Adventis Financial Modeling Certification (FMC) Level 1 Practice Test

The term that defines the difference between current assets and current liabilities is working capital. This financial metric represents a company's short-term liquidity and operational efficiency. By calculating working capital, stakeholders can assess a firm's ability to cover its short-term obligations with its short-term assets. A positive working capital indicates that a company has enough assets to meet its liabilities over the next year, which is crucial for maintaining smooth operations and financial stability.

In contrast, net income is a measure of profitability over a specific period and does not directly relate to current assets and liabilities. Shareholder equity represents the residual value of assets after liabilities have been deducted and reflects ownership in the company rather than its operational liquidity. Cash flow refers to the net amount of cash moving in and out of a business, which encompasses operating, investing, and financing activities, rather than focusing solely on the relationship between current assets and liabilities. Therefore, working capital is the correct term for the specified financial difference.