How is working capital calculated?

• A. Non-cash current assets minus non-debt current liabilities
• B. Current assets minus current liabilities
• C. Cash plus debt minus equity
• D. Net income minus expenses

Answer: (A)

The concept being tested is operating working capital, which focuses on the resources tied to the day-to-day operations rather than financing decisions. Operating working capital equals non-cash current assets minus non-debt current liabilities. Here, non-cash current assets exclude cash and cash equivalents, while non-debt current liabilities exclude short-term debt and the current portion of long-term debt.

This measure is preferred in private equity and operational analyses because it reflects the capital actually tied up in running the business—for example, receivables and inventory against payables and accruals—without counting cash reserves or financing obligations. By removing cash from assets and debt from liabilities, you isolate the operating cycle and liquidity needs.

For instance, if a company holds cash and also has short-term debt, traditional current assets minus current liabilities might mix financing decisions with operating needs. Using non-cash current assets minus non-debt current liabilities shows how much working capital the operations themselves require, which is useful for improvements in collections, inventory management, and supplier terms.