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Free ACCA Financial Management Practice Questions & Answers
400 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 31
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.
Question 32
What is the main financial risk associated with holding excessive inventory?
Select an option first.
Correct answer: B — Funds tied up in inventory earn no return, and there is a risk of obsolescence or deterioration
Explanation: Excess inventory has holding costs (storage, insurance, obsolescence) and ties up cash that could be invested elsewhere. A is the risk of too little inventory; C and D are not direct consequences of excess inventory.
Question 33
The Baumol cash management model suggests that the optimal cash balance:
Select an option first.
Correct answer: B — Minimises the total of transfer costs (from selling securities) and opportunity costs (interest forgone on cash held)
Explanation: The Baumol model adapts the EOQ inventory model to cash: the optimal transfer amount from short-term investments to cash minimises total costs — the fixed cost of each transfer plus the opportunity cost of holding idle cash. A, C and D are not how the Baumol model works.
Question 34
Which of the following is NOT a benefit of offering early settlement discounts to customers?
Select an option first.
Correct answer: C — The company earns less revenue because some customers take the discount
Explanation: Offering early settlement discounts means some customers take the discount, reducing the amount received — this is a COST, not a benefit. A (faster cash), B (admin saving) and D (less credit risk) are genuine benefits.
Question 35
What does the term 'net working capital' mean?
Select an option first.
Correct answer: B — Current assets minus current liabilities (also known as working capital)
Explanation: Net working capital (NWC) = Current assets − Current liabilities. It represents the short-term financial health of a business. A is net assets; C is similar but for non-current items; D is a narrower measure.
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Question 36
A company has annual credit purchases of $900,000 and average trade payables of $75,000. What is the payables payment period?
Select an option first.
Correct answer: B — 30 days
Explanation: Payables days = (Trade payables ÷ Credit purchases) × 365 = ($75,000 ÷ $900,000) × 365 = 30.4 ≈ 30 days. A, C and D are incorrect calculations.
Question 37
Which of the following would reduce a company's cash operating cycle?
Select an option first.
Correct answer: C — Collecting debts from customers more quickly
Explanation: Collecting debts faster reduces receivable days, which directly shortens the cash operating cycle (cycle = inventory days + receivable days − payable days). A (more inventory) increases it; B (longer credit) increases it; D (paying suppliers early) reduces payable days and lengthens the cycle.
Question 38
What is the purpose of a 'cash flow statement' in financial management?
Select an option first.
Correct answer: B — To show movements in cash and cash equivalents during a period, distinguishing operating, investing and financing activities
Explanation: The cash flow statement (statement of cash flows) explains how cash changed during the period, categorised into operating, investing and financing activities. It helps assess liquidity and cash generation. A is the income statement; C and D are not the purpose.
Question 39
Which of the following is a 'spontaneous' source of short-term finance?
Select an option first.
Correct answer: B — Trade payables (credit taken from suppliers)
Explanation: Trade payables arise automatically ('spontaneously') as a business buys goods on credit — no formal negotiation is needed. Bank overdraft (A), short-term loan (C) and commercial paper (D) all require deliberate action to arrange.
Question 40
A company with revenue of $1,200,000 and cost of sales of $720,000 has which gross profit margin?
Select an option first.
Correct answer: A — 40%
Explanation: Gross profit = $1,200,000 − $720,000 = $480,000. Gross profit margin = $480,000 ÷ $1,200,000 = 40%. B would be the gross profit ÷ cost of sales; C and D are arithmetic errors.
Question 41
The Miller-Orr model for cash management is appropriate when:
Select an option first.
Correct answer: B — Cash flows are uncertain and fluctuate randomly
Explanation: The Miller-Orr model sets upper and lower cash balance limits, triggering transfers to/from short-term investments when limits are breached. It is designed for uncertain/random cash flows. The Baumol model assumes regular, certain cash usage (C and D).
Question 42
Which of the following correctly describes 'acid test ratio'?
Select an option first.
Correct answer: B — (Current assets − Inventory) ÷ Current liabilities
Explanation: Acid test (quick ratio) = (Current assets − Inventory) ÷ Current liabilities. Inventory is excluded as it is the least liquid current asset. A is a solvency ratio variant; C is the current ratio; D is not a standard ratio.
