Question 8
Explain the following types of capital:
(i) Authorized capital;
(ii) Liquid capital.
(b) The following records were extracted from the books of Bandin and Bachur Partnership as at March 31st, 2020.
D
Equipment 150,000
Cash at bank 25,000
Creditors 120,000
Debtors 150,000
Stock as at 1/03/20 30,000
Motor van 300,000
Fixtures and fittings 40,000
Overdraft 45,000
Stock as at 31/03/20 25,000
Calculate:
- Fixed assets;
- Current liabilities;
- Current assets;
- Working capital;
- Average stock.
Observation
Many candidates attempted this question and their performance was good. However, some candidates used lost some points for using the wrong currency symbols.
The expected responses are:
(a) (i) Authorised capital
This is capital which is stated in the Memorandum of Association of a company and it is the maximum amount a company is allowed to raise.
(ii) Liquid capital
This is capital that is made up of assets that can easily be converted into cash.
(b) (i) Fixed assets D
Equipment 150,000
Motor van 300,000
Fixtures and fittings 40,000
490,000
(ii) Current liabilities D
Creditors 120,000
Overdraft 45,000
165,000
(iii) Current assets D
Stock 25,000
Debtors 150,000
Cash at bank 25,000
200,000
(iv) Working capital = Current assets – Current liabilities
Current assets = D25,000 + D150,000 + D25,000 = D200,000
Current liabilities = D120,000 + D45,000 = D165,000
Therefore, working capital = D200,000 – D165,000 = D35,000
(v) Average stock = Opening stock + Closing stock
2
= D30,000 + D25,000
2
= D55, 000
2
= D27, 500