Virginia Contractor General Practice Test

How is working capital calculated?

1. Current Assets + Current Liabilities

2. Current Assets - Current Liabilities

3. Current Assets x Current Liabilities

4. Current Liabilities - Current Assets

The correct answer is: Current Assets - Current Liabilities

Working capital is calculated by subtracting current liabilities from current assets. This calculation is essential for assessing a company's short-term financial health and operational efficiency. Current assets include items that are expected to be converted to cash or used up within a year, such as cash, accounts receivable, and inventory. Current liabilities, on the other hand, are obligations due within one year, including accounts payable, short-term loans, and other accrued expenses. By calculating working capital in this way, you can determine how much readily available capital a company has to cover its short-term obligations. Positive working capital indicates that a company has sufficient assets to cover its liabilities, which is a sign of good financial health, while negative working capital might suggest potential liquidity issues. This method is widely accepted and used in financial analysis to assess a company’s efficiency and its ability to manage its resources effectively, making it a crucial concept for contractors and business managers alike.