Financial

Management (FM)
September/
December 2022
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer
constructive advice for those sitting the exam in the
future.

Contents
General comments .............................................................. 2
Section A ............................................................................. 2
Example 1 ........................................................................ 2
Example 2 ........................................................................ 3
Example 3 ........................................................................ 4
Example 4 ........................................................................ 4
Section B ............................................................................. 5
Question 1 ....................................................................... 6
Question 2 ....................................................................... 6
Question 3 ....................................................................... 7
Question 4 ....................................................................... 7
Question 5 ....................................................................... 8
Section C ............................................................................. 9
Question 1 – Clover Co ................................................... 9
Requirement (a)(i) – 10 marks ......................................... 9
Requirement (a)(ii) – 4 marks ........................................ 12
Requirement (b) – 6 marks ............................................ 14
Question 2 – Purdy Co ...................................................... 16
Requirement (a) (i) – 7 marks ........................................ 17
Requirement (a)(ii) – 2 marks ........................................ 19
Requirement (a)(iii) – 1 mark ......................................... 20
Examiner’s(b)report
Requirement – FM ............................................
– 5 marks September/December 202221 1
Requirement (c) – 5 marks ............................................ 22
General comments

This examiner’s report should be used in conjunction with the published

September/December 2022 sample exam which can be found on the ACCA Practice
Platform.

In this report, the examining team provide constructive guidance on how to answer
the questions whilst sharing their observations from the marking process,
highlighting the strengths and weaknesses of candidates who attempted these
questions. Future candidates can use this examiner’s report as part of their exam
preparation, attempting question practice on the ACCA Practice Platform, reviewing
the published answers alongside this report.

The Financial Management (FM) exam is offered as a computer-based exam (CBE).

The model of delivery for the CBE exam means that candidates do not all receive the
same set of questions. In this report, the examining team offer detailed debriefs of
selected questions from each section of the exam.

• Section A objective test questions – we focus on four specific questions that

caused difficulty in the September/December 2022 sittings of the exam.
• Section B objective test case questions – here we look at one case from
section B in detail.
• Section C constructed response questions – here we provide commentary on
two questions, providing guidance on answering these questions and where
exam technique could be improved, including in the use of the CBE
functionality in answering these questions.

Section A

In this section we will look at FOUR Section A questions which proved to be

particularly difficult for candidates.

Example 1

Abrar Co has 6% convertible loan notes in issue with a floor value of $106.20 per
$100 loan note. Each loan note can be converted into 15 ordinary shares at any time
or redeemed in five years' time at nominal value.

What is the minimum share price at which investors would convert their loan
notes (to two decimal places)?

What does this test?

 Understanding of how convertible debt works

Examiner’s report – FM September/December 2022 2

What is the correct answer?

 The correct answer is $7.08

The floor value is the present value of the redemption option of the loan note.
Converting today means receiving 15 shares. Dividing the floor value by the number
of shares an investor receives upon conversion, this is the threshold at which it
makes sense to convert. (106.20/ 15 shares = $7.08 per share).

Commonly seen errors included just giving the floor value and not the value per
share as stated in the question and also dividing the redemption/nominal value by 15
shares to get $6.67.

Example 2

A state funded hospital has the objective of providing value for money. It measures
the achievement of this objective using the three E's (economy, effectiveness and
efficiency).

Which of the following performance indicators measures the hospital's

economy?

A Number of patients admitted per year

B Total medical staff salary cost
C Cost per successfully treated patient
D Average waiting time for patient admission to hospital

What does this test?

 The understanding of the different types of value for money measures

What is the correct answer?

The correct answer is B

Economy is the acquisition of resources of appropriate quantity and quality at

minimum cost. Total medical staff salary cost is the only answer option that does
this. Option C was incorrectly selected by a number of candidates, but this is a
measure of efficiency as this looks at how well inputs are converted into outputs.

Examiner’s report – FM September/December 2022 3

Example 3

A machine costing $450,000 has a useful life of six years, after which time its
estimated present value of resale will be $25,800. The present value of the total
running costs over the next six years is $82,280.

