Utah General Contractors - Business and Law Practice Exam

What is the formula for calculating working capital?

1. Total assets minus total liabilities

2. Current assets minus current liabilities

3. Net income minus expenditures

4. Cash flow minus operational expenses

The correct answer is: Current assets minus current liabilities

The formula for calculating working capital is current assets minus current liabilities. Working capital is a financial metric that represents the short-term liquidity of a business and provides insight into its operational efficiency and financial health. It essentially measures a company's ability to cover its short-term obligations with its short-term assets. Current assets include cash, accounts receivable, inventory, and any other assets that can be converted to cash within a year. Current liabilities consist of obligations that are due within the same time frame, such as accounts payable, short-term loans, and other accrued expenses. By subtracting current liabilities from current assets, businesses can assess whether they have enough resources to meet their immediate financial commitments, which is crucial for maintaining smooth operations. The other choices do not accurately represent the concept of working capital. Total assets minus total liabilities is the formula for calculating equity, which reflects the net worth of the business. Net income minus expenditures relates more to profitability and cash flows rather than liquidity. Cash flow minus operational expenses examines the cash generated from operations versus what is required for operations, which can provide insights into cash flow but does not directly indicate the liquidity position represented by working capital.