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FM Chapter 3 Questions – Management of working capital (1)

VIVA Subject Guide
 

70 Comments

  1. nithin
    How does the both ratio are incerase?
  2. Lunch
    There will be more asset in the current ratio formula, as they sold on credit. Second, there will be more asset and less inventory to deduct from, thus meaning more asset and higher ratio
  3. David
    Inventory goes up, but receivables go up more. Both are current assets.
  4. Zilindile
    thanks for the guidance
  5. Bless
    Thank you the after chapter tests, they help to rewire how i think. I'm grateful
  6. Amo
    Good
  7. Ande
    i understand the quick ratio increasing, but why would current ratio increase? since both receivable and inventory make up calculations for current ratio and the credit sales is merely a movement from inventory to receivables
  8. John MoffatTutor
    Recievables will be at the selling price, but inventory is recorded at cost (which is lower than the selling price).
  9. Noah
    Very Helpful Thank you
  10. Ntamyo
    I understand now, thanks a lot.
  11. Charles
    The level of inventory does not affect the Quick ratio. So how is it then that a sale of inventory on credit changed both ratios upwards??
  12. John MoffatTutor
    If it is sold on credit then receivables will increase (and so the quick ratio will increase).
  13. Ramabone
    Sold on credit and also for a profit
  14. Zunaib Khan
    it will increase quick ratios as inventories have decreased but the amount of liabilities remained the same.
  15. John MoffatTutor
    That is not correct. See my previous reply.
  16. Ramabone
    The sell of inventory at a profit means inventory will be reduced only to be replaced with a higher value of debtors.....
  17. syousuf
    Q1. Operating cycle = Inventory + Receivable

    Cash cycle = Inventory + Receivable - Payables


    The answer is wrong.
  18. John MoffatTutor
    The answer is correct. Check the free lectures!!

    (You appear to be studying for the CPA exams, and what CPA does is of no interest to us. Our study resources are for the ACCA exams :-) )
  19. syousuf
    Yes, in CPA operating cycle = AR + Inventory and cash cycle = AR + Inventory - AP.
    I was not aware that in US CPA what DR is CR in ACCA and vice versa.
  20. John MoffatTutor
    The debits and credits are the same worldwide!!! (but are irrelevant for Paper FM anyway).
    The operating cycle is as described in my free lectures - certainly as far as ACCA Paper FM is concerned.
  21. furqan
    why the quick ratio was increases in q 4? in formula of quick ratio is current asset - invetory /c.l ...so it should not be change in quick ratio .please answer i could not understand this
  22. John MoffatTutor
    But if they sell inventory at a profit there will be extra debtors. Debtors are part of current assets that are included in the quick ratio!
  23. furqan
    ohh now i understand thankss sir...
  24. Mohamed
    Many thanks, its wonderful
  25. John MoffatTutor
    You are welcome :-)
  26. Anthony
    Thanks a lot
  27. John MoffatTutor
    You are welcome :-)
  28. Lucas
    Q3, why long term finance is less risky than short term?

    Thanks in advanced
  29. John MoffatTutor
    Because long-term finance is usually at fixed interest, whereas the interest on short term borrowing is usually at a variable rate.

    Also, long term borrowing gives more time to get enough cash to reply it or to arrange new borrowings to be able to repay it.
  30. John MoffatTutor
    Inventory will fall. Receivables will increase, and the increase in receivables will be greater than the fall in the inventory because they are sold at a profit.
    Therefore there is an increase in the current assets, so an increase in the current ratio.
  31. Asher
    Question 3 should read "than using" and question 5 "nature of"
  32. Asher
    Thanks for these helpful questions.
  33. Naomi
    thank you for the questions sir
    q3 that talks about overtrading if we were asked to provide 2 answers to describe overtrading would we include that of high bank overdraft and of course the answer suffering liquidity due to rapid growth
  34. John MoffatTutor
    You could include them as being symptoms of possible overtrading.
  35. Naomi
    thank you sir
  36. John MoffatTutor
    You are welcome :-)
  37. Ansu Koroma
    Thanks
  38. alastairk
    Hello John
    I understand the quick ratio increasing as receivables increase and there is no inventory decrease as it is not included.
    However would the current ratio still not increase because there is a profit element included in the receivables?

