This preview shows page 1. Sign up to view the full content.
Unformatted text preview: if the firm pays down accounts payable). Therefore, any increase in a current asset account or any decrease in a current liability account results in a cash outflow. Similarly, a decrease in net working capital represents a cash inflow. Net working capital decreases when current assets fall (as when a firm sells inventory) or when current liabilities increase (as when the firm borrows from suppliers). A decrease in any current asset or an increase in any current liability results in a cash outflow. The cash flow effect from a change in net working capital is always equal and opposite in sing to the change in net working capital. For example, an increase in inventory represents an investment or cash outflow, while a reduction in that inventory frees up that investment of capital and represents a cash inflow. Thus in capital budgeting we subtract changes in net working capital to arrive at the cash flows....
View Full Document
- Spring '11