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

The following financial balance summary belongs to Kofi Retail Enterprises at the end of its trading period:

- Fixed Assets: ₦1,800,000\text{₦}1,800,000
- Current Assets: ₦650,000\text{₦}650,000
- Current Liabilities: ₦250,000\text{₦}250,000
- Long-term Loan: ₦400,000\text{₦}400,000

What is the Capital Employed of the business?

  1. ₦2,200,000\text{₦}2,200,000Answer
  2. B
    ₦2,450,000\text{₦}2,450,000
  3. C
    ₦2,700,000\text{₦}2,700,000
  4. D
    ₦1,800,000\text{₦}1,800,000

Answer

The Capital Employed of Kofi Retail Enterprises is ₦2,200,000\text{₦}2,200,000.
Capital Employed is computed either as Fixed Assets+Working Capital\text{Fixed Assets} + \text{Working Capital} or Total Assets−Current Liabilities\text{Total Assets} - \text{Current Liabilities}. Working Capital is ₦650,000−₦250,000=₦400,000\text{₦}650,000 - \text{₦}250,000 = \text{₦}400,000. Adding this to Fixed Assets (₦1,800,000\text{₦}1,800,000) gives ₦2,200,000\text{₦}2,200,000.

Step-by-Step Solution

1
Calculate Working Capital
Working Capital = Current Assets - Current Liabilities = ₦650,000−₦250,000=₦400,000\text{₦}650,000 - \text{₦}250,000 = \text{₦}400,000
Working Capital represents the net operational liquidity available to the firm.
2
Calculate Capital Employed
Capital Employed = Fixed Assets + Working Capital = ₦1,800,000+₦400,000=₦2,200,000\text{₦}1,800,000 + \text{₦}400,000 = \text{₦}2,200,000
Capital Employed measures the total value of assets utilized by the business to generate revenue (or Total Assets minus Current Liabilities).

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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