Which statement best defines working capital?

• A. Current assets minus current liabilities
• B. Total assets minus total liabilities
• C. Cash plus inventory minus debt
• D. Net income minus expenses

Answer: (A)

Working capital is a measure of liquidity that shows whether a company has enough short-term resources to cover its day-to-day needs. It is calculated by subtracting current liabilities from current assets. Current assets are items likely to be turned into cash within a year—cash, marketable securities, accounts receivable, and inventory. Current liabilities are obligations due within a year—accounts payable, short-term debt, and accrued expenses. When current assets exceed current liabilities, the company has positive working capital, meaning it can meet short-term obligations and continue operating smoothly. If current liabilities exceed current assets, there’s a liquidity gap that may require short-term financing or other adjustments. This focus on short-term liquidity is what sets working capital apart from broader measures like total assets minus total liabilities (which gives equity) or from profitability measures such as net income minus expenses.