCR A-Level Business H431 (H431)

Accounting and Finance

304 questions
20 subtopics
Assessed on all three papers
Component 01, Component 02 and Component 03

Accounting and Finance is examined in all three written papers — the specification is assessed in full on every one of them, and they differ by the context questions are set in rather than by content.

It covers accounting and finance objectives, sources of finance and the choice between them, A true and fair view and the accounting conventions, costs, revenue and profit, cost classification and costing methods, contribution and the break-even point, margin of safety and target profit, break-even charts, stepped fixed costs and special orders, payback period and average rate of return, net present value and the investment decision, budgets and variance analysis, cash-flow forecasts and cash-flow statements, cash-flow problems and working capital, the income statement and measures of profit, the statement of financial position, depreciation and the valuation of assets, liquidity and solvency ratios, profitability and efficiency ratios, shareholder ratios and the limits of ratio analysis and external influences and the finance strategy.

Sample questions from Accounting and Finance

Answer each one closed book first, then open the answer.

Accounting and finance objectives

Why is a start-up more likely to set a cash-flow objective than a profit objective?

Show the answer
Most start-ups make a loss in their early trading, and running out of cash forces closure long before low profit does, so survival depends on liquidity.
A true and fair view and the accounting conventions

Explain the convention of prudence.

Show the answer
Where there is uncertainty, losses and liabilities are recognised as soon as they become likely while profits and assets are recognised only when reasonably certain, so the position is never overstated.
Contribution and the break-even point

State the formula for break-even output.

Show the answer
Break-even output equals total fixed costs divided by contribution per unit.
Break-even charts, stepped fixed costs and special orders

A business has fixed costs of £30,000 up to 4,000 units and contribution of £10 per unit. Calculate its break-even output.

Show the answer
Break-even output is 3,000 units.
Budgets and variance analysis

Explain two purposes a budget serves besides controlling spending.

Show the answer
It coordinates departments around a single plan, and it motivates managers by giving them a clear target for which they are accountable.
Cash-flow problems and working capital

How does tightening credit control improve cash flow, and what is the risk of doing so?

Show the answer
Customers pay sooner, bringing receipts forward, but some may take their business to a competitor offering easier terms.
Depreciation and the valuation of assets

How does the reducing balance method of depreciation work?

Show the answer
A fixed percentage is applied to the asset's net book value each year, so the charge is largest in the first year and falls in every year after that.
Profitability and efficiency ratios

Cost of sales is £480,000 and average inventory £60,000. Calculate inventory turnover.

Show the answer
Inventory turns over 8 times a year.

The 20 subtopics

One subtopic is one session. Work down the list.

