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ACCA Applied Skills · Financial Management · Determining working capital needs and funding strategies

Which of the following ratio movements, taken together, most strongly indicates overcapitalisation (excess working capital) rather than overtrading?

A rising current ratio with lengthening inventory and receivable days and high cash balances indicates overcapitalisation. It shows excess funds tied up in current assets, whereas falling liquidity, rising overdraft and stretched payables point to overtrading.

  1. ARising current ratio, lengthening inventory days and receivable days, and high cash balancesCorrect
  2. BFalling current ratio, shortening payables days and rising overdraft
  3. CRising revenue, falling quick ratio and rising payables days
  4. DFalling inventory days and falling receivable days with an increasing overdraft

Explanation

Overcapitalisation means too much is tied up in current assets: high liquidity ratios, slow inventory and receivables turnover and idle cash. The other options show tight liquidity and heavy short-term borrowing, which suggest overtrading.

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