What is working capital?

What is working capital?

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

Answer: (A)

Working capital measures a company’s ability to cover its short-term obligations with its short-term resources. It is current assets minus current liabilities. Think of current assets as cash, accounts receivable, and inventory—things expected to be used or converted to cash within a year—while current liabilities are obligations due within the same period, like short-term debt and accounts payable. A positive result indicates a liquidity cushion to fund daily operations; a negative result signals potential liquidity issues. This is the correct form because it directly compares the resources available in the near term to the obligations due in the near term. Subtracting current assets from current liabilities would flip the metric and isn’t the standard measure. Total assets minus total liabilities equals equity, not working capital, and net income minus expenses equals profit, not liquidity.

Working capital measures a company’s ability to cover its short-term obligations with its short-term resources. It is current assets minus current liabilities. Think of current assets as cash, accounts receivable, and inventory—things expected to be used or converted to cash within a year—while current liabilities are obligations due within the same period, like short-term debt and accounts payable. A positive result indicates a liquidity cushion to fund daily operations; a negative result signals potential liquidity issues.

This is the correct form because it directly compares the resources available in the near term to the obligations due in the near term. Subtracting current assets from current liabilities would flip the metric and isn’t the standard measure. Total assets minus total liabilities equals equity, not working capital, and net income minus expenses equals profit, not liquidity.