Subtopic	What it covers	Questions
Accounting and finance objectives	Recall questions on accounting and finance objectives, the financial targets a business might set, quantifying them with deadlines, cost minimisation against profit maximisation, cash-flow objectives for start-ups, how financial objectives guide resources and corporate aims, their effect on shareholders and employees, and revising them.	13
Sources of finance and the choice between them	Recall questions on internal and external finance, retained profit, sale and leaseback, share and loan capital, rights issues, short- and long-term finance, overdrafts, bank loans, trade credit, debt factoring and venture capital, matching finance to assets, sole traders' options, and the factors behind the choice.	17
A true and fair view and the accounting conventions	Recall questions on a true and fair view, Generally Accepted Accounting Practice and comparability, and the conventions of consistency, going concern, accruals, materiality, objectivity, prudence and realisation, applied to prepayments, bad debts, deposits and legal claims.	17
Costs, revenue and profit	Recall questions on fixed and variable costs, calculating total and average cost, fixed cost per unit, total and average revenue, profit and profitability, why material price rises hit manufacturers hardest, raising profit without selling more, and judging a profit figure.	15
Cost classification and costing methods	Recall questions on direct and indirect costs and overheads, cost centres and profit centres with their benefits and drawbacks, full, absorption and marginal costing, calculating an overhead absorption rate, how the absorption basis changes apparent profitability, and pricing in the short and long run.	17
Contribution and the break-even point	Recall questions on contribution per unit and total contribution, the break-even point and break-even revenue, the contribution ratio, rounding break-even output, how price, fixed cost and variable cost changes move break-even, producing at a loss in the short run, and lowering the break-even point.	16
Margin of safety and target profit	Recall questions on calculating the margin of safety in units and as a percentage, profit as margin of safety times contribution, what a small margin means, target profit and the output needed to reach it, capacity limits, the effect of rising fixed costs, and forecast reliability.	14
Break-even charts, stepped fixed costs and special orders	Recall questions on drawing and reading a break-even chart, including the revenue and fixed cost lines, break-even point, profit and margin of safety, the chart's assumptions, stepped fixed costs and their effect on break-even and profit, and financial and non-financial special order decisions.	14
Payback period and average rate of return	Recall questions on investment appraisal and why it is needed, calculating the payback period and the average rate of return, the advantages and weaknesses of each method, comparing a project with money on deposit, and why a cash-strapped business may prefer a shorter payback.	14
Net present value and the investment decision	Recall questions on the time value of money, discount factors, calculating present value and net present value, the decision rule, how higher discount rates and risk change the result, the advantages and weaknesses of net present value, qualitative factors, and using several appraisal methods.	14
Budgets and variance analysis	Recall questions on budgets, income and expenditure budgets, zero and historical budgeting, the purposes of budgets, calculating favourable and adverse variances and a profit variance, why favourable cost variances and adverse sales variances can mislead, over-tight budgets, and investigating variances.	16
Cash-flow forecasts and cash-flow statements	Recall questions on cash flow, cash-flow forecasts and statements, cash flow against profit, calculating net cash flow and opening and closing balances, the effects of customer credit, supplier terms and price rises, the purposes and limitations of forecasts, and why shareholders read the cash-flow statement.	15
Cash-flow problems and working capital	Recall questions on working capital and its formula, the working capital cycle, the causes of cash-flow problems and the ways a business can ease them.	14
The income statement and measures of profit	Recall questions on the income statement, calculating gross profit, operating profit and profit for the year, cost of sales and operating expenses, finance costs and tax, what diverging gross and operating profit show, dividends and retained profit, and the uses and limitations of the statement.	15
The statement of financial position	Recall questions on the statement of financial position, current and non-current assets and liabilities, receivables and payables, calculating net current assets and net assets, retained earnings and shareholders' equity, why net assets equal equity, its use to suppliers, and its limitations.	14
Depreciation and the valuation of assets	Recall questions on depreciation and why it is not a cash outflow, straight-line and reducing balance calculations, net book value, choosing a method, goodwill, valuing inventory prudently, bad debts, valuing patents, brands and investments, and how the depreciation method affects reported profit.	18
Liquidity and solvency ratios	Recall questions on liquidity and solvency, calculating and interpreting the current ratio, acid test ratio, gearing and interest cover, why inventory is excluded from the acid test, the risks of a high current ratio and gearing above 50%, and when a highly geared business can still be sound.	15
Profitability and efficiency ratios	Recall questions on calculating the gross and net profit margins, return on capital employed and capital employed, return on equity, inventory turnover and days, debtor and creditor days, and non-current asset turnover, plus raising the gross margin and reading a falling net margin or rising debtor days.	18
Shareholder ratios and the limits of ratio analysis	Recall questions on shareholder ratios, calculating dividend per share, dividend yield, earnings per share and the price/earnings ratio, what a high price/earnings ratio suggests, why dividend yield moves with the share price, and the limitations of ratio analysis.	13
External influences and the finance strategy	Recall questions on how interest rates, recession, inflation and a weaker pound affect a business's accounts, legal, ethical, environmental, technological, social and political influences on finance, window dressing, international reporting, and financial strategy, its fit with stage of growth and the risk of heavy borrowing.	15

Accounting and Finance is 304 of the 2,384 questions in the guide.Get the guide, £8

How the guide is worked

Answering a question from memory stores it far better than reading the answer again. The guide runs that as a fixed procedure on one subtopic at a time, about twenty minutes a session.

Step 1 · Closed book
Cover the answers. Work through one subtopic and write down what you can. Leave blanks where you have nothing.
Step 2 · Open book
Go back to the top. Read each printed answer and write it out in full, including the ones you had right.
Step 3 · Closed book again
Same questions, same order, from memory. The gap between pass one and pass three is the session result.

Read the full method, the return schedule and the research behind it.