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ACCA Applied Knowledge · Financial Accounting · Analysis of financial statements

Which of the following changes would most likely be a sign of overtrading in a growing company?

Rapid revenue growth funded by a rising overdraft and longer payables days with a falling current ratio signals overtrading. The business is expanding beyond its long-term capital and relying on short-term finance, which strains liquidity.

  1. ARapid revenue growth funded by a rising bank overdraft and stretched payables days, with a falling current ratioCorrect
  2. BFalling revenue with a growing cash balance and shortening receivables days
  3. CRising revenue funded by a new issue of long-term equity, with a rising current ratio
  4. DStable revenue with falling inventory days and reducing payables

Explanation

Overtrading occurs when a business expands faster than its capital base supports, so it relies on short-term finance such as overdrafts and suppliers, and liquidity ratios decline. The other options show stable or well-financed positions.

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