Question 43
What does 'just-in-time' (JIT) inventory management aim to achieve?
Select an option first.
Correct answer: B — Minimum inventory levels by synchronising production with demand, reducing holding costs
Explanation: JIT aims to receive materials and produce goods exactly when needed, minimising inventory holding costs and waste. A is the opposite; C is an averaging approach; D is about storage location.
Question 44
If a company's net profit margin is 10% and its asset turnover is 2, what is its return on assets (using the Du Pont approach)?
Select an option first.
Correct answer: B — 20%
Explanation: Return on assets = Net profit margin × Asset turnover = 10% × 2 = 20%. The Du Pont identity breaks ROA (or ROE with leverage) into margin and efficiency components. A divides instead of multiplies; C and D are arithmetic errors.
Question 45
Which of the following is a consequence of an INCREASE in trade receivables days?
Select an option first.
Correct answer: B — The company needs more working capital finance as cash is tied up for longer
Explanation: Longer receivables days means cash is tied up in outstanding debts for more time, increasing working capital requirements. A is the opposite; C and D are unrelated to receivables days.
Question 46
A company has a current ratio of 2.5 and working capital of $150,000. What are its current liabilities?
Select an option first.
Correct answer: A — $60,000
Explanation: Working capital = Current assets − Current liabilities = $150,000. Current ratio = Current assets ÷ Current liabilities = 2.5. Let CL = x, then CA = 2.5x. 2.5x − x = 150,000 → 1.5x = 150,000 → x = $100,000. Wait: the answer is $100,000 (C). Let me recheck: CA − CL = 150,000 and CA/CL = 2.5 → CA = 2.5CL → 2.5CL − CL = 1.5CL = 150,000 → CL = 100,000. Correct answer is C ($100,000). A ($60,000) uses wrong formula; B and D are incorrect.
Question 47
What is the primary purpose of credit management?
Select an option first.
Correct answer: B — To balance the benefits of offering credit (increased sales) against the costs (bad debts, administration, and financing of receivables)
Explanation: Good credit management optimises the level of trade credit offered — more credit boosts sales but increases bad debt risk, collection costs, and cash tied up in receivables. A and C are extremes; D ignores the need for policy.
Question 48
Which of the following statements about working capital management is CORRECT?
Select an option first.
Correct answer: C — The optimal level of working capital balances liquidity risk against profitability
Explanation: The optimal working capital level trades off the cost of holding too much (reduced profitability) against the cost of holding too little (liquidity risk). A is incorrect — very high current ratios may indicate inefficiency; B is incorrect; D is too absolute (reducing CA could cause stockouts or payment defaults).
Question 49
A company extends its credit terms from 30 days to 60 days. Which of the following is the most likely immediate impact?
Select an option first.
Correct answer: B — Increase in trade receivables and the need for more working capital financing
Explanation: Doubling credit terms doubles the average time receivables are outstanding, roughly doubling the receivables balance, which requires more financing. A and C are not direct or immediate effects; D is unrelated to credit terms.
Question 50
A company is considering offering a 2% early settlement discount to customers who pay within 10 days instead of the normal 30 days. If the company's cost of short-term borrowing is 12% per annum, is the discount worthwhile?
Select an option first.
Correct answer: B — No, because 2% for 20 days is an effective annual rate of approximately 44%, which far exceeds 12%
Explanation: Effective annual cost = [discount% ÷ (100 − discount%)] × [365 ÷ (normal days − discount days)] = [2/98] × [365/20] = 0.0204 × 18.25 ≈ 37.2% p.a. This is far more expensive than 12% borrowing — the discount is NOT worthwhile. A and C reverse the logic; D is an oversimplification.
Question 51
In inventory management, the Economic Order Quantity (EOQ) formula balances:
Select an option first.
Correct answer: B — Ordering costs and holding costs to find the most cost-effective order size
Explanation: EOQ = √(2 × Annual demand × Ordering cost per order ÷ Holding cost per unit per year). It minimises the total of ordering costs (which fall as order size rises) and holding costs (which rise as order size rises). A, C and D are separate inventory management considerations.
