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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 121
What is the relationship between the 'cash conversion cycle' and 'funding requirements'?
Select an option first.
Correct answer: B — A longer cash conversion cycle means more funding is tied up in working capital for longer, increasing the company's financing requirements
Explanation: The longer the cash cycle (inventory days + receivable days − payable days), the more working capital the company needs to finance at any given time. A is the opposite; C is wrong; D is incorrect.
Question 122
A company has total assets of $500,000, total liabilities of $200,000, and annual revenue of $800,000. What is its 'asset turnover ratio'?
Select an option first.
Correct answer: B — 1.6 times
Explanation: Asset turnover = Revenue ÷ Total assets = $800,000 ÷ $500,000 = 1.6 times. A inverts the formula; C uses net assets ($300,000); D uses revenue ÷ liabilities.
Question 123
What does a low 'inventory turnover ratio' indicate?
Select an option first.
Correct answer: B — Inventory is moving slowly — the company may have excess, obsolete, or slow-moving inventory
Explanation: Low inventory turnover (long inventory days) means goods stay in the warehouse longer than expected, tying up cash and risking obsolescence. A describes high turnover; C and D are incorrect.
Question 124
Which of the following is NOT a component of a 'cash flow forecast'?
Select an option first.
Correct answer: C — Depreciation charges
Explanation: Depreciation is a non-cash accounting charge and does not appear in a cash flow forecast. Cash forecasts include only actual cash in and out — receipts (A), supplier payments (B), capex (D), wages, tax, etc.
Question 125
A company is considering a bulk-purchase discount of 3% if it orders 12 months of inventory at once rather than monthly. What is the main trade-off?
Select an option first.
Correct answer: A — Reduced purchase price vs. higher holding costs (storage, insurance, opportunity cost of capital tied up)
Explanation: Bulk buying reduces the per-unit purchase cost (discount) but increases average inventory held (higher holding costs). The EOQ model helps find the optimal order quantity that minimises total cost. B oversimplifies; C and D are incorrect trade-offs.
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Question 126
What is 'window dressing' in the context of financial ratios and why is it a concern?
Select an option first.
Correct answer: B — Deliberately timing transactions to manipulate the balance sheet at year-end to make ratios (e.g., current ratio) appear more favourable — this misleads investors and analysts
Explanation: Window dressing: e.g., collecting receivables early before year-end to boost current assets, or repaying overdraft temporarily. This gives a misleading picture of the company's typical liquidity position. A, C and D are not window dressing.
Question 127
Which of the following illustrates 'overtrading' in a growing company?
Select an option first.
Correct answer: B — Rapidly growing sales funded by increasing overdraft and receivables, with inventory and payables also growing fast while long-term financing remains unchanged
Explanation: Overtrading: rapid growth strains working capital — receivables, inventory and payables all grow quickly, but the long-term capital base hasn't grown, leading to an increasingly stretched overdraft. A describes decline; C and D are healthy signs.
Question 128
What is the formula for 'return on equity' (ROE)?
Select an option first.
Correct answer: B — Net profit after tax ÷ Shareholders' equity × 100%
Explanation: ROE = Net profit after tax ÷ Shareholders' equity × 100%. It measures the return generated for equity holders. A is ROA (approximately); C is gross margin; D is ROCE.
Question 129
A supplier offers terms of '1/15 net 45'. If a company's cost of short-term borrowing is 8%, should it take the discount?
Select an option first.
Correct answer: B — No — effective annual cost of the discount ≈ [1/99] × [365/30] ≈ 12.3%, exceeding the 8% borrowing cost
Explanation: Effective annual cost = [1%/(100%−1%)] × [365/(45−15)] = [0.01/0.99] × [365/30] = 0.01010 × 12.167 = 12.3% p.a. This exceeds the 8% borrowing cost — taking the discount is more expensive than borrowing to pay early. A, C and D miss the comparison.
Question 130
What is the 'debtors turnover ratio' (receivables turnover)?
Select an option first.
Correct answer: B — Revenue ÷ Trade receivables — how many times per year receivables are converted to cash
Explanation: Receivables turnover = Revenue ÷ Trade receivables (times per year). Higher turnover = faster collection. A inverts; C uses cost of sales; D is asset turnover.
