Question

Net working capital means

• A. Current Assets - Current Liabilities
• B. Current Assets + Current Liabilities
• C. Current Liabilities - Current Assets
• D. None of these

Hint:

Net Working Capital measures liquidity; a positive NWC shows strong short-term solvency and operational stability.

Answer 1

The Correct Option is A

Step 1: Understanding the concept.
Net Working Capital (NWC) is a key indicator of an organization’s short-term financial health and liquidity position.
It represents the difference between the company’s current assets and current liabilities.
It shows the amount of capital that a company has available for day-to-day operations.
Step 2: Formula and meaning.
The formula for Net Working Capital is:
\[ \text{Net Working Capital} = \text{Current Assets} - \text{Current Liabilities} \] If this value is positive, it means the company has enough assets to cover its short-term obligations.
If it is negative, it indicates financial strain or poor liquidity.
Step 3: Examples.
For example, if a company has current assets worth ₹5,00,000 and current liabilities of ₹3,00,000, then:
\[ \text{NWC} = 5,00,000 - 3,00,000 = 2,00,000 \] This means ₹2,00,000 is available as working capital for regular business operations.
Step 4: Importance of NWC.
Net Working Capital helps measure operational efficiency and short-term financial stability.
It ensures that the firm can meet its immediate expenses like salaries, raw material costs, and bills.
Step 5: Analysis of options.
- (1) Current Assets - Current Liabilities: Correct definition.
- (2) Current Assets + Current Liabilities: Incorrect, not used in accounting.
- (3) Current Liabilities - Current Assets: Represents negative working capital, not standard NWC.
- (4) None of these: Incorrect.
Step 6: Conclusion.
Therefore, Net Working Capital = Current Assets - Current Liabilities.