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

The financial extract of Alhaji Usman Trading Company at the end of its trading year reveals the following account balances:

- Premises: ₦2,500,000\text{₦}2,500,000
- Equipment: ₦800,000\text{₦}800,000
- Stock (Inventory): ₦450,000\text{₦}450,000
- Trade Debtors: ₦250,000\text{₦}250,000
- Cash at Bank: ₦100,000\text{₦}100,000
- Trade Creditors: ₦200,000\text{₦}200,000
- Bank Overdraft: ₦150,000\text{₦}150,000

What is the Capital Employed of the business?

  1. ₦3,750,000\text{₦}3,750,000Answer
  2. B
    ₦4,100,000\text{₦}4,100,000
  3. C
    ₦4,450,000\text{₦}4,450,000
  4. D
    ₦3,900,000\text{₦}3,900,000

Answer

The Capital Employed of Alhaji Usman Trading Company is ₦3,750,000\text{₦}3,750,000.
The value stating ₦3,750,000\text{₦}3,750,000 is correct because Capital Employed equals Fixed Assets plus Working Capital. Fixed Assets are Premises (₦2,500,000\text{₦}2,500,000) + Equipment (₦800,000\text{₦}800,000) = ₦3,300,000\text{₦}3,300,000. Working Capital is Current Assets (Stock ₦450,000\text{₦}450,000 + Debtors ₦250,000\text{₦}250,000 + Cash ₦100,000\text{₦}100,000 = ₦800,000\text{₦}800,000) minus Current Liabilities (Creditors ₦200,000\text{₦}200,000 + Overdraft ₦150,000\text{₦}150,000 = ₦350,000\text{₦}350,000), yielding ₦450,000\text{₦}450,000. Therefore, Capital Employed = ₦3,300,000+₦450,000=₦3,750,000\text{₦}3,300,000 + \text{₦}450,000 = \text{₦}3,750,000.

Step-by-Step Solution

1
Calculate total Fixed Assets
Fixed Assets = Premises (₦2,500,000\text{₦}2,500,000) + Equipment (₦800,000\text{₦}800,000) = ₦3,300,000\text{₦}3,300,000
Fixed assets represent long-term capital assets used in operations.
2
Calculate total Current Assets
Current Assets = Stock (₦450,000\text{₦}450,000) + Trade Debtors (₦250,000\text{₦}250,000) + Cash at Bank (₦100,000\text{₦}100,000) = ₦800,000\text{₦}800,000
Current assets comprise short-term resources convertible to cash within an accounting year.
3
Calculate total Current Liabilities
Current Liabilities = Trade Creditors (₦200,000\text{₦}200,000) + Bank Overdraft (₦150,000\text{₦}150,000) = ₦350,000\text{₦}350,000
Current liabilities are short-term obligations due within one year.
4
Calculate Working Capital
Working Capital = Current Assets (₦800,000\text{₦}800,000) - Current Liabilities (₦350,000\text{₦}350,000) = ₦450,000\text{₦}450,000
Working capital measures net operational liquidity.
5
Calculate Capital Employed
Capital Employed = Fixed Assets (₦3,300,000\text{₦}3,300,000) + Working Capital (₦450,000\text{₦}450,000) = ₦3,750,000\text{₦}3,750,000
Capital Employed is the total capital actively invested in running the business.

Key Concept

Capital Employed Calculation
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Topics

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

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