28 A company's liquidity (quick or acid test) ratio, which includes receivables, cash and

payables, is 0.5.
Consideration is being given to two changes:
Proposal 1 offer a 2% cash discount to customers for early settlement,
Proposal 2 delay payment to all suppliers.
All other things being equal, what will be the effects of the proposed change on the
liquidity ratio?
Proposal 1
A Increase
B Decrease
C No change
Proposal 2
D Increase
E Decrease
F No change LO 2e

29 If an increase in inventory levels is funded by an increase in the bank overdraft, what will be
the effect on the quick (liquidity) ratio?
A Increase
B Decrease
C Remain the same
D Increase, decrease or remain the same depending on the initial size of the quick ratio
LO 2e

30 A company has a current ratio greater than 1:1 and a quick (liquidity) ratio less than 1:1. If
the company uses cash to reduce trade payables, how will these payments affect each of
the ratios?
Current ratio
A Increase
B Decrease
C No change
Quick (liquidity) ratio
D Increase
E Decrease
F No change LO 2e

84 Management Information: Question Bank ICAEW 2019

 31 A retailing company's current assets and current liabilities consist of inventory at cost
£2,100, receivables, cash and trade payables. Its financial ratios include the following:
Quick (liquidity) ratio 2:1
Rate of inventory turnover 10 times p.a.
Gross profit margin 30%
Receivables collection period 1 month
Payables payment period 1.6 months
The opening inventory, receivables and payables balances are the same as the closing
balances.
The closing cash in hand balance will be
A £3,100
B £2,170
C £1,000
D £100 LO 2e

32 Fenton Ltd's projected revenue for 20X1 is £350,000. It is forecast that 12% of sales will
occur in January and remaining sales will be equally spread among the other 11 months. All
sales are on credit. Receivables accounts are settled 50% in the month of sale, 45% in the
following month, and 5% are written off as bad debts after two months.
The budgeted cash collections for March are
A £24,500
B £26,600
C £28,000
D £32,900 LO 2e

33 A retail company extracts the following information from its accounts at 30 June 20X6:
£
Average inventory 490,000
Average receivables 610,000
Average payables 340,000
Cost of sales 4,500,000
Purchases 4,660,000
Gross profit margin 32%
The number of days in the company's cash operating cycle is
A 34 days
B 44 days
C 47 days
D 51 days LO 2f

ICAEW 2019 Chapter 7: Working capital 85

 34 Fraser Ltd manufactures leather bags. The company buys raw materials from suppliers that
allow the company 2.5 months credit. The raw materials remain in inventory for 1 month
and it takes Fraser Ltd 2 months to produce the goods, which are sold immediately
production is completed. Customers take an average 1.5 months to pay.
Fraser Ltd's cash operating cycle is
A 1 month
B 1.5 months
C 2 months
D 6 months LO 2f

35 Trant plc has a two-stage trading process:

Stage 1: buy a large quantity of goods on credit
Stage 2: immediately sell them on credit at a profit
Which of the following will increase after Stage 1?
A Receivables and inventory
B Current assets and non-current assets
C Payables and cash
D Current assets and current liabilities LO 2g

36 Merlion plc is an international company based in Malaysia. It manufactures and sells items
for a wide variety of outdoor leisure pursuits including wind surfing, camping and mountain
biking. A summary of the ratios provided by the chief accountant is as follows:
Ratio 20X4 20X5 20X6
Receivables collection period 49 days 38 days 35 days
Payables payment period 51 days 35 days 30 days
Inventory turnover period 23 days 25 days 29 days
What are the figures for Merlion plc's cash operating cycle for each of the three years?
Cash operating cycle in 20X4
A 21 days
B 28 days
C 34 days
Cash operating cycle in 20X5
D 21 days
E 28 days
F 34 days
Cash operating cycle in 20X6
G 21 days
H 28 days
I 34 days LO 2g

86 Management Information: Question Bank ICAEW 2019

 37 Shrier plc is trying to decide on its optimal level of current assets. The company's
management face a trade-off between
A profitability and risk
B liquidity and risk
C equity and debt
D short-term and long-term borrowing LO 2g

