Funeral Arts National Board Practice Exam

What term refers to the amount by which a business's current assets exceed its liabilities?

1. Current ratio

2. Investment margin

3. Working capital

4. Operating profit

The correct answer is: Working capital

The term that refers to the amount by which a business's current assets exceed its liabilities is known as working capital. Working capital is a financial metric that measures a company's operational efficiency and short-term financial health. It is calculated by subtracting current liabilities from current assets. A positive working capital indicates that a business can cover its short-term obligations, which is crucial for maintaining operations and managing day-to-day expenses. Understanding working capital is fundamental because it provides insights into how well a company can handle its financial commitments in the short term. This is especially important for businesses that operate on tight cash flows or need to ensure liquidity for day-to-day operations. In contrast, the current ratio measures the relationship between current assets and current liabilities but does not quantify the excess amount, which working capital does. Investment margin and operating profit, while important financial concepts, pertain to different aspects of business performance and are not related to the measure of short-term assets versus liabilities in the same direct manner.