• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
Free ACCA & CIMA online courses from OpenTuition

Free ACCA & CIMA online courses from OpenTuition

Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams

  • ACCA
  • CIMA
  • FIA
  • OBU
  • Books
  • Forums
  • Ask AI
  • Search
  • Register
  • Login
  • ACCA Forums
  • Ask ACCA Tutor
  • CIMA Forums
  • Ask CIMA Tutor
  • FIA
  • OBU
  • Buy/Sell Books
  • All Forums
  • Latest Topics

20% off ACCA & CIMA Books

OpenTuition recommends the new interactive BPP books for September 2025 exams.
Get your discount code >>

Hello Sir John muffet.

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Hello Sir John muffet.

  • This topic has 8 replies, 2 voices, and was last updated 3 years ago by John Moffat.
Viewing 9 posts - 1 through 9 (of 9 total)
  • Author
    Posts
  • March 27, 2022 at 4:11 pm #652040
    dennissherpa101
    Member
    • Topics: 58
    • Replies: 60
    • ☆☆

    Sir John is increase in working capital an increase in liquidity? although I know if current assets contain cash only then it would be true but I am not sure if it hold true for inventory and receivables. if having too much inventory reducing the liquidity? Does liquidity mean cash only? the other question is how does holding little working capital improve profitabilty?

    March 27, 2022 at 5:53 pm #652057
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Liquidity refers to cash and assets that can be quickly converted into cash. The current ratio is a measure of liquidity although more important is the acid test / quick ratio because it excludes inventory (inventory takes longer to be able to convert into cash).

    Reducing working capital can improve profitability because reducing inventory reduces the cost of the capital tied up in inventory and reducing receivables reduces the risk of irrecoverable debts, and reduces the interest cost of allowing credit to customers.

    All of this is explained in my free lectures on working capital. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.

    March 28, 2022 at 3:53 am #652082
    dennissherpa101
    Member
    • Topics: 58
    • Replies: 60
    • ☆☆

    sir is if my working capital increase with buying more inventory by cash does it mean my liquidity decreases although there was an increase in working capital?
    Sir increase in receivables by more sales and carrying more inventory to meet the demand. doesn’t it improve my profitability at the expense of liquidity?

    March 28, 2022 at 8:47 am #652091
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    If more inventory is bought for cash then it does decrease the liquidity.

    Certainly selling more is likely to increase profitability. But what is concerned here is carrying more inventory than needed or having more receivables than needed (because of increasing the credit period for customers). In that case it will reduce the profitability for the reasons I stated before.

    March 28, 2022 at 3:34 pm #652124
    dennissherpa101
    Member
    • Topics: 58
    • Replies: 60
    • ☆☆

    SO sir John can I sum it up as lower working capital = higher profitability/ lower liquidity
    Where as higher working capital = lower profitability/ higher liquidity .?

    March 28, 2022 at 3:42 pm #652125
    dennissherpa101
    Member
    • Topics: 58
    • Replies: 60
    • ☆☆

    Sorry sir for taking up your time. I have watched your video 3 times already. but what confuses me is. if I look at the kaplan book it looks for me as if it is contradicting. my thought is there needs to be balance between liquidity and profitability but if one is higher then the other aspect has to. suffer. so if you are holding more inventory and giving more credit terms to your customers then you are taking an approach to be more profitable( This is higher working capital = more profitability) but having more inventory and receivables affect the cashflow so you have an liquidity problem…… but this concept doesn’t go with the cost of capital tied up.( higher working capital = more cost so less profit) is there something I am not understanding? can you please correct me. ps: I trust your lecture more than kaplan book I was able to score 90% just watching your video so was very glad to see you in Fm videos.

    March 28, 2022 at 5:12 pm #652150
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    I think that maybe you are confusing two things.

    Certainly if a company sells more then we would expect higher profitability and at the same time they will need to have more receivables etc. and so will have more liquidity.

    However, separately, if a company (for example) currently allow customers 1 month to pay, but decides to allow them 2 months to pay instead, then this will mean that that receivables increase (even if their sales stay the same). This will mean that the interest cost of the extra receivables will be higher and the risk of irrecoverable debts will be higher, and thereof they will have more expense (and less profit) than if they had not allowed 2 months credit instead of 1 months credit.

    March 29, 2022 at 10:34 am #652218
    dennissherpa101
    Member
    • Topics: 58
    • Replies: 60
    • ☆☆

    Sir how will a companies receivables increase if the sales were the same. for example I did one sell the entire year of a $100 (on credit) even if the period is 1 month or 2 months the amount to be received(receivables) will be $100.

    March 29, 2022 at 4:05 pm #652236
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    If the sales are $100 a month and they give one months credit, then the receivables will be $100 throughout the year.

    If the sales are $100 a month and they give two months credit, then the receivables through the year will be $200 (because they are always being owed for 2 months sales).

    Do watch my lectures on the management of receivables.

  • Author
    Posts
Viewing 9 posts - 1 through 9 (of 9 total)
  • You must be logged in to reply to this topic.
Log In

Primary Sidebar

Donate
If you have benefited from our materials, please donate

ACCA News:

ACCA My Exam Performance for non-variant

Applied Skills exams is available NOW

ACCA Options:  “Read the Mind of the Marker” articles

Subscribe to ACCA’s Student Accountant Direct

ACCA CBE 2025 Exams

How was your exam, and what was the exam result?

BT CBE exam was.. | MA CBE exam was..
FA CBE exam was.. | LW CBE exam was..

Donate

If you have benefited from OpenTuition please donate.

PQ Magazine

Latest Comments

  • OmarAlbeity on ACCA BT Chapter 6 – Some legal obligations – Questions
  • Salimbek909 on The nature and structure of organisations – ACCA Paper BT
  • Sefater on Chapter 3 – Property Income and Investments – Individuals TX-UK FA2023
  • adityachaudhry on Discounted cash flow techniques (part 3) – ACCA (AFM) lectures
  • nuripamir on ACCA Administrative Review

Copyright © 2025 · Support · Contact · Advertising · OpenLicense · About · Sitemap · Comments · Log in