Which metric represents the difference between current assets and current liabilities?

Which metric represents the difference between current assets and current liabilities?

• A. Working capital
• B. Net income
• C. Liquidity ratio
• D. Asset turnover

Answer: (A)

Working capital is the difference between current assets and current liabilities. It shows how much short-term resources a company has to cover its day-to-day obligations. When current assets exceed current liabilities, there’s positive working capital, indicating better short-term liquidity and flexibility to fund operations. If current liabilities outstrip current assets, that can signal potential liquidity stress. The other terms don’t fit this description. Net income is the profit earned over a period, not a balance-sheet difference. A liquidity ratio typically compares current assets to current liabilities as a ratio (not a simple difference). Asset turnover measures how efficiently assets generate revenue (sales relative to total assets).

Working capital is the difference between current assets and current liabilities. It shows how much short-term resources a company has to cover its day-to-day obligations. When current assets exceed current liabilities, there’s positive working capital, indicating better short-term liquidity and flexibility to fund operations. If current liabilities outstrip current assets, that can signal potential liquidity stress.

The other terms don’t fit this description. Net income is the profit earned over a period, not a balance-sheet difference. A liquidity ratio typically compares current assets to current liabilities as a ratio (not a simple difference). Asset turnover measures how efficiently assets generate revenue (sales relative to total assets).