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

 

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      • 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.

      • 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.

    • 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.

    • 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.

  9. 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

  11. 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

    • 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!!)

    • 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.

  18. 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 ?

    • 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.

      • 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.)

      • 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?

      • 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

    • 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.

    • 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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