What is the standard formula for working capital?

• A. Current assets minus current liabilities.
• B. Current liabilities minus current assets.
• C. Net assets minus fixed assets.
• D. Cash plus inventories.

Answer: (A)

Working capital shows how much liquid resources a business has to cover its short-term needs. The standard formula is current assets minus current liabilities. Current assets are things the business expects to convert into cash within a year, such as cash, accounts receivable, and inventories. Current liabilities are obligations due within the same period, like accounts payable and short-term borrowings. Subtracting current liabilities from current assets reveals the funds available to run day-to-day operations after meeting those short-term obligations. A positive result means the business has excess short-term resources; a negative result signals potential liquidity problems that might require action to cover obligations.

For contrast, subtracting in the opposite order would not give the usual measure of liquidity. Net assets minus fixed assets relates to longer-term resources and equity, not day-to-day liquidity. Cash plus inventories alone omits other current assets like receivables and doesn’t fully reflect the short-term position.