Working capital is defined as which of the following?

Working capital is defined as which of the following?

• A. Current assets minus current liabilities
• B. Current liabilities minus current assets
• C. Total assets
• D. Net income

Answer: (A)

Working capital gauges a business's short-term liquidity—the resources available to cover everyday obligations. It is found by subtracting current liabilities from current assets, so it shows how much liquid capital remains after meeting near-term debts. For example, if current assets total 150,000 and current liabilities total 90,000, working capital is 60,000, indicating the company should be able to cover its upcoming obligations with some cushion. This definition matters because it focuses on the ability to pay short-term debts with assets that are likely to be converted to cash within a year. If current liabilities exceed current assets, working capital is negative, signaling potential liquidity problems. The other options don’t reflect this concept: liabilities minus assets would flip the sign and misrepresent liquidity; total assets include long-term assets and don’t isolate short-term resources; net income measures profitability over a period, not the ability to meet near-term obligations.

Working capital gauges a business's short-term liquidity—the resources available to cover everyday obligations. It is found by subtracting current liabilities from current assets, so it shows how much liquid capital remains after meeting near-term debts. For example, if current assets total 150,000 and current liabilities total 90,000, working capital is 60,000, indicating the company should be able to cover its upcoming obligations with some cushion.

This definition matters because it focuses on the ability to pay short-term debts with assets that are likely to be converted to cash within a year. If current liabilities exceed current assets, working capital is negative, signaling potential liquidity problems.

The other options don’t reflect this concept: liabilities minus assets would flip the sign and misrepresent liquidity; total assets include long-term assets and don’t isolate short-term resources; net income measures profitability over a period, not the ability to meet near-term obligations.