350 CHAPTER 9 Financial Statements, Cash Flow, and Taxestreasurer, and they are not used in the core operations. Therefore, short-term invest-
ments are normally excluded when calculating net operating working capital.^6
Some current liabilities—especially accounts payable and accruals—arise in the
normal course of operations. Moreover, each dollar of such current liabilities is a dol-
lar that the company does not have to raise from investors to acquire current assets.
Therefore, to calculate net operating working capital, we deduct these operating cur-
rent liabilities from the operating current assets. Other current liabilities that charge
interest, such as notes payable to banks, are treated as investor-supplied capital and
thus are not deducted when calculating net working capital.
If you are ever uncertain about an item, ask yourself whether it is a natural conse-
quence of operations or if it is a discretionary choice, such as a particular method of fi-
nancing, or an investment in a financial asset. If it is discretionary, it is not an operat-
ing asset or liability.
We can apply these definitions to MicroDrive, using the balance sheet data given
in Table 9-1. Here is the net operating working capital for 2002:
Net operating working capital (Cash Accounts receivable Inventories)
(Accounts payable Accruals)
($10 $375 $615) ($60 $140)
$800 million.
MicroDrive’s total operating capital at year-end 2002 was
Total operating capital (Net operating working capital)
(Operating long-term assets)
(9-4)$800 $1,000
$1,800 million.
Note that MicroDrive’s only operating long-term assets are net plant and
equipment.
Now note that MicroDrive’s net operating working capital a year earlier, at year-
end 2001, was
Net operating working capital ($15 $315 $415) ($30 $130)
$585 million.
Adding the $870 million of fixed assets, its total operating capital at year-end 2001
was
Total operating capital $585 $870
$1,455 million.
Notice that we have defined operating capital as the sum of net operating working
capital and operating long-term assets. In other words, our definition is in terms of as-
sets. However, the term “capital” is also commonly used to denote funds provided by
investors, such as notes payable, long-term bonds, preferred stock, and common
stock. For MicroDrive, the total capital provided by investors at year-end 2001 was
$60 $580 $40 $840 $1,520 million. Of this amount, $65 million was tied up
in short-term investments, which are not directly related to MicroDrive’s operations.
Therefore, only $1,520 $65 $1,455 million of investor-supplied capital was used
in operations. Notice that this is exactly the same value as calculated above. This(^6) If the marketable securities are held as a substitute for cash, and therefore reduce the cash requirements,
then they may be classified as part of operating working capital. Generally, though, large holdings of mar-
ketable securities are held as a reserve for some contingency or else as a temporary “parking place” for funds
prior to an acquisition, a major capital investment program, or the like.