Which of the following accurately describes working capital?
A) Current assets minus inventory
B) Current assets minus current liabilities
C) Total debt minus stockholders' equity
D) Cost of goods sold divided by average inventory

Question

Quizplus · Accepted Answer

Working capital is defined as the difference between a company's current assets and its current liabilities. This represents the amount of funds a company has available to meet its short-term obligations. Option B is the only choice that accurately reflects this definition.

Option A is incorrect because it only subtracts inventory from current assets, leaving out other current assets such as cash and accounts receivable. Option C is incorrect because it is calculating the company's leverage ratio, not working capital. Option D is incorrect because it is a calculation of inventory turnover, not working capital.

Which of the Following Accurately Describes Working Capital