How is working capital defined?

• A. Net Income - Dividends
• B. Current Assets - Current Liabilities
• C. Total Assets - Total Liabilities
• D. Current Assets / Current Liabilities

Answer: (B)

Working capital is a liquidity measure that shows how much short-term resources a company has to fund its day-to-day operations. It is defined as current assets minus current liabilities. A positive result means the firm has enough short-term assets to cover its short-term obligations, while a negative result can indicate potential liquidity problems. For example, if current assets total 120,000 and current liabilities total 90,000, working capital is 30,000, meaning there is 30,000 available to meet upcoming expenses. This concept differs from the current ratio, which is current assets divided by current liabilities and expresses liquidity as a ratio rather than a dollar amount. It also differs from total assets minus total liabilities, which equals shareholders’ equity, not liquidity. Net income minus dividends reflects profitability and earnings retention, not the short-term liquidity position.