Finance | OCR A-Level Business H436 (H436)

Finance

343 questions
24 subtopics
Component 02: Operations, finance and external influences
Component 02

Finance is examined in Component 02, Operations, finance and external influences.

It covers the finance function and business failure, assets, liabilities and capital, cash, profit and working capital, cost behaviour and sales revenue, contribution and the break-even point, break-even charts and the margin of safety, using contribution to make short-term decisions, levels of profit and profit margins, budgets and budget setting, budget variances, cash flow forecasting and its uses, the structure of a cash flow forecast, remedies for a cash flow shortage, liquidity, the current ratio and the acid test, retained profit, owners' investment and asset sales, loans, overdrafts and other debt finance, share capital, venture capital, crowdfunding and grants, choosing a source of finance, financial statements and who uses them, the income statement, the statement of financial position (balance sheet), return on capital employed and gearing, inventory turnover, receivable days and payable days and ratio analysis and its limitations.

Sample questions from Finance

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

The finance function and business failure

Why is a bank reluctant to lend to a firm that keeps poor financial records?

Show the answer
It cannot judge whether the firm generates enough cash to meet the repayments, so the loan looks far riskier and is refused or priced higher.
Cost behaviour and sales revenue

State the formula for total revenue.

Show the answer
Total revenue = selling price per unit × quantity sold.
Using contribution to make short-term decisions

Why should a firm working at full capacity usually refuse a discounted order?

Show the answer
Meeting it would displace sales at the full price, so the contribution lost is greater than the contribution gained.
Budget variances

Budgeted labour costs were £80,000 and actual labour costs were £74,500. State the variance and its type.

Show the answer
There is a variance of £5,500, and it is favourable because the cost was lower than budgeted.
Remedies for a cash flow shortage

How does delaying payment to suppliers help cash flow?

Show the answer
It keeps cash in the business for longer, effectively borrowing from suppliers at no interest.
Loans, overdrafts and other debt finance

What makes an overdraft more suitable than a loan for covering a short gap?

Show the answer
Interest is charged only on the amount actually used and only while it is used, and the business can draw on it and repay it as its cash position changes.
Financial statements and who uses them

What does a bank considering a loan look for in a set of accounts?

Show the answer
Evidence that the business generates enough profit and cash to meet the repayments, how much it already owes, and what assets could be offered as security.
Return on capital employed and gearing

A firm's profit is rising but its ROCE is falling. What does that tell you?

Show the answer
The capital employed is growing faster than the profit it generates, so the extra investment is earning a poorer return than the money already in the business.

The 24 subtopics

One subtopic is one session. Work down the list.

Subtopic	What it covers	Questions
The finance function and business failure	Recall questions on what the finance function does, the information it supplies to managers and outside users, the dangers of poor financial records, and insolvency, administration, liquidation, bankruptcy and the warning signs of failure.	15
Assets, liabilities and capital	Recall questions on non-current and current assets, current and non-current liabilities, share capital and retained profit as equity, calculating net current assets, net assets and total equity, and ranking assets by liquidity.	14
Cash, profit and working capital	Recall questions on the difference between cash and profit, why a profitable business can run short of cash, how credit sales, asset purchases and loans affect each, calculating working capital, and overtrading.	12
Cost behaviour and sales revenue	Recall questions on fixed and variable costs with examples, the formulas for total cost, total revenue and unit cost, calculating costs, revenue and profit, and why fixed cost per unit falls as output rises.	16
Contribution and the break-even point	Recall questions on contribution per unit and total contribution, calculating profit and break-even output, how changes in fixed costs, variable costs and price move the break-even point, and output needed for a target profit.	17
Break-even charts and the margin of safety	Recall questions on reading a break-even chart, its axes and fixed cost, total cost and total revenue lines, the profit and loss areas, calculating the margin of safety, and how the chart shifts when costs or price change.	15
Using contribution to make short-term decisions	Recall questions on judging special orders by contribution, discontinuing an apparently loss-making product, the lowest acceptable price, how changes in sales and variable costs affect profit, and the assumptions and uses of break-even analysis.	16
Levels of profit and profit margins	Recall questions on gross profit, operating profit and profit for the year, cost of sales, expenses and finance costs, calculating each profit margin, the difference between profit and profitability, and comparing margins fairly.	16
Budgets and budget setting	Recall questions on budgets and how they help a business plan, allocate resources, coordinate, control, motivate and measure performance, incremental and zero-based budgeting, delegated and imposed budgets, and the drawbacks of budgeting.	13
Budget variances	Recall questions on what a variance is, what makes one favourable or adverse, calculating revenue and cost variances, and how a business acts on them.	14
Cash flow forecasting and its uses	Recall questions on the cash flow forecast, how it differs from an income statement, how it warns of trouble early, and why a lender asks for one.	13
The structure of a cash flow forecast	Recall questions on cash inflows and outflows, calculating net cash flow and opening and closing balances, reading a forecast with a negative net cash flow or closing balance, and why credit sales and depreciation are treated as they are.	15
Remedies for a cash flow shortage	Recall questions on remedies for a cash flow shortage, including cost control, inventory management, delaying supplier payments, selling assets, sale and leaseback, delaying investment and overdraft facilities, and the risks and limits of each.	14
Liquidity, the current ratio and the acid test	Recall questions on liquidity and why it can matter more than profit, the current ratio and the acid test, calculating both, and how to read the results.	15
Retained profit, owners' investment and asset sales	Recall questions on internal sources of finance, retained profit and its advantages and drawbacks, owners' investment from personal savings, selling assets and sale and leaseback, and why owners often prefer internal finance.	12
Loans, overdrafts and other debt finance	Recall questions on bank loans and collateral, overdrafts, leasing, trade credit and credit cards as business finance, their advantages and drawbacks, and the principle of matching a source of finance to its use.	14
Share capital, venture capital, crowdfunding and grants	Recall questions on share capital and rights issues, the difference between dividends and interest, venture capital, crowdfunding and grants, which businesses can use each, and their advantages, drawbacks and risks.	14
Choosing a source of finance	Recall questions on the factors that decide a source of finance — cost, flexibility, control, the size of the sum and what it is for.	14
Financial statements and who uses them	Recall questions on what the financial statements are, why a company must produce them, and what a lender, a shareholder and the tax authority each look for.	12
The income statement	Recall questions on the lines of an income statement from revenue and cost of sales to expenses, finance costs, taxation and profit for the year, calculating gross profit, profit for the year and retained profit, and its limitations.	16
The statement of financial position (balance sheet)	Recall questions on the statement of financial position, its non-current and current assets, current and non-current liabilities and equity, calculating net current assets, net assets and total equity, and what the snapshot fails to show.	15
Return on capital employed and gearing	Recall questions on return on capital employed and capital employed, calculating and improving ROCE, the gearing ratio and how to calculate it, the dangers and deliberate use of high gearing, and ways to reduce it.	15
Inventory turnover, receivable days and payable days	Recall questions on efficiency ratios, calculating inventory turnover, trade receivable days and trade payable days, interpreting and improving each figure, and working out how long cash is tied up in the trading cycle.	14
Ratio analysis and its limitations	Recall questions on why businesses use ratios, the four families of financial ratio, which ratios banks and shareholders use, window dressing, accounting policies and external conditions, and non-financial measures used alongside ratios.	12

Finance is 343 of the 2,383 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.