State two features of a hierarchical organizational structure.

Calculating X and Y in Table 3, prepare a profit and loss account for WC for 2022 (show all your working).

Using Table 4, calculate WC’s net cash flow for 2022 (show all your working).

Explain the difference between WC’s profit and its cash flow.

Features of a hierarchical organization include:

• Pyramidal with many layers (workers>supervisors>managers>senior managers>executives>CEO) or long chain of command or tall structure.
• Usually a narrow span of control.
• Decisions flow from top down and information passes from the bottom up.
• Authority/decision-making is centralized.
• Delegated authority, if any, is narrowly defined.
• Individuals in a hierarchical organization tend to have specialized skills.
• Decision-making typically takes time or is not a quick process.

If a candidate raises the issue of decision-making, award [1] if they say that decision-making typically takes time.

However, if the candidate appropriately contextualizes their response, they can earn [1] for saying decision-making can be faster. For example, if a candidate wrote something to the effect of “In hierarchical organizations where delegation occurs, decision-making can be fast.”

Accept any other relevant feature.

Award [1] for each feature identified up to a maximum of [2].

Gross profit (X) = $16 000 000
Tax (Y) = $800 000

If, in their workings, the candidate has dropped the 000s, accept X = $16 000 and Y = $800.

WC Profit and loss account for the year 2022
Figures in $000

Award [1] for correctly calculating gross profit (X), [1] for correctly calculating (Y), [1] for the correct layout of a profit and loss account, and [1] for a correct heading. Maximum award: [4].

N.B. In the heading candidates must say the name of the company (WC), the year, and profit and loss account (they may say income statement). If the candidates does not say “in 000s”, accept.

If, in their workings, the candidate has dropped the 000s, accept Z = $2 600.

An alternate method for calculating net cash flow is to use the following formula:

Closing balance = net cashflow + opening balance
$10 000 000 = NCF + $7 400 000
$10 000 000 − $7 400 000 = $2 600 000.

Award [1] for correct method and [1] for correct answer. Maximum award: [2].

A candidate can earn [1] by defining profit (revenue minus expenses) and then explain that cash flow is the movement of funds such as external financing (an inflow) or debt service (an outflow) or some other specific examples of inflows or outflows.

For a second mark [2], candidates must apply their response to the stimulus. Application must be more than nominal (just naming WC but otherwise providing a generic answer). Based up the stimulus, two opportunities exist for genuine application:

• The candidate refers to the $3 200 000 profit and the $2 600 000 cashflow.
• The candidate refers to the product (dryers) when exemplifying how a timing difference can occur between sales and payment received (trade credit).

An alternate way a candidate can earn [2] is by explaining that profit is typically calculated on an accrual basis (when revenue or expense actually accrues to the business) but does not reflect the actual movement of funds. On an accrual basis, WC had a net profit of $3 200 000. Cash flow reflects the actual movement of funds – when a business receives payment or makes a payment. In 2022, WC had receipts in excess of payments in the net amount of $2 600 000. This difference between profit and cashflow reflects a timing difference between the accrual of a revenue or an expense and the actual receipt or payment of funds.

Award [1] for partial understanding and explanation and [2] for a complete understanding and explanation. A candidate does not have to use the word accrual, but they must convey some understanding of a timing difference between the profit and loss account and the cash flow. If the candidate does not apply their response to the stimulus, the maximum award is [1].

Many candidates earned 1 mark on this question, and some earned 2 marks. Often candidates were too vague in their responses.

Many candidates earned 4 marks on this question. Some lost a mark for not having a heading to their Profit and Loss account.

Most candidates accurately calculated the net cash flow.

Many candidates new the difference between profit and cashflow but many, unfortunately, failed to apply their response to the stimulus.