ACCA FM · Chapter 4
Managing inventory, receivables and payables MCQs with Answers
12 multiple-choice questions on Managing inventory, receivables and payables for ACCA FM Financial Management. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A company uses 48,000 units of a component each year. Each order costs $150 to place and it costs $2.40 to hold one unit in inventory for a year. What is the economic order quantity (EOQ), to the nearest unit?
- A) 1,732 units
- B) 2,449 units
- C) 8,485 units
- D) 6,000,000 units
Show answer & explanation
Answer: B) 2,449 units
EOQ = square root of (2 x Co x D / Ch) = square root of (2 x 150 x 48,000 / 2.40) = square root of 6,000,000 = 2,449.5, which is 2,449 units to the nearest unit. Omitting the 2 gives 1,732 units, and forgetting to take the square root gives 6,000,000.
Question 2
A retailer sells 36,000 units of a product each year. Ordering costs are $80 per order and holding costs are $1.60 per unit per year. If the retailer orders the economic order quantity, what is the total annual ordering and holding cost?
- A) $1,518
- B) $3,036
- C) $4,554
- D) $6,072
Show answer & explanation
Answer: B) $3,036
EOQ = square root of (2 x 80 x 36,000 / 1.60) = 1,897 units. Annual ordering cost = 36,000 / 1,897 x 80 = $1,518; annual holding cost = 1,897 / 2 x 1.60 = $1,518. Total = $3,036. At the EOQ, ordering and holding costs are always equal. Using the full order quantity rather than average inventory for holding cost gives $4,554.
Question 3
A company buys 20,000 units a year at $10 each. Ordering costs are $200 per order and holding costs are $1.50 per unit per year (unaffected by the purchase price). The supplier offers a 2% discount on all units if each order is for at least 5,000 units. Compared with ordering the EOQ, what is the net annual saving from ordering 5,000 units at a time (to the nearest $)?
- A) $1,086
- B) $2,914
- C) $4,000
- D) $5,086
Show answer & explanation
Answer: B) $2,914
EOQ = square root of (2 x 200 x 20,000 / 1.50) = 2,309.4 units. Ordering and holding costs at the EOQ = (20,000/2,309.4 x 200) + (2,309.4/2 x 1.50) = $3,464. At 5,000 units: (20,000/5,000 x 200) + (5,000/2 x 1.50) = $4,550, an increase of $1,086. Discount saved = 20,000 x $10 x 2% = $4,000. Net saving = $4,000 - $1,086 = $2,914 (to the nearest $).
Question 4
Which of the following is an assumption of the basic economic order quantity (EOQ) model?
- A) Demand is known and constant throughout the year
- B) Bulk purchase discounts are available for large orders
- C) Holding cost per unit rises as the order size increases
- D) Lead time varies randomly from order to order
Show answer & explanation
Answer: A) Demand is known and constant throughout the year
The basic EOQ model assumes constant and known demand, a constant purchase price (no bulk discounts), constant ordering and holding costs per order and per unit, and no stockouts with a known lead time. Bulk discounts can be evaluated separately but are not part of the basic formula.
Question 5
Weekly usage of a raw material is between 300 and 500 units, averaging 400 units. The supplier lead time is between 2 and 4 weeks, averaging 3 weeks. At what inventory level should the company reorder in order to avoid any stockouts?
- A) 600 units
- B) 1,200 units
- C) 1,500 units
- D) 2,000 units
Show answer & explanation
Answer: D) 2,000 units
To be certain of avoiding stockouts, the reorder level must cover the maximum usage over the maximum lead time: 500 units x 4 weeks = 2,000 units. Average usage over the average lead time (1,200 units) would lead to stockouts whenever usage or lead time is above average.
Question 6
Which of the following is a feature of a just-in-time (JIT) inventory system?
- A) Production of goods in long runs to build up finished goods inventory
- B) Large buffer inventories held to guard against supply disruption
- C) Close relationships with a small number of reliable suppliers who deliver frequently in small batches
- D) Bulk purchasing to obtain quantity discounts
Show answer & explanation
Answer: C) Close relationships with a small number of reliable suppliers who deliver frequently in small batches
JIT aims to minimise inventory by receiving materials only as they are needed for production and producing only to meet demand. This requires dependable suppliers, frequent small deliveries and high quality. Buffer inventory, bulk buying and long production runs all increase inventory, which JIT seeks to avoid.
