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

The financial extract of Chief Adebayo's enterprise at the end of the trading year shows the following balances:

- Fixtures and Fittings: ₦650,000\text{₦}650,000
- Motor Vehicles: ₦1,200,000\text{₦}1,200,000
- Inventory: ₦350,000\text{₦}350,000
- Trade Debtors: ₦180,000\text{₦}180,000
- Cash at Bank: ₦120,000\text{₦}120,000
- Trade Creditors: ₦220,000\text{₦}220,000
- Accrued Expenses: ₦30,000\text{₦}30,000

What is the capital employed of the business?

  1. A
    ₦2,100,000
  2. ₦2,250,000Answer
  3. C
    ₦2,500,000
  4. D
    ₦2,750,000

Answer

₦2,250,000
Capital Employed is defined as Fixed Assets plus Working Capital (or Total Assets minus Current Liabilities). Fixed Assets equal ₦1,850,000\text{₦}1,850,000 and Working Capital equals ₦400,000\text{₦}400,000 (₦650,000−₦250,000\text{₦}650,000 - \text{₦}250,000), yielding ₦2,250,000\text{₦}2,250,000.

Step-by-Step Solution

1
Calculate Total Fixed Assets
Fixtures and Fittings (₦650,000) + Motor Vehicles (₦1,200,000) = ₦1,850,000
Identify long-term assets used in generating revenue.
2
Calculate Current Assets
Inventory (₦350,000) + Trade Debtors (₦180,000) + Cash at Bank (₦120,000) = ₦650,000
Sum all short-term liquid assets.
3
Calculate Current Liabilities
Trade Creditors (₦220,000) + Accrued Expenses (₦30,000) = ₦250,000
Sum all short-term obligations.
4
Calculate Working Capital
Current Assets (₦650,000) - Current Liabilities (₦250,000) = ₦400,000
Working capital is net short-term asset position.
5
Calculate Capital Employed
Fixed Assets (₦1,850,000) + Working Capital (₦400,000) = ₦2,250,000
Capital employed represents total net assets invested in the enterprise.

Key Concept

Capital Employed Calculation
Estimated Time:1m 30s
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Topics

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

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