ACCA Financial Management (F9) Certification Practice Exam

Which situation may indicate symptoms of overtrading in a company?

1. Reduction in sales revenue

2. Lengthening trade accounts payable

3. Decrease in current asset volume

4. Increase in equity capital

The correct answer is: Lengthening trade accounts payable

The situation that indicates symptoms of overtrading in a company is the lengthening of trade accounts payable. Overtrading occurs when a business tries to achieve higher sales without having sufficient financial resources to support that growth. This typically leads to stretched working capital and cash flow problems. When a company is overtrading, it may begin to delay payments to its suppliers, resulting in an increase in trade accounts payable. This suggests that the company is having difficulty meeting its short-term obligations and is relying on its suppliers to provide extended credit, which can indicate financial strain caused by over-reaching its operational capacity. On the other hand, a reduction in sales revenue, a decrease in current asset volume, or an increase in equity capital do not directly suggest overtrading. A decline in sales revenue would typically indicate poor performance rather than overtrading, while a decrease in current assets could imply liquidity issues that are more aligned with inefficiency rather than growth. An increase in equity capital usually reflects a stable or growing financial position, which counters the idea of overtrading.