Which equation represents working capital?

Which equation represents working capital?

• A. Current assets - current liabilities
• B. Total assets - total liabilities
• C. Current assets + current liabilities
• D. Current liabilities - current assets

Answer: (A)

Working capital is a measure of a business’s short-term liquidity—the resources available to run daily operations. It is calculated by subtracting current liabilities from current assets. Current assets are items that can be turned into cash within a year, like cash, accounts receivable, and inventory. Current liabilities are obligations due within a year, such as accounts payable and short-term debt. The difference between these shows how much cushion the company has to pay its short-term debts. A positive result means there is liquidity to cover obligations; a negative result signals potential liquidity issues. The other options don’t capture this liquidity concept: total assets minus total liabilities equals equity, not working capital; adding current assets and current liabilities isn’t a standard liquidity measure; subtracting current assets from current liabilities gives the opposite sign of the correct measure.

Working capital is a measure of a business’s short-term liquidity—the resources available to run daily operations. It is calculated by subtracting current liabilities from current assets. Current assets are items that can be turned into cash within a year, like cash, accounts receivable, and inventory. Current liabilities are obligations due within a year, such as accounts payable and short-term debt. The difference between these shows how much cushion the company has to pay its short-term debts. A positive result means there is liquidity to cover obligations; a negative result signals potential liquidity issues. The other options don’t capture this liquidity concept: total assets minus total liabilities equals equity, not working capital; adding current assets and current liabilities isn’t a standard liquidity measure; subtracting current assets from current liabilities gives the opposite sign of the correct measure.