The company's cost of capital is 10%.

What is the equivalent annual cost of using the machine if it were bought and
replaced every six years in perpetuity (to the nearest dollar)?

What does this test?

 The calculation of the equivalent annual cost of a machine for a replacement

decision.

What is the correct answer?

 The correct answer is $116,299

The present value of one cycle in $ is:

Outlay (450,000)
Running costs (82,280)
Resale 25,800
(506,480)

For each cycle of six years, using the six-year 10% annuity factor, this has an
equivalent annual cost of 506,480 / 4.355 = $116,299 (to the nearest dollar).

Some candidates incorrectly just evaluated the present value of one cycle, while
some others appeared to simply divide the present value of one cycle by the number
of years in the cycle.

Example 4

A financial manager believes that if information regarding his organisation is made

public, it will not affect the share price as this information is already reflected in the
current share price.

In terms of capital market efficiency, to which of the following does the

financial manager's belief relate?

A Weak form efficiency

B No efficiency
C Strong form efficiency
D Semi-strong form efficiency

Examiner’s report – FM September/December 2022 4

What does this test?
 The understanding of the efficient markets hypothesis (EMH).

What is the correct answer?

 The correct answer is: C Strong form efficiency
Under strong form efficient markets, the share price will reflect all information
regardless of whether it is in the public domain or not. A significant number of
candidates selected semi-strong form efficiency suggesting a lack of understanding
of the EMH.

Section B

Section B tests candidates’ knowledge on a number of topics in more detail than

section A, with three case questions containing five two-mark objective test
questions.

Here is an example case question on syllabus area G risk management.

Wren Co

The home currency of Wren Co is the dollar ($) and the company has a supplier in a
foreign country whose currency is the dinar (D). In six months’ time, Wren Co must
make a payment to the supplier, of D3 million, and the company is concerned about
exchange rate risk.

Exchange rates:
Spot exchange rate 2.00 dinars per dollar
Six-month forward exchange rate 1.94 dinars per dollar

Six-month interest rates Borrowing Deposit

Dinars 4% per year 2% per year
Dollars 10% per year 8% per year

Wren Co wants to compare making a lead payment of D3 million now, with taking out
a forward exchange contract for D3 million, that can be exercised in six months’ time.
As the company is short of cash, it would need to borrow money for any exchange
rate risk hedging.

Wren Co is considering raising $500,000 in three months’ time in order to ease its
cash flow problems. The company would borrow the money for a period of six
months and it would hedge interest rate risk by using a forward rate agreement
(FRA). Wren Co has been offered two different FRAs by its bank: a 3 v 9 FRA at

Examiner’s report – FM September/December 2022 5

10.0 – 8.0 and a 3 v 6 FRA at 9.8 – 7.8, but the company is also considering interest
rate derivative hedging.

Question 1

In relation to interest rate derivatives, which of the following statements is

correct?

A Interest rate futures hedges can be closed out any time

B Forward rate agreements fix the interest rate on future long-term borrowing
C If interest rate options are allowed to lapse, there is no overall cost to the
holder
D Buying both an interest rate cap and an interest rate floor is an example of an
interest rate collar

 The correct answer is A

Interest rate futures can be closed out at any time.

A number of candidates selected either option B or D, but forward rate agreements

are not long-term instruments, so option B is incorrect. Also buying a cap and selling
(not buying) a floor would be an example of a collar, so option D is incorrect.

Question 2

Considering future values on the D3 million payment date, and comparing the
lead payment with the forward exchange contract (FEC), which of the following
statements is true?

