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Free Questions › ACCA › Financial Management
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 61
What effect does increasing inventory holding have on the cash conversion cycle?
Select an option first.
Correct answer: B — It lengthens the cycle
Explanation: Cash conversion cycle = Inventory days + Receivable days − Payable days. Increasing inventory raises inventory days, directly lengthening the cycle. A, C and D are incorrect.
Question 62
A company's annual sales are $2,400,000 and receivables are $200,000. What is the receivables turnover ratio?
Select an option first.
Correct answer: A — 12 times
Explanation: Receivables turnover = Revenue ÷ Trade receivables = $2,400,000 ÷ $200,000 = 12 times per year. B, C and D are incorrect calculations.
Question 63
What is the key difference between 'hard capital rationing' and 'soft capital rationing'?
Select an option first.
Correct answer: A — Hard rationing is imposed by external capital markets; soft rationing is internally imposed by management
Explanation: Hard capital rationing occurs when external capital markets will not provide funds (e.g., due to credit risk). Soft capital rationing is an internal management decision to limit capital expenditure despite funds being available. B, C and D are incorrect.
Question 64
A company factors its receivables and receives 80% of invoice value immediately. The remaining 20% is received (net of service charges) once customers pay. The main advantage of this arrangement is:
Select an option first.
Correct answer: B — Immediate cash inflow, improving liquidity without waiting for customers to pay
Explanation: Factoring accelerates cash receipt — the company gets 80% of invoice value immediately instead of waiting 30–60 days. D is wrong: in full factoring, the factor manages the sales ledger. A applies to confidential arrangements; C is wrong (factoring has finance charges).
Question 65
In the context of working capital management, what does 'aggressive' working capital policy mean?
Select an option first.
Correct answer: B — Holding minimal current assets to maximise returns, accepting higher liquidity risk
Explanation: An aggressive working capital policy minimises current assets (low inventory, tight credit control, minimal cash) to maximise asset efficiency, at the cost of higher liquidity risk. A and C are unrelated; D is one element but not the full definition.
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Question 66
Which of the following is a correct formula for the operating profit margin?
Select an option first.
Correct answer: B — EBIT ÷ Revenue
Explanation: Operating profit margin = EBIT (Earnings Before Interest and Tax) ÷ Revenue. A uses net profit (after tax and interest); C is gross profit margin (before operating expenses); D uses EBITDA and total assets (not a standard operating margin).
Question 67
A company has the following data: Inventory $50,000; Receivables $80,000; Cash $10,000; Payables $60,000; Overdraft $20,000. What is its current ratio?
Select an option first.
Correct answer: A — 1.75
Explanation: Current assets = $50,000 + $80,000 + $10,000 = $140,000. Current liabilities = $60,000 + $20,000 = $80,000. Current ratio = $140,000 ÷ $80,000 = 1.75. B, C and D are incorrect calculations.
Question 68
In credit policy, what does a '2/10 net 30' arrangement mean?
Select an option first.
Correct answer: B — A 2% discount is offered if payment is made within 10 days; otherwise the full amount is due within 30 days
Explanation: 2/10 net 30 is a standard discount notation: 2% discount if paid within 10 days; full (net) amount due within 30 days. A, C and D misread the notation.
Question 69
Which of the following statements about the quick ratio is CORRECT?
Select an option first.
Correct answer: C — The quick ratio removes inventory because it is less liquid than other current assets and may not be quickly convertible to cash
Explanation: The quick (acid test) ratio excludes inventory from current assets because inventory may take time to convert to cash and may not sell at full value. A and B are too absolute (context matters); D is only true if inventory is zero.
Question 70
What is the formula for calculating the number of days' inventory on hand?
Select an option first.
Correct answer: B — (Inventory ÷ Cost of sales) × 365
Explanation: Inventory days = (Inventory ÷ Cost of sales) × 365. This gives the average number of days inventory is held before being sold. A is the inventory turnover ratio (not in days); C is inventory turnover (times per year); D uses revenue instead of cost of sales.
Question 71
Which of the following BEST describes the purpose of a 'receivables ageing schedule'?
Select an option first.
Correct answer: B — To analyse trade receivables by how long they have been outstanding, helping identify overdue debts
Explanation: An ageing schedule lists outstanding invoices by age (e.g., 0–30 days, 31–60 days, 61–90 days, 90+ days), highlighting overdue balances for collection action. A is the sales ledger; C is a purchase ledger function; D misapplies EOQ.
