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Free ACCA Financial Management Practice Questions & Answers
394 exam-style 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 1
What is the primary financial objective of a company listed on a stock exchange?
Select an option first.
Correct answer: B — To maximise shareholder wealth
Explanation: Maximising shareholder wealth (reflected in the share price) is the overriding objective for listed companies. Profit maximisation (D) ignores the time value of money and risk; revenue maximisation (A) and cost minimisation (C) are operational, not strategic, objectives.
Question 2
Which of the following best defines 'working capital'?
Select an option first.
Correct answer: B — Current assets minus current liabilities
Explanation: Working capital = Current assets − Current liabilities. It measures a company's short-term liquidity and operational efficiency. A defines net assets in a different sense; C is net assets; D is not a standard financial definition.
Question 3
The working capital cycle (also called the cash operating cycle) measures:
Select an option first.
Correct answer: B — The time between paying for raw materials and receiving cash from customers
Explanation: The cash operating cycle = Inventory days + Receivable days − Payable days. It measures how long cash is tied up in operations before it is recovered. A, C and D are incorrect definitions.
Question 4
If a company has current assets of $800,000 and current liabilities of $500,000, what is its current ratio?
Select an option first.
Correct answer: B — 1.6
Explanation: Current ratio = Current assets ÷ Current liabilities = $800,000 ÷ $500,000 = 1.6. A is incorrect arithmetic; C and D are below 1, which would indicate the liabilities exceed assets.
Question 5
The quick ratio (acid test ratio) differs from the current ratio because it:
Select an option first.
Correct answer: B — Excludes inventory from current assets in the numerator
Explanation: Quick ratio = (Current assets − Inventory) ÷ Current liabilities. Inventory is excluded because it is the least liquid current asset and may not be quickly convertible to cash. A, C and D are incorrect.
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Question 6
A company has inventory of $200,000 and annual cost of sales of $1,200,000. What is the inventory turnover period in days?
Select an option first.
Correct answer: A — 60 days
Explanation: Inventory days = (Inventory ÷ Cost of sales) × 365 = ($200,000 ÷ $1,200,000) × 365 = 60.8 ≈ 61 days. However, using exact calculation: 200,000/1,200,000 × 365 = 60.83. The closest standard answer is 61 days (B). Note: A (60 days) uses a 360-day year convention which is also commonly used. B is the most precise. Both A and B are acceptable depending on convention — the formula is the key.
Question 7
Which of the following is a consequence of having too much working capital?
Select an option first.
Correct answer: B — Lost investment opportunities and reduced profitability due to funds tied up unnecessarily
Explanation: Excessive working capital means funds are unnecessarily tied up in inventory or receivables, reducing returns. Too little working capital causes A, C and D. The optimal level balances liquidity against the cost of holding excess current assets.
Question 8
What does the term 'overtrading' mean in financial management?
Select an option first.
Correct answer: B — A company expanding its business activity too rapidly without sufficient long-term financing to support the increased working capital requirement
Explanation: Overtrading (or undercapitalisation) occurs when a business grows sales faster than its working capital can support, leading to a cash flow crisis despite profitability. A, C and D are incorrect definitions.
Question 9
A trade receivables collection period of 45 days means:
Select an option first.
Correct answer: B — On average, customers take 45 days to pay the company after a sale is made
Explanation: Receivable days = (Trade receivables ÷ Credit sales) × 365. A result of 45 days means customers take an average of 45 days to settle their invoices. A describes payable days; C is inventory days; D is the entire cash cycle.
Question 10
Which of the following is NOT a method of financing working capital?
Select an option first.
Correct answer: C — Issuing long-term bonds
Explanation: Long-term bonds are a source of permanent (long-term) capital, not used to finance day-to-day working capital. A (overdraft), B (trade payables), and D (factoring) are all short-term working capital financing methods.
Question 11
The 'aggressive' approach to working capital financing involves:
Select an option first.
Correct answer: B — Financing fluctuating current assets and some permanent current assets with short-term funds
Explanation: An aggressive approach uses short-term (cheaper but riskier) finance for both fluctuating and some permanent current assets, maximising return but increasing liquidity risk. A is the conservative approach; C and D describe high working capital levels, not financing approaches.
Question 12
What is the main advantage of holding higher levels of cash?
Select an option first.
Correct answer: B — It improves liquidity and reduces the risk of being unable to meet obligations
Explanation: Holding more cash improves the ability to meet obligations and provides a buffer against unexpected outflows (Keynes: transactions, precautionary, speculative motives). A is wrong – cash held earns little return; C and D are not primary advantages.
Question 13
Which of the following would INCREASE a company's cash operating cycle?
Select an option first.
Correct answer: C — Increasing the inventory holding period
Explanation: Cash operating cycle = Inventory days + Receivable days − Payable days. Increasing inventory days lengthens the cycle. A (shorter receivables) and B (longer payables) both shorten the cycle. D means customers pay earlier, which is like reducing receivable days — also shortening the cycle.
Question 14
What does a current ratio below 1.0 indicate?
Select an option first.
Correct answer: B — The company's current liabilities exceed its current assets, suggesting short-term liquidity risk
Explanation: A current ratio below 1.0 means current liabilities exceed current assets — the company may struggle to meet short-term obligations as they fall due. A, C and D relate to different financial measures.
Question 15
A factoring arrangement in which the factor bears the risk of bad debts is called:
Select an option first.
Correct answer: B — Non-recourse factoring
Explanation: Non-recourse factoring: the factor assumes the credit risk — if the customer fails to pay, the factor bears the loss. Recourse factoring (A) leaves bad debt risk with the selling company. C is a different confidential arrangement; D is trade finance for exports.
