How is Working Capital defined?

How is Working Capital defined?

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

Answer: (A)

Working capital measures short-term liquidity by comparing the resources a company can quickly convert to cash with the obligations it must meet in the near term. It is defined as current assets minus current liabilities. Current assets—like cash, accounts receivable, and inventory—are assets expected to be converted to cash within a year. Current liabilities—such as accounts payable and short-term debt—are obligations due within a year. A positive result means the company has enough short-term assets to cover its near-term obligations, while a negative result signals potential liquidity issues. The other concepts don’t reflect liquidity in the near term: profit is net income minus expenses, total assets minus total liabilities is total capitalization or net assets, and equity minus liabilities isn’t a standard liquidity measure.

Working capital measures short-term liquidity by comparing the resources a company can quickly convert to cash with the obligations it must meet in the near term. It is defined as current assets minus current liabilities. Current assets—like cash, accounts receivable, and inventory—are assets expected to be converted to cash within a year. Current liabilities—such as accounts payable and short-term debt—are obligations due within a year. A positive result means the company has enough short-term assets to cover its near-term obligations, while a negative result signals potential liquidity issues. The other concepts don’t reflect liquidity in the near term: profit is net income minus expenses, total assets minus total liabilities is total capitalization or net assets, and equity minus liabilities isn’t a standard liquidity measure.