Correct Answer:
B. Current assets minus current liabilities
Working capital is defined as Current assets minus current liabilities. This metric is a crucial indicator of a company's short-term liquidity and operational efficiency. Current assets are those expected to be converted into cash, sold, or consumed within one year, such as cash, accounts receivable, and inventory. Current liabilities are obligations due within one year, including accounts payable, short-term loans, and accrued expenses. A positive working capital balance suggests that a company has sufficient short-term assets to cover its short-term debts, indicating good financial health and the ability to fund day-to-day operations. Effective working capital management is vital for maintaining solvency and fostering sustainable growth.
- Fixed assets minus liabilities does not represent working capital. Fixed assets are long-term assets (e.g., property, plant, equipment), and subtracting total liabilities (both current and long-term) from them would not provide a relevant measure of short-term operational liquidity.
- Long-term debt refers to financial obligations that are not due within the next year. While it is a component of a company's overall capital structure and influences financial health, it is distinct from working capital, which specifically focuses on the short-term balance between assets and liabilities.
- Net profit is the amount of money a company earns after deducting all expenses, including taxes, from its revenue over an accounting period. It is a measure of profitability and performance, rather than an indicator of a company's short-term liquidity position, which working capital quantifies.