Future Business Leaders of America (FBLA) Agribusiness Practice Test

What is net working capital?

1. Debt minus assets

2. Cash available to cover short-term liabilities

3. Cash available to the firm to meet day-to-day expenses

4. Total current assets

The correct answer is: Cash available to the firm to meet day-to-day expenses

Net working capital is a financial metric that indicates the short-term liquidity position of a company. It represents the difference between a company's current assets and current liabilities, reflecting the available cash and other assets that can be quickly converted into cash to meet day-to-day operational expenses. The correct choice highlights the importance of available cash for covering ongoing operational costs, ensuring that the business can continue to function smoothly without facing liquidity issues. Understanding net working capital involves recognizing that it is essential for a business to manage its short-term assets effectively. The measurement shows how well a company can pay off its short-term obligations with its short-term assets. While cash is a significant component of this equation, net working capital isn't solely about cash but encompasses any current assets that can contribute to funding operating activities. The other choices do not correctly define net working capital. They either misinterpret the components of working capital or focus on specific types of assets or liabilities rather than the overall relationship between current assets and current liabilities, which is vital for assessing a firm's short-term financial health.