Why We Subtract the Change in Working Capital when Defining Cash Flows? A Pedagogical Note

Ignacio Velez-Pareja ()

No 3782, Proyecciones Financieras y Valoración from Master Consultores

Abstract: In this short teaching note I explain why we subtract the change in working capital from the proper item (Earnings before interest and taxes (EBIT) or Net income) in the Income Statement. I show in detail how departing from the sales revenues and the cost of goods sold we have to subtract the change in working capital. This explanation might be seen as unnecessary given it is a common practice. However, my experience in teaching this subject indicates that some additional explanations are needed.

Keywords: Cash flows (search for similar items in EconPapers)
JEL-codes: M21 (search for similar items in EconPapers)
Pages: 7
Date: 2005-05-11
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Persistent link: https://EconPapers.repec.org/RePEc:col:000463:003782

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