2.4.2b Use and limitations of financial information in decision making Quiz: Pearson Edexcel Business, Unit 9

The 20 questions

1. What is a limitation of using past financial information to make a decision?

   • It can only be used by qualified accountants and not by the business owners themselves
   • It is never available to managers who need to make decisions about the business
   • It may not reflect future conditions, such as a change in market demand
   • It always shows the exact future profit that the business is going to make next year

2. Which is a limitation of relying on a single year's accounts?

   • One year's accounts always include every cost the business will ever pay
   • One year's accounts show the value of the business's brand exactly
   • One year may be unusual, so trends across several years give a clearer view
   • One year's accounts are required by law to predict the next year's profit

3. Why might financial information be incomplete when judging a business's performance?

   • It shows only the business's trading figures and never includes any of its costs at all
   • It may leave out non-financial factors such as staff morale and customer satisfaction
   • It is compiled by customers rather than by the business that is being judged by them
   • It always includes every factor that could affect the business's long-term success or failure

4. A business reports a profit rise, but the cash balance falls. Which is the most likely explanation?

   • Sales were made on credit, so cash has not yet been received
   • The business has sold every item it owns, so it has no stock left
   • The business has no customers who paid in cash during the period
   • The business has stopped paying any of its bills for the year

5. Which is a limitation of using average figures to judge a business?

   • An average always shows the same result as the highest monthly figure
   • An average can hide large differences between months or products
   • An average is useless because it cannot be shown on a chart
   • An average can only be calculated for the business's largest product

6. A business's accounts show a healthy net profit, but it has a large loan due for repayment next month. What does this suggest?

   • Profit alone does not show whether the business can meet its short-term debts
   • The business is definitely safe and needs no further checks on its cash position at all
   • The business should close immediately because it has any debt at all in its accounts
   • The loan is irrelevant to the business because profit is always enough to pay debts

7. Which factor could make a business's financial figures less useful to a manager?

   • Figures are out of date by the time they are reviewed
   • Figures are presented in pounds rather than in a foreign currency
   • Figures are reviewed monthly rather than yearly by the managers
   • Figures are displayed in a table rather than a bar chart each time

8. Why might a business use marketing data together with financial data when making a decision?

   • Marketing data can show whether sales growth is likely to continue
   • Marketing data replaces the need for any financial records at all
   • Marketing data always shows the business's exact future cash flows
   • Marketing data is only needed by businesses that do not sell products

9. What is a limitation of using a business's profit margin to compare with a rival's?

   • The two businesses may use different accounting methods or cost structures
   • Profit margins cannot be calculated from the figures in published accounts
   • Profit margins are identical for every business in the same market
   • Profit margins only apply to businesses that have never made a loss

10. A manager uses a single month of sales data to decide on a large investment. Which is the main weakness?

    • One month of sales data always includes every cost for the whole year
    • One month may be unrepresentative, for example because of a seasonal peak
    • One month of sales data cannot be displayed on any graph or chart
    • One month of sales data is always too accurate to rely on for decisions

11. A business's gross profit margin is 40%, but its competitor's is 25%. Why might this comparison be misleading?

    • Gross profit margins are always the same in every business in the economy
    • The businesses may sell different products with different cost structures
    • The competitor's margin must be wrong because it is lower than the business's
    • Gross profit margin cannot be compared between any two businesses at all

12. Which of these is a reason a manager might distrust financial information?

    • It was checked by an independent accountant before being published for its readers
    • It was prepared by someone with a motive to present the business favourably
    • It was produced using a standard, recognised accounting method that is widely accepted
    • It was prepared using figures that match the business's bank statements for the year

13. A business's accounts are prepared on an accruals basis. What is a limitation of this approach for cash management?

    • Profit can look healthy while the business has little cash available
    • Profit is always the same as the cash in the bank in every case
    • Accruals stop the business from recording its costs for the year
    • Accrual accounts do not record any sales made by the business at all

14. Why is it a limitation if financial data does not include non-financial factors?

    • Non-financial factors always reduce the value of a business's assets on its balance sheet
    • Non-financial factors are included automatically in every set of accounts that is published
    • Decisions may miss factors such as staff morale or brand reputation that affect future profit
    • Financial data is not needed for decisions if non-financial factors are present in the business

15. A business has sales of £120,000 but its sales forecast was £150,000. What is the percentage shortfall against the forecast?

    • 25%
    • 80%
    • 20%
    • 30%

16. Which is a limitation of using financial data from a rival business?

    • Rival data is always published in the same format across every sector
    • Rival data may be incomplete, out of date or not directly comparable
    • Rival data is always more complete than the business's own accounts
    • Rival data is required by law to match the business's own figures

17. A business needs to decide whether to expand. Which is the strongest reason to use several sources of information?

    • No single source gives a full picture, so combining sources reduces the risk of error
    • Several sources always confirm the same answer, so one source is enough for the decision
    • Using several sources means the business can ignore the answers that disagree with its plans
    • Using several sources removes the need for any financial analysis at all before expanding

18. What is a limitation of using a bar chart of sales to decide on pricing?

    • The chart shows the exact price customers would pay for every product in the range
    • The chart shows the total cost of every supplier that the business has used this year
    • The chart shows what happened but not how customers would respond to a price change
    • The chart shows the price of each competitor's product in the same market as the business

19. Why might a business's financial figures be misleading for a single product line?

    • A single product line never has any costs that the business must pay for in a year
    • Overheads may be shared across products, so the allocation can distort the result
    • A single product line cannot be shown in any financial record that the business keeps
    • Financial figures for a single product always include all of the business's overhead costs

20. Explain why a manager should be cautious about making decisions from profit figures alone.

    • Profit ignores cash timing, risk and non-financial factors that affect the business
    • Profit figures are only useful for businesses that have no customers or suppliers
    • Profit figures tell a manager exactly how much cash the business has in the bank
    • Profit figures are always wrong and should never be used for any decision at all

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