Cash, accounts receivable, inventory, and similar items that will be converted into cash in the near future are c assets.

Accounts payable, wages payable, and similar obligations that are due in the near future are c liabilities. The difference between current assets and current liabilities is called working capital. Operating activities—such as making sales; purchasing materials for inventory; and incurring production, selling, and administrative expenses—are the principal causes of changes in working capital items. We shall analyze the asset and liability categories separately.