ACCA FM · Chapter 3 · Question 5 of 10
Why is there said to be a conflict between the two main objectives of working capital management?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Holding more current assets improves liquidity but reduces profitability because of the cost of funding them
Explanation
The objectives of working capital management are profitability and liquidity. Higher inventories, receivables and cash make it easier to meet obligations as they fall due, but these assets must be financed and generate little or no return, so profitability falls. Lower levels improve profitability but increase liquidity risk.
More Working capital: the cash operating cycle and ratios MCQs
- Q7A company's credit sales for the year were $4.8m and its trade receivables at the year end were $720k. What is the trade receivables…
- Q8A company expects revenue to increase from $10m to $12m next year. Cost of sales is 70% of revenue. It will maintain receivables at 45…
- Q9A company made credit purchases of $2.92m during the year and its cost of sales was $3.65m. Trade payables were $280k at the start of the…
- Q10Which of the following is a characteristic of over-capitalisation in working capital?
- Q1Extracts from a company's financial statements show: revenue (all on credit) $7,300k, cost of sales $5,110k, inventory $840k, trade…