Net working capital is defined as …………

Question

BlackTom AI · Accepted Answer

Net working capital (NWC) is a measure of a company’s short-term liquidity and represents the amount of resources available after settling short-term obligations.
Option 1: current assets divided by current liabilities. This ratio is a liquidity ratio known as the current ratio if multiplied appropriately, but division alone does not yield NWC; it yields a proportion, not the difference between assets and liabilities.
Option 2: current assets minus current liabilities. This is the correct definition of NWC, reflecting how much of the company’s short-term assets exceed its short-term obligations, and it directly measures immediate financial cushion or deficit.
Option 3: current assets multiplied by current liabilities. Multiplication produces a product that has no standard interpretation as NWC and exaggerates the relationship between the two categories, making it incorrect.
Option 4: current assets plus current liabilities. Adding the two components would inflate the metric and does not reflect the net position; NWC is concerned with the net balance, not the total sum of assets and liabilities.

BFIL001 Week 8 Practice Quiz

Net working capital is defined as …………

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