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Free ACCA Advanced Financial Management Practice Questions & Answers
400 exam-style Advanced Financial Management questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 301
What is 'cash pooling' and what are the benefits for multinational corporations?
Select an option first.
Correct answer: B — A treasury technique that aggregates the cash balances of multiple subsidiaries into a single ('pool') to improve liquidity management — the combined balance earns more interest (or reduces net borrowing costs) than individual balances managed separately. Physical pooling: cash is actually transferred; notional pooling: balances are notionally combined for interest calculation
Explanation: B is correct. Cash pooling: reduces the need for external borrowing (subsidiaries with deficits use surpluses of others instead of borrowing externally). Notional pooling: no physical movement of funds, reduces transfer costs and tax issues. Reduces total external borrowing → lower interest costs. A is excess cash. C is FX netting. D is cash investment.
Question 302
What is 'working capital management' and why is it important?
Select an option first.
Correct answer: B — Managing the short-term assets and liabilities that a business uses in its day-to-day operations — the balance between holding enough liquid assets to meet obligations and not tying up too much capital in unproductive short-term assets. Measured by the cash conversion cycle
Explanation: B is correct. Working capital = Current assets − Current liabilities. Key components: inventory, receivables, payables, and cash. Cash conversion cycle (CCC) = inventory days + receivable days − payable days. Shorter CCC = more efficient. Over-investing in working capital ties up capital and reduces ROE; under-investing risks running out of cash. A is capital investment. C is capital structure. D is banking relationships.
Question 303
What is the 'cash conversion cycle' (CCC) and what does a shorter CCC indicate?
Select an option first.
Correct answer: A — The time from when a company buys inventory to when it receives cash from sales
Explanation: A is correct. Note: A is actually the same concept expressed slightly differently, but the formal formula answer is A. CCC = Days inventory outstanding + Days sales outstanding − Days payable outstanding. Shorter CCC → less cash tied up in operations → better liquidity. A describes the essence. B has the same correct formula: it's the correct answer. Selecting B: B is the correctly stated formal definition. A is the informal description.
Question 304
What is the formula for 'inventory days' (days inventory outstanding)?
Select an option first.
Correct answer: A — Inventory / Cost of sales × 365
Explanation: A is correct. Inventory days = (Inventory / Cost of sales) × 365. A lower number indicates inventory is sold quickly. B inverts the formula (giving inventory turnover times). C uses revenue instead of cost of sales. D also uses revenue.
Question 305
What is 'receivable days' (debtor days) and what does a rising trend suggest?
Select an option first.
Correct answer: B — Trade receivables divided by revenue × 365 — measures the average time taken by customers to pay. A rising trend may suggest: relaxed credit policy, customers taking longer to pay (possible financial distress), or poor credit control
Explanation: B is correct. Receivable days = (Trade receivables / Revenue) × 365. Rising receivable days → cash tied up for longer → working capital pressure. Causes: extending credit terms to boost sales, poor collection procedures, or customer financial difficulties. A is a different ratio. C inverts the formula. D gives the opposite metric.
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Question 306
What is 'payable days' (creditor days) and what does it represent?
Select an option first.
Correct answer: B — Trade payables divided by cost of sales × 365 — the average number of days taken to pay suppliers. A higher number means the company is using supplier credit more effectively as a source of free financing — but too high may damage supplier relationships
Explanation: B is correct. Payable days = (Trade payables / Cost of sales) × 365. Extending payable days: free source of finance (supplier credit), but risks: early payment discounts lost, damaged supplier relationships, supply disruption. Optimal: take all credit allowed but pay by due date. A, C and D use wrong bases.
Question 307
What is 'factoring' and how does it help cash flow?
Select an option first.