A The FEC costs $46,392 more than the lead payment

B The FEC costs $28,608 more than the lead payment
C The lead payment costs $46,392 more than the FEC
D The lead payment costs $28,608 more than the FEC

The correct answer is D

FEC cost = D3m/ 1.94 = $1,546,392

The six-month dollar borrowing rate = 10%/ 2 = 5%
Lead payment cost in six-months’ time = D3m/ 2 x 1.05 = $1,500,000 x 1.05 =
$1,575,000
FEC cost – lead payment cost = 1,575,000 – $1,546,392 = $28,608
The lead payment costs $28,608 more than the FEC

A significant number of candidates selected option A, which does not address the
requirement of making the comparison on the future payment date and the fact that
the money for the lead payment would have to be borrowed.

Examiner’s report – FM September/December 2022 6

Question 3

If Wren Co takes out the relevant FRA and borrows at a base rate of 10.5% per
year, in three months' time, what is the company's net cost of borrowing?

A $20,000
B $25,000
C $24,500
D $27,500

The correct answer is B.

Using the 3 v 9 FRA

Interest paid on loan = 500,000 x 0.105 x 6/ 12 = $26,250
Payment from bank = 500,000 x 0.005 x 6/ 12 = $1,250
Net interest payment = 26,250 – 1,250 = $25,000

A significant number of candidates selected option C, which is incorrect because this

is based on selecting the wrong FRA. Some candidates also selected option D,
suggesting they added the FRA compensation payment to the interest cost on the
loan.

Question 4

Which of the following statements is correct?

A If the exchange rate is 2.00 dinars per dollar, a relative increase in dollar
interest rates will cause the dollar to appreciate against the dinar
B The international Fisher effect states that the expected change in the spot rate
is equal to the expected difference in inflation rates
C Forward exchange rates reflect interest rate parity
D Purchasing power parity relates exchange rates and long-term interest rates

The correct answer is C

It is correct that forward exchange rates reflect interest rate parity.

Average six month interest rates are as follows
Dollar = (4% + 2%) x 6/12 = 1.5%
Dinar = (10% + 8%) x 6/12 = 4.5%

Interest rate parity predicted forward rate = 2.00 x 1.015/1.045 = 1.94 dinars per
dollar

Some candidates selected option A, but increasing dollar interest rates would cause
the dollar to depreciate. Option B was also a popular choice for candidates, but this
statement relates to purchasing power parity rather than the international Fisher

Examiner’s report – FM September/December 2022 7

effect. Similarly, option D reflects interest rate parity rather than purchasing power
parity.

Question 5

In relation to foreign currency risk, which of the following statements is/are

correct?

(1) Economic risk is exchange rate risk that can be avoided by operating in
domestic markets only
(2) Exchange rate risk arises because of changes in exchange rates that have
not been anticipated

A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2

The correct answer is B

Organisations which only operate in domestic markets are still subject to economic
risk as long-term currency movements can make foreign exporters more competitive
in the domestic market, so statement 1 is not correct.

Unanticipated changes in exchange rates are a cause of exchange rate risk, so

statement 2 is correct.

Examiner’s report – FM September/December 2022 8

Section C

In this section we will look in detail at TWO constructed response questions from
different syllabus areas. The full questions and solutions have been published and
are available on the ACCA Practice Platform.

Question 1 – Clover Co

This question is from the Investment Appraisal (syllabus area D), focussing primarily
on a specific investment decision in part (a), namely an asset replacement decision,
and on the superiority of discounted cash flow (DCF) methods over non-DCF
methods in part (b). It is split into three requirements, with part (a)(i) a calculation
question on equivalent annual cost (EAC), part (a)(ii) a discussion based upon the
decision needed and part (b) as already stated.

Clover Co is a company needing to replace a machine which is essential to its

production process. The company has identified two alternative machines which are
of identical capacity, but different technology and replacement cycles. The scenario
details the respective initial costs, costs of operation and maintenance, and residual
values of the machines.

Looking at each part in detail:

Requirement (a)(i) – 10 marks

(a)(i) Calculate the equivalent annual cost of each machine’s replacement

cycle.

Parts (a)(i) and (ii) of this question specifically addressed syllabus area D4(b),
“Evaluate asset replacement decisions using equivalent annual cost and equivalent
annual benefit”.

