Arizona Contractors License Practice Exam

What is the formula for calculating working capital?

1. Current Assets + Current Liabilities

2. Current Assets - Current Liabilities

3. Current Assets x Current Liabilities

4. Current Assets / Current Liabilities

The correct answer is: Current Assets - Current Liabilities

The formula for calculating working capital is defined as the difference between current assets and current liabilities. Working capital is a financial metric that measures a company's operational efficiency and short-term financial health. It indicates the available funds that a business can use to run its day-to-day operations. By subtracting current liabilities from current assets, you arrive at a figure that represents the amount of money available for the company to cover its short-term obligations. If the working capital is positive, it implies that the company has enough assets to meet its liabilities, which is a sign of good financial health. Conversely, negative working capital may indicate potential liquidity issues. This understanding of working capital is crucial for contractors and businesses alike, as it helps in assessing cash flow management, planning for future expenses, and making informed business decisions.