How is working capital calculated?

Working capital is calculated by subtracting current liabilities from current assets. This formula provides a key measure of a company's short-term financial health and operational efficiency. Current assets include cash, accounts receivable, and inventory that can be converted to cash within a year, while current liabilities encompass obligations that are due within the same timeframe, such as accounts payable and short-term debt.

By determining the difference between these two categories, working capital offers insight into the company's ability to meet its short-term obligations. A positive working capital indicates that a company has enough assets to cover its liabilities, which is a sign of financial stability, whereas a negative figure could indicate potential liquidity problems.

Other options presented do not correctly reflect the concept of working capital. For instance, calculating net income plus total liabilities or total assets minus current liabilities does not provide a measure of short-term financial health, and adding current assets to current liabilities would not yield a meaningful assessment of a company's working capital. This fundamental definition is crucial for anyone involved in financial management, accounting, or analysis.