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Question

Difficulty: MediumBalance Sheet Classification of Assets and Liabilities

Chidi operates a retail store and compiled the following financial items at the end of his trading period:

- Fixtures and Fittings: ₦150,000\text{₦}150,000
- Office Equipment: ₦90,000\text{₦}90,000
- Stock of Goods: ₦45,000\text{₦}45,000
- Trade Debtors: ₦30,000\text{₦}30,000
- Cash in Hand: ₦5,000\text{₦}5,000
- Trade Creditors: ₦25,000\text{₦}25,000
- Bank Overdraft: ₦10,000\text{₦}10,000
- 5-Year Bank Loan: ₦60,000\text{₦}60,000

What is the total value of Chidi's working capital in Naira?

Answer: 45000 ₦

Answer

The total value of Chidi's working capital is 45,000 Naira.
Working capital is calculated as Total Current Assets minus Total Current Liabilities. Total Current Assets consist of Stock of Goods (₦45,000), Trade Debtors (₦30,000), and Cash in Hand (₦5,000), which equal ₦80,000. Total Current Liabilities consist of Trade Creditors (₦25,000) and Bank Overdraft (₦10,000), which equal ₦35,000. Subtracting liabilities from assets yields ₦80,000 - ₦35,000 = ₦45,000.

Step-by-Step Solution

1
Classify current assets from the given financial items
Current Assets = Stock of Goods (₦45,000) + Trade Debtors (₦30,000) + Cash in Hand (₦5,000) = ₦80,000
Current assets are items held for less than one accounting year that can be converted into cash within the normal operating cycle.
2
Classify current liabilities from the given financial items
Current Liabilities = Trade Creditors (₦25,000) + Bank Overdraft (₦10,000) = ₦35,000
Current liabilities are short-term debts due within one accounting period. Bank overdraft is classified as a current liability, while the 5-year loan is a non-current liability.
3
Subtract Total Current Liabilities from Total Current Assets to determine Working Capital
Working Capital = ₦80,000 - ₦35,000 = ₦45,000
Working capital (net current assets) measures operational liquidity by showing the excess of liquid assets over short-term obligations.

Key Concept

Working Capital Calculation and Balance Sheet Classification
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Topics

Balance Sheet Classification of Assets and Liabilities