38 If a business is suffering from liquidity problems, the aim must be to reduce the length of
the cash operating cycle. Which three of the following actions would achieve this?
A Reducing the credit period extended to receivables
B Reducing the payables payment period
C Extending the period of credit taken from suppliers
D Reducing the production period
E Extending the inventory holding period LO 2g

39 Albert's Autos is a small garage providing car servicing. Business is good, there is a steady
stream of income from repeat customers and breakdown recoveries. There are no
significant cash reserves and there is no need for an overdraft. Now the organisation that
passes on most of the breakdown recovery work offers Albert a contract to supply recovery
services over a 50-mile radius. It is seeking 60 days credit rather than Albert's usual 30 days.
Albert is keen but has been warned to look for signs of overtrading.
Which two of the following are most likely to be symptoms of overtrading?
A A lengthening of the cash operating cycle
B A rapid reduction in sales
C Increase in the level of the current ratio
D A rapid increase in sales
E A shortening of the cash operating cycle LO 2g

40 Apart from the actual cost of buying inventory, there are other inventory costs to consider.
Which two of the following are inventory holding costs?
A Clerical and administrative expenses
B Insurance
C Opportunity cost of capital tied up
D Production stoppages due to lack of raw materials
E The cost of inventory packaging materials LO 2g

ICAEW 2019 Chapter 7: Working capital 87

 41 The different functions within a company (finance, production, marketing, etc) often have
differing views about what is an 'appropriate' level of inventory. Essentially, two inventory
problems need to be answered – how much to order and when to order?
If we order inventory more frequently which of the following can we expect?
A Lower ordering costs and lower average inventory
B Lower ordering costs and higher average inventory
C Higher ordering costs and lower average inventory
D Higher ordering costs and higher average inventory LO 2g

2cd
42 The Economic Order Quantity (EOQ) can be expressed as follows:
h
What does h describe in this formula?
A The cost of holding one unit of inventory for one period
B The cost of placing one order
C The cost of a unit of inventory
D The customer demand for the item LO 2g

43 Fruit & Nut Ltd is re-evaluating its inventory control policy. Its daily demand for wooden
boxes is steady at 40 a day for each of the 250 working days (50 weeks) of the year. The
boxes are currently bought weekly in batches of 200 from a local supplier for £2 each. The
cost of ordering the boxes from the local supplier is £64 per order, regardless of the size of
the order. The inventory holding costs, expressed as a percentage of inventory value, are
2cd
25% pa. The Economic Order Quantity (EOQ) can be expressed as follows:
h
Identify the correct EOQ
A 101 boxes
B 253 boxes
C 1,600 boxes
D 2,262 boxes LO 2g

44 Kate Osmond works for a company manufacturing industrial fasteners, so the company has
several thousand types of inventory item. The company wants to introduce a new inventory
control system and Kate is reviewing what is available.
Identify the most suitable system for an organisation with so many inventory items.
A Re-order level system
B Periodic review system
C ABC system
D Just-in-time system LO 2g

88 Management Information: Question Bank ICAEW 2019

 45 The key trade-off that lies at the heart of working capital management is that between
A business stability and solvency
B debtors and creditors
C current assets and current liabilities
D liquidity and profitability LO 2g

46 Identify whether the following tasks are normally undertaken by the treasury department of
a large business.
Credit control
A Yes
B No
Short-term investment
C Yes
D No
Capital investment appraisal
E Yes
F No LO 2g

47 Total usage of one item of Archer Ltd's inventory for the next month is estimated to be
100,000 units. The costs incurred each time an order is placed are £180. The carrying cost
per unit of the item each month is estimated at £2. The purchase price of each unit is £4.
The economic order quantity formula is:

(2cd) /h

When using this formula to find the optimal quantity to be ordered, identify the amounts
that are included in the calculation.
Cost per order (£180)
A Included
B Not included
Carrying cost per unit per month (£2)
C Included
D Not included
Purchase price per unit (£4)
E Included
F Not included LO 2g

ICAEW 2019 Chapter 7: Working capital 89

 48 Rust Ltd invoices customers at the beginning of the month following the month in which a
sale is made. All of the cash to be received in respect of these invoices occurs within two
calendar months of invoicing. The company receives in cash 45% of the total gross sales
value in the month of invoicing. Because Rust Ltd operates in a market where there is poor
creditworthiness bad debts are 20% of total gross sales value, but there is a 10% discount
for settling accounts within a calendar month of invoicing.
What percentage of the sales invoiced in the first month will be received as cash in the
second month by Rust Ltd?
A 55.0%
B 35.0%
C 39.5%
D 30.0% LO 2g