Correct answer: B — A financial service where a company sells its trade receivables to a factor (usually a bank subsidiary) at a discount — the factor provides: early payment (typically 80–90% of invoice value), sales ledger management, and credit protection (non-recourse factoring). Helps cash flow by accelerating collection
Explanation: B is correct. Factoring: receivables sold outright. Advance payment: immediate cash (typically 80–90%), balance (less fees) when customer pays. Recourse: factor has recourse to company if customer defaults. Non-recourse: factor bears credit risk (higher fee). Benefits: immediate cash, reduced credit control costs. Disadvantage: cost (discount), potential reputational impact. A is asset-backed lending. C is wrong. D describes invoice discounting (confidential).
Question 308
What is 'invoice discounting' and how does it differ from factoring?
Select an option first.
Correct answer: B — The company borrows money against its outstanding receivables (the factor advances funds against the invoice value) while retaining control of its sales ledger — unlike factoring, customers are not notified and the company continues to collect debts. It is a confidential, flexible financing arrangement
Explanation: B is correct. Invoice discounting: asset-based lending, company retains sales ledger, confidential (customers unaware). More flexible and cheaper than factoring (no sales ledger management service). Factoring: full service, customers notified. A is reverse factoring/supplier finance. C is supply chain finance. D is tax planning.
Question 309
What is 'supply chain finance' (reverse factoring) and how does it help suppliers?
Select an option first.
Correct answer: B — A programme where a buyer arranges for a financial institution to pay its suppliers early at a discounted rate based on the buyer's credit rating — the supplier receives early payment (improved cash flow) and the buyer retains its extended payment terms
Explanation: B is correct. Reverse factoring (SCF): the buyer's credit rating drives the discount rate (lower than if the supplier sought factoring independently). Benefits: supplier gets early cash at low cost; buyer extends payment terms without harming suppliers. A is commodity risk. C is standard factoring. D is operational/supply chain strategy.
Question 310
What is 'dynamic discounting' and how does it differ from supply chain finance?
Select an option first.
Correct answer: B — A flexible programme allowing a buyer to offer early payment to suppliers in exchange for a discount — the discount varies dynamically depending on how early payment is made (earlier = higher discount). Unlike SCF, funding comes from the buyer's own cash
Explanation: B is correct. Dynamic discounting: buyer-funded (uses the buyer's own surplus cash to earn a return by paying suppliers early). Rate: sliding scale, higher discount for earlier payment. Unlike SCF: no third-party funder, no transfer of buyer credit risk. A, C and D are wrong.
Question 311
What is 'cash flow at risk' (CFaR)?
Select an option first.
Correct answer: B — A measure of the worst-case shortfall in cash flow at a given confidence level over a specified period — analogous to VaR but applied to operating cash flows rather than financial portfolio values. Used by non-financial corporations to assess the impact of market risk on cash generation
Explanation: B is correct. CFaR: applied to corporate treasury to measure risk to operating cash flows from market variables (FX, interest rates, commodity prices). Useful for non-financial firms where the main concern is cash flow stability, not portfolio values. A is equity-at-risk or VaR concept. C is a cash buffer. D is a probability of default measure.
Question 312
What is 'counterparty risk' in derivatives transactions and how is it managed?
Select an option first.
Correct answer: B — The risk that the counterparty in a derivatives transaction will default before the contract matures, leaving an unrealised gain uncollected — managed through: central counterparty clearing (CCPs), collateral (margin), ISDA master agreements with netting provisions, and credit limits
Explanation: B is correct. Counterparty risk (bilateral credit risk in OTC derivatives): uncrystallised gain at risk if counterparty defaults. Post-2008 regulation (Dodd-Frank, EMIR): mandatory clearing of standardised OTC derivatives through CCPs (reduces bilateral counterparty risk), margin requirements. ISDA Master Agreement: netting reduces gross exposure to net. A is market risk. C is exercise risk. D is regulatory risk.
Question 313
What is a 'revolving credit facility' (RCF) and why is it used by corporates?
Select an option first.
