What is working capital?

What is working capital?

• A. Revenue remaining after all expenses
• B. Net profit available to shareholders
• C. Current assets minus current liabilities
• D. Total assets minus total liabilities

Answer: (C)

Working capital is defined as the difference between a company's current assets and its current liabilities. It is a crucial financial metric that indicates the liquidity position of a business, showing how well it can cover its short-term obligations with its short-term assets. Positive working capital signifies that a company has sufficient current assets to meet its current liabilities, allowing it to maintain operations and support day-to-day activities. Conversely, negative working capital may signal financial trouble, as it implies that a company may face challenges in meeting its short-term financial commitments. In contrast, the other definitions relate to different financial concepts. Revenue remaining after all expenses pertains to net income, while net profit available to shareholders references earnings after taxes and dividends have been paid. Total assets minus total liabilities describes a company’s net worth or shareholders' equity rather than its liquidity position. Therefore, the definition associated with current assets minus current liabilities most accurately represents working capital.

Working capital is defined as the difference between a company's current assets and its current liabilities. It is a crucial financial metric that indicates the liquidity position of a business, showing how well it can cover its short-term obligations with its short-term assets. Positive working capital signifies that a company has sufficient current assets to meet its current liabilities, allowing it to maintain operations and support day-to-day activities. Conversely, negative working capital may signal financial trouble, as it implies that a company may face challenges in meeting its short-term financial commitments.

In contrast, the other definitions relate to different financial concepts. Revenue remaining after all expenses pertains to net income, while net profit available to shareholders references earnings after taxes and dividends have been paid. Total assets minus total liabilities describes a company’s net worth or shareholders' equity rather than its liquidity position. Therefore, the definition associated with current assets minus current liabilities most accurately represents working capital.