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Interpretation of Financial StatementsSyllabus HInterpretation of Financial StatementsWorking Capital
ACCA · Question 10 · Interpretation of Financial Statements
Section A
ConsultCo, a management consultancy firm, has a receivables collection period of 45 days, a payables payment period of 30 days, and zero inventory. If ConsultCo manages to negotiate an extension of its payables payment period to 40 days without affecting its receivables, what will be the impact on its working capital cycle?
Section A
ConsultCo, a management consultancy firm, has a receivables collection period of 45 days, a payables payment period of 30 days, and zero inventory. If ConsultCo manages to negotiate an extension of its payables payment period to 40 days without affecting its receivables, what will be the impact on its working capital cycle?
Answer options:
A.
The working capital cycle will increase by 10 days.
B.
The working capital cycle will decrease by 10 days.
C.
The working capital cycle will remain unchanged.
D.
The working capital cycle will decrease by 40 days.
How to approach this question
Formula for Working Capital Cycle = Inventory Days + Receivables Days - Payables Days. Calculate the initial cycle, then the new cycle, and find the difference.
Full Answer
B.The working capital cycle will decrease by 10 days.✓ Correct
The working capital cycle measures how long cash is tied up in the business. It is calculated as Inventory Days + Receivables Days - Payables Days. Initially: 0 + 45 - 30 = 15 days. After negotiation: 0 + 45 - 40 = 5 days. The cycle has decreased by 10 days, meaning cash is tied up for a shorter period.
Common mistakes
Adding payables days instead of subtracting them.
Practice the full ACCA FA — Financial Accounting Practice Exam 6
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