Examiner’s report – FM September/December 2022 9

Part (a)(i) required two separate EAC calculations, one for machine 1 and one for
machine 2. There were 5 marks available for each.

For each calculation, it was important to start with the correct layout, with the years
1-3, as per the suggested solution (or 0-3 if preferred) as column headings for
machine 1 and the items of cash inflow or outflow used as row descriptors. The
same approach was needed for machine 2, with column headings covering an extra
2 years, years 4 and 5. The suggested solution shows this.

The next step was to include the correct cash flows at the correct points in time, in
order to calculate the net cash flow for each year.

The cost of the initial investments for each machine clearly needed to be entered at
time 0 for each machine, as the cash outlays are immediate. Some candidates
incorrectly entered these outflows at time 1. The respective residual values (RVs)
were given in the scenario and are relevant cash flows. These should be entered at
the correct times, respectively time 3 and time 5.

The maintenance costs for both machines were stated at their year 1 values e.g.
“Maintenance costs would be $52,000 per year in the first year of operation”
Therefore, the year 1 values did not need to be inflated.

The application of the specific cost inflation of 8% per year for machine 1 (6% per
year for machine 2) commenced in year 2 e.g. $52,000 * 1.08 = $56,160 with a
further 8% inflation applied for year 3. An error seen here quite often was the
application of two years’ inflation in year 2, when only one year’s inflation was
needed, even when the correct year 1 cost had been entered.

The same principles applied to the operating costs i.e. the year 1 cost was given in
the scenario, $300,000 for machine 1 ($248,000 for machine 2). Therefore, year 2
required the application of one year’s cost inflation (10% for machine 1, 12% for
machine 2).

Both the maintenance costs and operating costs were required for the whole life
cycle of the machine i.e. 3 years for machine 1, 5 years for machine 2. Some
candidates incorrectly omitted these costs for the final year of the machine’s life, in
that they were including only 2 years of costs for machine 1, and 4 years for machine
2.

A key point to reiterate, as it has been made in previous examiner’s reports, is that it
is vitally important for candidates to show their workings on all figures. By showing
workings, candidates are showing the question marker the method which has been

Examiner’s report – FM September/December 2022 10

used to obtain the figures and, if a simple or repeated error has been made, it may
be possible for a question marker to award method marks.

It is perfectly acceptable to show the working within a cell e.g.

Alternatively, placing the annual cost inflation rate in a cell in a separate workings’
area demonstrates smart spreadsheet use.

Once the net cash flows for each year had been computed, the net present value
(NPV) of the cost of each machine’s life cycle could be calculated by applying the
relevant discount factor at Clover Co’s discount rate of 13%.

It was at this point that knowledge of the EAC approach became relevant. A machine
with a 5-year replacement cycle is almost certain to have a higher cost in present
value terms than a machine with a 3-year cycle. Therefore, in such situations it is not
possible to make a replacement cycle decision based upon simply comparing these
two values, as the two machines have unequal lives.

In order to make the two machines comparable for replacement decision purposes, it
was necessary to calculate an EAC for each by dividing by the relevant annuity
factor (AF) i.e. a 3-year 13% AF for machine 1, a 5-year 13% AF for machine 2.

These can both be found via the given Annuity Table:

Alternatively, it is acceptable to sum the single period discount factors already

entered in the discounted cash flow schedule (3-year 13% AF shown here):

Examiner’s report – FM September/December 2022 11

Care must be taken, however, not to include the year 0 discount factor of 1 when
using this technique. Some candidates incorrectly computed the AFs due to the
inclusion of this figure i.e. 3-year 13% AF = 1 + 2.361 = 3.361. This is an error of
principle with respect to annuity factors.

A common error here, which must be avoided, was to simply divide the NPV by the
number of years of the life of the machine. Such a calculation does not result in the
EAC of the machine.

