Practice 1.2 Types of business entities with authentic IB Business Management exam questions for both SL and HL students. This question bank mirrors Paper 1, 2, 3 structure, covering key topics like systems and structures, human behavior and interaction, and sustainability and ethics. Get instant solutions, detailed explanations, and build exam confidence with questions in the style of IB examiners.
FreshSteps Foundation
FreshSteps Foundation is a non-profit social enterprise based in Kenya that installs small-scale water filtration systems in rural communities. It operates as a private limited company (Ltd) but reinvests all surplus profits to expand its social impact rather than paying dividends.
Its business objectives include achieving financial sustainability and maintaining a minimum return on capital employed (ROCE) of 5% to fund future installations without relying heavily on grants.
Table 1: Statement of Profit or Loss for FreshSteps Foundation for the year ending 31 December 2024 (figures in $000)
| Item | Amount ($000) |
|---|---|
| Sales revenue | 2,600 |
| Cost of sales | 1,300 |
| Operating expenses | 1,050 |
| Depreciation expense | 100 |
| Interest expense | 40 |
| Tax | — (tax-exempt) |
Table 2: Additional Financial Information
| Item | Amount ($000) |
|---|---|
| Capital employed | 3,500 |
| Current assets | 480 |
| Current liabilities | 400 |
| Initial investment for new project | 800 |
| Net annual cash inflow from project | 220 |
Calculate the gross profit for FreshSteps Foundation. Show all your working.
State why FreshSteps Foundation is tax exempt.
Calculate the current ratio for FreshSteps Foundation. Show all your working.
Calculate the payback period for the new project. Show all your working.
Explain one financial challenge that FreshSteps Foundation may face by relying on project-based cash inflows.
EcoPod Ltd.
EcoPod Ltd. is a private limited company that designs and installs compact eco-friendly garden offices. The company was started by two friends who wanted to promote sustainable working spaces as an alternative to traditional home offices. One of their main business objectives is to expand production while maintaining their commitment to sustainability.
To finance its growth, EcoPod Ltd. reinvested retained profit and also secured a bank loan. However, the company has recently experienced cash flow difficulties due to late payments from customers and rising material costs.
Table 1 shows EcoPod Ltd.’s financial data for the previous month.
Table 1: Financial data for EcoPod Ltd. (Previous month)
| Item | Amount ($) |
|---|---|
| Revenue | 120,000 |
| Cost of goods sold | 70,000 |
| Operating expenses | 30,000 |
| Cash inflows | 45,000 |
| Cash outflows | 60,000 |
| Opening cash balance | 5,000 |
State two sources of finance used by EcoPod Ltd.
Calculate the net profit for the month. Show all your working.
Calculate the closing cash balance. Show all your working.
Identify one internal stakeholder and explain how they may be affected by EcoPod Ltd.’s cash flow problems.
Outline one advantage of operating as a private limited company.
Solveta Ltd.
Solveta Ltd. is a private limited company that manufactures eco-friendly packaging materials for global e-commerce businesses. The company recently launched a major marketing campaign to enter three new export markets. This campaign involved substantial investment in promotion, pricing adjustments, and changes to distribution (place) to align with regional consumer expectations.
To fund this expansion, Solveta used a mix of retained profit, a medium-term loan, and newly issued share capital. While sales revenue has increased, rising logistics and distribution costs have impacted short-term liquidity. The finance department has released Solveta’s statement of financial position and asked the marketing and finance teams to assess its implications for profitability and cash flow.
Figure 1. Solveta Ltd. Statement of financial position as at 30 June 2024
| Item | $ |
|---|---|
| Assets | |
| Non-current assets | |
| Property, plant and equipment | 600,000 |
| Less: Accumulated depreciation | (150,000) |
| Net non-current assets | 450,000 |
| Current assets | |
| Cash | 60,000 |
| Debtors | 85,000 |
| Stock | 105,000 |
| Total current assets | 250,000 |
| Total assets | 700,000 |
| Liabilities | |
| Current liabilities | |
| Bank overdraft | 12,000 |
| Trade creditors | 48,000 |
| Short-term loan | 40,000 |
| Total current liabilities | 100,000 |
| Non-current liabilities | |
| Borrowings—medium term | 180,000 |
| Total liabilities | 280,000 |
| Net assets | 420,000 |
| Equity | |
| Share capital | 300,000 |
| Retained earnings | 120,000 |
| Total equity | 420,000 |
Explain one reason Solveta Ltd. may have chosen to use more than one source of finance for its international marketing campaign.
