DECA Financial Consulting Practice Exam 2025 - Free DECA Financial Consulting Practice Questions and Study Guide

Working capital is defined as the net difference between current assets and current liabilities. This measure is crucial for assessing a company's short-term financial health and operational efficiency. Current assets include cash, accounts receivable, inventory, and other assets expected to be converted into cash within a year, while current liabilities encompass obligations such as accounts payable and other debts due within the same timeframe.

By calculating working capital, businesses can determine their ability to meet short-term obligations and manage day-to-day operations. A positive working capital indicates that a company can easily cover its short-term liabilities, suggesting a healthy liquidity position. In contrast, negative working capital may signal potential difficulties in meeting obligations, which could lead to financial instability.

The other definitions do not accurately describe working capital. Total revenue refers to the income generated by a business's operations, while the sum of short-term debts only highlights its liabilities, not the relationship with assets. Likewise, total equity pertains to the ownership interest in the company as reflected by assets minus liabilities, which is distinct from the concept of working capital.