Question 16
Which ratio measures how many times a company's operating profit covers its interest charges?
Select an option first.
Correct answer: B — Interest cover ratio
Explanation: Interest cover = EBIT ÷ Interest expense. It shows how many times operating profit covers interest payments. A (gearing) measures debt proportion; C measures liquidity; D measures how well dividends are covered by earnings.
Question 17
The 'conservative' approach to working capital management involves:
Select an option first.
Correct answer: C — Holding high levels of current assets and financing them with long-term funds to minimise liquidity risk
Explanation: The conservative approach holds more current assets (reducing shortage risk) and finances them with long-term funds (reducing liquidity risk), at the cost of lower profitability. A is aggressive; B and D increase risk.
Question 18
A company's gross profit margin is 40% and revenue is $500,000. What is the gross profit?
Select an option first.
Correct answer: A — $200,000
Explanation: Gross profit = Gross profit margin × Revenue = 40% × $500,000 = $200,000. B would be the cost of sales; C and D are arithmetic errors.
Question 19
Which of the following best describes the purpose of a cash budget?
Select an option first.
Correct answer: B — To forecast future cash inflows and outflows to identify potential surpluses or shortfalls
Explanation: A cash budget (cash flow forecast) projects expected cash receipts and payments, helping management identify future shortfalls that need financing or surpluses that can be invested. A and D are unrelated purposes; C is business valuation.
Question 20
If a company's receivables days increase from 30 to 50 days, which of the following is most likely?
Select an option first.
Correct answer: B — The company has experienced a deterioration in credit control or has offered more generous credit terms
Explanation: An increase in receivables days means customers are taking longer to pay. This suggests weaker credit control, more generous credit terms, or customer financial difficulties. A is the opposite; C and D are unrelated.
Question 21
What is meant by 'payables days' (trade payables payment period)?
Select an option first.
Correct answer: B — The average number of days a company takes to pay its suppliers
Explanation: Payables days = (Trade payables ÷ Cost of purchases or Cost of sales) × 365. A longer payables period means the company is using supplier credit for longer. A is inventory days; C and D are different measures.
Question 22
Which of the following is an example of a 'permanent' current asset?
Select an option first.
Correct answer: C — The minimum level of inventory a business always needs to maintain
Explanation: Permanent current assets are the base level of current assets always needed regardless of seasonal fluctuations (e.g., minimum inventory). Fluctuating (temporary) current assets vary with business activity. A is a precautionary cash balance; B is temporary; D is a temporary investment.
Question 23
The net present value (NPV) of a project is $0. This means:
Select an option first.
Correct answer: B — The project generates exactly the required rate of return and should be accepted
Explanation: An NPV of exactly $0 means the project earns precisely the cost of capital (the discount rate). Shareholders are no better or worse off, and the project may be accepted. A NPV above zero creates value; below zero destroys value. A, C and D are incorrect interpretations.
Question 24
Which of the following best describes the 'matching principle' in working capital management?
Select an option first.
Correct answer: B — Long-term assets should be financed with long-term funds, and short-term assets with short-term funds
Explanation: The matching principle states that the maturity of finance should match the life of the asset being financed — non-current assets with long-term capital, current assets with short-term finance. A is an accounting concept; C is the balance sheet equation; D is cash accounting.
Question 25
A company sells goods on 30-day credit terms but its customers take an average of 45 days to pay. What is the most likely consequence?
Select an option first.
Correct answer: B — Cash flow pressure and the need for additional working capital financing
Explanation: Customers paying 15 days late means the company receives cash later than planned, creating a funding gap it must bridge through overdraft, factoring, or other short-term finance. A, C and D are incorrect consequences.
Question 26
Which of the following correctly describes 'invoice discounting'?
Select an option first.
Correct answer: B — The company borrows against the security of its invoices but retains responsibility for collecting the debt
Explanation: Invoice discounting: the company uses unpaid invoices as security to borrow, but keeps control of its sales ledger and collects debts itself. In factoring (A), the factor takes over collection. C is an early settlement discount; D is a credit note/allowance.
Question 27
If a company's operating cycle is 60 days but it pays its suppliers after 30 days, what is the cash conversion cycle?
Select an option first.
Correct answer: B — 30 days
Explanation: Cash conversion cycle = Operating cycle − Payables days = 60 − 30 = 30 days. This is the number of days the company needs to finance from its own resources. A adds instead of subtracts; C ignores payables; D is incorrect arithmetic.
Question 28
Which of the following is the formula for the receivables collection period?
Select an option first.
Correct answer: B — (Trade receivables ÷ Revenue) × 365
Explanation: Receivables days = (Trade receivables ÷ Revenue) × 365. It measures the average number of days credit customers take to pay. A is the receivables turnover ratio (not days); C is inventory days; D is payable days.
Question 29
A company's cash cycle has shortened. This most likely indicates:
Select an option first.
Correct answer: B — The company is collecting debts faster, reducing inventory holding time, or taking longer to pay suppliers
Explanation: A shorter cash cycle means funds are tied up in working capital for less time — better efficiency. This typically results from faster collections (lower receivable days), lower inventory holding, or extended payables. A, C and D are unrelated to the cash cycle directly.
Question 30
Which of the following is most likely to be classified as a 'current asset'?
Select an option first.
Correct answer: C — Inventory expected to be sold within the next 3 months
Explanation: A current asset is expected to be converted to cash within one year (or one operating cycle). Inventory expected to sell in 3 months meets this definition. A, B and D are non-current (long-term) assets.
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