ACCA FM · Chapter 3 · Question 4 of 10
Which of the following is a typical symptom of overtrading?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) A rapid increase in revenue accompanied by a sharp rise in the bank overdraft and in payables days
Explanation
Overtrading (undercapitalisation) occurs when a business expands its sales too quickly without enough long-term finance to support the extra working capital. Symptoms include rapid revenue growth, rising inventory and receivables, increasing reliance on the overdraft and trade credit, and falling liquidity ratios. A high current ratio and large cash balances suggest over-capitalisation instead.
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