True Or False | The Excess Of Current Liabilities Over Current Assets Is Referred To As Working Capital

Solution To The True & False Question

The correct answer is “False”, as Working Capital (Net Working Capital) is the excess of Current Assets over Current Liabilities to run the daily operations of the business smoothly. If the current liabilities are more than current assets, then it means that the business is not working smoothly i.e., the business may not be able to meet its short-term obligations in future and it is running on short-term debt. So, it may face difficulties to operate daily business’s operations and utilize cash and cash equivalents for the business growth.

Positive Working Capital = Current Asset - Current Liabilities

So, working capital equals Current Assets minus Current Liabilities and it is called positive working capital when Current Assets are greater than Current Liabilities and Negative Working capital shows that current liabilities are more than current assets during the Accounting Cycle.