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.
Explanation
a(i). Danchukwu's working capital based on available information = Current Asset - Current liabilities
Current Assets:
Cash in hand 18,000
Stock 24,000
42,000
Current Liabilities:
Creditors 22,000
Working Capital = 42,000 - 22,000 = N20,000.
(b) Uses of Working Capital include:
(i) It serves as a check against tying down of too much money for current assets.
(ii) It helps to determine availability of funds for the day-to-day running of the business.
(iii) It helps to determine the solvency of the business.
(iv) It indicates that the business is not financed by suppliers.
(v) Since the working capital is used to buy stock from where profit is derived, the higher the working capital the higher the profit expected.
(c) Current Capital is also known as floating capital. It is capital that is regularly required for business operation, e.g, stock and cash. However Fixed Capital are the durable items or investments a business uses to further produce goods.
Fixed assets of a business include the business buildings, machines, fixtures and fittings. Current Capital is the total current assets which include stock, cash and debtors, while fixed capital is the total fixed assets including machinery, etc.