4UFM Level 4 Finance for

Managers
Open-book exam question and
answer booklet
June 2020

Centre name The Business School

your college name

Learner’s name Tujuanna Smith

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their own words and incorporate their own judgements. Direct quotations from the published or
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Date: 10 June 2020

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For ABE use only

ABE 2nd mark
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 Business profile (200 words)

Samsung is a Korean company, which was created in 1938 by Lee Byung – Chull, in Taegu. The
company made its debut in the technological industry in 1969, and can now be termed as one of
the largest manufacturers of electronics devices in the world, and even accounts of about a fifth
of South Korea’s exports. (Peter Bondarenko,2020) The company’s headquarters is located in
Samsung town, Seoul. The company had a capital base of over USD 229 billion, and generated
annual revenue of USD 237 billion for the fiscal years 2017-2019. (Samsung, 2020)

Samsung and its over 240 subsidiaries operate four main business divisions under which they
offer a variety of products and services. These four divisions are; (Samsung, 2020)

Consumer Electronics – produces Samsung televisions, monitors, air conditioners.

Information Technology and Mobile Communications - produces mobile phones,

communications systems and computers.

Device solutions - produces semiconductors, memory, foundry.

Harman – produces connected car systems, audio and visual products.

The company’s main competitors include; Apple, LG, Sony, Huawei…

Samsung operates on an international scale, which sees the company penetrating multitudes of
markets, to maintain this universal reach, the company employees over 300 thousand employees.
(Owler.com 2020) The company seeks to maintain competitive advantage through product
differentiation. In the technological industry, these companies compete aggressively through
innovative product design, interfaces …. Adequately maneuvering in these turbulent seas, has
seen Samsung gaining large success, and achieving a large market share in the mobile industry,
being nearly 22% In 2019. (Canalys, 2020)

OPEN BOOK EXAM QUESTIONS START ON THE NEXT PAGE

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 Question 1 25 Marks

Explain the purpose of financial and management accounting within your chosen organisation.
Within your answer you must provide an outline of the needs of different business stakeholders in
relation to this information.
(750 words)

Accounting is a process that involves identifying, measuring, and communicating economic data of
transactions in an organisation, to permit the informed judgements and decisions of the stakeholders
of this information. It is divided into two strands (Financial and Management Accounting) and these
further assist organisations in achieving their goals and objectives by providing a reliable and
calculable framework that consistently produces accurate financial information.
Financial accounting is a systematic bookkeeping process that uses an organisation’s revenue,
expanses, and receivables’ information to design accurate financial reports reflecting business
activity and performance of the fiscal health of a company. The purpose of financial accounting in
the Samsung Electronics Co. Ltd is to reveal a veracious and fair picture of the financial affairs of
the company which aims at allowing various stakeholders (internal and external) to assess the value
of the company. Another main purpose of financial accounting within Samsung Electronics includes
but is not limited to:
Safeguarding the Interest of various stakeholders
The purpose of financial accounting information correlates with the decision making of its users. The
key stakeholders of Samsung Electronics and their specific needs are outlined below:
 Shareholders and Investors
Samsung’s shareholder structure consists of both local companies for e.g. National Pension Service
of Korea and international investors such as The Vanguard and group Inc. whose main concern is
risk and return on their investments. As titleholders, their need for financial information is to keep
track of the performance, economic position and to evaluate the effectiveness and efficiency of
management. This further facilitates the assessment of whether the business will be able to pay
dividends, if it’s securing profits or running at a loss and lastly if they should continue investing
capital into the business.
 Customers
They are the purchasers of Samsung’s products and services and indefinitely the economic drivers
of the organisation. As such, they are reliant on financial information to evaluate the capability of
Samsung Electronics to continue supplying them with their electronic needs in the future. Financial
statements facilitate such evaluations indicating the profits/losses as well as the financial
performance and establishing a platform for whether the entity can continue operating as a ‘going
concern’.
 Suppliers and Creditors
Suppliers and Creditors are the parties that provide a range of products and services necessary for
Samsung’s operations and sustenance. Their need for financial accounting information is to
determine the liquidity of the business. This assesses whether Samsung is capable of meeting their
obligations to pay for supplies given to them either on a short term or long-term basis.
 Investments Analysts
As a company traded on the Korea Exchange (KRK), investment analysts become prime users of
Samsung’s financial information as they require it to analyse the competitive performance of the
entity within its sector.
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  Government
The Korean Government and the governments worldwide that house Samsung Electronics
Company’s operations need accounting information to ascertain the amount of corporation tax that
has to be levied and collected based on the business’s profitability. These regulatory agencies also
require this financial accounting information to support various decisions regarding government
interventions for e.g. Grants and subsidies Approvals and Government take-overs.
 Financial Institutions
These are stakeholder groups that provide alternative capital sources to for funding to Samsung
Electronics. They need real-time accounting information on the economic and financial position to
determine whether Samsung is profitable enough to repay the interest and principle amounts
charged on loans when the time is due.
 Management
The managers are the agents placed to run the day-to-day operations of the organisation. They
execute these responsibilities through a variety of managerial functions that are interconnected to
the economic and fiscal framework of said business, as such, financial accounting information
becomes essential to track if they are accomplishing objectives set and to aid in decision making.
 Employees
They require financial information to assess whether the company is within the position to maintain
continued stability, sustainability and most importantly profitability. Through this information,
employees are able to descry the possibility of salary increases, future remunerations, retirement
benefits and job security.

