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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 91
Which of the following financing strategies is MOST appropriate for a company with highly seasonal sales?
Select an option first.
Correct answer: B — Using a combination of long-term finance (for permanent working capital) and flexible short-term finance (e.g., overdraft) for seasonal peaks
Explanation: Seasonal businesses need flexible financing — long-term funds for the permanent base of current assets, and variable short-term borrowing (overdraft) for seasonal peaks. A is inflexible and expensive; C ignores debt; D ignores the seasonal fluctuation.
Question 92
In evaluating a change in credit terms, which of the following costs and benefits must be considered?
Select an option first.
Correct answer: B — Incremental contribution from increased sales, incremental bad debts, incremental financing cost of receivables, and incremental administration costs
Explanation: A full credit policy analysis compares all incremental costs (financing, bad debts, administration) against incremental benefits (contribution margin on additional sales). A, C and D each consider only one factor.
Question 93
A company has a receivables balance of $150,000 (all on 60-day terms). It is offered a non-recourse factoring arrangement charging 1% per month on the advance of 85% of receivables, plus a service fee of 0.5% of invoice value. The company currently spends $8,000 per year on credit control. What annual saving or cost arises from factoring?
Select an option first.
Correct answer: B — The net cost or saving depends on whether the annual finance charge plus service fee exceeds the administration saving of $8,000
Explanation: Annual calculation: Advance = 85% × $150,000 × (60/30 average) = variable; finance charge = 1% per month on advance; service fee = 0.5% × annual invoices. Compare against $8,000 admin saving plus any bad debt savings. The outcome depends on specific numbers — B correctly identifies that a full comparison is needed. A and C are too absolute; D is only true for non-recourse factoring.
Question 94
Which of the following best describes 'supply chain financing' from the perspective of a large buyer company?
Select an option first.
Correct answer: B — It enables the buyer to extend its effective payment terms to suppliers while allowing suppliers to access early payment from a third-party finance provider
Explanation: Supply chain finance (reverse factoring) lets the buyer keep goods/services on credit for longer while the supplier gets paid early by a bank/finance house (at the buyer's favourable credit rate). A, C and D misrepresent how it works.
Question 95
The reorder level formula is: (Maximum usage × Maximum lead time). What does this formula produce?
Select an option first.
Correct answer: C — The level at which inventory should be reordered to avoid stockouts even in worst-case conditions
Explanation: Reorder level (maximum method) = Maximum daily usage × Maximum lead time. This ensures that even if demand is at its highest and delivery takes longest, inventory will not run out before the order arrives. A is EOQ; B describes the maximum inventory level; D is safety stock (the buffer above the average).
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Question 96
If the cost of capital is 12% per annum, what is the approximate daily holding cost of carrying $1 of inventory?
Select an option first.
Correct answer: B — 0.032877 cents per day ($0.12/365 = $0.0003288 ≈ 0.03 cents)
Explanation: Daily holding cost per $1 = 12% ÷ 365 = $0.001205 per dollar of inventory per day, or approximately 0.033 cents per day. More precisely: $0.12 ÷ 365 = $0.000329 per day ≈ 0.033 cents. B is the best approximation. A is slightly different rounding; C and D are wrong.
Question 97
A company has working capital of $200,000. It increases its inventory by $50,000, financed by an overdraft. What happens to working capital?
Select an option first.
Correct answer: B — Working capital is unchanged
Explanation: Working capital = Current assets − Current liabilities. Inventory (CA) increases by $50,000 and overdraft (CL) increases by $50,000 → net effect on working capital = +$50,000 − $50,000 = $0. Working capital is unchanged. A, C and D are incorrect.
Question 98
In treasury management, what does 'netting' mean?
Select an option first.
Correct answer: B — Consolidating inter-company transactions so that only the net amount between group companies is settled, reducing the volume and cost of transactions
Explanation: Netting in treasury management (bilateral or multilateral) offsets payments due between group entities, so only the net balance is transferred — reducing the number of transactions, foreign exchange costs, and settlement risk. A is an accounting concept; C and D are different treasury functions.
Question 99
The 'matching principle' in asset financing means that:
Select an option first.
Correct answer: B — The duration of the finance should be matched to the life of the asset — long-term assets financed by long-term funds, short-term assets by short-term finance
Explanation: The matching (or hedging) approach to financing states that long-term assets (non-current and permanent current assets) should be financed by long-term capital, while fluctuating current assets can be financed short-term. A and C are wrong; D is a copying approach, not the matching principle.
Question 100
What is the key advantage of 'centralised treasury management' over decentralised treasury management?
Select an option first.
