What is the formula for working capital?

What is the formula for working capital?

• A. Current Assets - Current Liabilities
• B. Current Liabilities - Current Assets
• C. Net Income - Dividends
• D. Cash Flow From Operations - Financing Activities

Answer: (A)

Working capital measures short-term liquidity by comparing assets that can be turned into cash within a year to the obligations due in the same period. The formula is current assets minus current liabilities, and the resulting figure shows how much cushion is available to fund day-to-day operations. A positive result means there’s enough liquidity to cover short-term liabilities, while a negative result indicates potential liquidity risk or the need for additional financing. The other options don’t fit because reversing the subtraction isn’t the standard liquidity measure, net income minus dividends is a profitability metric, and cash flow from operations minus financing activities mixes cash flow categories rather than assessing balance sheet liquidity.

Working capital measures short-term liquidity by comparing assets that can be turned into cash within a year to the obligations due in the same period. The formula is current assets minus current liabilities, and the resulting figure shows how much cushion is available to fund day-to-day operations. A positive result means there’s enough liquidity to cover short-term liabilities, while a negative result indicates potential liquidity risk or the need for additional financing. The other options don’t fit because reversing the subtraction isn’t the standard liquidity measure, net income minus dividends is a profitability metric, and cash flow from operations minus financing activities mixes cash flow categories rather than assessing balance sheet liquidity.