Accounting: Pearson Edexcel International A Level Teacher Resource Pack 2

PEARSON EDEXCEL
INTERNATIONAL A LEVEL
ACCOUNTING
TEACHER RESOURCE PACK 2
• Check student responses to the activities

and exam practice questions using the
student book answers.
• Prepare for exam success with practice

exam papers and mark scheme.
• Improve exam technique with model exam

answers for each section of the exam
paper, covering a range of command
words. Also includes activities to embed
knowledge of exam requirements.
• Support answer-writing technique for

evaluate questions on the exam paper
with a framework and model answer
commentary.
IAL Accounting
Exam Practice
‘Recommend’ style Question
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2.6 Project appraisal
• Application of discounted
methods
• Application of non-discounted
methods
Resource for question
Naifaru Construction has been offered a contract to build and operate a water
treatment works in an area where there is a lot of water pollution. The following
information is available:
• The cost of capital is 6%.
• Investment payback period required: less than five years.
The following calculations have been carried out for the investment:
• Net present value is (£87,350)
• Average rate of return: 5.2%
• Internal rate of return: 6.5%
• Payback is three years and 2 months.
Exam question
Recommend whether Naifaru Construction should proceed with the
project using both financial and non-financial factors. (12)
Is this a good answer?
Case for the investment:
• The payback period is three years and two months, which is a short
period of time as the water treatment works will last for a long time.
• They will get their money back quickly.
Case against the investment:
• The average rate of return (ARR) is not very high – only 6.5%.
• The net present value is negative by £87,350.
Is this a good answer?
Conclusion
I would recommend the project should proceed as the cost of capital
is 6%, which is a good amount of return for a business to make.
Examiner feedback
The marks available for this question are based on a standard levels of response
for evaluation questions – Level 1 to Level 4. Each level contains all skills and so it
is important that you recognise this when writing your answer. Writing in bullet
points should be avoided at all times. It makes it difficult to apply and analyse the
points made. This candidate has made some valid points (AO1) for and against
but left it to the examiner to analyse these. The second bullet point in the case for
the investment is a continuation of the first point rather than a new argument and
therefore does not gain any credit. In the case against the investment, the
candidate has misread the figure. The recommendation is an assertion rather than
a reasoned judgement. This response would be awarded Level 1: 3 marks –
limited knowledge, no application and generic assertion.
Examiner review of assessment objectives
Case for the investment:
• The payback period is three years and two months, which is a short
period of time as the water treatment works will last for a long time.
• They will get their money back quickly.
Case against the investment:
• The average rate of return (ARR) is not very high – only 6.5%.
• The net present value is negative by £87,350.
Key to assessment objectives: Knowledge and Understanding, Application, Analysis, Evaluation
Examiner review of assessment objectives
Conclusion
I would recommend the project should proceed as the cost of
capital is 6%, which is a good amount of return for a business
to make.
Activity
Using the information from the previous slides, improve this
answer to the question. Remember that this candidate only
demonstrated limited knowledge of project appraisal methods and
did not gain any marks for application. The candidate confused
the IRR and ARR figures. Read the question carefully to
understand both the figures given and the context. This will allow
you to apply your answer. The candidate did not refer to any non-
financial factors. While a recommendation was given, this was
unsupported.
An example of best practice
One point in favour is that the payback period is only three years and two months. This is
significantly shorter than the maximum payback period the company requires. As a result,
they will get a return on the investment quickly, and less than the five-year length required.
However, the payback period does not take into account cash in-flows after the payback
period. It might be that the cash in-flows stop shortly after the payback period. If this were
the case, it might mean the project should not go ahead.
From a non-financial viewpoint, the project should go ahead. Building the treatment works
will solve the water pollution and so benefit the local community. Additionally, the
construction will create employment opportunities both in the short term and long term,
thus benefitting the local economy.
Clear understanding shown, analysed and applied to the scenario. In addition, an element of
evaluation is present in the argument.
However, it could be argued that the project should not go ahead as the
average rate of return of 5.2% is marginally below the required cost of
capital benchmark of 6%. As it is just below, it is not definite that the
investment should be rejected, however, as the NPV is negative, it further
suggests the project should be rejected. From a non-financial viewpoint,