Question 131
Which of the following would SHORTEN the operating cycle of a manufacturing company?
Select an option first.
Correct answer: B — Implementing JIT to reduce raw material and WIP inventory holding
Explanation: Operating cycle = Raw material days + WIP days + Finished goods days + Receivable days − Payable days. JIT reduces inventory holding periods, shortening the cycle. A lengthens it (longer receivable days); C increases inventory; D increases WIP days.
Question 132
What is meant by a 'negative cash conversion cycle' and which type of companies commonly achieve this?
Select an option first.
Correct answer: B — A situation where a company collects cash from customers before it needs to pay suppliers — common in supermarkets and subscription businesses with strong buyer power over suppliers
Explanation: Negative CCC = payable days > inventory days + receivable days. Supermarkets (pay suppliers in 30–60 days but collect cash immediately) and subscription services are classic examples. This creates a 'cash machine' effect — growth actually generates cash. A and C are wrong; D is incorrect.
Question 133
In working capital management, what does 'permanent working capital' refer to?
Select an option first.
Correct answer: B — The minimum level of working capital that a business always maintains, regardless of seasonal fluctuations in activity — representing the core operational financing requirement
Explanation: Permanent working capital is the baseline level always required (minimum inventory, minimum receivables, minimum cash). It should be financed by long-term funds. Temporary/fluctuating working capital varies with seasonal demand. A and D are too absolute; C misdefines it.
Question 134
Which of the following best describes the 'conservative' funding strategy for working capital?
Select an option first.
Correct answer: B — Finance permanent current assets and some fluctuating current assets with long-term capital, reducing liquidity risk at the cost of higher financing expense
Explanation: Conservative approach: finance even some fluctuating current assets with long-term (stable, more expensive) funds. This maximises liquidity safety at the expense of profitability. A is aggressive; C is the matching approach for non-current assets; D is impractical.
Question 135
What does 'net present value' (NPV) measure?
Select an option first.
Correct answer: B — The present value of all future cash inflows minus the present value of all cash outflows, discounted at the required rate of return
Explanation: NPV = sum of (Cash flow_t ÷ (1+r)^t) for all time periods, minus the initial investment. A positive NPV means the project creates value for shareholders. A ignores time value of money; C is a different technique; D is a different measure.
Question 136
What is the payback period of a project with an initial investment of $100,000 that generates $25,000 per year?
Select an option first.
Correct answer: A — 4 years
Explanation: Payback period = Initial investment ÷ Annual cash flow = $100,000 ÷ $25,000 = 4 years. B, C and D are incorrect calculations.
Question 137
Which of the following is a major disadvantage of the payback period method of investment appraisal?
Select an option first.
Correct answer: B — It ignores cash flows occurring after the payback date and does not account for the time value of money
Explanation: The payback period ignores: (1) all cash flows after the payback date (so a project with a large terminal cash flow is undervalued), and (2) the time value of money (early cash flows are treated the same as later ones). A, C and D are incorrect or describe other limitations.
Question 138
The 'accounting rate of return' (ARR) or 'return on investment' is calculated as:
Select an option first.
Correct answer: B — Average annual profit ÷ Average investment (or initial investment) × 100%
Explanation: ARR = (Average annual accounting profit ÷ Average investment) × 100%, or sometimes using initial investment. A inverts the formula; C is the profitability index; D uses cash flow rather than profit.
Question 139
A project has the following cash flows: Year 0: −$50,000; Year 1: $20,000; Year 2: $20,000; Year 3: $20,000. Using a 10% discount rate, is the NPV positive or negative?
Select an option first.
Correct answer: A — Positive, approximately $710
Explanation: PV of annuity of $20,000 for 3 years at 10% = $20,000 × 2.487 = $49,740. NPV = $49,740 − $50,000 = −$260. Actually the annuity factor at 10% for 3 years is 2.487. NPV = $49,740 − $50,000 = −$260 (slightly negative). If using the 3-year annuity factor of 2.4869: NPV ≈ −$262. So NPV is slightly negative (B). Answer: B. Note: at exactly 10% discount rate with equal cash flows, the IRR must exceed 10% for NPV to be positive. Here the IRR ≈ 9.7%, so NPV is slightly negative.
