anonymous
  • anonymous
When the target firm has huge amounts of prepayments received, does the corresponding cash belong to the WC and to Invested Capital?
Finance
  • Stacey Warren - Expert brainly.com
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chestercat
  • chestercat
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anonymous
  • anonymous
If the item is prepaid (i.e. unearned) revenue, then include the amount as a component of net working capital. If the item is a prepaid expense that is operational in nature, include the amount as a component of net working capital. If the amount is prepaid but unrelated to the on-going operations of the business (i.e. a large deposit on a non operational airplane, etc.), then do not include in working capital or invested capital.
Kiki
  • Kiki
Do you mean that the accounts "Cash" and "Unearned Revenue" belong to the Net working Capital?
anonymous
  • anonymous
Personally, I exclude cash from net working capital. Unearned Revenue is a liability that is deducted against current assets to arrive at net working capital. So unearned revenue is included in net working capital.

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Kiki
  • Kiki
Thanks for the answer. But if you exclude cash from NWC then it can happen that NWC is constantly negative because you subtract the unearned revenue from current assets, which do not include the corresponding cash position. This is very often the case in the plant construction sector, where the companies regularly get huge amounts of cash before starting to build the plant.
anonymous
  • anonymous
Well, then you may have to forecast negative working capital outlays for the business. It's just he economics of long-term construction. Its a valuable payment that is received early by the firm. If the cash balance, however, is required to remain in deposit or is necessary for operational purposes, you may include the amount in net working capital. But, at least theoretically, there is nothing wrong with a negative working capital balance. So long as the firm is not insolvent, negative working capital, at least in my opinion, translates into good economics; that is, the company finances its working capital requirements with the interest free float of unearned revenue prepayments.

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