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ACCA Applied Skills · Financial Management · The nature, elements and importance of working capital

Which of the following best describes the working capital of an entity?

Working capital is current assets less current liabilities. It represents the net funds invested in day-to-day trading activities such as inventory, receivables, cash and payables. Total assets less total liabilities is net assets, which is a different measure.

  1. ATotal assets less total liabilities
  2. BCurrent assets less current liabilitiesCorrect
  3. CNon-current assets plus inventory less trade payables
  4. DCash and cash equivalents less bank overdrafts

Explanation

Working capital is the net of current assets and current liabilities, i.e. the funds tied up in day-to-day operations. Total assets less total liabilities is net assets (equity), so option A is wrong. Cash less overdrafts only covers net liquid funds and ignores inventory, receivables and payables.

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