49 Youri plc has the following opening and closing balances on its trade receivables budget
for next year, 20X7:
£
Opening balance on trade receivables (invoiced on 31 December 20X6) 56,000
Closing balance on trade receivables (invoiced on 30 November 20X7) 72,000
In 20X7 credit sales are expected to be £276,000. The company offers a 10% discount on all
amounts paid within one month of the invoice date. In 20X7 the company expects 50% of
eligible trade customers to take advantage of this discount.
How much cash does Youri plc expect to receive from customers during the year?
A £247,000
B £243,400
C £260,000
D £276,000 LO 2g

90 Management Information: Question Bank ICAEW 2019

Chapter 8: Performance management
1 Shown below is a diagram of a simple control cycle. What should be in the box marked 'X'?

Measure
Resources Operations
outputs

Control action

Monitor
X
and control

A Feedback
B Fixed costs
C Activity levels
D Budgets and standards LO 3a

2 Which of the following is not a feature of effective feedback reports?

A Made available in a timely fashion
B Produced on a regular basis
C Distributed to as many managers as possible
D Sufficiently accurate for the purpose intended LO 3a

3 Which of the following describes exception reporting?

A Reporting of exceptional activities within an organisation
B Reporting only controllable matters to managers
C Reporting only of variances which exceed a certain value
D Reporting of all variances to the relevant manager LO 3a

4 Which two of the following statements about management control reports are correct?
A Reports should be completely accurate.
B Reports should be clear and comprehensive.
C Reports should not include information about uncontrollable items.
D Based on the information contained in reports, managers may decide to do nothing.
LO 3a

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 5 Which of the following is not an example of budget bias?
A A manager overestimates costs when setting the budget, to guard against
overspending during the period.
B A manager's advertising budget is disproportionately large in comparison with the
budgeted revenue to be generated.
C A manager underestimates revenues when setting the budget to ensure that the
budget target can be easily exceeded.
D A manager overestimates revenues when setting the budget in order to make a
favourable impression on senior managers. LO 3a

6 Which of the following statements is correct?

A Since management accounts are prepared for a different purpose from that of external
financial reports, there is no need for any convergence between the two.
B The setting of appropriate performance measures will ensure that an organisation's
performance management is effective.
C Since the board of directors is not concerned with the day to day management of a
business they do not require regular management reports.
D Management control activity might involve a comparison of the latest forecast results
with the original budget. LO 3a

7 Which of the following is not a style of performance evaluation identified in Hopwood's

studies?
A Budget constrained
B Non-accounting
C Revenue focused
D Profit conscious LO 3a

8 Select which of the following styles of using budgetary information is most likely to lead to
each of the situations described.
Job related tension is caused by which of the following styles:
A Budget constrained
B Profit conscious
C Non-accounting
Less focus on cost control is caused by which of the following styles:
D Budget constrained
E Profit conscious
F Non-accounting

92 Management Information: Question Bank ICAEW 2019

 Incidence of budget bias is caused by which of the following styles:
G Budget constrained
H Profit conscious
I Non-accounting LO 3a

9 A company have recently implemented a new budgetary planning and control system after
several years of trading.
Having made a significant investment in the new system, the company's management team
were surprised to learn that it is not designed to do which of the following?
A Improve control of actual performance
B Improve coordination of activities
C Improve gross profit
D Improve communication of ideas and plans LO 3a

10 Which of the following is a reason for adopting a decentralised rather than a centralised
organisational structure?
A Improved goal congruence between the goals of divisional management and the goals
of the organisation
B Rapid management response to changes in the trading environment
C Availability of objective performance measures
D Improved communication of information between the group's managers LO 3a

11 Division P is an investment centre within PC Ltd. Over which of the following is the manager
of division P likely to have control?
(1) Transfer prices
(2) Level of inventory in the division
(3) Discretionary fixed costs incurred in the division
(4) Apportioned head office costs
A (1), (2), (3) and (4)
B (1), (2) and (3) only
C (1) and (2) only
D (1) only LO 3b

ICAEW 2019 Chapter 8: Performance management 93