What is the formula for working capital?

• A. Current assets + current liabilities
• B. Current liabilities - current assets
• C. Current assets - current liabilities
• D. Current assets + cash equivalents

Answer: (C)

Working capital is a financial metric that represents the difference between a company's current assets and current liabilities. It is calculated using the formula: current assets minus current liabilities. This calculation provides insight into a company's short-term liquidity and operational efficiency, indicating whether it has enough resources to cover its short-term obligations.

By subtracting current liabilities from current assets, you can gauge a company's ability to meet its financial obligations in the near term, reflecting its overall financial health. A positive working capital suggests that a company can pay off its short-term liabilities, while a negative working capital indicates potential liquidity problems.

In this context, the other options do not define working capital properly. The first option adds current assets and current liabilities, which does not yield a meaningful measure of liquidity. The second option incorrectly subtracts current assets from current liabilities, reversing the necessary elements and thereby resulting in a value that does not provide insight into liquidity. Lastly, the choice incorporating current assets and cash equivalents does not accurately represent the definition of working capital, as cash equivalents alone do not encompass the entire current assets required for the calculation.