Practice IB Business Management Topic 1.2 Types of Business Entities with authentic exam-style questions for both SL and HL students. This question bank focuses on the exact syllabus content for 1.2 Types of Business Entities and mirrors Paper 1, 2, 3 style where relevant.
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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 sales | 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., showing 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.
Green Haven Ltd. (GH)
Green Haven Ltd. (GH) is a small private limited company that produces indoor hydroponic garden kits. GH was started by two former biology teachers with the aim of promoting sustainable food production in urban homes.
Initially, GH was funded through personal savings and a bank loan. In its first year of operation, GH earned € 240,000 in revenue and incurred € 160,000 in total costs. GH purchases components from suppliers on 30-day trade credit terms. GH now aims to expand and is considering applying for a government grant to help fund the purchase of new machinery.
Table 1 shows selected financial information for GH.
Table 1: Selected financial data for GH
| Item | Amount (€) |
|---|---|
| Revenue | 240,000 |
| Total costs | 160,000 |
| Net profit | ? |
| Loan interest (annual) | 5,000 |
| Owner investment | 40,000 |
Define the term business
Identify two characteristics of a private limited company (Ltd).
Calculate GH's net profit for its first year of operation. Show all your working.
State one short-term and one long-term source of finance GH is using (as indicated in the stimulus).
Explain one benefit for GH of having a social objective, such as promoting sustainable food production.
UrbanNest Ltd.
UrbanNest Ltd. is a UK-based furniture company that designs and sells compact, modular pieces for urban apartments. Originally founded as a partnership, it restructured into a private limited company (Ltd.) to raise capital for growth. Its business objectives include increasing market share by 10% annually and maintaining a ROCE of 15%. Following strong domestic sales, UrbanNest is planning to launch a new e-commerce platform to support international expansion into Southeast Asia.
While revenue growth remains steady, rising marketing spend and inventory costs have placed pressure on liquidity. The finance team has shared final account data for 2024, revealing tight cash reserves and slower inventory turnover due to new customisable product lines. The company is now exploring funding options to support its expansion plan.
Table 1: Selected Financial Data – UrbanNest Ltd. (2024)
| Item | Amount (£) |
|---|---|
| Revenue | 2,800,000 |
| Cost of sales | 1,600,000 |
| Operating expenses | 900,000 |
| Net profit | 300,000 |
| Capital employed | 2,000,000 |
| Average stock | 320,000 |
Explain one advantage for UrbanNest Ltd. in changing from a partnership to a private limited company.
Calculate the return on capital employed (ROCE) for UrbanNest Ltd. Show all your working.
Using your ROCE result, comment on whether UrbanNest Ltd. achieved its financial objective.
Suggest one internal and one external source of finance UrbanNest Ltd. could use to fund its e-commerce platform investment.
Explain how UrbanNest Ltd.'s type of business entity and financial performance may influence its access to finance.