the treatment works may cause other pollution issues such as noise and
increased traffic in the area, thus having a negative impact on the local
community.
Candidate has presented a counter argument, therefore providing a balanced
answer that looks at both the case for and against accepting the contract.
In conclusion, from a financial aspect I would recommend that the
project be rejected. As a plc, the primary objective is likely to be
profit, and as the project has a negative NPV and a lower ARR than
the cost of capital, the project does not meet the necessary criteria to
go ahead. While the payback period is good, NPV is probably a
better measure as it takes into account the time value of money and
so backs up the decision not to proceed with the investment.
A fully justified decision has been made. The candidate makes a decision
and justifies it in the context of the arguments they have presented.
Examiner feedback
Recommend questions require knowledge and understanding,
application, analysis and evaluation. They are marked using levels of
response. This response demonstrates accurate knowledge and
understanding (AO1 – Level 4) and is supported by relevant and
effective application applied to the context, using both financial and
non-financial factors (AO2 – Level 4). There are logical chains of
reasoning (AO4) and the assessment is balanced and in context
throughout the response. The recommendation is informed and in
context (AO4 – Level 4). The example would achieve Level 4 – full
marks.
Evaluate, essay guidance
Evaluate the usefulness of statements of cash flows in assessing the financial
performance of limited companies.
(12)
Score: Mid-Level 4 (11)
Colour key:
Knowledge
Application
Analysis
Evaluation/conclusion
Strengths
• A relevant point is made
A benefit of a statement of cash flow in assessing
at the start.
the financial performance of a limited companies is • Developed chain of
that it shows where the limited company has reasoning.
generated its cash and how it has utilised this cash.
This helps the users of financial statements to
assess if the company is generating sufficient cash Weaknesses
to continue trading. A statement of cash flow shows
• There is no need to write
the amount of cash that is generated from operating
out the question again.
activities. This is a very important source of cash and • The point made in the first
in practice it would be difficult for a company to paragraph should be
continue trading in both the long term and short term expressed as two points –
without cash from day-to-day trading activities. assessing the generation
of cash is one use and
However, a statement of cash flow only shows cash assessing the utilisation
inflows and cash outflows. It does not show the profit of cash is another.
of a limited company. In the short term a business
may be able to carry on trading while making a loss as long as there are positive cash flows.
However, in the long run a successful business must be able to generate a profit. Profit is a
key indicator of financial performance. Cash inflows
and cash outflows can be manipulated in the short Weaknesses
term to create a positive cash flow. • The argument that cash
A statement of cash flow can help assess the flows can be manipulated
could have been applied
financial performance of a business as it shows how
by adding – non-current
the business has used the cash during the year. The assets could be sold to
statement has different sections that reflect the increase the net cash
different uses of the cash – from operating activities, from investing activities to
investing activities and financing activities. This improve the amount of
means potential investors can see if the company cash in the business.
has invested in non-current assets. This could indicate good performance, despite the poor
cash flow position, as the company could be about to expand and use the non-current
assets to generate future profits.
A negative point about its usefulness is that the statement of cash flow does not show the
liquidity of the company. The statement shows the absolute cash position of the business. It
shows the opening and closing balances of cash and cash equivalents but it does not
indicate the short-term liquidity position, the current ratio, the long-term liquidity or the
gearing position. In order to assess the performance of a company these ratios need to be
calculated. This will allow the user to assess the performance over time and between other
similar companies.
In conclusion, a statement of cash flow is not a good indicator of the financial performance of
a business as it does not show the profit or profitability of a company, which could be argued
are the most important criteria in determining its success. While it shows how the cash has
been generated and utilised, it does not show the liquidity of the company. It provides useful
additional information, especially for non-experts, as it is based on actual cash movements
and so is not subject to the application of accounting conventions and concepts.
Strengths
• Relevant points for and against relating to use as an indicator of financial
performance.
• Arguments are good when developed with solid application.
• Supported and well-developed conclusion.
Weaknesses
• Application could be improved by greater reference to specific sections of the

