Net working capital is defined as

Net working capital is defined as

• A. Total Assets Minus Total Liabilities
• B. Current Assets Minus Current Liabilities
• C. Current Assets Plus Current Liabilities
• D. Net Income Minus Expenses

Answer: (B)

Net working capital reflects a company’s ability to meet its short-term obligations using its short-term assets. It is current assets minus current liabilities. Current assets are items likely to be converted to cash within a year (like cash, receivables, and inventory), while current liabilities are obligations due within a year (such as payables and short-term debt). A positive result means the firm has liquidity to fund day-to-day operations; a negative result indicates potential liquidity risk. The other formulations don’t measure this liquidity position: total assets minus total liabilities equals equity, not short-term liquidity. Adding current assets and current liabilities doesn’t produce a meaningful liquidity metric. Net income minus expenses computes profit, not cash available to meet near-term obligations.

Net working capital reflects a company’s ability to meet its short-term obligations using its short-term assets. It is current assets minus current liabilities. Current assets are items likely to be converted to cash within a year (like cash, receivables, and inventory), while current liabilities are obligations due within a year (such as payables and short-term debt). A positive result means the firm has liquidity to fund day-to-day operations; a negative result indicates potential liquidity risk.

The other formulations don’t measure this liquidity position: total assets minus total liabilities equals equity, not short-term liquidity. Adding current assets and current liabilities doesn’t produce a meaningful liquidity metric. Net income minus expenses computes profit, not cash available to meet near-term obligations.