A construction company has current assets of $350,000 and current liabilities of $280,000. What is the company's working capital?
Correct Answer
A) $70,000
Working capital = Current assets - Current liabilities = $350,000 - $280,000 = $70,000. This represents the company's short-term financial health.
Why This Is the Correct Answer
Working capital is calculated by subtracting current liabilities from current assets. This formula measures a company's short-term liquidity and ability to meet immediate obligations. With current assets of $350,000 and current liabilities of $280,000, the working capital equals $350,000 - $280,000 = $70,000. This positive working capital indicates the company has sufficient short-term assets to cover its short-term debts.
Why the Other Options Are Wrong
Option B: $630,000
$350,000 only represents the current assets amount without subtracting current liabilities. While current assets are part of the working capital calculation, the complete formula requires subtracting current liabilities to determine net working capital.
Option D: $350,000
$280,000 only represents the current liabilities amount without any calculation. This ignores the current assets entirely and doesn't follow the working capital formula. Simply stating one component of the equation is not the answer.
Memory Technique
Remember 'Working Capital = What you CAN use' - Current Assets minus Current liabilities gives you what's left to WORK with.
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