The state of affairs of Danchukwu Enterprises for the year ended 30th September, 1997 shows the following: Capital 90,000.00 Creditors 22,000.00 Vehicles 50...
Question 1 Report
The state of affairs of Danchukwu Enterprises for the year ended 30th September, 1997 shows the following:
| Capital | 90,000.00 |
| Creditors | 22,000.00 |
| Vehicles | 50,000.00 |
| Furniture & Fittings | 20,000.00 |
| Cash in hand | 18,000.00 |
| Stock | 24,000.00 |
(a) What is Danchukwu's working capital, using the above information?
(b) Mention four uses of working capital.
(c) Differentiate current capital from fixed capital.
Answer Details
(a) Danchukwu's working capital
Working capital is the excess of current assets over current liabilities.
Current assets: Cash in hand \(18{,}000\) + Stock \(24{,}000 = 42{,}000\).
(Vehicles \(50{,}000\) and Furniture & Fittings \(20{,}000\) are fixed assets; Capital is a source of funds, not an asset.)
Current liabilities: Creditors \(= 22{,}000\).
\[\text{Working capital} = \text{Current assets} - \text{Current liabilities}\]\[= 42{,}000 - 22{,}000 = \mathbf{N20{,}000.00}\]
(b) Four uses of working capital
- To purchase stock (goods) for resale.
- To pay wages and salaries of workers.
- To meet day-to-day running expenses such as rent, electricity and transport.
- To pay short-term creditors and other current liabilities as they fall due.
(c) Difference between current (circulating) capital and fixed capital
| Current (circulating) capital | Fixed capital |
|---|---|
| Capital used to buy current assets that change form quickly, such as stock, cash and debtors. | Capital used to buy fixed (durable) assets such as machinery, buildings and vehicles. |
| It is short lived and constantly circulates in the course of trading. | It is invested for a long period and is not meant for resale. |
| It is easily converted into cash (liquid). | It is not easily converted into cash. |
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