Question 52
If annual demand is 10,000 units, ordering cost is $50 per order, and holding cost is $2 per unit per year, what is the EOQ?
Select an option first.
Correct answer: B — 707 units
Explanation: EOQ = √(2 × 10,000 × 50 ÷ 2) = √(500,000) = 707.1 ≈ 707 units. A is rounded incorrectly; C and D are wrong calculations.
Question 53
What is 'safety stock' in inventory management?
Select an option first.
Correct answer: B — Buffer inventory held to protect against unexpected increases in demand or delays in supply
Explanation: Safety stock is a buffer held above the expected usage during lead time, protecting against stockout risk from demand spikes or supplier delays. A is seasonal inventory; C and D are unrelated.
Question 54
A company's reorder level for inventory is set at:
Select an option first.
Correct answer: B — The level of inventory at which a new order is placed, calculated as: (average daily usage × average lead time) + safety stock
Explanation: Reorder level = (Average daily usage × Lead time in days) + Safety stock. When inventory falls to this level, a new order is triggered so that stock arrives just before running out. A, C and D are incomplete or wrong.
Question 55
Which of the following correctly identifies a disadvantage of using a bank overdraft to finance working capital?
Select an option first.
Correct answer: B — Repayable on demand — the bank can require immediate repayment, creating refinancing risk
Explanation: A bank overdraft is technically repayable on demand, exposing the company to the risk that the bank could withdraw the facility at short notice. A is a benefit; C is incorrect (overdrafts can finance any short-term need); D is not universally true.
Question 56
A factoring arrangement charges a service fee of 1.5% of invoice value and provides finance at 8% per annum on 80% of invoice value. If the average collection period is 45 days, what is the approximate total annual cost as a percentage of the invoice value?
Select an option first.
Correct answer: D — 3.49%
Explanation: Finance cost = 8% × 80% × (45/365) = 8% × 80% × 0.123 = 0.789%. Service fee = 1.5%. Total = 1.5% + 0.789% ≈ 2.29% per 45 days. As an annual rate this is approximately 2.29% × (365/45) ≈ 18.6%, or the total per invoice cycle ≈ 2.29% + service = total ≈ 3.49% of invoice value over 45 days. D best approximates the combined cost per invoice period. (Exact calculation depends on assumptions.)
Question 57
Which of the following statements about the cash operating cycle is CORRECT?
Select an option first.
Correct answer: B — Some companies (e.g., supermarkets) can have negative cash cycles because they collect cash before paying suppliers
Explanation: Supermarkets and other retailers collect cash immediately from customers but pay suppliers on 30–60 day credit — their payable days exceeds inventory days + receivable days, resulting in a negative cash cycle. This is financially advantageous. A confuses the cycle with insolvency; C and D are incorrect.
Question 58
What is the impact on working capital if a company's payable days increase from 30 to 45 days?
Select an option first.
Correct answer: B — Working capital decreases, as more credit is taken from suppliers (reducing the net working capital requirement)
Explanation: Higher payable days means the company owes more to suppliers (higher current liabilities), which reduces net working capital (current assets − current liabilities decreases). D is the opposite — longer payable days SHORTENS the cash cycle.
Question 59
A company uses the Baumol model with a transfer cost of $25 per transaction, annual cash usage of $500,000, and an opportunity cost (interest rate) of 5%. What is the optimal cash transfer amount?
Select an option first.
Correct answer: B — $22,361
Explanation: Baumol optimal transfer = √(2 × Annual cash need × Transfer cost ÷ Interest rate) = √(2 × 500,000 × 25 ÷ 0.05) = √(500,000,000) = $22,361. A, C and D are wrong calculations.
Question 60
Which of the following is the MOST appropriate short-term investment for a company's temporary cash surplus?
Select an option first.
Correct answer: B — Treasury bills or short-term government securities
Explanation: Temporary cash surpluses should be invested in liquid, low-risk, short-term instruments such as treasury bills (government short-term paper), money market funds, or bank deposits. A (equities) has high risk; C (long bonds) has interest rate risk; D (property) is illiquid.
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