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

The accounting balances extracted from the books of Nkem Commercial Enterprises at the end of its financial year are as follows:

Account TitleAmount (₦\text{₦})
Motor Vehicles & Equipment3,200,0003,200,000
Stock of Goods850,000850,000
Trade Debtors450,000450,000
Cash in Hand200,000200,000
Trade Creditors600,000600,000
Accrued Rent150,000150,000

What is the net working capital of the enterprise?

  1. ₦750,000\text{₦}750,000Answer
  2. B
    ₦1,500,000\text{₦}1,500,000
  3. C
    ₦2,250,000\text{₦}2,250,000
  4. D
    ₦3,950,000\text{₦}3,950,000

Answer

The net working capital of Nkem Commercial Enterprises is ₦750,000\text{₦}750,000.
Net Working Capital is defined as the surplus of current assets over current liabilities. Adding the stock, debtors, and cash gives total current assets of ₦1,500,000\text{₦}1,500,000. Subtracting the sum of creditors and accrued rent (₦750,000\text{₦}750,000) yields the net working capital of ₦750,000\text{₦}750,000.

Step-by-Step Solution

1
Identify and sum all Current Assets
Stock (₦850,000\text{₦}850,000) + Trade Debtors (₦450,000\text{₦}450,000) + Cash in Hand (₦200,000\text{₦}200,000) = ₦1,500,000\text{₦}1,500,000
Current assets consist of short-term liquid assets convertible to cash within an accounting year.
2
Identify and sum all Current Liabilities
Trade Creditors (₦600,000\text{₦}600,000) + Accrued Rent (₦150,000\text{₦}150,000) = ₦750,000\text{₦}750,000
Current liabilities are short-term financial obligations due within one year.
3
Calculate Net Working Capital
Current Assets (₦1,500,000\text{₦}1,500,000) - Current Liabilities (₦750,000\text{₦}750,000) = ₦750,000\text{₦}750,000
Working Capital measures operational liquidity available for day-to-day business operations.

Key Concept

Net Working Capital Formula
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Topics

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

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