    Thanks
    Alastair
  39. John MoffatTutor
    The current ratio will indeed increase, which is what the answer to the question says :-)
  40. Thuy
    Sir, if my thought is correct
    As current ratio = current assets ( receivable + cash +inventory)/current liability

    Inventory will decrease but receivable will increase with bigger amount (including profit) so generally the current ratio will increase
  41. John MoffatTutor
    Correct :-)
  42. Akhil
    Hello sir. Isn't it true that even if the decrease in inventory is actually higher than the increase in receivables . The quick ratio will still increase?
  43. Akhil
    And the point that inventory is sold at a profit is irrelevant ?
  44. John MoffatTutor
    The quick ratio will indeed increase.
    However the question also asks about the current ratio, and for this the fact that it is sold at a profit certainly is relevant.
  45. Akhil
    Thank you sir!
  46. John MoffatTutor
    You are welcome :-)
  47. delima12
    A great experience with the lecture and very good attempt on the MCQ Test.
  48. John MoffatTutor
    Thank you for your comment :-)
  49. AJ
    How come quick ratio will fall?
  50. AJ
    If inventories is sold at cost
  51. John MoffatTutor
    The question doesn't mention them being sold at cost, and neither does the answer say that the quick ratio will fall!!

    Inventories will fall (but they are not included in the quick ratio anyway). Receivables will increase. Therefore current assets less inventory increases and therefore the quick ratio will increase (which is exactly what the answer says!!)
  52. machaha
    and I have a problem in attempting online multiple choice questions.
  53. John MoffatTutor
    Do you mean that you cannot access them on your computer? (in which case you should post on the support page - the link is above).

    Or do you mean that you cannot do the questions? If that is the case, have you watched the free lectures - there is no point at all in attempting the questions without having studied first.
  54. machaha
    please help me pass f9 this December.
  55. John MoffatTutor
    I suggest that you watch my free lectures, and practice every question in your Revision Kit - practice is vital.
  56. oyet
    Very interesting test. Once you understood the chapter, you won't fail any questions.
  57. John MoffatTutor
    I am pleased that you found it interesting :-)
    (I hope that you watched the lectures also)
  58. Ye Hut
    For Q4 the answer should (b), because if inventory sell in credit, then inventory will fall and receivable will increase, so in current ratio won't change but quick ratio will increase. Is it correct ?
  59. John MoffatTutor
    No - the correct answer is (a). Because they sell goods at a price higher than cost, inventory will fall (by the cost) but receivables will increase by a higher amount than the fall in inventory.
  60. lotfyattia
    but in the result the correct answer is c not a as both ratios will increase
  61. John MoffatTutor
    There is no (a) (b) or (c) - the choices in the test are presented in a random order and so everyone gets them listed differently :-)
    The correct answer is always that both ratios increase (which should be obvious with regard to the quick ratio, and I have explained above why the current ratio increases.)
  62. lieza
    if the inventory is sold at cost, then both ratio will decrease right?
  63. John MoffatTutor
    No. The quick ratio will fall, but the current ratio will not change.
  64. Ster
    Hi Sir, would the quick ratio not increase regardless of whether inventory has been sold at cost price or for a profit? I understand the current ratio would remain unchanged with a cost sale, but since the acid-test ratio isn't affected by changes in inventory, won't any increase to cash/receivables increase the ratio?
  65. John MoffatTutor
    Yes - sorry my original answer was correct, but my latest answer was not! The quick ratio will increase :-)
  66. T.M.Nowfeer
    John moffat is correct as he explained above for this no 4 question but to Hasliza ,



    example; C/A 60
    C/L 20
    INVENTORY - 20 ( including in c/a)

    We sold 10 worth of inventory to 15 as credit
    solution ; c/r (60-10+15)/20=3.25
    q/r ((60-10+15)-(20-10))/20=2.75
    INV- 20, 10 sold , to find qr remain 10 worth of invetory wants to deduct


    if sold 10 worth of inventory to 10 as credit

    c/r (60-10+10)/20 =3
    qr ((60-10+10)-(20-10))/20=2.5
  67. T.M.Nowfeer
    if i an wrong please make me clear
  68. John MoffatTutor
    That is why you should buy a Revision Kit from one of the ACCA approved publishers as is stated throughout this website!!
    You cannot possibly attempt the exam without having a Revision Kit and having practiced every question in it.

    We provide this website free of charge and there is a limit to what we are able to provide.
  69. caroline
    HELP....!I CANT DOWNLOAD
  70. John MoffatTutor
    If you are trying to download the practice tests, then you cannot - they can only be attempted online.
    (Only the Lecture Notes can be downloaded - everything else is online only. It is the only way that we can keep this website free of charge)

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