In short
Working capital is current assets minus current liabilities. It measures the resources available to fund day-to-day operations and meet short-term obligations.
Key takeaways
- Increases in receivables and inventory use cash, reducing operating cash flow under the indirect method.
- Too much working capital can mean idle resources; too little can mean liquidity strain.
- Paying a current liability with cash doesn't change working capital.
Example
Current assets of $500,000 and current liabilities of $300,000: working capital is $200,000 and the current ratio about 1.7.
Where it's tested
BAR: Financial Statement Analysis — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company's days inventory outstanding is 60, days sales outstanding is 45 and days payables outstanding is 30. What is its cash conversion cycle?