Correct answer: B — It allows pooling of cash balances across the group, potentially eliminating the need for individual subsidiaries to borrow at high rates while others hold surplus cash
Explanation: Centralised treasury allows cash pooling — surplus in one subsidiary offsets a deficit in another, reducing overall external borrowing. It also concentrates expertise and achieves better rates from bulk dealing. A is a benefit of decentralisation; C is a consequence; D overstates (currency risk is managed, not eliminated).
Question 101
In the context of the Miller-Orr model, what happens when the cash balance reaches the UPPER limit?
Select an option first.
Correct answer: B — A portion of cash is invested in short-term securities to bring the balance back down to the return point
Explanation: When cash hits the upper limit in the Miller-Orr model, the excess cash (upper limit − return point) is invested in short-term securities, bringing the balance back to the return point. A describes the lower limit event; C and D are not part of the model.
Question 102
Which of the following statements about the 'aggressive' working capital policy is MOST accurate?
Select an option first.
Correct answer: B — It maximises profitability by holding minimum current assets, but increases the risk of stockouts, delayed payments, and potential insolvency
Explanation: The aggressive policy (minimum CA, financed short-term) improves profitability but increases liquidity risk — if demand spikes or credit is withdrawn, the company may face crisis. A overstates; C and D are incorrect.
Question 103
A company has the following: annual sales $3,000,000; receivables $250,000; payables $150,000; inventory $200,000; cost of sales $2,100,000. What is its cash conversion cycle (in days)?
Select an option first.
Correct answer: B — Approximately 47 days
Explanation: Receivable days = (250/3,000) × 365 = 30.4 days. Inventory days = (200/2,100) × 365 = 34.8 days. Payable days = (150/2,100) × 365 = 26.1 days. CCC = 30.4 + 34.8 − 26.1 = 39.1 ≈ 39 days. Closest is A (38 days). Note: using credit sales or cost of sales for receivables/payables affects the answer slightly. Using revenue for receivables: 30.4 days; cost of sales for payables: 26.1 days → CCC ≈ 39 days. A is the closest correct answer.
Question 104
What is meant by 'accounts receivable securitisation'?
Select an option first.
Correct answer: B — Pooling trade receivables and selling them to a special purpose vehicle which issues asset-backed securities to investors, providing immediate cash
Explanation: Securitisation involves pooling large volumes of receivables and converting them into tradeable securities backed by those receivables. It is a capital market-based alternative to factoring, typically used by large companies with significant receivables portfolios. A is pledging (different from securitisation); C is credit insurance; D is factoring.
Question 105
Which of the following CORRECTLY identifies how overtrading manifests on the balance sheet?
Select an option first.
Correct answer: B — Rapidly growing receivables and inventory relative to long-term financing, often with a high and growing overdraft
Explanation: Overtrading creates a classic pattern: revenue grows quickly, but receivables and inventory grow even faster (more working capital needed), financed by an expanding overdraft. Long-term capital has not kept pace with growth. A is opposite; C and D don't describe overtrading.
Question 106
A company has the following: beginning receivables $80,000; end receivables $100,000; credit sales $600,000. What are cash collections from customers?
Select an option first.
Correct answer: A — $580,000
Explanation: Cash collected = Opening receivables + Credit sales − Closing receivables = $80,000 + $600,000 − $100,000 = $580,000. B adds the difference instead of subtracting; C and D are wrong.
Question 107
In working capital management, what is 'spontaneous financing'?
Select an option first.
Correct answer: B — Trade credit that arises automatically as a result of conducting business — no formal arrangement is required
Explanation: Spontaneous (or automatic) financing arises naturally from business operations — primarily trade payables (buying on credit from suppliers) and accruals. No formal credit agreement is needed. A, C and D require deliberate action.
Question 108
If a company has a high current ratio (e.g., 4:1) but a low quick ratio (e.g., 0.8:1), this most likely indicates:
Select an option first.
Correct answer: B — The company holds a very large amount of inventory relative to its other current assets, which may indicate slow-moving stock
Explanation: A high current ratio but low quick ratio (after removing inventory) indicates the current assets are dominated by inventory. This could mean slow-moving, overvalued, or obsolete stock — a potential liquidity problem. A, C and D are incorrect interpretations.
Question 109
What is the opportunity cost of holding inventory, and why does it matter in the EOQ calculation?
Select an option first.
Correct answer: B — The return forgone by having cash tied up in inventory rather than invested elsewhere; it is the holding cost component in the EOQ formula
Explanation: In the EOQ formula, the holding cost (H) per unit per year includes the opportunity cost of capital tied up in inventory. This is a key component: as order size increases, average inventory rises, and so does the opportunity cost. A, C and D are other costs but not specifically the 'opportunity cost' component.
