Define working capital and its significance.

• A. Working capital equals total assets minus total liabilities.
• B. Working capital is primarily cash balance; measures cash management.
• C. Working capital equals inventory only; measures stock levels.
• D. Working capital = current assets minus current liabilities; measures short-term liquidity and operational efficiency.

Answer: (D)

Working capital measures a company’s ability to cover its short-term obligations with its short-term resources. It is defined as current assets minus current liabilities. This matters because current assets include cash, accounts receivable, and inventory—resources that can be used or converted into cash within a year—while current liabilities include obligations due within a year, such as accounts payable and short-term debt. A positive result means the business typically has a cushion to pay its near-term bills and continue operations; a negative result signals potential liquidity problems.

This definition captures both liquidity and how efficiently a company uses its short-term assets. It’s not just about cash (that would miss other liquid resources), nor is it about inventory alone or total assets minus total liabilities (that latter is equity, not working capital).