Business Studies Multiple Choice Question – 25 April 2022

In Electromac’s third year of trading it experienced cash flow problems despite making a high profit.

To improve its cash flow position Electromac should?

Select ONE answer:

1. give longer credit terms to customers
2. pay its suppliers immediately
3. use a factoring service
4. increase its inventory levels

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 3

1. Not correct – payments will be delayed which will reduce the amount of cash flowing into the business and worsen the cash flow position.
2. Not correct – this will result in more cash leaving the business before it needs to which will put more pressure on cash flow.
3. Correct – Cash flow is the movement of money in and out of a business. Electromac needs cash immediately to meet its day to day operations. Factoring will give immediate payment and therefore should ease cash-flow.
4. Not correct – more cash will be tied up in inventory which will worsen the cash flow situation.

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