Funeral Arts National Board Practice Exam

What does working capital indicate about a business?

1. Its profitability over time

2. Its financial liquidity

3. Its growth potential

4. Its asset allocation

The correct answer is: Its financial liquidity

Working capital is a critical financial metric that assesses a company's short-term liquidity and operational efficiency. It is calculated as the difference between current assets and current liabilities. A positive working capital indicates that a business can cover its short-term obligations with its short-term assets, reflecting its ability to finance day-to-day operations. This liquidity plays a crucial role in ensuring that a business can meet its immediate financial commitments, such as paying suppliers and employees, without having to secure additional financing. While profitability, growth potential, and asset allocation are important aspects of a business's overall financial health, they do not directly pertain to the concept of working capital. Profitability focuses on the company's ability to generate income over time, growth potential pertains to the company's capacity for future expansion, and asset allocation involves the strategic distribution of resources across various assets to optimize returns. Therefore, the indication of financial liquidity as it relates to working capital is the key factor that makes this the correct answer.