Question 72
If a company increases its credit period from 30 to 60 days and as a result increases annual sales by $100,000 (from $500,000 to $600,000) with a contribution margin of 30%, what is the additional contribution from the increased sales?
Select an option first.
Correct answer: A — $30,000
Explanation: Additional contribution = Incremental sales × Contribution margin = $100,000 × 30% = $30,000. This must be weighed against the additional cost of carrying the higher receivables balance. B, C and D are wrong calculations.
Question 73
A company has the following data: Revenue $800,000; Variable costs $480,000; Fixed costs $150,000. What is the contribution margin ratio?
Select an option first.
Correct answer: C — 60%
Explanation: Contribution = Revenue − Variable costs = $800,000 − $480,000 = $320,000. Contribution margin ratio = $320,000 ÷ $800,000 = 40%. Wait — let me recalculate: ($800,000 − $480,000) / $800,000 = $320,000 / $800,000 = 0.40 = 40%. Correct answer is A (40%). C (60%) would be the variable cost ratio. B, D are wrong.
Question 74
What is meant by 'dynamic discounting' in working capital management?
Select an option first.
Correct answer: A — Offering varying discount rates to customers depending on how early they pay
Explanation: Dynamic discounting allows buyers to offer early payment to suppliers at a discount that increases the earlier the payment is made — a win-win for both liquidity (supplier) and return (buyer). B, C and D are incorrect uses of the term.
Question 75
Which of the following best describes the 'conservative' approach to current asset financing?
Select an option first.
Correct answer: B — Permanent and fluctuating current assets are financed with long-term capital, reducing liquidity risk at the expense of higher financing costs
Explanation: The conservative approach uses long-term (more expensive, more stable) finance for all current assets, minimising the risk that short-term funding is withdrawn. A is aggressive; C and D are partial descriptions.
Question 76
A company sells goods on credit with a 60-day collection period. It is considering offering a 1.5% discount for payment within 10 days. Its borrowing cost is 10% per annum. Should it offer the discount?
Select an option first.
Correct answer: B — No, because the effective annual cost of the discount (approximately 11.2%) is greater than the borrowing cost of 10%
Explanation: Effective annual cost ≈ [1.5/98.5] × [365/50] = 0.01523 × 7.3 = 11.12% p.a. This exceeds the 10% borrowing cost — so the discount is more expensive than borrowing; do NOT offer it. A ignores the time element; C and D are oversimplifications.
Question 77
Which of the following is NOT a motive for holding cash, according to Keynes?
Select an option first.
Correct answer: D — Profit motive
Explanation: Keynes identified three motives for holding cash: transactions (day-to-day payments), precautionary (unexpected needs), and speculative (to exploit investment opportunities). The 'profit motive' is not one of them — cash itself earns little or no return.
Question 78
A company has an inventory turnover of 6 times per year. What is the average inventory holding period?
Select an option first.
Correct answer: A — 60.8 days
Explanation: Inventory holding period = 365 ÷ Inventory turnover = 365 ÷ 6 = 60.8 days. B rounds the same answer; C gives the turnover ratio not the days; D is the full year.
Question 79
Which of the following is a characteristic of a company with HIGH working capital requirements?
Select an option first.
Correct answer: B — Significant inventory holdings, long production cycles, or selling goods on lengthy credit terms
Explanation: High working capital requirements arise when a business has long cash cycles — e.g., manufacturers with lengthy production, or businesses selling on extended credit. A, C and D describe low working capital requirements.
Question 80
The term 'window dressing' in financial reporting refers to:
Select an option first.
Correct answer: B — Manipulating year-end figures to make financial ratios appear more favourable than they really are
Explanation: Window dressing involves timing transactions near year-end to improve the appearance of the balance sheet (e.g., collecting receivables early to boost the current ratio, then allowing them to build up again). A is literal; C is legitimate disclosure; D is inventory management.
Question 81
In the Miller-Orr model, the 'return point' for cash balances is:
Select an option first.
Correct answer: B — One-third of the way between the lower and upper limits (lower limit + spread/3)
Explanation: The Miller-Orr return point = Lower limit + (1/3 × spread), where spread = 3/4 × (3 × variance × transaction cost ÷ interest rate)^(1/3). When the cash balance hits the upper limit, money is invested to bring it back to the return point; when it hits the lower limit, investments are liquidated. A, C and D are incorrect.
Question 82
Which of the following is the MOST significant limitation of using financial ratios to analyse a company?
Select an option first.