Suggest one element of the marketing mix Solveta adjusted to support its international expansion
Calculate the current ratio and acid test ratio for Solveta Ltd. Show all your working.
Outline what these liquidity ratios suggest about Solveta’s short-term financial position.
Comment on how Solveta’s cost and revenue structure may affect its profitability.
BlueSky Media (BSM)
BlueSky Media (BSM) is a start-up founded by Maya, who runs the business as a sole trader. The company specializes in producing digital content for small businesses, including video production, social media management, and website design. Due to the growing demand for BSM’s services, Maya is considering expanding the business and has several options: forming a partnership with another content creator, incorporating as a private limited company (Ltd), or even transitioning into a cooperative with other freelancers.
Maya’s decision will significantly impact the business structure, growth potential, and risk management strategies. As BSM expands, Maya also sees the opportunity to pursue contracts with government agencies, which would involve more rigorous legal and financial requirements.
Identify the sector in which BlueSky Media operates.
Identify one potential advantage of operating as a sole trader.
Analyze the benefits and drawbacks of transitioning BlueSky Media from a sole trader to a private limited company (Ltd).
Discuss how Maya’s choice of business structure could impact the growth and sustainability of BlueSky Media in the long term.
NaturFresh Cooperative (NFC)
NaturFresh Cooperative (NFC) is an agricultural cooperative based in Spain, jointly owned by local farmers. NFC markets fresh organic produce across Europe, experiencing significant recent market growth due to rising consumer demand for healthy foods.
To maintain its competitiveness, NFC emphasizes its unique selling proposition (USP) of providing fresh, sustainably grown, locally sourced produce. NFC regularly conducts primary market research to better understand customer preferences and refine its product offerings.
NFC’s financial team highlighted concerns about low liquidity ratios, which management plans to address urgently. They also recognize that the cooperative’s strong reputation and brand name are critical intangible assets essential to sustaining growth.
To further enhance its competitive position, NFC is considering implementing a comprehensive customer loyalty program, encouraging repeat purchases and strengthening customer relationships across its European markets.
Define the term ‘primary market research’.
Explain two advantages of NFC operating as a cooperative.
Explain two reasons why intangible assets are important for NFC’s continued growth.
Explain two benefits to NFC of implementing a customer loyalty program.
Recommend two strategies NFC could use to improve its liquidity ratios without compromising its USP or market growth.
Design by Elaine (DBE)
Elaine, an artist and designer, operates as a sole trader under the name Design by Elaine (DBE). To improve brand awareness, she opened a four-month pop-up shop* in a shopping centre. DBE’s estimated cash inflows, outflows and opening cash balance for the four months are shown in Table 1. Elaine sold existing stock (inventory).
Table 1: Selected financial information for DBE’s four-month pop-up store
| Estimated revenue per month | $2000 for the first month, increasing by 10 % each following month |
|---|---|
| Monthly rent | $1000 |
| Opening cash balance | $500 |
| Electricity cost per month | $200 |
| Elaine's monthly salary | $500 |
| Promotional expenses | $200 in the first and third month |
The pop-up shop performed less well than Elaine had forecasted. Revenue peaked in the third month but fell in the fourth. Her closing cash balance was $1800. Towards the end o the fourth month, the shopping centre owner, Jack, asked Elaine whether she would like to continue operating the pop-up shop. He offered her a two-year lease on the shop, with a monthly rental of $1400. Elaine’s existing stock was almost depleted.
* pop-up shop: a shop (store) that is opened for a short period of time
Using Table 1, prepare a cash-flow forecast for DBE for the four months of operation of its pop-up shop.