Once the division of the NPVs by the relevant AFs had been completed correctly,
then it was at this point that a decision could be made. The correct calculations
being:

Machine 1 EAC = (2,788,927) / 2.361 = (1,172,701)

Machine 2 EAC = (3,649,151) / 3.517 = (1,037,507)

Overall, part (a)(i) was done well. Improvements can be made by candidates
presenting their work better. Examples of areas for improvement include displaying
all the calculations in one column or using a column width which was too small
resulting in a line of ######, which meant each column had to be expanded. Ideally,
work should be presented as it would be in a professional accounting or finance
environment.

Requirement (a)(ii) – 4 marks

(a)(ii) Discuss which machine should be selected by Clover Co.

Part (a)(ii) required a discussion of which of the two machines should be chosen by
Clover Co.

It should have been clear to candidates that a discussion requirement worth 4 marks
was asking for more than just “choose machine x because it has a lower cost”.
Unfortunately, some candidate’s responses offered little more than this.

Whilst a financial acceptability judgement was required, the scenario offered clues as
to the other factors that required consideration, namely:

Examiner’s report – FM September/December 2022 12

 • The residual values of the two machines;
• The technology continuing to develop and its effect on potential obsolescence
and;
• The differing life cycles of the machines;

The starting point to a response to part (a)(ii) should have been consideration of the
EAC figures calculated in part (a)(i) where, due to the unequal lives of the machines,
the comparison needed to be made between the machines’ respective EACs.

In situations such as this, it is the asset with the lowest EAC which should be
chosen, as it is a cost which is being considered. By looking at the EACs stated
above in (a)(i), it is clear that machine 2 has a lower EAC by:

($1,037,507) - ($1,172,701) = $135,194.

Therefore, on financial grounds only, machine 2 with its 5-year replacement cycle
should have been chosen.

Once this had been done, the opportunity then arose to discuss other factors
affecting the decision as outlined above. For example, not only is the RV of machine
1 expected to be higher, but it was also a more certain value as a buyback price had
been included in the contract of sale. By contrast, the RV of machine 2 was an
estimate of a future value based on existing market information, characteristics
which made the RV more uncertain in nature.

Another factor affecting the decision was the differing technology of the two
machines. Machine 1 appeared to be affected less by the risk of obsolescence than
machine 2, therefore committing to a 5-year replacement cycle may not have been
as clear cut a decision as the figures suggested. Furthermore, more frequent
replacement of assets gives a flexibility in that, generally, newer assets are likely to
be the most technologically advanced models. This would have been another
advantage for the 3-year cycle of machine 1.

For these discussion points, it was necessary for candidates to do more than simply
repeat what was said in the scenario. Consideration of the implications of these
points for the decision was needed. Moreover, a discussion means that full
sentences should be used. Short bullet points of, for example, three or four words do
not constitute a discussion and are usually not creditworthy. The best responses
took each of the relevant factors, explained them and illustrated their implications in
the context of Clover Co.

To develop an important point made in (a)(i) above, ideally work should be presented
as it would in a professional environment, as if reporting to a manager. The typing of

Examiner’s report – FM September/December 2022 13

a whole paragraph of text in one cell can result in the text being difficult to read for
the marker and can be harder to follow and understand. Sentences written in a
spreadsheet should ideally be succinct and laid out as one sentence per row of the
spreadsheet. Before submitting their responses, candidates should try to ensure that
their work is presented in as clear and professional a way as it would in a
professional accounting and finance environment.

Further examples of the techniques required for a question such as Clover Co can
be found in previously published questions such as Cabreras Co (March/June 2021),
Crockett Co (September/December 2020, part (b)) and Melanie Co
(September/December 2018, part (a)(ii)).

Requirement (b) – 6 marks

(b) Discuss why discounted cash flow (DCF) investment appraisal methods
are considered to be superior to non-DCF methods.

This requirement directly addressed syllabus item D1(g), “discuss the superiority of
discounted cash flow (DCF) methods over non-DCF methods.”

The suggested solution covers the main points to be addressed here namely time
value of money (tvm), use of cash flows instead of profits and consideration of the
whole project life. Many candidates made a good attempt with most of the main
points occurring frequently.