Correct answer: B — Ratios are based on historical data and may not reflect current or future performance
Explanation: Financial ratios are derived from past financial statements and do not capture forward-looking information, qualitative factors, off-balance sheet items, or the impact of economic changes. A, C and D are incorrect or exaggerated.
Question 83
What is meant by a 'zero balance account' in treasury management?
Select an option first.
Correct answer: B — A bank account that is automatically swept to zero each day, with the balance consolidated into a master account
Explanation: Zero balance accounts (ZBAs) allow subsidiaries to maintain separate accounts for payment purposes, but cash is automatically transferred to/from a central account daily to maintain a zero balance — improving central control and reducing idle balances. A, C and D are incorrect definitions.
Question 84
Which of the following represents the COST of offering trade credit to customers?
Select an option first.
Correct answer: B — Opportunity cost of funds tied up in receivables, plus bad debt risk and administration costs
Explanation: Offering trade credit has costs: the opportunity cost of financing the receivables balance (interest on borrowing or forgone investment return), bad debt write-offs, and credit control administration. A is the benefit; C and D are unrelated.
Question 85
A company is evaluating whether to change its credit policy. Currently, sales are $1,000,000, bad debts are 2%, and collection period is 30 days. Under the new policy, sales would rise to $1,200,000, bad debts would increase to 3%, and collection period would be 45 days. The contribution margin is 35% and cost of financing receivables is 10%. Should the new policy be adopted?
Select an option first.
Correct answer: C — Requires calculation of incremental contribution, incremental financing cost, and incremental bad debts to decide
Explanation: This requires comparing: incremental contribution = 35% × $200,000 = $70,000; incremental bad debts = (3% × $1,200,000) − (2% × $1,000,000) = $36,000 − $20,000 = $16,000; incremental financing cost = [($1,200,000 × 45/365 × 65% cost ratio) − ($1,000,000 × 30/365 × 65%)] × 10% — all must be compared. A and D are too simplistic; B only considers one factor.
Question 86
Using the EOQ model, what is the effect on the EOQ if annual demand doubles?
Select an option first.
Correct answer: B — EOQ increases by approximately 41%
Explanation: EOQ = √(2 × D × O ÷ H). If D doubles to 2D: new EOQ = √(2 × 2D × O ÷ H) = √2 × original EOQ ≈ 1.414 × original EOQ, an increase of about 41%. A, C and D are incorrect — the relationship is square root (not linear).
Question 87
A company can choose between two working capital policies: Policy A has current assets of $400,000 and current liabilities of $200,000; Policy B has current assets of $300,000 and current liabilities of $200,000. Policy A has ROCE of 15%; Policy B has ROCE of 18%. Which policy is more appropriate?
Select an option first.
Correct answer: B — Policy B, because it generates higher returns on capital employed, though with lower liquidity
Explanation: Policy B is more aggressive (lower working capital), generating a higher ROCE at the cost of lower liquidity. The choice depends on the company's risk tolerance. B correctly identifies the trade-off. A and D focus only on liquidity; C ignores profitability.
Question 88
In the context of supply chain finance, 'reverse factoring' (also called 'approved payables finance') benefits:
Select an option first.
Correct answer: B — Suppliers by allowing them to receive early payment from a finance provider, approved by the buyer, typically at the buyer's lower credit rating cost
Explanation: In reverse factoring, the buyer approves invoices and a finance provider pays suppliers early (at the buyer's credit rating — usually cheaper than the supplier's own rate). The supplier gets cash early; the buyer extends its effective payment terms. A and C are one-sided; D is incorrect.
Question 89
A company is evaluating the decision to buy or make a component. The make option has variable costs of $8 per unit, fixed costs of $50,000 per year (incremental), and requires 10,000 units per year. The buy option costs $14 per unit. Which is cheaper?
Select an option first.
Correct answer: B — Make, because total cost is $130,000 vs $140,000 to buy
Explanation: Make cost = (10,000 × $8) + $50,000 = $80,000 + $50,000 = $130,000. Buy cost = 10,000 × $14 = $140,000. Making is cheaper by $10,000. A ignores fixed costs; C is wrong (the fixed costs are stated as incremental — new costs if the component is made); D is incomplete.
Question 90
What is the 'average payment period' for trade payables and how does it relate to working capital management?
Select an option first.
Correct answer: B — It is the average number of days taken to pay suppliers, and extending it reduces the working capital requirement but may damage supplier relationships
Explanation: Longer payables days reduce net working capital (more supplier credit = lower current liabilities or higher payables) but may harm supplier relations, risk loss of discounts, or threaten supply continuity. A, C and D are incorrect.
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