Working capital is a measure of a company’s current assets less its current liabilities.
Review Chapter 7 for definitions of assets and liabilities. But in summary:
An asset is a resource held to produce some economic benefit. Examples of assets are cash, inventory, accounts receivable, and property.
A current asset is an asset whose economic benefit is expected to come within one year. Examples of current assets are cash, inventory, and accounts receivable.
A liability is any debt or financial obligation of a company. Examples of liabilities are accounts payable, accrued expenses, long-term debt, and a deferred tax liability.
A current liability is a debt or financial obligation that is due within one year. Examples of current liabilities are accounts payable and accrued expenses.
The working capital, or the current assets less the current liabilities, helps us determine if cash coming in from our current assets will cover the liabilities that are coming due in the next 12 months. If working capital is positive, meaning current assets are greater than the current liabilities, we will potentially have more than enough funds to cover our liabilities coming due. If the working capital is negative, meaning current assets are less than the current liabilities, we do not have enough resources to pay our current ...