Net working capital is defined as …………

Question

BlackTom AI · Accepted Answer

When approaching the definition of net working capital, it's helpful to recall that it measures the short-term financial health of a company by considering liquid assets available to run daily operations.
Option 1: 'current assets multiplied by current liabilities' would produce a product, which mixes two balance sheet scales in a way that does not reflect available liquidity. Multiplication here does not represent the surplus or deficit of near-term resources.
Option 2: 'current assets divided by current liabilities' yields a ratio, not a difference. While ratios can inform solvency perspectives, this expression does not express the net amount of liquid funds after obligations are accounted for.
Option 3: 'current assets plus current liabilities' adds assets and liabilities together, which would inflate the size of both sides and fail to reflect any net position. NWC is concerned with what remains after settling short-term obligations, not an aggregate of both.
Option 4: 'current assets minus current liabilities' captures the essence of net working capital: the difference between what is readily available (current assets) and what is due in the near term (current liabilities). This tells us whether there is a positive buffer to fund daily operations and growth, or a potential shortfall.
In summary, the concept of net working capital is best understood as the residual amount after subtracting current liabilities from current assets, aligning with its role as a liquidity measure for short-term needs.

25400 Financial Literacy - Spring 2025 🔴 Practice Questions for In-class Quiz 2

Net working capital is defined as …………

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