Question

Quantitative Problem: Rosnan Industries' 2019 and 2018 balance sheets and income statements are shown below.

Balance Sheets
	2019	2018
Assets
Cash and equivalents	$80	$65
Accounts receivable	275	300
Inventories	375	250
Total current assets	$730	$615
Net plant and equipment	2,300	1,490
Total assets	$3,030	$2,105
Liabilities and Equity
Accounts payable	$150	$85
Accruals	75	50
Notes payable	130	55
Total current liabilities	$355	$190
Long-term debt	450	290
Common stock	1,225	1,225
Retained earnings	1,000	400
Total liabilities and equity	$3,030	$2,105

Income Statements
	2019	2018
Sales	$2,285	$1,585
Operating costs excluding depreciation	1,250	1,000
EBITDA	$1,035	$585
Depreciation and amortization	100	75
EBIT	$935	$510
Interest	63	46
EBT	$872	$464
Taxes (25%)	218	116
Net income	$654	$348
Dividends paid	$54	$48
Addition to retained earnings	$600	$300
Shares outstanding	100	100
Price	$25.00	$22.50
WACC	10.00%

The balance in the firm's cash and equivalents account is needed for operations and is not considered "excess" cash.

What is Rosnan's 2019 net operating working capital (NOWC)?

$  

What is Rosnan's 2019 net working capital (NWC)?

$  

Answer 1

Answer to What is Rosnan's 2019 net operating working capital (NOWC)

Net Operating Working Capital = Current Operating Assets - Current Operating Liabilities

= $650 - $225

= $ 425

Where,

Current operating Assets = + Accounts Receivable + Inventory

=   $ 275 + $ 375

= $ 650

Note : Cash and Cash Equivalents has not been taken because it is given in question that the firm's cash and equivalents account is needed for operations and is not considered "excess" cash, so for calculating net we have not considered cash & cash equivalents as it is not in excess.

Current Operating Liabilities =  Accounts Payable + Accrual

= $ 150 + $ 75

= $ 225

Note : Notes Payable not considered because the same are not related to the operating business of the company . These are basically relates to the finance activities of the company. so, we have not considered the same.

Answer to What is Rosnan's 2019 net working capital (NWC)

Net Working Capital = Current Assets - Current Liabilities

= $ 730 - $ 355

= $ 375

Where,

Current Assets =  Cash and Cash Equivalents + Accounts Receivable + Inventory

= $ 80 + $ 275 + $ 375

= $ 730

Current Liabilities = Trade Accounts Payable + Accrued Liabilities + Notes Payable

= $ 150 + $ 75 + $ 130

= $ 355

Difference between NOWC & NWC :

Net Operating Working Capital removes cash , marketable securities & non -interest short term debt form the current assets and current liabilities respectively.so, Cash & Financial assets & financial liabilities are excluded while calculating NOWC.

Net working capital represents the company' ability to meet its short term liquidity requirements and therefore, focus is more on short term period .