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

An enterprise presents the following financial balances at the end of its trading year:

- Premises and Machinery: ₦1,850,000\text{₦}1,850,000
- Stock (Inventory): ₦410,000\text{₦}410,000
- Trade Debtors: ₦240,000\text{₦}240,000
- Cash at Bank: ₦150,000\text{₦}150,000
- Trade Creditors: ₦270,000\text{₦}270,000
- Accrued Expenses: ₦130,000\text{₦}130,000
- Long-term Loan: ₦600,000\text{₦}600,000

What is the Capital Employed of the enterprise in Naira (₦\text{₦})?

Answer: 2250000 ₦

Answer

The Capital Employed of the enterprise is ₦2,250,000\text{₦}2,250,000.
Capital Employed represents the total resources employed in the business operations. It is computed as Fixed Assets plus Working Capital. First, calculate Current Assets (Stock ₦410,000\text{₦}410,000 + Debtors ₦240,000\text{₦}240,000 + Bank ₦150,000\text{₦}150,000 = ₦800,000\text{₦}800,000) and Current Liabilities (Creditors ₦270,000\text{₦}270,000 + Accrued Expenses ₦130,000\text{₦}130,000 = ₦400,000\text{₦}400,000). Working Capital is ₦800,000−₦400,000=₦400,000\text{₦}800,000 - \text{₦}400,000 = \text{₦}400,000. Adding Working Capital to Fixed Assets (Premises and Machinery ₦1,850,000\text{₦}1,850,000) gives a Capital Employed of ₦2,250,000\text{₦}2,250,000.

Step-by-Step Solution

1
Determine total Current Assets
Current Assets = ₦410,000+₦240,000+₦150,000=₦800,000\text{₦}410,000 + \text{₦}240,000 + \text{₦}150,000 = \text{₦}800,000
Current assets consist of short-term liquid assets including stock, debtors, and cash at bank.
2
Determine total Current Liabilities
Current Liabilities = ₦270,000+₦130,000=₦400,000\text{₦}270,000 + \text{₦}130,000 = \text{₦}400,000
Current liabilities consist of short-term obligations payable within a year, including trade creditors and accrued expenses.
3
Calculate Working Capital
Working Capital = ₦800,000−₦400,000=₦400,000\text{₦}800,000 - \text{₦}400,000 = \text{₦}400,000
Working capital is the net operational buffer calculated as Current Assets minus Current Liabilities.
4
Compute Capital Employed
Capital Employed = ₦1,850,000+₦400,000=₦2,250,000\text{₦}1,850,000 + \text{₦}400,000 = \text{₦}2,250,000
Capital Employed represents the total long-term assets and funds financing the business, calculated as Fixed Assets plus Working Capital (or Total Assets minus Current Liabilities).

Key Concept

Capital Employed represents the total funds actively utilized in running a business. It can be computed either as Fixed Assets + Working Capital or Total Assets - Current Liabilities.
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Topics

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

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