Which statement is true?

• A. Working capital is defined as current assets minus current liabilities.
• B. A net capital ratio greater than one indicates the business is solvent.
• C. Net farm income from operations includes gains or losses from disposal of farm capital items.
• D. Short term goals may require more than one year to achieve.

Answer: (A)

Working capital measures liquidity for the near term. It is defined as current assets minus current liabilities, and a positive amount shows the business can cover its short-term obligations with its readily available resources. This simple calculation sits at the heart of understanding short-term financial health.

If you see a net capital ratio greater than one, that label doesn’t automatically guarantee solvency. Solvency reflects long-term ability to meet all obligations, and different definitions of such ratios can lead to different conclusions. So a single ratio above one isn’t a definitive sign of being solvent.

Net farm income from operations is about the core operating performance of the farm, excluding gains or losses from disposing of capital items. Those gains or losses are handled separately as non-operating or capital activity, not part of operating income.

Short-term goals are intended to be achievable within one year. If a goal requires more than a year, it’s considered longer-term, not a short-term target.

Therefore, the statement that matches the standard definition is that working capital equals current assets minus current liabilities.