ACCA FM · Chapter 3 · Question 10 of 10
Which of the following is a characteristic of over-capitalisation in working capital?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Excessive inventories, receivables and cash leading to a low return on investment
Explanation
Over-capitalisation means the company holds more working capital than it needs, for example excessive inventory, generous credit to customers or idle cash. Liquidity ratios are high, but the return on capital employed is low because funds are tied up unproductively. The other options are symptoms of overtrading.
More Working capital: the cash operating cycle and ratios MCQs
- Q2A manufacturer provides the following annual data ($000): purchases of raw materials 2,190, cost of sales 3,650, credit sales 4,380…
- Q3A company has inventory of $450k, trade receivables of $380k, cash of $70k and current liabilities of $600k. What are its current ratio…
- Q4Which of the following is a typical symptom of overtrading?
- Q5Why is there said to be a conflict between the two main objectives of working capital management?
- Q6Which of the following, taken on its own, would SHORTEN a company's cash operating cycle?