Management Accounting is the practice of identifying, measuring, analysing, interpreting and

communicating financial information for the pursuit of an organisation’s goals (Investopedia). The
fundamental purpose of management accounting is to assist in planning for the future of the
business. It is solely devoted for internal use and is aimed at assisting management i.e. Directors
and managers in formulating appropriate measures and making informed decisions that facilitates
Samsung’s alignment to its target. Management being the essential users of this information rely on
the myriad of data from financial accounting to incorporate strategies and because of its lone internal
uses, the structure and presentation of the information can be modified to suit the needs of its
intended users. Therefore, managers can tweak the presentation of the information to better aid
their planning and strategy formulation, control of activities, monitoring and directing of finances as
well as the execution of financial analysis.

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 Question 2 25 Marks

Discuss how the contents of your organisation’s annual financial statements can demonstrate
business performance to external stakeholders (for example lenders and investors). Within your
discussion you are required to explain FIVE different financial ratios which would be of relevance
to these stakeholders.
Note – You are not required to obtain copies of these statements and you are also not required
to undertake any calculations.
(750 words)

Annual Financial statements are accurate presentations of the fiscal health of a business that
reflects its performance and financial position. This provides stakeholders both internal and external
with useful information for making important evaluations as well as economic and financial decisions
regarding the business.
Samsung Electronics maintains its accounting records in Korean Won (W) and prepares
consolidated financial statements that follows the guidelines set by the Korean International
Financial Reporting Standards (“Korean IFRS”) in the Consolidated Financial Statements 1110 Act
(Samsung Sustainability Report 2019). This constitutes Samsung Electronics as the controlling
company and collectively integrates all of the financial reports of its 240 subsidiaries worldwide. The
financial statements that are prepared by Samsung Electronics on a Quarterly and Annual basis
are:
1. Consolidated Statements of Financial Position
2. Consolidated Statements of Profit or Loss
3. Consolidated Statements of Comprehensive Income
4. Consolidated Statements of Changes in Equity
5. Consolidated Statements of Cash Flows
A company’s financial statements provide various financial information that investors, creditors,
analysts and the Government use to evaluate the company’s fiscal performance. By publishing
these financials management can communicate to the interested external stakeholders the
accomplishments met by the company.
Samsung’s Consolidated Statement of Financial Position addresses the concerns of its investors
and creditors by providing detailed information about the company’s asset investments. As sources
of finance whether by debt or equity, investors and creditors rely on this financial statement to gauge
conditions for the safety and profitability of their investments. The statement of financial position
also lists the company’s outstanding debt and equity components as well as its assets and liabilities
at the end of the quarterly or annual accounting period.
The Consolidated Statement of Profit or Loss showcases Samsung’s operating margin of sales,
expenses and profits or losses of the company during a specific time. When investors use this
statement an evaluation into the company’s past income performances and assessment of future
cash flows can be done. The Government can also use the variables presented on the statement to
determine the amount of taxes to be levied and also the possibility of the company receiving grants
or subsidies.
The Consolidated Statement of Cash Flow exhibits aggregate data concerning Samsung’s cash
inflows and outflows that the company received from its ongoing operations, investment and
financing activities. This statement is useful to investors so they can ascertain whether or not the
company has sufficient cash to pay for expenses and assets purchases.

