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

The financial records of Kalu Trading Enterprises at the end of a trading period show the following balances:

- Fixed Assets: ₦800,000\text{₦}800,000
- Stock (Inventory): ₦250,000\text{₦}250,000
- Trade Debtors: ₦150,000\text{₦}150,000
- Cash at Bank: ₦100,000\text{₦}100,000
- Trade Creditors: ₦180,000\text{₦}180,000
- Bank Overdraft: ₦70,000\text{₦}70,000

What is the capital employed of the business?

  1. ₦1,050,000\text{₦}1,050,000Answer
  2. B
    ₦1,300,000\text{₦}1,300,000
  3. C
    ₦1,550,000\text{₦}1,550,000
  4. D
    ₦550,000\text{₦}550,000

Answer

The capital employed of the business is ₦1,050,000\text{₦}1,050,000.
Capital Employed represents the net capital actively utilized in running the enterprise. It is computed as Fixed Assets plus Working Capital. Here, Working Capital is ₦500,000−₦250,000=₦250,000\text{₦}500,000 - \text{₦}250,000 = \text{₦}250,000. Adding this to Fixed Assets of ₦800,000\text{₦}800,000 yields ₦1,050,000\text{₦}1,050,000.

Step-by-Step Solution

1
Calculate Total Current Assets
Current Assets = Stock + Trade Debtors + Cash at Bank = ₦250,000+₦150,000+₦100,000=₦500,000\text{₦}250,000 + \text{₦}150,000 + \text{₦}100,000 = \text{₦}500,000
Current assets comprise short-term assets convertible into cash within one trading cycle.
2
Calculate Total Current Liabilities
Current Liabilities = Trade Creditors + Bank Overdraft = ₦180,000+₦70,000=₦250,000\text{₦}180,000 + \text{₦}70,000 = \text{₦}250,000
Current liabilities are short-term debts due within one year.
3
Calculate Net Working Capital
Working Capital = Current Assets - Current Liabilities = ₦500,000−₦250,000=₦250,000\text{₦}500,000 - \text{₦}250,000 = \text{₦}250,000
Working capital measures liquid capital available for daily operations.
4
Calculate Capital Employed
Capital Employed = Fixed Assets + Working Capital = ₦800,000+₦250,000=₦1,050,000\text{₦}800,000 + \text{₦}250,000 = \text{₦}1,050,000
Capital employed reflects the total long-term assets and net working capital invested in operating the business.

Key Concept

Capital Employed = 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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