The following financial balances were extracted from the ledger of Alabi Enterprises at th… — JAMB UTME

The following financial balances were extracted from the ledger of Alabi Enterprises at the end of the trading period:

- Motor Vans: $\text{₦}1,800,000$
- Inventory (Stock): $\text{₦}540,000$
- Trade Receivables (Debtors): $\text{₦}410,000$
- Provision for Bad Debts: $\text{₦}20,000$
- Insurance Prepaid: $\text{₦}35,000$
- Cash at Bank: $\text{₦}125,000$
- Trade Payables (Creditors): $\text{₦}310,000$
- Bank Overdraft: $\text{₦}95,000$
- Accrued Wages: $\text{₦}40,000$
- 3-Year Bank Loan: $\text{₦}750,000$

What is the net working capital of Alabi Enterprises in Naira ( $\text{₦}$ )?

Answer: 645000 ₦

Answer

The net working capital of Alabi Enterprises as at year-end is ₦645,000.

Working capital is calculated as Current Assets minus Current Liabilities. Summing net trade receivables (₦390,000), inventory (₦540,000), prepaid insurance (₦35,000), and cash at bank (₦125,000) gives ₦1,090,000 in current assets. Subtracting current liabilities comprising trade payables (₦310,000), bank overdraft (₦95,000), and accrued wages (₦40,000) totaling ₦445,000 yields ₦645,000.

Step-by-Step Solution

Identify and total all Current Assets

Current Assets = Inventory (₦540,000) + Net Trade Receivables (₦410,000 - ₦20,000 = ₦390,000) + Prepaid Insurance (₦35,000) + Cash at Bank (₦125,000) = ₦1,090,000

Non-current assets like Motor Vans are excluded from working capital calculations. Provision for bad debts must be deducted from gross trade receivables to show net realizable debtors.

Identify and total all Current Liabilities

Current Liabilities = Trade Payables (₦310,000) + Bank Overdraft (₦95,000) + Accrued Wages (₦40,000) = ₦445,000

Current liabilities are short-term obligations payable within one accounting period. The 3-Year Bank Loan is a long-term (non-current) liability and must be excluded.

Calculate Net Working Capital

Working Capital = Total Current Assets - Total Current Liabilities = ₦1,090,000 - ₦445,000 = ₦645,000

Working capital represents the net operational liquidity available to a business.

Key Concept

Balance Sheet Classification of Assets and Liabilities & Working Capital Calculation

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