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Samsung’s Changes in Equity statement presents a summary of the changes in the shareholders’’
equity accounts as it reconciles the opening equity account balances with their closing balances.
This statement is important as it allows investors and analysts to see what factors cause a change
in the owners’ equity during the accounting period.
The Consolidated Statement of Comprehensive Income is a show of the company’s net assets
variation from its non-owner sources inclusive of net and unrealised income (i.e. unrealised gains
or losses on hedge/derivative financial instruments and foreign currency transactions gains or
losses). This provides a holistic view of Samsung’s income not fully captured on the statement of
Profit or Loss. (Investopedia)
Financial ratios are mathematical tools that use numerical values taken from a company’s financial
statements to gain information about its performance. Ratios serve as indicators, clues or red flags
between variables used to measure a firm’s performance in terms of profitability, liquidity, asset
utilization and operational efficiency (Advameg, Inc.com)
The users of financial ratios are both internal and external parties to the business. The external
stakeholders of Samsung Electronics include current and potential Investors, Financial Institutions
(Banks and Lenders), the Government, Analysts, Suppliers/Creditors and Customers. For Samsung
Electronics financial ratios serves as an important means of measuring, comparing and predicting
their performance through various ratios inclusive of:
 Operating Profit Margin
The operating profit margin is a profitability ratio that gathers its information from the
company’s Consolidated Statement of Profit or Loss as it evaluates the percentage of
operating profit (i.e. profit before interest and tax) relative to the revenue earned in a specific
period. This margin helps analysts and potential investors gauge how successful
management is at controlling expenses and generating revenue. Stakeholders generally
desire a high operating profit margin as it suggests the company is shrewdly managing costs
and generating sales with greater potential to derive profits and more cushion against
fluctuations in costs or increased competition.

 Inventory Turnover Ratio

The inventory turnover ratio is an efficiency ratio that measures how effectually a company
can control its inventory base to maximise its stock turnover. This measurement considers
the Cost of Sales and the average inventory figures which are both elements of the statement
of Profit or Loss and Financial Position respectively. This ratio shows Samsung’s investors
and creditors (Banks) how easily its inventory can be turned into cash. For investors this
means higher and faster returns on investments as well as better cash flows whereas banks
are interested in this ratio because inventory is mostly used as collateral for loans and lenders
would want to know the inventory can be easily sold if loan obligations are not met. A high
inventory turnover is more favourable for Samsung as a tech company as it faces significant
pricing and competitive pressures also fast obsolescence rates due to highly innovative
products from competitors like Apple Inc. Companies in thee industries all have high inventory
turnover rates because the cost of hoarding such stock in a hypercompetitive, fast-evolving
industry is costly.

 Current Ratio
The current ratio is a liquidity ratio that shows investors, creditors and analysts Samsung’s
ability to pay short-term financial obligations. A current ratio of 1.0 – 3.0 is feasible for
Samsung as it indicates that the business has enough cash to settle current debt and financial
payables but finances are also sufficient enough that it can be reinvested into inventory or
paid to shareholders as dividends. This ratio assesses the operations of Samsung and plays
a pivotal role in the decision-making of its stakeholders’ business interests as the company’s
financial stability in relation to outstanding debt is tested.

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  Debt to Equity Ratio
This is a stability ratio that measures the amount of debt based on figures stated in the
balance sheet and is seen by investors and creditors as a true measure of riskiness of the
business. It measures this by analysing the amount of capital contributed by creditors (debt)
and the amount given by shareholders (equity) that is used to finance the business’ assets.
A high Debt to Equity ratio indicates a high risk as the company has been aggressive in
financing its growth with debt. This could be either beneficial or detrimental for the business
as shareholders benefit if the leverage increases earnings by a greater amount than interest
on payments. However, if the cost of debt financing outweighs the amount of income
generated, shares value in the company may decline.

 Dividend Yield
The dividend yield is an investor financial ratio that determines the cash flow returns attributed
to an investor from owning stocks or shares in the company. These cash flows can be
generated in the form of dividends or stock appreciation. For Samsung, this ratio measures
the annual or quarterly value of dividends received relative to the market value per share thus
giving investors an indicator of whether their stocks align with their investment strategy.

