Which statement correctly defines working capital and a commonly used liquidity ratio?

• A. Working capital = current liabilities minus current assets; current ratio = current assets / current liabilities
• B. Working capital = current assets minus current liabilities; current ratio = current assets / current liabilities
• C. Working capital = net income minus dividends; current ratio = total assets / total liabilities
• D. Working capital = current assets minus current liabilities; quick ratio = (current assets minus inventories) / current liabilities

Answer: (B)

Working capital is the amount a company has available to run its day-to-day operations, calculated as current assets minus current liabilities. The current ratio, a widely used measure of short-term liquidity, is current assets divided by current liabilities. This pair is the standard way to express short-term financial health: you subtract what’s owed in the near term from what’s owned in the near term, and you compare assets to obligations with a ratio.

The statement aligns with that standard: it defines working capital as current assets minus current liabilities and uses current assets divided by current liabilities for the liquidity measure. Other options misstate the concepts or use a different ratio. Subtracting current liabilities from current assets is the reverse of working capital. Using net income and dividends is not about liquidity or working capital. And while the quick ratio is a valid liquidity metric, the current ratio is the more commonly referenced measure in introductory materials, making the described pair the best fit.