Question 110
What is the primary difference between 'profit' and 'cash flow'?
Select an option first.
Correct answer: B — Profit is based on accruals accounting (recognising revenue when earned and costs when incurred); cash flow is the actual movement of cash in and out of the business
Explanation: A profitable company can still run out of cash (e.g., due to long receivables days, heavy capital expenditure). Cash flow reflects actual cash movements; profit adjusts for timing (accruals, prepayments) and non-cash items (depreciation). A is wrong; C is not always true; D is incorrect.
Question 111
Which of the following is a NON-CASH item that reduces reported profit but does NOT affect operating cash flow?
Select an option first.
Correct answer: B — Depreciation of a fixed asset
Explanation: Depreciation is a non-cash accounting charge — it reduces profit but involves no cash outflow. In a cash flow statement, depreciation is added back to operating profit to convert it to operating cash flow. A, C and D are actual cash payments.
Question 112
A company's profit after tax is $150,000. Depreciation is $30,000, receivables increased by $20,000, inventory decreased by $10,000, and payables increased by $15,000. What is the operating cash flow?
Select an option first.
Correct answer: A — $185,000
Explanation: Operating cash flow = Profit + Depreciation + Decrease in inventory + Increase in payables − Increase in receivables = $150,000 + $30,000 + $10,000 + $15,000 − $20,000 = $185,000. B ignores adjustments; C and D are wrong calculations.
Question 113
What does the 'free cash flow' of a company represent?
Select an option first.
Correct answer: B — Operating cash flow less capital expenditure required to maintain the business — the cash available for distribution to investors (debt and equity)
Explanation: Free cash flow (FCF) = Operating cash flow − Capital expenditure (maintenance). It represents the cash a business generates that is available to repay debt, pay dividends, or reinvest. A is dividends; C is cash balance; D is not a financial term.
Question 114
Which of the following ratios measures a company's ability to service its debt from operating cash flows?
Select an option first.
Correct answer: B — Operating cash flow ÷ Total debt — the cash flow to debt ratio
Explanation: Cash flow to debt ratio = Operating cash flow ÷ Total debt. A higher ratio indicates better ability to repay debt from internally generated cash. A measures short-term liquidity; C measures profitability; D measures credit management efficiency.
Question 115
What is the impact on working capital of paying a trade creditor?
Select an option first.
Correct answer: B — Working capital is unchanged (cash decreases but payables decrease by the same amount, both current items)
Explanation: Paying a creditor: cash (current asset) decreases; trade payable (current liability) decreases by the same amount. The net effect on working capital (CA − CL) = −x − (−x) = 0. A, C and D are wrong.
Question 116
A company has revenue of $2,000,000, cost of sales of $1,400,000, and operating expenses of $300,000. What is the operating profit margin?
Select an option first.
Correct answer: B — 15%
Explanation: Operating profit = $2,000,000 − $1,400,000 − $300,000 = $300,000. Operating profit margin = $300,000 ÷ $2,000,000 = 15%. A uses gross profit; C is gross profit margin; D is incorrect.
Question 117
Which of the following is a 'liquid asset'?
Select an option first.
Correct answer: C — A bank current account balance
Explanation: Liquid assets are those quickly and easily converted to cash at or near their book value. A bank current account (C) is the most liquid asset. A, B and D take time to sell and may lose value on quick disposal.
Question 118
What does a rising 'gearing ratio' suggest about a company's financial position?
Select an option first.
Correct answer: B — The company is taking on more debt relative to equity, increasing financial risk and fixed interest obligations
Explanation: A rising gearing ratio means more debt in the capital structure. This increases financial risk (fixed interest payments, higher default risk) but may also increase EPS if ROCE > cost of debt. A, C and D are incorrect.
Question 119
Which of the following BEST explains why a company might choose to hold a cash surplus rather than invest all excess funds?
Select an option first.
Correct answer: B — To maintain flexibility and meet unexpected obligations (precautionary motive) or exploit investment opportunities (speculative motive)
Explanation: Companies hold cash for: transactions (day-to-day payments), precautionary (unexpected needs), and speculative (investment opportunities) motives. The opportunity cost of holding cash is the foregone return from investment. A, C and D are incorrect.
Question 120
In a 'just-in-time' (JIT) production system, which of the following is a KEY RISK?
Select an option first.
Correct answer: B — Supply chain disruptions can halt production because there is no buffer inventory
Explanation: JIT eliminates buffer inventory, making the company highly vulnerable to any supply disruption (late delivery, supplier failure). This is JIT's main operational risk. A, C and D describe problems JIT is designed to solve.
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