Final answer:
Working capital is calculated by subtracting current liabilities from current assets. It measures a company's ability to meet its short-term financial obligations. A positive working capital indicates liquidity, while a negative working capital suggests financial difficulties.
Step-by-step explanation:
Working capital is the measure of a company's ability to meet its short-term financial obligations. It is calculated by subtracting current liabilities from current assets. The formula for calculating working capital is:
Working Capital = Current Assets - Current Liabilities
For example, if a company has $500,000 in current assets and $300,000 in current liabilities, the working capital would be $200,000:
$200,000 = $500,000 - $300,000
A positive working capital indicates that the company has enough liquidity to cover its short-term debts, while a negative working capital suggests financial difficulties.