Question

What is the definition of net working capital?

Net working capital is the difference between a firm's current assets and current liabilities.           

Net working capital is the sum of a firm's cash and marketable securities accounts.

Net working capital is the value of a firm's assets that can be converted into cash in one year or less.        

Net working capital is the amount of cash a firm has on hand as of a specific date.

Answer 1

Solution :

Net working capital is the difference between current assets and current liabilities of a firm. It is a measure of liquidity of a firm. It is the net short - term investment of a firm.

The net working capital is calculated as follows :

Net working capital = Current Assets – Current Liabilities

Thus the solution is option 1 : Net working capital is the difference between a firm's current assets and current liabilities.

The other options are incorrect due to the following reasons :

Option : 2

The sum of a firm's cash and marketable securities accounts is known as cash and cash equivalents and not Net working Capital.

Option : 3

The value of a firm's assets that can be converted into cash in one year or less is known as its Current Assets and not Net working Capital.

Option : 4

The amount of cash a firm has on hand as of a specific date is known as its cash position and not Net working Capital.