Correct answer: B — A flexible credit facility allowing a company to draw, repay, and re-draw funds up to an agreed limit over a defined period — used for working capital, general corporate purposes, and as a 'backstop' liquidity facility. Only commitment fees are paid on unused amounts; full interest on drawn amounts
Explanation: B is correct. RCF: revolving (repayable and re-drawable), flexible (draw as needed), committed (bank obligated to lend within the limit, subject to covenants). Two costs: commitment fee on undrawn balance (typically 30–50% of margin) + interest on drawn amount (SONIA/SOFR + margin). Used by most investment-grade companies as a liquidity backstop. A is a mortgage. C is a bond. D is a government scheme.
Question 314
What is the difference between a 'bilateral' and 'syndicated' loan?
Select an option first.
Correct answer: B — A bilateral loan is between one borrower and one bank; a syndicated loan is between one borrower and a group of banks (the 'syndicate') — each syndicate member lends a portion of the total facility, reducing concentration risk for individual banks and enabling larger loans
Explanation: B is correct. Syndicated loan: arranged by a lead bank (arranger/bookrunner) who assembles a group of participating banks. Allows companies to borrow larger amounts than any single bank would lend. Each bank takes a portion. Administrative agent manages the facility. A is wrong. C is not the defining feature. D is wrong.
Question 315
What is a 'commercial paper' (CP) and how is it used?
Select an option first.
Correct answer: B — A short-term (typically 1–270 days) unsecured debt instrument issued by investment-grade companies directly in the money markets to raise short-term funds — typically issued at a discount to face value (like a treasury bill). Used for: working capital, bridging finance, and short-term liquidity management
Explanation: B is correct. CP: issued at a discount, redeemed at par. Money market instrument. No interest payments — return is the discount. Backed by the company's credit rating (only accessible to investment-grade issuers). Cheaper than bank loans for short-term needs. A is long-term. C is a trade document. D is a bank facility.
Question 316
What is a 'bond indenture' (loan agreement) and what does it contain?
Select an option first.
Correct answer: B — The legal contract governing a bond issue — it specifies: coupon rate, payment dates, maturity date, covenants (positive and negative), events of default, redemption provisions, collateral (if secured), and ranking (seniority). Protects bondholders' rights
Explanation: B is correct. Bond indenture (trust deed in the UK): the governing document. Contains: financial covenants (interest cover, leverage), negative covenants (restrictions on debt, asset sales, dividends), events of default (triggers that give bondholders right to demand early repayment), and seniority. Administered by a trustee on behalf of bondholders. A is a credit report. C is board minutes. D is a prospectus.
Question 317
What is 'credit rating' and which agencies provide it?
Select an option first.
Correct answer: B — An opinion of a borrower's ability and willingness to meet its financial obligations — provided by credit rating agencies (CRAs) such as Moody's, Standard & Poor's (S&P), and Fitch. Investment grade = BBB-/Baa3 and above; below investment grade = high yield (speculative / 'junk') bonds
Explanation: B is correct. Credit ratings: investment grade (AAA/Aaa to BBB-/Baa3) — low default risk, accessible to pension funds and conservative investors. Sub-investment grade / high yield (BB+/Ba1 and below) — higher risk, higher yield. Ratings affect: borrowing costs (spread over risk-free rate), market access, and investor base. A is an internal credit model. C is a stress test. D is a regulatory ratio.
Question 318
What is the 'spread' on a corporate bond and what drives it?
Select an option first.
Correct answer: B — The extra yield (basis points above a risk-free benchmark, e.g., government bonds) demanded by investors to compensate for the credit risk of a corporate bond — driven by: the issuer's credit rating, time to maturity, liquidity, industry, and market conditions (risk appetite)
Explanation: B is correct. Credit spread = Corporate bond yield − Government bond yield. Higher spread = more credit risk or less liquidity. IG spreads: typically 50–200bps. HY spreads: 200–1000bps+. During market stress (2008 crisis, COVID): spreads widen dramatically. A and C describe the bid-ask spread. D is a different comparison.
Question 319
What is 'interest rate risk' for a company with floating-rate debt?
Select an option first.
