In business finance, which of the following is correctly classified as working capital for a firm?

Introduction / Context:
Working capital is a key concept in business finance and accounting. It reflects the short term financial health and liquidity position of a firm. Understanding working capital helps managers ensure that the business can meet its day to day obligations such as paying suppliers, wages, and utility bills. This question asks you to identify which statement correctly describes working capital. The options include current assets, current liabilities, a combination of both, and other unrelated items, so you must recall the precise definition used in financial analysis.

Given Data / Assumptions:

• Current assets include items such as cash, marketable securities, inventory, and accounts receivable.
• Current liabilities include items such as accounts payable, short term loans, and other obligations due within one year.
• Working capital is a measure of short term liquidity.
• Fixed assets and long term liabilities are part of long term capital structure, not working capital.

Concept / Approach:
There are two related terms: gross working capital and net working capital. Gross working capital sometimes refers simply to total current assets. However, in many exam oriented definitions and analytical contexts, working capital is taken to mean net working capital, which equals current assets minus current liabilities. This net figure shows the margin of safety available to meet short term obligations. A positive net working capital suggests that current assets are sufficient to cover current liabilities, while a negative figure indicates potential liquidity stress. The question expects this commonly used net definition, focusing on the difference between current assets and current liabilities.

Step-by-Step Solution:
Step 1: Recall that working capital is primarily concerned with short term assets and liabilities. Step 2: Identify current assets as resources that can be converted into cash within one year. Step 3: Identify current liabilities as obligations that must be settled within one year. Step 4: Recognise that net working capital is defined as current assets minus current liabilities. Step 5: Compare this definition with the answer options. Step 6: Select the option that describes working capital as the difference between current assets and current liabilities.

Verification / Alternative check:
For verification, consider a simple balance sheet example. Suppose a firm has current assets of 500 units and current liabilities of 300 units. Net working capital equals 500 minus 300, which is 200 units. This means the firm has a buffer of 200 units of short term resources after covering its short term obligations. If we used only current assets without subtracting current liabilities, we would overstate the firm's flexibility. If we used current liabilities alone, we would ignore the asset side. By taking the difference, we obtain a clearer picture of liquidity. This confirms that working capital is best understood as current assets minus current liabilities.

Why Other Options Are Wrong:
The option that lists current assets alone corresponds to gross working capital, but it does not measure the net liquidity position because it ignores short term obligations. The option that lists current liabilities alone misses the asset side entirely. The option combining current assets and liabilities together without adjustment is vague and does not match any standard definition. The choice that talks about fixed assets and long term liabilities belongs to capital structure analysis, not working capital. Therefore, none of these options accurately define working capital in the sense used in financial management, except the one that focuses on the difference between current assets and current liabilities.

Common Pitfalls:
A common pitfall is to confuse gross working capital with net working capital and assume that exam questions always use the gross definition. Another mistake is to think that any financial term involving current items automatically includes both assets and liabilities without adjustment. To avoid these errors, memorise clearly that net working capital equals current assets minus current liabilities. When answering questions, check whether the wording suggests a net measure of liquidity or simply a list of items. This will help you consistently identify the correct definition across different contexts.

Final Answer:
Thus, in business finance working capital is correctly defined as the difference between current assets and current liabilities, representing the firm's net short term liquidity position.