How is working capital calculated?

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Multiple Choice

How is working capital calculated?

Working capital shows short-term liquidity and is calculated by subtracting current liabilities from current assets. Current assets are items like cash, accounts receivable, and inventory that you expect to convert to cash within a year. Current liabilities are obligations due within a year, such as accounts payable and short-term debt. The difference indicates how much cushion the business has to cover day-to-day operations. If current assets exceed current liabilities, you have positive working capital and stronger short-term liquidity; if not, liquidity may be tighter. Remember, total assets minus total liabilities equals owners’ equity, not working capital. For example, with current assets of 150,000 and current liabilities of 100,000, working capital is 50,000. The current ratio (current assets divided by current liabilities) is another way to gauge liquidity.

Working capital shows short-term liquidity and is calculated by subtracting current liabilities from current assets. Current assets are items like cash, accounts receivable, and inventory that you expect to convert to cash within a year. Current liabilities are obligations due within a year, such as accounts payable and short-term debt. The difference indicates how much cushion the business has to cover day-to-day operations. If current assets exceed current liabilities, you have positive working capital and stronger short-term liquidity; if not, liquidity may be tighter. Remember, total assets minus total liabilities equals owners’ equity, not working capital. For example, with current assets of 150,000 and current liabilities of 100,000, working capital is 50,000. The current ratio (current assets divided by current liabilities) is another way to gauge liquidity.

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