Better responses developed each point. For example, the tvm point could have been
developed by comparing its use by the various methods i.e. NPV and IRR take
account of tvm, whereas payback ignores the timing of cash flows and ROCE uses
average profits instead of cash flows.

Examiner’s report – FM September/December 2022 14

Furthermore, the point about the cash flow basis could have been developed to
discuss the superiority of cash flows as they are not distorted by the techniques used
to arrive at the average annual accounting profit (required for ROCE), such as
depreciation policies.

The main issues with weaker responses were largely based upon not addressing the
requirement and candidates just writing ‘everything they know’ about the four
investment appraisal techniques. This often took the form of advantages and
disadvantages of each method, and scored few, if any, marks. Other mistakes
included the suggestion that IRR was a non-discounted cash flow method, which led
to a comparison of IRR and NPV, and also stating that DCF methods gave a clear
decision rule whereas ROCE and payback need a target, forgetting, however, that
IRR also needs a target.

The previously mentioned Cabreras Co (March/June 2021), addressed this syllabus

area in its part (c).

Examiner’s report – FM September/December 2022 15

Question 2 – Purdy Co

This question is from Syllabus Area C - “Working Capital Management”

The question focuses on the following learning outcomes from Syllabus Area C,
sections 1, 2 and 3:

• Discuss, apply and evaluate the use of relevant techniques in managing

inventory, including the Economic Order Quantity model and bulk purchase
discount.

• Identify the objectives of working capital management in terms of liquidity and

profitability and discuss the conflict between them.

• Explain the cash operating cycle.

• Explain the cash operating cycle and the level of investment in working
capital.

Purdy Co is a manufacturing company and currently uses the economic order

quantity (EOQ) model to determine the order size of Chemical X. The current
ordering method needs to be compared with a new supplier offering a cheaper cost
for Chemical X, but Purdy Co is required to buy larger quantities. Therefore, the
question is structured in smaller specific units to guide candidates in answering the
scenario requirements quickly and clearly to see the marks available for each part of
the question, guiding them into responding effectively.

Focusing on each part in detail:

Examiner’s report – FM September/December 2022 16

Requirement (a) (i) – 7 marks

(a)(i) Calculate the total annual costs relating to Chemical X for both the
current and potential suppliers.

Part (a)(i) required two calculations – first, using the EOQ model and second, using
bulk purchase at a reduced cost. The EOQ formula is given in the formula sheet. The
only complexity is calculating the safety inventory cost (buffer cost). Seeing that
many candidates could perform well in this requirement was pleasing.

A difficulty faced in EOQ calculations is that the input values in the calculation for
EOQ can vary slightly from scenario to scenario. In general, you need to take care of
which figures to enter into the formula. The common issues to remember here are:
First, including costs that are affected by order quantity and holding costs. Second –
ensure you deal with consistent units, for example, annual demand in units
(5,000,000 litres), cost of holding a unit for a year in $ ($2.50) and ordering cost of a
single order in $ ($400). Please note that in your practice questions, scenarios may
have given the demand per week or per month, and this should be converted to an
annual demand.

The most common mistake in calculating the EOQ was to include the annual
demand as 5,000. This may have been down to needing to read the scenario more
carefully or understand the requirements of the model. so, take care to read and
practice everything carefully. In both scenarios, many candidates did not use
average inventory for calculating holding costs.

Use the spreadsheet when laying out your answer and show all workings with the
cells, referring to other cells where possible as this helps avoid potential mistyping of
numbers. The following examples show a good layout for this answer, where
headings/labels are used, and it is clear for the marker to see exactly how the
calculations have been done.

The detailed calculation of the total annual cost of Chemical X is shown below

Examiner’s report – FM September/December 2022 17

In calculating the total annual order cost if Purdy Co were to use the potential
supplier, the advantage here is that the above calculations can be repeated using
the bulk order of 1,000,000 litres and a unit purchase cost of $2.25 per litre. But,
again, reading the scenario carefully was the key here – the most common mistake
was missing the calculation of the new safety buffer holding cost, unit prices/costs
were mixed up and using the EOQ again.

