A business with a current ratio of 1:1 has working capital of?

A business with a current ratio of 1:1 has working capital of?

• A. $0
• B. $1,000
• C. $-1,000
• D. $32,000

Answer: (A)

The key idea is that working capital is the difference between current assets and current liabilities. A current ratio of 1:1 means current assets equal current liabilities. Since working capital = current assets − current liabilities, subtracting an equal amount from itself gives zero. For example, if current assets and current liabilities are both $10,000, working capital is $10,000 − $10,000 = $0. The ratio shows the balance between the two, not the size of the amounts.

The key idea is that working capital is the difference between current assets and current liabilities. A current ratio of 1:1 means current assets equal current liabilities. Since working capital = current assets − current liabilities, subtracting an equal amount from itself gives zero. For example, if current assets and current liabilities are both $10,000, working capital is $10,000 − $10,000 = $0. The ratio shows the balance between the two, not the size of the amounts.