Virginia Contractor General Practice Test

How can working capital be calculated?

1. Current assets + current liabilities

2. Current assets - current liabilities

3. Current assets × current liabilities

4. Current assets ÷ current liabilities

The correct answer is: Current assets - current liabilities

Working capital is a financial metric that represents the difference between a company's current assets and current liabilities. It provides insight into the short-term financial health and operational efficiency of a business. The calculation involves subtracting current liabilities from current assets. Current assets typically include cash, accounts receivable, and inventory, which are expected to be converted into cash or used up within a year. Current liabilities, on the other hand, comprise obligations that the company needs to pay within the same timeframe, such as accounts payable and short-term debt. By employing the formula of current assets minus current liabilities, businesses can determine their available operating liquidity. A positive working capital indicates that the company can easily cover its short-term liabilities, whereas a negative result can signal potential financial troubles or liquidity issues. This critical metric is not only useful for the company's internal management but also for investors and creditors assessing risk and operational performance.