INSTRUCTOR MANUAL
Instructor’s Manual for Principles of Finance
03/21/22 1
, Instructor’s Manual for Principles of Finance
Chapter 19
The Importance of Trade Credit and Working Capital in Planning
Chapter Summary
The Cash or Operating Cycle diagram below captures the operating or cash cycle of a typical
business (one oriented toward production). It follows the process of a company, beginning with
only cash and how that asset changes form over the cycle. If also includes the interrelatedness
of income statement accounts and balance sheet accounts. It is a snapshot of the day-to-day
operation of a business and the path of its cash.
1 Cash: Start. Company
pays for raw materials. 9/1 Cash: End. Customer
pays for product or service.
2 Purchases
! 9 8 Collections
2
3 Materials
8
Cash Cycle
Inventory
3 7 Accounts
7 Receivable
4 Production
4 6
5 6 Sales
5 Finished
Inventory
Lecture Outline
19.1 What Is Working Capital?
The term capital is used extensively in business. The context in which it is used generally
determines its specific meaning. In this chapter, working capital is the amount of funds a
company holds and manages in the ongoing operation of its business. It is the various sources
and uses of funds (cash) depicted in the graphic above.
Cash is sourced and used in business operation in forms like sales (source) and expenses (use)
that are captured on the company’s income statement. But this is only one area of cash. The
other essential sources/uses of cash are the company’s short-term assets and liabilities. These
accounts are captured on the company’s balance sheet. Effective management of working
capital accounts (i.e., current assets and current liabilities) provides the liquidity (cash) the
company needs to operate.
03/21/22 2
Instructor’s Manual for Principles of Finance
03/21/22 1
, Instructor’s Manual for Principles of Finance
Chapter 19
The Importance of Trade Credit and Working Capital in Planning
Chapter Summary
The Cash or Operating Cycle diagram below captures the operating or cash cycle of a typical
business (one oriented toward production). It follows the process of a company, beginning with
only cash and how that asset changes form over the cycle. If also includes the interrelatedness
of income statement accounts and balance sheet accounts. It is a snapshot of the day-to-day
operation of a business and the path of its cash.
1 Cash: Start. Company
pays for raw materials. 9/1 Cash: End. Customer
pays for product or service.
2 Purchases
! 9 8 Collections
2
3 Materials
8
Cash Cycle
Inventory
3 7 Accounts
7 Receivable
4 Production
4 6
5 6 Sales
5 Finished
Inventory
Lecture Outline
19.1 What Is Working Capital?
The term capital is used extensively in business. The context in which it is used generally
determines its specific meaning. In this chapter, working capital is the amount of funds a
company holds and manages in the ongoing operation of its business. It is the various sources
and uses of funds (cash) depicted in the graphic above.
Cash is sourced and used in business operation in forms like sales (source) and expenses (use)
that are captured on the company’s income statement. But this is only one area of cash. The
other essential sources/uses of cash are the company’s short-term assets and liabilities. These
accounts are captured on the company’s balance sheet. Effective management of working
capital accounts (i.e., current assets and current liabilities) provides the liquidity (cash) the
company needs to operate.
03/21/22 2
