What is Working Capital?

What is Working Capital?

• A. Current liabilities minus current assets.
• B. Cash plus debt minus current liabilities.
• C. Current assets minus current liabilities.
• D. Net income minus current assets.

Answer: (C)

Working capital is a measure of a company’s ability to cover its short-term obligations with its short-term resources. It is calculated as current assets minus current liabilities. Current assets are items that can be turned into cash within a year, such as cash, accounts receivable, and inventory. Current liabilities are obligations due within a year, like accounts payable, short-term debt, and accrued expenses. A positive result means the company has a cushion to fund day-to-day operations; a negative result indicates potential liquidity pressure. The other options don’t reflect this liquidity picture: subtracting current liabilities from current assets is the inverse and would misstate liquidity; adding cash and debt and then subtracting current liabilities mixes items that aren’t the standard working-capital measure; using net income with current assets confuses profitability with liquidity.

Working capital is a measure of a company’s ability to cover its short-term obligations with its short-term resources. It is calculated as current assets minus current liabilities. Current assets are items that can be turned into cash within a year, such as cash, accounts receivable, and inventory. Current liabilities are obligations due within a year, like accounts payable, short-term debt, and accrued expenses. A positive result means the company has a cushion to fund day-to-day operations; a negative result indicates potential liquidity pressure.

The other options don’t reflect this liquidity picture: subtracting current liabilities from current assets is the inverse and would misstate liquidity; adding cash and debt and then subtracting current liabilities mixes items that aren’t the standard working-capital measure; using net income with current assets confuses profitability with liquidity.