ACCA Applied Skills · Financial Management · The nature, elements and importance of working capital
Which of the following is a symptom of overtrading?
Overtrading shows as rapid sales growth funded mainly by short-term credit and overdrafts, causing deteriorating liquidity ratios. It arises because growth outstrips the long-term finance available, unlike overcapitalisation, which involves excess cash and idle resources.
- ARapid sales growth financed mainly by short-term credit and an overdraft, with falling liquidity ratiosCorrect
- BFalling sales, rising cash balances and falling inventory
- CLarge cash balances and low receivables days with high long-term equity funding
- DReduced inventory levels financed by a new share issue
Explanation
Overtrading occurs when a business expands faster than its long-term capital base supports, relying on suppliers and overdrafts, so liquidity ratios deteriorate. The other options describe contraction or overcapitalisation, which are the opposite situation.
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