Question 7
A company currently allows customers 50 days' credit. It is considering offering a 1.5% early settlement discount for payment within 10 days. What is the effective annual cost of the discount, using compound interest and a 365-day year?
- A) 11.7%
- B) 13.7%
- C) 13.9%
- D) 14.8%
Show answer & explanation
Answer: D) 14.8%
Customers taking the discount pay 98.5 per 100 owed, 40 days earlier. The cost for 40 days is 1.5/98.5 = 1.523%. Annual compound cost = (100/98.5)^(365/40) - 1 = 14.79%, which is 14.8% to 1 decimal place. The simple-interest equivalent is 13.9%, and using 50 days instead of the 40-day acceleration understates the cost.
Question 8
A factor provides a 'with recourse' service. What does this mean?
- A) Customers are not told that their debts have been factored
- B) The factor bears the loss if a customer fails to pay
- C) The factor provides finance but does not manage the sales ledger
- D) The company bears the loss if a customer whose debt has been factored fails to pay
Show answer & explanation
Answer: D) The company bears the loss if a customer whose debt has been factored fails to pay
Under recourse factoring, the risk of bad debts remains with the client company: if a customer defaults, the factor recovers the amount advanced from the company. With non-recourse factoring the factor bears the bad debt risk, for a higher fee. Not telling customers is a feature of confidential invoice discounting.
Question 9
A company has annual credit sales of $7.3m and receivables of 70 days. A factor would reduce the collection period to 40 days for a fee of 1.5% of credit sales, and the company would save $90,000 a year in credit control costs. The company finances receivables with an overdraft costing 8% a year. The factor will not advance any finance. What is the annual net benefit or cost of using the factor (365-day year)?
- A) Net benefit of $28,500
- B) Net cost of $61,500
- C) Net benefit of $138,000
- D) Net cost of $19,500
Show answer & explanation
Answer: A) Net benefit of $28,500
Reduction in receivables = $7,300,000 x (70 - 40) / 365 = $600,000. Overdraft interest saved = $600,000 x 8% = $48,000. Administration saving = $90,000. Factor fee = $7,300,000 x 1.5% = $109,500. Net benefit = $48,000 + $90,000 - $109,500 = $28,500 (all figures exact).
Question 10
A supplier offers a 2% discount for payment within 15 days. The company currently pays after 60 days. What is the effective annual cost of NOT taking the discount, using compound interest and a 365-day year?
- A) 13.1%
- B) 16.2%
- C) 16.6%
- D) 17.8%
Show answer & explanation
Answer: D) 17.8%
By not taking the discount the company effectively borrows $98 for 45 extra days at a cost of $2. Annual cost = (100/98)^(365/45) - 1 = 17.81%, or 17.8% to 1 decimal place. If the company can borrow more cheaply than this, it should take the discount. 16.6% is the simple-interest equivalent.
Question 11
Which of the following correctly distinguishes invoice discounting from factoring?
- A) In invoice discounting the finance provider takes over the collection of debts
- B) Invoice discounting always transfers bad debt risk to the finance provider
- C) In invoice discounting the company keeps control of its sales ledger and collects the debts itself
- D) Invoice discounting provides no cash in advance of collection from customers
Show answer & explanation
Answer: C) In invoice discounting the company keeps control of its sales ledger and collects the debts itself
Invoice discounting is a way of raising finance against selected invoices: the provider advances a percentage of their value, while the company continues to administer its sales ledger and collect the debts, often without customers being aware. Factoring typically involves the factor taking over sales ledger administration and collection.
Question 12
Which of the following is the LEAST appropriate way for a company to manage the risk of a new credit customer failing to pay?
- A) Obtaining a credit reference from the customer's bank
- B) Reviewing the customer's published financial statements
- C) Setting an initial credit limit and reviewing it after a period of satisfactory trading
- D) Offering the customer a longer credit period than normal to encourage a first order
Show answer & explanation
Answer: D) Offering the customer a longer credit period than normal to encourage a first order
Credit risk is managed by assessing creditworthiness before granting credit (bank and trade references, credit agency reports and financial statements) and by controlling exposure through credit limits. Offering a new customer longer credit increases exposure to a customer whose reliability has not yet been established, so it increases rather than manages risk.