(a) Explain the following types of capital (i)Authorized capital (ii) Liquid capital (b) the following records were extracted from the books of Bandin and B...

Answer Details

(a) Types of capital

(i) Authorized capital: This is the maximum amount of share capital that a company is permitted to raise from the public, as stated in its Memorandum of Association. It is also called nominal or registered capital, and the company cannot issue shares beyond this limit without altering the memorandum.

(ii) Liquid capital: This is the excess of a firm's liquid (quick) assets over its current liabilities. Liquid assets are the current assets that are cash or readily convertible into cash, i.e. current assets less stock (and prepayments). It measures the firm's ability to settle short-term debts immediately.

(b) Bandin and Bachur Partnership as at 31st March, 2020

(i) Fixed assets = 150,000 + 300,000 + 40,000 = N490,000

(ii) Current liabilities = Creditors + Overdraft = 120,000 + 45,000 = N165,000

(iii) Current assets = Cash at bank + Debtors + Closing stock = 25,000 + 150,000 + 25,000 = N200,000

(iv) Working capital = Current assets - Current liabilities = 200,000 - 165,000 = N35,000

(v) Average stock = (Opening stock + Closing stock) / 2 = (30,000 + 25,000) / 2 = N27,500