Hard2 marksMultiple Choice

Interpretation of Financial StatementsRatio AnalysisOvertradingSection B

This question is part of a case study — click to read the full scenario(Case 26)

Section B - Case 3

*OmniCart is an e-commerce retailer. The following financial data is available for the years ended 31 December:

20X5:
Revenue: $8,000,000
Cost of Sales: $5,000,000
Inventory: $500,000
Trade Receivables: $800,000
Trade Payables: $600,000

20X4:
Revenue: $6,000,000
Cost of Sales: $3,600,000
Inventory: $400,000
Trade Receivables: $500,000
Trade Payables: $450,000

Assume a 365-day year for all calculations.*

Question:
What is OmniCart's inventory turnover period (in days) for the year ended 31 December 20X5?

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ACCA · Question 29 · Interpretation of Financial Statements

Section B - Case 3

OmniCart is an e-commerce retailer. The following financial data is available for the years ended 31 December:

20X5:
Revenue: $8,000,000
Cost of Sales: $5,000,000
Inventory: $500,000
Trade Receivables: $800,000
Trade Payables: $600,000

20X4:
Revenue: $6,000,000
Cost of Sales: $3,600,000
Inventory: $400,000
Trade Receivables: $500,000
Trade Payables: $450,000

Assume a 365-day year for all calculations.

Question:
Based on the working capital metrics calculated, what is the most significant risk OmniCart is facing in 20X5?

Answer options:

Excessive liquidity, as receivables are growing faster than payables.

Overtrading, as evidenced by rapidly growing revenue coupled with a lengthening cash operating cycle.

Inventory obsolescence, as inventory days have doubled.

Over-reliance on supplier financing.

How to approach this question

Look at the trends: Revenue is up sharply. Receivables days are up (taking longer to collect). Payables days are down (paying faster). This puts a massive strain on cash flow, which is the definition of overtrading.

Full Answer

B.Overtrading, as evidenced by rapidly growing revenue coupled with a lengthening cash operating cycle.✓ Correct

Overtrading occurs when a business expands its operations too quickly without sufficient long-term capital to support the expansion. Symptoms include rapidly increasing revenue, increasing receivables days (struggling to collect from new customers), and pressure on cash flow. - Revenue increased by 33%. - Receivables days increased from 30.4 to 36.5 days. - Payables days decreased from 45.6 to 43.8 days. OmniCart is paying suppliers faster but collecting from customers slower, while trying to fund 33% more sales. This is a severe liquidity risk known as overtrading.

Common mistakes

Assuming that increasing sales automatically means healthy cash flow.

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Practice the full ACCA FR — Financial Reporting Practice Exam 5

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Practice the full ACCA FR — Financial Reporting Practice Exam 5

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