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ERIC Number: EJ1088192
Record Type: Journal
Publication Date: 2016
Pages: 8
Abstractor: As Provided
ISBN: N/A
ISSN: ISSN-1942-2504
EISSN: N/A
Net Operating Working Capital, Capital Budgeting, and Cash Budgets: A Teaching Example
Tuner, James A.
American Journal of Business Education, v9 n1 p15-22 2016
Many introductory finance texts present information on the capital budgeting process, including estimation of project cash flows. Typically, estimation of project cash flows begins with a calculation of net income. Getting from net income to cash flows requires accounting for non-cash items such as depreciation. Also important is the effect of changes in net operating working capital on cash flow. While students readily understand how to account for depreciation when calculating cash flow, they typically have much more difficulty understanding how and why changes in working capital affect cash flows. This paper develops a teaching example to show exactly how and why changes in net operating working capital affect cash flows. The example shows how to derive operating cash flows for a proposed project using the accrual accounting method and then shows a cash budget for the same project. Finally, the example shows that the discrepancy between the cash flows shown in the cash budget and the operating cash flows can be resolved by accounting for changes in working capital. A survey of students in an MBA managerial finance course indicates student satisfaction with the teaching example and gives evidence that students prefer the teaching example to explanations of the effect of working capital on project cash flows given in the assigned text. [This article was reprinted from "American Journal of Business Education" v6 n6 p641-648 2013.]
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Publication Type: Journal Articles; Reports - Descriptive
Education Level: N/A
Audience: N/A
Language: English
Sponsor: N/A
Authoring Institution: N/A
Grant or Contract Numbers: N/A