BrightFuture Education (BFE)
BrightFuture Education (BFE) is a social enterprise focused on providing affordable after-school tutoring services for students in underprivileged communities. The business was initially set up as a non-governmental organization (NGO) by Tom and Sara, who wanted to prioritize social impact over profit. However, they are now considering restructuring BFE as a private limited company (Ltd) to access additional funding for growth.
Tom and Sara are also exploring the idea of a public-private partnership (PPP) with the local government to launch a large-scale community tutoring program. This would involve balancing BFE's social mission with the need to meet the financial and regulatory requirements of the partnership.
Identify the type of organization that BFE currently is.
Identify one advantage of operating as an NGO.
Explain the potential benefits and challenges of transitioning BrightFuture Education from an NGO to a private limited company.
Discuss how a public-private partnership (PPP) could impact BrightFuture Education’s mission and ability to scale its services.
GroveFresh Markets (GM)
GroveFresh Markets (GM) is a start-up owned by Lisa, who operates as a sole trader. The business specializes in selling organic and locally sourced produce at community markets. With the business's recent growth, Lisa is considering expanding by partnering with another local farmer or incorporating as a private limited company (Ltd) to access more funding.
Lisa is also exploring the possibility of setting up GroveFresh as a cooperative to involve other small-scale farmers and share profits, decision-making, and resources. This change could significantly impact GM's operations, especially if Lisa aims to scale up and supply larger retailers in the future.
Identify the sector in which GroveFresh Markets operates.
Identify one disadvantage of operating as a sole trader.
Analyze the benefits and drawbacks of transitioning GroveFresh Markets from a sole trader to a cooperative.
Discuss how the choice between a private limited company and a cooperative could impact GroveFresh Markets' growth and mission in the long term.
Galileo Manufacturing Ltd. (GM)
Galileo Manufacturing Ltd. (GM) is a private limited company that operates a manufacturing facility on the International Space Station. Using a three-dimensional (3D) printer, GM manufactures parts and tools for use by the National Aeronautics and Space Administration (NASA) of the United States (US) government. NASA is GM’s sole customer. Soon, GM will expand its manufacturing capacity to make large items, such as satellites, that NASA can then put into orbit.
A new manufacturing facility with increased capacity will cost $40 million. Expected profit from the new manufacturing facility is given in Table 1 below.
Table 1: Expected profit from GM’s new manufacturing facility
| Year | 1 | 2 | 3 | 4 |
|---|---|---|---|---|
| Forecasted annual profit (in millions of dollars) | 8 | 12 | 16 | 16 |
The US government has contracted to purchase the manufacturing facility from GM at the end of four years for $2.5 million.
Explain one reason for GM manufacturing on the International Space Station.
For the new manufacturing facility, calculate the payback period (show all your working)
Comment on the new manufacturing facility's payback period, based on your answer in question 2.
State two advantages of a private limited company.
Calculate the average rate of return (ARR) (show all your working);
Solar Soccer Academy Ltd. (SSA) Solar Soccer Academy Ltd. (SSA) is a private limited company set up five years ago by Stephen Murdock. It provides top-quality soccer (football) skills and technique coaching. So far, SSA has been a success, and Stephen is deciding whether to open another academy in a neighbouring city. The cost of building a second academy is $500 000. Stephen has produced forecasted financial information for the second academy’s first five years of operation:
Table 1. Forecasted financial information for a second academy
| Year | Cash inflow ($) |
|---|---|
| 1 | 160 000 |
| 2 | 200 000 |
| 3 | 240 000 |
| 4 | 375 000 |
| 5 | 700 000 |
Stephen estimates cash outflow to be 25 % of the total cash inflow in years 1, 2 and 3 and 20 % of the total cash inflow in years 4 and 5.
State two features of a private limited company.
Calculate SSA’s the payback period for a second academy(show all your working);
Calculate SSA’s average rate of return (ARR) for the first five years of operation (show all your working);
Calculate SSA’s net present value (NPV) at a discount rate of 4 % (see Table 2) (show all your working).
| Year | Discount rate |
|---|---|
| 1 | 0.9615 |
| 2 | 0.9246 |
| 3 | 0.8890 |
| 4 | 0.8548 |
| 5 | 0.8219 |
Explain one disadvantage for SSA of only using the payback period method in making its decision to open a second academy.