What does working capital represent in financial management?

• A. Current assets plus current liabilities
• B. Current assets divided by current liabilities
• C. Current assets minus current liabilities
• D. Current liabilities minus current assets

Answer: (C)

Working capital is a crucial concept in financial management that indicates the short-term financial health and operational efficiency of a business. It is calculated as the difference between current assets and current liabilities.

The reason why current assets minus current liabilities is the correct interpretation is that it focuses on the funds available to meet the company's short-term obligations. Current assets include items like cash, accounts receivable, and inventory, which are expected to be converted into cash within a year. Current liabilities are the company's short-term debts and obligations that are due within the same period.

A positive working capital value suggests that the company has enough short-term assets to cover its short-term liabilities, which is a sign of financial stability. Conversely, a negative working capital indicates potential liquidity problems, as it suggests that the company may struggle to pay its short-term debts.

The other options suggest different mathematical relationships that do not accurately reflect the definition of working capital. For example, current assets plus current liabilities would provide a misleading measure, as it does not indicate whether a company can cover its obligations with its available resources. Current assets divided by current liabilities would offer a ratio, while current liabilities minus current assets would illustrate an entirely different financial situation. Thus, understanding the definition of working capital as current assets minus