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 Question 3 25 Marks

Discuss the use of both cash flow forecasts and financial budgets to aid decision-making within
your organisation.
(750 words)

A cash flow forecast is a projection of an organisation’s future cash position based on anticipated
payments and receivables (CashAnalytics). It estimates the amount of money that is expected to
flow in and out of the business during a specific financial timeframe. The main purpose of cash flow
forecasting within Samsung is to assist with managing the day to day itinerary for the company. It
outlines techniques required to undertake a detailed analysis of the fiscal dynamics of the business
from both a historical and foresighted perspective. As such a cash flow forecast is a key component
that aids in decision-making when designing financial strategies as it provides a clear estimate of
Samsung’s financial standing in the future. Therefore, these forecasts serve as accurate and reliable
determinants of projected cash exchanges from future business revenues and expenses that can
be used to make key decisions regarding future finances and investments. Some ways in which this
can be achieved includes:
Long-term planning and budgeting purposes
Cash flow forecasts help businesses recognize their financial requirements to meet their
goals and objectives. By designing a number of alternate scenarios from variables shown in
the cash flow statements Samsung’s management and shareholders can get a better
understanding of how different scenarios can impact the cash flow of their business. The
preparedness for unforeseen circumstances will be beneficial in the success of a business
as it identifies and eliminates weak strategies early on to help the business gain confidence
to pursue their business interests.

Projecting Future Cash Income and Expenses to identify financial needs

Cash flow forecasts are also able to provide projected cash income and expenses for
businesses which when compared to actual sales and expenses, it tells management how
the business is performing on paper and in terms of real cash thus, the business can identify
their financial needs and determine if short or long-term business loans are required or if the
business expects to incur major capital expenditure in the near future.
Budgeting is also another crucial ingredient that aids management in making decisions about the
success of any business. It can be defined as a projection tool that assists in planning and
strategizing so that the business is able to cover upcoming expenses. Through forecasting funds,
prioritizing projects and allocating money to different sources, a budget is the backbone of any
good business plan.
The financial budget gives the management team of Samsung a broader perspective when
examining the business's current financial standing. It shows where the business is in terms of
daily operations, of the market as a whole and of plans for expansion and growth. By evaluating
these available funds the company is taking account of where all of the resources are currently
being used and carefully assessing their current standing, to look at the development of future
short- and long-term plans. Budgeting also allows a business to streamline and eliminate
roadblocks to growth.
In essence, utilizing accurate and detailed cash flow forecasts and budgeting plans gives business
owners the ability to improve their decision making skills, enhance problem-solving capabilities
and strengthen their financial management skills.

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 Question 4 25 Marks

Explain different costing and pricing methods to make business decisions.

Provide examples to support your answer, which may be based on any organisation of your
choice.
(750 words)

Write your answer here

Every organisation has various options for selecting pricing methods. A pricing method is a model
used to establish the best price for a product or service that maximises profit and shareholder value
while considering influential factors such as revenue goals, competition, consumer demand, costs,
brand image and market trends. Pricing methods can be divided into 5 broad categories, namely:
 Cost Plus Pricing
This is a pricing method wherein the business adds a certain percentage mark up to the
selling price of a product based on the cost of goods production calculations. The mark-up is
the percentage of profit that is calculated on total cost where the additional percentage “marks
up” how much profit the business would like to attain.

 Competitive Pricing
Also known as competition-based pricing, this model focuses on the existing market rate for
a product or service and uses the competitors’ prices as a benchmark for setting prices.

 Skimming Pricing
This is a pricing strategy by which the business initially charges a high price for its product or
service in the goal to gather as much revenue as possible while consumer demand is high
and then lowers it over time as the product becomes less and less popular.

 Value Based Pricing

This happens when a company sets a price of the product or service based on the target
customers’ perceived interest or value of the product even though a higher price can be
charged for the product.

 Discount Pricing
This is a pricing technique that businesses use where the original price of a product is
reduced to either increase customer traffic, clear old inventory or increase sales.
“Costs are expenses that a business incurs when producing and supplying products and services
to customers.” (Level 4 Finance for Managers Study Guide). The various costing methods
include:
 Marginal Costing
Marginal costing is the additional cost incurred in producing an extra unit of output, charged
only to the total variable cost assigned to one unit. This costing assists management in
making business decisions, such as replacement of machines, discontinuing a product or
service, etc. It also helps the management in ascertaining the appropriate level of activity,
through break even analysis, that reflect the impact of increasing or decreasing production
level, on the company’s overall profit.

