Working Capital is defined as which expression?

Working Capital is defined as which expression?

• A. current liabilities - current assets PLUS net income, depreciation, taxes, proceeds
• B. current assets - current liabilities
• C. current liabilities - current assets
• D. total assets - total liabilities

Answer: (A)

Working capital measures short-term liquidity and is defined as current assets minus current liabilities. Current assets are resources expected to be converted into cash within a year (like cash, accounts receivable, and inventory), while current liabilities are obligations due within a year (such as accounts payable and short-term debt). A positive result indicates the firm has more short-term resources than obligations, signaling good liquidity; a negative result points to potential liquidity issues. The first option mixes balance-sheet items with income-statement components (net income, depreciation, taxes, proceeds), which are not used to define working capital. Other options either refer to total assets minus total liabilities (which equals equity) or reverse the subtraction, giving the opposite sign. Therefore, the standard expression is current assets minus current liabilities.

Working capital measures short-term liquidity and is defined as current assets minus current liabilities. Current assets are resources expected to be converted into cash within a year (like cash, accounts receivable, and inventory), while current liabilities are obligations due within a year (such as accounts payable and short-term debt). A positive result indicates the firm has more short-term resources than obligations, signaling good liquidity; a negative result points to potential liquidity issues. The first option mixes balance-sheet items with income-statement components (net income, depreciation, taxes, proceeds), which are not used to define working capital. Other options either refer to total assets minus total liabilities (which equals equity) or reverse the subtraction, giving the opposite sign. Therefore, the standard expression is current assets minus current liabilities.