Federal Nursing Home Administrator Practice Exam

What is the formula for calculating working capital?

1. Current assets minus current liabilities

2. Current liabilities minus current assets

3. Total assets minus total liabilities

4. Current assets plus current liabilities

The correct answer is: Current assets minus current liabilities

The formula for calculating working capital is based on the relationship between current assets and current liabilities. Working capital reflects a company’s short-term financial health and operational efficiency. Specifically, working capital is determined by subtracting current liabilities from current assets. This calculation provides insight into the company’s ability to cover its short-term obligations with its short-term assets. A positive working capital indicates that a business has sufficient assets to pay its current debts, while a negative working capital might signal financial trouble or liquidity issues. The other options do not provide the correct approach for calculating working capital. For instance, calculating current liabilities minus current assets would yield a figure that represents liabilities that exceed assets, which is not useful for assessing short-term financial health. Similarly, total assets minus total liabilities provides a measure known as shareholder equity, which is focused on the overall financial standing of an organization rather than its operational liquidity. Lastly, adding current assets to current liabilities does not yield an informative figure concerning a company's ability to meet its short-term obligations.