Question

1. Given the following Financial Information Answer the following question:

   	2017	2018
   Cash	2,000	189,100
   Accounts Receivable	2,000	2,020
   Inventory	8,000	8,080
   Prepaid Assets	3,000	3,030
   Other Assets	4,000	4,040
   Total Current Assets	19,000	206,270
   Net PPE	20,000	4,000
   Intangibles	10,000	10,000
   Total Assets	49,000	220,270
   Accounts Payable	8,000	8,080
   Salary Payable	6,000	6,060
   Notes Payable	3,000	3,000
   Total Current Liabilities	17,000	17,140
   Long-Term Debt	40,000	40,000
   Total Liabilities	57,000	57,140
   Common Stock	80,000	80,000
   Retained Earnings	-88,000	83,130
   total equity	8,000	163,130

   	2018
   Sales	1,733,000
   COGS	1,299,750
   Gross Profit	433,250
   SG&A	23,000
   Other Operating Expenses	14,000
   Depreciation	2,000
   Interest	3,676
   Taxes	142,560
   Net Income	248,014
   dividends	76,884

   Calculate the Change in Net Operating Working Capital (NOWC)

   		a. $187,130.00
   		b. $187,270.00
   		c. $-187,270.00
   		d. $-187,130.00

Answer 1

Net Operating Working Capital is the difference between Operating Current Assets and Operating Current Liabilities.

NOWC = Operating Current Assets - Operating Current Liabilities

Operating current assets are the current assets which directly support the operating cycle of a company.They do not include marketable securities and other financial short term assets. Similarly, operating current liabilities include only the liabilities which are directly related to the operating process.

NOWC of 2017 = Cash + AR + Inventory + Prepaid Assets + Other Assets - AP - Salary Payable

=> 2,000 + 2,000 + 8,000 + 3,000 + 4,000 - 8,000 - 6,000=> 5,000

NOWC of 2018 = Cash + AR + Inventory + Prepaid Assets + Other Assets - AP - Salary Payable

=> 189,100 + 2,020 + 8,080 + 3,030 + 4,040 - 8,080 - 6,060=> 192,130

Change in Net Operating Working Capital = NOWC of 2018 - NOWC of 2017

=> 192,130 - 15,000

=> 187,130 (Option A)

Note : Other current assets is treated as an operating current asset as there is no specific info. Notes Payable is a financial current asset and is not directly related to the operating cycle. So, it is not included in the NOWC.