ACCA Applied Knowledge · Business and Technology · Accounting and finance functions within business organisations
A retailer's finance director notes that profit is high but the bank balance is falling rapidly, as inventory and receivables have grown fast. Which term best describes this situation?
The situation is overtrading. The business is growing sales quickly, but inventory and receivables absorb cash faster than profits generate it, so liquidity falls despite high profit. Window dressing concerns misleading presentation, and capital rationing concerns limits on investment funds, neither of which describes this.
- AOvertradingCorrect
- BWindow dressing
- CCapital rationing
Explanation
Overtrading occurs when a business expands sales faster than its working capital funding, so profitable growth ties up cash in inventory and receivables and causes liquidity problems. Window dressing is manipulating reported figures, and capital rationing is a limit on funds for investment projects.
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