Financial Statement Analysis Practice Test

Working capital is a key financial metric that represents the difference between current assets and current liabilities. It is an indicator of a company's short-term financial health and operational efficiency. Current assets include cash, accounts receivable, and inventory, which are expected to be converted into cash or used up within one year. Current liabilities are obligations that the company needs to settle within the same timeframe, such as accounts payable and short-term debt.

Having positive working capital indicates that a company can easily meet its short-term financial obligations, whereas negative working capital could signal potential liquidity problems. This measure is crucial for assessing how well a business is managing its operational efficiency and funding its day-to-day operations. It allows analysts and investors to evaluate whether a company has sufficient resources to continue its operations without the risk of financial distress. Understanding and monitoring working capital helps in making informed financial decisions and ensures a business remains solvent in the short term.