MARK SCHEME — PAPER 2

BTEC Level 3 Business Unit 3: Personal and Business Finance | Total Marks: 90

Question 1 — Finance Sources (20 marks)

Learning Aims D1, D2, D3 — Business Finance Sources & Decision-making

Part (a): Identify 3 internal finance sources (3 marks)

1 mark per correct identification. Examples: Retained profit, sales of fixed assets, working capital reduction, owner's capital

Part (b): Explain 1 advantage + 1 disadvantage of retained profit (6 marks)

L1 (1-2m): Basic statement
L2 (3-4m): Explains one factor
L3 (5-6m): Explains both advantage and disadvantage

Advantage: No interest charges or repayment schedule; retains ownership and control; funds available immediately (3 marks)
Disadvantage: Reduces dividends to shareholders; slow to accumulate large sums; opportunity cost of not investing profits (3 marks)

Part (c): Compare bank loans vs. debentures (8 marks)

L1-L2 (1-4m): Basic comparison
L3 (5-8m): Comprehensive comparison with multiple factors (cost, control, security, risk)

Factor	Bank Loan	Debenture
Interest Rate	Variable, often higher	Fixed rate, may be lower
Duration	Shorter (5-10 years)	Longer (10-25 years)
Security	Personal guarantee often required	Secured against assets
Ownership	Lender has no claim on ownership	Debenture holder is creditor

Part (d): Evaluate most suitable finance for £500k expansion (3 marks)

Must make a recommendation and justify based on company context (size, profitability, collateral available)

Question 1 Total: 20 marks

Question 2 — Income Statement Analysis (26 marks)

Learning Aim F1 — Income Statements & Profitability Ratios

Part (a): Calculate gross profit (2 marks)

Revenue minus Cost of Goods Sold

Revenue: £2,400,000
COGS: £840,000
Gross Profit = £2,400,000 − £840,000 = £1,560,000 ✓ (2 marks)

Part (b): Calculate net profit (4 marks)

Gross Profit minus Operating Expenses and Tax

Gross Profit: £1,560,000
Operating Expenses: £840,000
Operating Profit: £1,560,000 − £840,000 = £720,000
Assume no tax for exam, Net Profit = £720,000 ✓ (4 marks)

Part (c): Calculate gross profit margin % (3 marks)

GP / Revenue × 100

(£1,560,000 ÷ £2,400,000) × 100 = 65% ✓ (3 marks)

Part (d): Analyse profitability using ratios (9 marks)

L2 (4-6m): Calculates 1-2 ratios
L3 (7-9m): Multiple ratios with interpretation

Key ratios to analyse:

Net Profit Margin = (£720,000 ÷ £2,400,000) × 100 = 30% (healthy margin)
Return on Capital = 30% indicates strong profitability
COGS ratio = 35% shows reasonable cost control

Interpretation: Company is highly profitable with strong margins. Gross margin of 65% indicates premium pricing or low material costs. Net margin of 30% reflects good operational efficiency.

Part (e): Suggest 2 ways to improve net profit margin (8 marks)

L3 (7-8m): Two realistic suggestions with explanation of impact

Suggestion 1: Reduce operating expenses — Review overheads, negotiate supplier contracts, improve labour efficiency. Could increase margin from 30% to 33% if expenses reduced by 5% (£42,000 saving) (4 marks)
Suggestion 2: Increase revenue through price rises or efficiency — Raise prices by 3% (adds £72,000 revenue) or improve production efficiency to reduce COGS. (4 marks)

Question 2 Total: 26 marks

Question 3 — Ratio Analysis (24 marks)

Learning Aim F3 — Liquidity & Profitability Ratios

Part (a): Calculate ROCE (3 marks)

EBIT ÷ Capital Employed × 100

EBIT: £1,850,000
Capital Employed: £9,250,000
ROCE = (£1,850,000 ÷ £9,250,000) × 100 = 20% ✓ (3 marks)

Part (b): Calculate current ratio + acid test (6 marks)

Current Assets ÷ Current Liabilities; Exclude inventory for acid test

Current Ratio = £4,200,000 ÷ £2,800,000 = 1.5 ✓ (3 marks)
Acid Test = (£4,200,000 − £1,500,000) ÷ £2,800,000 = £2,700,000 ÷ £2,800,000 = 0.96 ✓ (3 marks)

Part (c): Interpret financial health (9 marks)

L2 (4-6m): Basic interpretation
L3 (7-9m): Balanced analysis of strengths and concerns

ROCE (20%): Strong return on capital indicates efficient use of funds and good profitability.
Current Ratio (1.5): Company can cover short-term liabilities 1.5 times, indicating good liquidity (target is 1-2).
Acid Test (0.96): Without inventory, slightly below 1.0, suggesting reliance on stock conversion for liquidity. Minor concern if inventory turns slowly.
Overall: Company is financially healthy with strong profitability, acceptable liquidity, but should monitor working capital.

Part (d): Compare profitability if profit increased to £2.775m (6 marks)

Recalculate ratios and explain impact

New ROCE = (£2,775,000 ÷ £9,250,000) × 100 = 30% (up from 20%)
Impact: A 50% increase in profit would boost ROCE from 20% to 30%, representing excellent financial performance and stronger shareholder returns. This demonstrates improved operational efficiency or market share gains.

Question 3 Total: 24 marks

Question 4 — Statement of Financial Position (20 marks)

Learning Aim F2 — Balance Sheet Structure & Depreciation

Part (a): Prepare full SFP (12 marks)

Must show: Non-current assets (with depreciation), Current assets, Current liabilities, Non-current liabilities, Equity

Westbridge Properties — Statement of Financial Position (Example)

Non-Current Assets
Property at cost: £3,000,000
Accumulated depreciation: (£600,000)
NBV: £2,400,000 (6 marks)

Current Assets
Stock: £400,000
Receivables: £300,000
Cash: £200,000
Total CA: £900,000 (3 marks)

Current Liabilities
Payables: £500,000
Overdraft: £200,000
Total CL: £700,000 (2 marks)

Working Capital: £900,000 − £700,000 = £200,000
Net Assets: £2,400,000 + £200,000 = £2,600,000 (1 mark)

Part (b): Calculate net book value of property + equipment (4 marks)

Cost minus accumulated depreciation

Property Cost: £3,000,000
Annual depreciation (5-year life): £600,000/year
After 2 years: £1,200,000 accumulated depreciation
NBV = £3,000,000 − £1,200,000 = £1,800,000 ✓ (4 marks)

Part (c): Explain importance of showing depreciation separately (4 marks)

L2 (2-3m): One reason explained
L3 (4m): Multiple reasons with clarity

Reasons to show depreciation separately:

Asset valuation: Shows true book value (cost minus wear) for decision-making
Financial transparency: Stakeholders see how much assets have been consumed
Working capital: Distinguishes between cash outflow (purchase) and non-cash expense (depreciation)
Tax planning: Depreciation is a tax-deductible expense affecting profit

Question 4 Total: 20 marks | Paper 2 Total: 90 marks

Paper 2 Key Skills Tested: Financial calculations (profit, ROCE, current ratio), ratio interpretation, SFP preparation, depreciation understanding. Candidates must show all working and justify recommendations.