How is working capital measured?
Understand the Problem
The question is asking for the correct method to measure working capital, which involves evaluating the relationship between current assets and current liabilities.
Answer
Working capital = Current assets - Current liabilities
Working capital is measured by subtracting a company's current liabilities from its current assets.
Answer for screen readers
Working capital is measured by subtracting a company's current liabilities from its current assets.
More Information
Working capital is an important metric for understanding a company's short-term financial health and its efficiency in using resources. It indicates the liquidity of the company and its ability to cover short-term liabilities with its short-term assets.
Tips
A common mistake is confusing working capital with the working capital ratio, which is calculated as current assets divided by current liabilities.
Sources
- What Is Working Capital? How to Calculate and Why It's Important - netsuite.com
- How Do You Calculate Working Capital? - Investopedia - investopedia.com
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