 Absorption Costing

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 This is a cost accounting method for valuing inventory at the full or total cost (i.e. both fixed
and variable costs) of producing a product. The price of inventory includes all direct and
indirect costs, like material costs, and overhead costs, and it gives a comprehensive and
accurate view on how much it costs to produce that specific product.

 Whole-Life Costing
Whole life costing takes into account the total cost of a product or service over its lifetime,
from concept through to disposal including purchase, hire or lease, maintenance, operation,
utilities, training and disposal.

 Opportunity Costs
Opportunity cost is a financial technique that examines the possible profit lost or cost
incurred when one alternative is selected over another. This term can be applied to a
management decision of whether to pay off a debt now, or use the funds to buy new
assets that could be used to generate additional profits.
Samsung is a market leader in the consumer electronics and home appliances sectors and the
company uses skimming and competitive pricing methods. For e.g. when a new and improved
product with different storage variants capacity and additional features is launched by Samsung, the
product is priced exorbitantly high. When rivalry companies launch other products with similar
features, Samsung lowers its prices to prevent the reduction of its market share due to the launch
of a new product. Its competitive pricing enables Samsung to protect its market position against
competitors who are leaders in a specific industry. These pricing methods Aid in developing and
executing effectively, an intelligent strategy that will attain optimal product prices for maximising
corporate revenue and shareholder dividends.
The costing methods highlighted above are important measures that managements use to make
appropriate decisions, planning and control and having effective cost management measures in
place to deal with the increasing changes in the industries and complexities of businesses
operations.

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 END OF PAPER

TOTAL NUMBER OF MARKS FOR THIS PAPER IS 100

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Reference list

 ABE Study Guide (2017) ‘Finance for Managers’. pp. 1-75

 Samsung.com (2020) – ‘Financial Statements’ Available at:
https://www.samsung.com/global/ir/financial-information/audited-financial-statements/
[Accessed on 18th May, 2020]
 Encyclopædia Britannica, Inc. (2020) – ‘Samsung Electronics’ Available at:
https://www.britannica.com/topic/Samsung-Electronics [Accessed on 18th May, 2020]
 Samsung.com (2020) - ‘ Notes to the Consolidated Financial Statements’ Available at:
https://images.samsung.com/is/content/samsung/p5/global/ir/docs/2019_con_quarter04_no
te.pdf [Accessed on 18th May, 2020]
 Owler.Com (2020) – ‘Samsung's Competitors, Revenue, Number of Employees, Funding and
Acquisitions’ Available at: https://www.owler.com/company/samsung [Accessed on 18th May,
2020]

 Canalys.com(2000-2020) - ‘Global smartphone market Q4 and full year 2019’ Available at:
https://www.canalys.com/newsroom/canalys-global-smartphone-market-q4-
2019#:~:text=Ultimately%20Samsung%20retained%20the%20lead,global%20smartphone
%20market%20in%202019. [Accessed on 18th May, 2020]
 Samsung.com (2019) – ‘Samsung Electronics Sustainability Report 2019’ Available at:
https://images.samsung.com/is/content/samsung/p5/global/ir/docs/sustainability_report_201
9_en.pdf [Accessed on 18th May, 2020]
 Investopedia.com (2020) – ‘Consolidated Statement of Comprehensive Income’ Available
at: https://www.investopedia.com/terms/c/comprehensiveincome.asp [Accessed on 18th
May, 2020]
 Advameg, Inc.com (2020) – ‘Financial Ratios’ Available at:
https://www.referenceforbusiness.com/management/Ex-Gov/Financial-
Ratios.html#:~:text=PROFITABILITY%20RATIOS&text=One%20of%20the%20most%20wi
dely,six%20cents%20in%20net%20income. [Accessed on 18th May, 2020]
 CashAnalytics. Com (2020) – ‘What is cash flow forecasting’ Available at:
https://www.cashanalytics.com/what-is-cash-flow-forecasting/ [Accessed on 18th May, 2020]

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