ACCA Financial Management (F9) Certification Practice Exam

What is a potential risk associated with overinvesting in current assets?

1. Increased profit margins

2. Cash flow problems

3. Higher sales volumes

4. Strengthened market position

The correct answer is: Cash flow problems

Overinvesting in current assets can lead to cash flow problems, which is why this option is recognized as the correct answer. When a business allocates excessive resources to current assets, such as inventory or receivables, it may find itself with a surplus of stock that is not moving quickly enough to generate sales, or it may extend too much credit to customers without receiving timely payments. This ties up cash that could otherwise be utilized for operational needs, paying off liabilities, or investing in profitable opportunities. Consequently, even though the business might seem to be well-prepared for sales or have a strong inventory position, the liquidity problems that arise from overinvestment in current assets can severely impact its ability to meet financial obligations, pay suppliers, or handle unexpected expenses. Thus, while it might appear advantageous to hold more current assets, the reality is that it can lead to significant cash flow challenges. In terms of the other options, increased profit margins, higher sales volumes, and a strengthened market position could theoretically result from well-managed investments in current assets, but overinvestment itself does not guarantee these outcomes. Instead, it often results in excessive costs and inefficiencies that detract from the overall financial stability and performance of the business.