A contractor's balance sheet shows current assets of $180,000 and current liabilities of $215,000. What is the working capital, and what does the answer tell the contractor?
Explanation
Working capital is current assets minus current liabilities: $180,000 less $215,000 is negative $35,000. The result is an amount of money, and it can be negative. A negative figure means the obligations due inside the year exceed what the business expects to turn into cash inside the year, which is a shortfall rather than a cushion. Dividing the same two balances instead of subtracting them gives a ratio, a different measure that carries no dollar sign; adding them measures nothing at all.
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