Based on these figures, what are cash inflows? Cash outflows? What happened to each account? What is net cash flow?

Sales were $998, but receivables rose by $10. So cash collections were $10 less than sales, or $988. Costs were $734, but inventories fell by $20. This means that we didn't replace $20 worth of inventory, so costs are actually overstated by this amount. Also, payables fell by $30. This means that, on a net basis, we actually paid our suppliers $30 more than we received from them, resulting in a $30 understatement of costs. Adjusting for these events, we calculate that cash costs are $734 - 20 + 30 = $744. Net cash flow is $988 - 744 = $244.

Finally, notice that net working capital increased by $20 overall. We can check our answer by noting that the original accounting sales less costs of $998 - 734 is $264. In addition, CWT spent $20 on net working capital, so the net result is a cash flow of $264 - 20 = $244, as we calculated.

9If there were other accounts, we might have to make some further adjustments. For example, a net increase in inventory would be a cash outflow.

Ross et al.: Fundamentals I IV. Capital Budgeting I 10. Making Capital I I © The McGraw-Hill of Corporate Finance, Sixth Investment Decisions Companies, 2002

Edition, Alternate Edition

322 PART FOUR Capital Budgeting

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