statement, but this does not detract from an excellent answer.
Evaluate, essay framework
Evaluate the usefulness of statements of cash flows in assessing the financial
performance of limited companies.
(12)
Score: Mid-Level 4 (11)
Plan
Introduction Not required.

1st point Shows how cash is generated, especially from operations –
importance of this.
1st point counter- Only shows cash, not profit/profitability. Profit as a key indication of
balanced financial performance.
2nd point Shows how cash is utilised – purchase of non-current assets and
inventory, predict future performance.
2nd point counter- Absolute vs relative cash position – does not show liquidity – current
balanced and gearing – which is needed to assess performance.
Conclusion and Probably not a good indicator on its own – need profit and liquidity to
recommendation assess financial performance.
Essay
1st point A benefit of a statement of cash flow in assessing the financial

performance of a limited companies is that it shows where the limited
company has generated its cash and how it has utilised this cash.
This helps the users of financial statements to assess if the company
is generating sufficient cash to continue trading. A statement of cash
flow shows the amount of cash that is generated from operating
activities. This is a very important source of cash and in practice it
would be difficult for a company to continue trading in both the long
term and short term without cash from day-to-day trading activities.
1st point counter- However, a statement of cash flow only shows cash inflows and cash
balanced outflows. It does not show the profit of a limited company. In the
short term a business may be able to carry on trading while making a
loss as long as there are positive cash flows. However, in the long
run a successful business must be able to generate a profit. Profit is
a key indicator of financial performance. Cash inflows and cash
outflows can be manipulated in the short term to create a positive
cash flow.
2nd point A statement of cash flow can help assess the financial performance
of a business as it shows how the business has used the cash during
the year. The statement has different sections that reflect the
different uses of the cash – from operating activities, investing
activities and financing activities. This means potential investors can
see if the company has invested in non-current assets. This could
indicate good performance, despite the poor cash flow position, as
the company could be about to expand and use the non-current
assets to generate future profits.
2nd point counter- A negative point about its usefulness is that the statement of cash
balanced flow does not show the liquidity of the company. The statement
shows the absolute cash position of the business. It shows the
opening and closing balances of cash and cash equivalents but it
does not indicate the short-term liquidity position, the current ratio,
the long-term liquidity or the gearing position. In order to assess the
performance of a company these ratios need to be calculated. This
will allow the user to assess the performance over time and between
other similar companies.
Conclusion and In conclusion, a statement of cash flow is not a good indicator of the
recommendation financial performance of a business as it does not show the profit or
profitability of a company, which could be argued are the most
important criteria in determining its success. While it shows how the
cash has been generated and utilised, it does not show the liquidity
of the company. It provides useful additional information, especially
for non-experts, as it is based on actual cash movements and so is
not subject to the application of accounting conventions and
concepts.

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PEARSON EDEXCEL

• Check student responses to the activities

• Prepare for exam success with practice

• Improve exam technique with model exam

• Support answer-writing technique for

Key to assessment objectives: Knowledge and Understanding, Application, Analysis, Evaluation

Key to assessment objectives: Knowledge and Understanding, Application, Analysis, Evaluation

Key to assessment objectives: Knowledge and Understanding, Application, Analysis, Evaluation

Score: Mid-Level 4 (11)

• Application could be improved by greater reference to specific sections of the

Score: Mid-Level 4 (11)

Introduction Not required.

1st point A benefit of a statement of cash flow in assessing the financial

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