Examiner’s report – FM September/December 2022 18

The safety buffer can also be calculated in litres. Candidates should recognise that
increasing order quantity will result in a decrease in the total cost of ordering, but at
the same time, increase the holding cost.

Requirement (a)(ii) – 2 marks

(a)(ii) Calculate the value of the average investment in Chemical X inventory

for both the current and potential suppliers.

Part (a) (ii) required calculating the average investment required by Purdy Co under
both scenarios for two marks. This part proved more challenging. Very few extra
calculations were attempted. This suggested that many candidates were not aware
of how to manage the calculation, which is shown below:

Examiner’s report – FM September/December 2022 19

With EOQ:

(40,000 litres/2) + (5,000,000litres x 5 days/365 days) = 88,493 litres

With the bulk order:

(1,000,000 litres/2) + (5,000,000litres x 15 days/365 days) = 705,479 litres

The above units calculated should have been converted to $ as the question stated
“average investment”; for example, 88,493 litres x $3.00 = $265,479.

Many ignored (a)(ii) and only a minority of candidates completed it successfully for
this part of the working capital management scenario.

Requirement (a)(iii) – 1 mark

(a) (iii) Recommend, with justification, whether Purdy Co should change its
supplier.

As with any financial management questions, linking the calculations to the

discussion is the best way to score easy marks. While longer than required from a
candidate in an exam, the suggested solution is good evidence of how to score well
on these questions by adding depth to the analysis. For example, rather than just
saying, “potential supplier’s total cost is lower than the current supplier, therefore, it
is better to change to the potential supplier,” it is important to look at why this might
be the case. Here, the information in the scenario about the “pressure from its bank
to reduce its overdraft” could have been used. This could then be linked to the
financial director’s concerns about cost, working capital investment and cash
operating cycle. Relevant comments must be made, and not just statements short of
justification. The weakness of the recommendation provided in (a) (iii) highlights the
necessity to check the information in the scenario and use this in framing the
relevant discussion.

There are many examples of similar questions in the past exam library, and it is
essential to practice them.

• See FM September/December 2021 exam Kandy Co for Bulk purchase

discount.
• See FM September/December 2019 exam Dusty Co for the financial effect of
EOQ and Bulk order discount.

Examiner’s report – FM September/December 2022 20

Requirement (b) – 5 marks

(b) Discuss the conflict that exists between the objectives of liquidity and
profitability in the management of working capital.

Part (b) was a 5-mark discussion of the conflict between the objectives of liquidity
and profitability in the management of working capital. Answers tended to be
relatively brief. Some candidates showed that they had learned the explanations of
liquidity and profitability but could not discuss the conflict between the two working
capital objectives.

It is also important in questions like this to answer discursive parts of the requirement
– with many candidates picking up marks for suggesting a detailed explanation of
liquidity and profitability. However, whilst there were some good illustrations of the
conflict, some answers drifted into a discussion about the financing of working
capital.

Overall performance for part (b) was satisfactory.

Examiner’s report – FM September/December 2022 21

Requirement (c) – 5 marks

(c) Explain the cash operating cycle and its relationship with the level of
investment in working capital.

Part (c) was a 5-mark discussion on the cash operating cycle. Responses to this part
were mixed, with the easier, basic points explaining the cash operating cycle in the
form of days equations and descriptive terms being identified. Candidates knew that
the length of the cash operating cycle determined the level of resources/funds
required in working capital. Good answers explained the nature of business types,
efficiency of working capital management and individual working capital elements for
illustrating the length of the cash operating cycle. However, candidates need to
recognise that discussion-type questions require more than brief points, which are
not in full sentences.

Practice the published questions and other questions on the Practice Platform and
also in the materials from ACCA’s Approved Content Providers and identify the
learning outcomes as prescribed in the FM syllabus. This will help you with the
relevant topics and what the exam will test for both the numerical and discussion
questions.

Examiner’s report – FM September/December 2022 22