Question 140
What is the 'internal rate of return' (IRR) of a project?
Select an option first.
Correct answer: B — The discount rate at which the NPV of the project equals zero
Explanation: The IRR is the discount rate that makes NPV = 0. If the IRR exceeds the cost of capital, the project is acceptable (creates value). A defines the 'hurdle rate'; C is ARR; D is the borrowing rate.
Question 141
A company requires a minimum return of 12% on its investments. A project has an IRR of 15%. What decision should be made?
Select an option first.
Correct answer: B — Accept, because the IRR exceeds the required return (hurdle rate)
Explanation: When IRR > cost of capital (hurdle rate), the project generates returns above the minimum required, creating shareholder value — it should be accepted. A and D are wrong; C ignores the comparison.
Question 142
Which of the following best describes the 'time value of money'?
Select an option first.
Correct answer: B — A dollar received today is worth more than a dollar received in the future because today's dollar can be invested to earn a return
Explanation: The time value of money (TVM) principle: a given sum is worth more now than the same sum in the future because it can be invested today to grow. B correctly states this. A is about inflation (related but different); C and D are other concepts.
Question 143
What is the present value of $10,000 to be received in 3 years, using a discount rate of 10%?
Select an option first.
Correct answer: A — $7,513
Explanation: PV = $10,000 ÷ (1.10)^3 = $10,000 ÷ 1.331 = $7,513. B is the future value; C and D are incorrect calculations.
Question 144
A perpetuity pays $5,000 per year forever. If the discount rate is 8%, what is the present value?
Select an option first.
Correct answer: B — $62,500
Explanation: PV of a perpetuity = Annual payment ÷ Discount rate = $5,000 ÷ 0.08 = $62,500. A, C and D are incorrect calculations.
Question 145
Which investment appraisal method is considered SUPERIOR for decision-making and why?
Select an option first.
Correct answer: C — NPV, because it considers all cash flows, accounts for the time value of money, and measures value creation directly in dollar terms
Explanation: NPV is theoretically superior: it considers ALL cash flows over the project's life, discounts for TVM, and gives a direct measure of value created in dollar terms. Payback (A) ignores TVM and post-payback flows; ARR (B) uses accounting profit not cash flow; IRR (D) has limitations (multiple IRRs, reinvestment assumption).
Question 146
What does a 'discount factor' represent?
Select an option first.
Correct answer: B — The present value of $1 received at a future point in time
Explanation: A discount factor = 1 ÷ (1+r)^t, representing what $1 receivable at time t is worth today at discount rate r. A, C and D are incorrect definitions.
Question 147
If a project has an initial investment of $80,000 and generates NPV of $12,000, what is the profitability index?
Select an option first.
Correct answer: B — 1.15
Explanation: Profitability index = (NPV + Initial investment) ÷ Initial investment = ($12,000 + $80,000) ÷ $80,000 = $92,000 ÷ $80,000 = 1.15. C gives the NPV ÷ investment ratio only; A, D are wrong.
Question 148
Which of the following is the formula for the future value of a sum invested today?
Select an option first.
Correct answer: B — FV = PV × (1 + r)^n
Explanation: FV = PV × (1 + r)^n, where r is the interest rate and n is the number of periods. A calculates PV not FV; C is simple interest only for one period; D is simple interest for one period only.
Question 149
What does 'capital rationing' mean in the context of investment appraisal?
Select an option first.
Correct answer: B — A situation where a company has insufficient capital to fund all positive-NPV projects and must choose which to prioritise
Explanation: Capital rationing means not all value-creating (positive-NPV) projects can be funded. The company must rank and prioritise projects. Divisible projects are ranked by profitability index; for indivisible projects, combinations are evaluated. A, C and D are incorrect.
Question 150
When appraising a project, which of the following cash flows should be EXCLUDED?
Select an option first.
Correct answer: C — Sunk costs already incurred before the decision
Explanation: Sunk costs are past expenditures that cannot be recovered regardless of the decision made. They are irrelevant to future decisions. Only future, incremental cash flows (A, B, D) are relevant. Opportunity costs (D) ARE relevant and should be included.
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