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Difficulty: MediumCapital Structure Calculations (Working Capital, Capital Employed, Capital Owned)

The financial records of Folake Traders at the close of the trading year show the following balance sheet balances:

Financial ItemAmount (₦\text{₦})
Premises1,200,0001,200,000
Motor Vehicles800,000800,000
Stock of Goods450,000450,000
Trade Debtors250,000250,000
Cash at Bank150,000150,000
Trade Creditors300,000300,000
Bank Overdraft150,000150,000
1010-Year Bank Loan500,000500,000

What is the working capital of Folake Traders?

  1. ₦400,000\text{₦}400,000Answer
  2. B
    ₦1,300,000\text{₦}1,300,000
  3. C
    ₦550,000\text{₦}550,000
  4. D
    ₦250,000\text{₦}250,000

Answer

₦400,000\text{₦}400,000
Working capital is calculated as Current Assets−Current Liabilities\text{Current Assets} - \text{Current Liabilities}. Summing the current assets gives Stock(₦450,000)+Debtors(₦250,000)+Cash at Bank(₦150,000)=₦850,000\text{Stock} (\text{₦}450,000) + \text{Debtors} (\text{₦}250,000) + \text{Cash at Bank} (\text{₦}150,000) = \text{₦}850,000. Summing the current liabilities gives Trade Creditors(₦300,000)+Bank Overdraft(₦150,000)=₦450,000\text{Trade Creditors} (\text{₦}300,000) + \text{Bank Overdraft} (\text{₦}150,000) = \text{₦}450,000. Subtracting current liabilities from current assets gives ₦850,000−₦450,000=₦400,000\text{₦}850,000 - \text{₦}450,000 = \text{₦}400,000. Note that long-term liabilities such as the 1010-Year Bank Loan and fixed assets such as Premises and Motor Vehicles are excluded.

Step-by-Step Solution

1
Identify and sum all Current Assets
Current Assets = Stock of Goods (₦450,000\text{₦}450,000) + Trade Debtors (₦250,000\text{₦}250,000) + Cash at Bank (₦150,000\text{₦}150,000) = ₦850,000\text{₦}850,000
Current assets consist of short-term liquid assets convertible to cash within one financial period. Fixed assets (Premises and Motor Vehicles) are excluded.
2
Identify and sum all Current Liabilities
Current Liabilities = Trade Creditors (₦300,000\text{₦}300,000) + Bank Overdraft (₦150,000\text{₦}150,000) = ₦450,000\text{₦}450,000
Current liabilities are short-term debts due within one year. Long-term liabilities (1010-Year Bank Loan) are excluded.
3
Apply the Working Capital formula
Working Capital = Current Assets - Current Liabilities = ₦850,000−₦450,000=₦400,000\text{₦}850,000 - \text{₦}450,000 = \text{₦}400,000
Working capital measures a business's operational liquidity available for day-to-day business activities.

Key Concept

Working Capital Calculation
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Topics

Capital Structure Calculations (Working Capital, Capital Employed, Capital Owned)

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