Correct answer: B — The risk that rising interest rates will increase the company's interest payments on floating-rate debt — managed by: fixed-rate borrowing, interest rate swaps (pay fixed, receive floating), interest rate caps, or FRAs
Explanation: B is correct. Floating rate debt: interest resets periodically (e.g., quarterly) based on SONIA + margin. Rising rates → higher interest payments → lower profit and cash flow. Hedging tools: swap to fixed rate, buy cap. A is a solvency risk. C is the risk faced by a fixed-income investor, not a floating-rate borrower. D is policy risk.
Question 320
What is 'duration gap' management in interest rate risk?
Select an option first.
Correct answer: B — A strategy where a financial institution matches the duration of its assets to the duration of its liabilities to minimise the impact of interest rate changes on its net worth — a positive duration gap means assets have longer duration than liabilities (net worth falls when rates rise)
Explanation: B is correct. Duration gap (for banks and insurers): Asset duration − Liability duration. Positive gap: more rate-sensitive assets → net interest margin exposed if rates rise. Zero gap = immunised. Banks manage duration gap to align with their risk appetite. A is a bond measure. C is a yield analysis. D is credit risk management.
Question 321
What is the 'foreign exchange reserves' of a country and why does it matter for corporate treasury?
Select an option first.
Correct answer: B — The foreign currency assets held by a country's central bank — relevant for corporates because low reserves indicate potential risk of currency crisis, capital controls, or exchange rate volatility in that country, which affects multinationals operating there
Explanation: B is correct. FX reserves: held by central banks to: defend the exchange rate, pay foreign obligations, and provide confidence. Low reserves → risk of devaluation, capital controls, or economic crisis. For corporate treasury: high political and currency risk when operating in countries with low reserves. A describes external debt. C is corporate FX holdings. D is capital account inflows.
Question 322
What is a 'currency peg' and what is the risk for companies operating in countries with a peg?
Select an option first.
Correct answer: B — A policy where a country's central bank fixes its currency's value against another currency (e.g., USD) — companies benefit from exchange rate certainty, but the risk is a sudden devaluation if the central bank cannot defend the peg (e.g., Black Wednesday 1992, Argentina 2001)
Explanation: B is correct. Currency peg: removes exchange rate volatility for exporters and importers, but creates risk of sudden large devaluations when the peg breaks. Companies operating in pegged currency countries should assess the sustainability of the peg and consider hedging or natural hedges for significant positions. A is a futures hedge. C is FX regulations. D is a currency swap.
Question 323
What are 'payment netting' and 'multilateral netting' systems and what are the benefits?
Select an option first.
Correct answer: B — Systems where multiple transactions between entities are aggregated and only the net amount is settled — multilateral netting uses a central clearing party to net across multiple counterparties. Benefits: reduces the volume of individual cash transfers, lowers transaction costs, and reduces credit exposure
Explanation: B is correct. Payment netting: bilateral (two parties offset mutual obligations). Multilateral (e.g., CLS — Continuous Linked Settlement): multiple parties, central clearing. Benefits: reduced settlement flows (lower transaction costs), reduced FX settlement risk (payment vs payment). Used extensively in interbank FX markets. A is gross settlement. C is a calendar approach. D is a conversion requirement.
Question 324
What is a 'eurobond' and how does it differ from a 'domestic bond'?
Select an option first.
Correct answer: B — An international bond issued in a currency other than that of the country in which it is issued — typically issued in bearer form, often in USD or EUR, and underwritten by a syndicate of international banks. Different from a domestic bond, which is issued in the local market, in the local currency, under local regulations
Explanation: B is correct. Eurobond: issued in international capital markets, in a currency foreign to the issuing country (e.g., a UK company issuing USD bonds in London). Usually pays gross interest (no withholding tax). Allows access to a larger investor base. Domestic bond: issued in local currency, in the local market, under local regulations. A is too narrow. C is too narrow. D is a floating-rate bond.
Question 325
What is 'political risk insurance' (PRI) and who provides it?
Select an option first.
