How do you compute working capital?

How do you compute working capital?

• A. Current Liabilities minus Current Assets.
• B. Noncurrent Assets minus Noncurrent Liabilities.
• C. Current Assets minus Noncurrent Liabilities.
• D. Current Assets minus Current Liabilities.

Answer: (D)

Working capital shows how well a company can cover its short-term obligations with its short-term resources. It’s calculated by taking current assets and subtracting current liabilities. This difference reflects the funds available to run daily operations after settling near-term debts. For example, if current assets are 120,000 and current liabilities are 80,000, working capital is 40,000, indicating the ability to meet near-term needs. If the result is negative, it suggests potential liquidity issues. The other approaches would mix long-term items or use the wrong components, which wouldn’t accurately measure the liquidity available to cover immediate obligations.

Working capital shows how well a company can cover its short-term obligations with its short-term resources. It’s calculated by taking current assets and subtracting current liabilities. This difference reflects the funds available to run daily operations after settling near-term debts. For example, if current assets are 120,000 and current liabilities are 80,000, working capital is 40,000, indicating the ability to meet near-term needs. If the result is negative, it suggests potential liquidity issues. The other approaches would mix long-term items or use the wrong components, which wouldn’t accurately measure the liquidity available to cover immediate obligations.