Doubts

Changes in NWC (Lecture 06)

Changes in NWC (Lecture 06)

by Lorin Yuezer -
Number of replies: 1

Dear Julio,

I had a quick question regarding the video lecture for session 06 on "Valuation: Cash-Flows". In slide 7, the change in operating assets and liabilities - such as inventories, receivables, and payables - is included as part of the investment cash flow.

In both academic theory and practical application, I’ve typically seen changes in net working capital included under operating cash flow, particularly in the context of cash flow statements following IFRS or US GAAP. I imagine it may relate to the logic of capital tied up in operations from a valuation perspective.

Could you kindly clarify the reasoning behind including these changes in the investment cash flow in this context?

Thank you in advance!

Best regards,
Lorin

In reply to Lorin Yuezer

Re: Changes in NWC (Lecture 06)

by Julio Crego -
Dear Lorin,

It is not really important how to classify them in this course.

I find it useful when it comes to pricing and risk. Operating cash flow shares the same risk (often), while investment cash flows might bear very different types of risks.

In terms of accounting, they are considered as operating. Honestly, I am not sure why, but I feel it is because accounting reports occur at a given time and want to give a long-term perspective of the firm. A firm that sold many items and did not pay anything to suppliers (it pays the day after reporting) will seem like a very efficient firm, which obviously is not.