Correct answer: B — Insurance protecting companies against political risks in foreign countries such as: expropriation, nationalisation, currency inconvertibility, political violence, and contract repudiation — provided by: MIGA (World Bank group), national export credit agencies (ECA), and private insurers (Lloyd's syndicates)
Explanation: B is correct. PRI: mitigates country risk for foreign direct investment. MIGA (Multilateral Investment Guarantee Agency): provides PRI to encourage FDI in developing countries. ECAs (UK Export Finance, US EXIM Bank): support domestic exporters and investors overseas. Private: Zurich, Lloyd's. A is equity market insurance. C is FX insurance (currency option / forward). D is property insurance.
Question 326
What is a 'natural hedge' and why is it preferred to financial derivatives by some companies?
Select an option first.
Correct answer: B — A situation where a company's operating activities naturally offset exchange rate or commodity price risks without using derivatives — e.g., a company with revenues and costs both in USD has a natural hedge for USD/GBP exposure; producing in the same country as sales markets reduces FX risk
Explanation: B is correct. Natural hedge: operational matching of revenues and costs in the same currency/commodity. Examples: locating production in target markets (offshoring), sourcing in the export market's currency, matching debt currency to revenue currency. Preferred by some: no derivative premium, no basis risk, longer-term, reduces economic exposure not just transaction exposure. A is commodity hedging. C is wrong. D is wrong.
Question 327
What is the 'net present value of growth opportunities' (PVGO) in share valuation?
Select an option first.
Correct answer: B — The difference between a company's current share price and the no-growth value (EPS/Ke) — it represents the present value of all future investment opportunities that are expected to generate returns above the cost of equity. High PVGO = growth company; low PVGO = value company
Explanation: B is correct. PVGO = P − (EPS/Ke). This decomposes the share price into: value from existing assets (EPS/Ke = perpetuity of current earnings) + PVGO (market expectation of future positive NPV investments). High-tech/growth companies: high PVGO. Mature/value companies: low PVGO. A is the no-growth value. C is already-invested NPV. D is negative of P/B.
Question 328
What is 'operational risk' and how does it relate to treasury functions?
Select an option first.
Correct answer: B — The risk of loss from inadequate or failed internal processes, people, systems, or external events — in treasury: rogue trading, settlement errors, systems failures, fraud, and model risk. Managed through: segregation of duties, limits and controls, independent reconciliation, and systems testing
Explanation: B is correct. Operational risk: particularly relevant to treasury because of: large transaction sizes, complex instruments, multiple systems. High-profile failures: Barings (Nick Leeson — rogue trader), LTCM (model risk). Controls: front/middle/back office segregation, dual authorisation, independent valuation, stress testing. A is strategic risk. C is competitive risk. D is regulatory risk.
Question 329
What is 'model risk' in financial risk management?
Select an option first.
Correct answer: B — The risk that a financial model used to value assets or manage risk is incorrect due to flawed assumptions, incorrect mathematical formulation, or inappropriate application — can lead to mispriced derivatives, incorrect hedges, or misreported risk positions
Explanation: B is correct. Model risk: prominent in complex derivatives valuation (e.g., exotic options, CDOs), VaR models, and credit scoring. Mitigated by: independent model validation, stress testing of model assumptions, multiple models used in parallel, and human oversight. LTCM failure partly attributed to model risk. A is a technical spreadsheet error. C and D are specific forms of model risk.
Question 330
What is a 'cross-currency swap' and how does it differ from a standard currency swap?
Select an option first.
Correct answer: B — A cross-currency swap (CCS) involves the exchange of interest payments AND principal in two different currencies, typically with periodic exchange of floating interest in one currency for floating interest in another (though fixed-for-fixed or fixed-for-floating variants exist) — used by companies with cash flows in one currency to service debt issued in another
Explanation: B is correct. Cross-currency swap: both interest and principal exchanged in different currencies. Used to: hedge long-term FX exposure on debt (e.g., a EUR company issues USD bonds → enters CCS to pay EUR fixed/receive USD fixed, converting USD debt to EUR). Similar to a currency swap — terms often used interchangeably. A is wrong. C describes an FX forward. D is a spot/forward pair.
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