Theory question 108
Business CalculationsCommerce 2 (essay)
Fred Asamah had the following state of affairs as at 31st December, 1999:
Vehicles N82,000
Furniture N15,000
Stocks N38,000
Debtors N25,000
Creditors N30,000
Cash in hand N10,000
Bank overdraft N5,000
Capital N135,000
(a) Calculate: (i) the current assets of the business (ii) its current liabilities (iii) its working capital
(b) What is a current asset?
(c) State one significance of calculating the working capital
Show the model answer
(a)(i) Current assets = stocks 38,000 + debtors 25,000 + cash in hand 10,000 = N73,000.
(ii) Current liabilities = creditors 30,000 + bank overdraft 5,000 = N35,000.
(iii) Working capital = 73,000 − 35,000 = N38,000.
(b) A current asset is an asset held for a short time (usually under a year) that changes from day to day in the course of trade, e.g. stock, debtors, cash.
(c) Any one: shows whether the business can pay its short-term debts (liquidity); shows the funds available for day-to-day running; helps owners and creditors judge the firm's financial health.
Vehicles and furniture are fixed assets; leave them out of (a).