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Investment Policy

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Investment Policy

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • September 2, 2021 at 9:20 pm #634041
    AshleyMarc1997
    Member
    • Topics: 48
    • Replies: 24
    • ☆☆

    If a company has invested in the working capital too much finance it has adopted Conservative Investment Policy and if a company has invested in the working capital too low finance it has adopted Aggressive Investment Policy as compared to another company.

    Is it correct that all the working capital ratios can be used to identify if the company has higher or lower working capital investment such as:

    1) Net Working Capital
    2) Long-term Finance
    3) Levels of Receivables, Inventory & Payables
    4) Receivable days, Inventory days & Payable days
    5) Net Operating Cycle
    6) Current Assets & Non-current Assets
    7) Current ratio & Quick ratio
    8) Sales to Net Working Capital ratio
    9) Cash available

    [Increase in these ratios will indicate that company has invested too much funds in the working capital; However, Decrease in these ratios will indicates that company has invested lower funds in the working capital]

    September 3, 2021 at 8:17 am #634085
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51573
    • ☆☆☆☆☆

    Yes, all of those ratios can be relevant. It is more important to compare with a company in the same business rather than to compare two years of the same company.

    September 4, 2021 at 9:53 am #634242
    AshleyMarc1997
    Member
    • Topics: 48
    • Replies: 24
    • ☆☆

    Thank you for your answer, Sir Moffat. May GOD bless you 🙂

    1) In the exam question, we simply have to look at the factors by comparing with similar companies in the industry to identify whether we have adopted conservative investment policy by investing too much in our WC or we have adopted aggressive investment policy by investing too low funds in our WC. [correct?]

    2) Is it true that all the ratios that I mentioned in my earlier post will indicate an increase in the Working Capital of a company if those ratios increase as compared to another company in the sector? [correct?]

    3) We can look for these ratios to see whether we have higher working capital (i.e. overcapitalization) such as:
    i) Increase in Net Working Capital
    ii) Increase in Long-term Borrowings
    iii) Increase in Levels of Receivables, Inventory & Payables
    iv) Increase in Receivable days, Inventory days & Payable days (i.e. Operating Cash Cycle) AND
    v) Increase in Net Operating Cycle
    vi) Current ratio or Quick ratio (if they increase we have conservative policy and if they decrease we have aggressive policy);
    vii) Increase in CA & NCA
    viii) Increase in Sales to Net Working Capital ratio
    ix) Increase in Cash available

    If the ratios mentioned above result in increasing as compared to another company in the sector then it is indicating that the company has invested too much funds in its WC (and therefore it is a conservative policy or we can say company has overcapitalization). [correct?]

    September 4, 2021 at 12:03 pm #634274
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51573
    • ☆☆☆☆☆

    All of that is correct 🙂

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