Future Business Leaders of America (FBLA) Agribusiness Practice Test

How is net working capital calculated?

1. Current assets minus total liabilities

2. Current assets plus current liabilities

3. Current assets minus current liabilities

4. Net profit divided by current assets

The correct answer is: Current assets minus current liabilities

Net working capital is a financial metric that assesses a company's operational efficiency and short-term financial health. It is calculated by subtracting current liabilities from current assets. Current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted into cash within a year. Current liabilities are obligations that the company needs to pay off within the same time frame, such as accounts payable, wages, and short-term loans. By determining the difference between current assets and current liabilities, net working capital provides insights into the company's ability to meet its short-term obligations. A positive net working capital indicates that a company can easily cover its short-term debts, while a negative value may signal liquidity problems. The other options do not correctly represent how net working capital is calculated. For instance, adding current liabilities to current assets does not yield a meaningful indicator of financial health, nor does dividing net profit by current assets relate to the concept of working capital. This clear distinction makes the calculation derived from current assets minus current liabilities the appropriate approach to measuring a company's short-term financial position.