In Figure 5.2 note that the $5 million of operating liabilities is deducted from total assets to determine the $21 million amount, which is the total capital needed for investing in its assets. I favor this layout for management analysis purposes because it deducts the amount of spontaneous liabilities from the total assets of the business. Recall that the normal operating liabilities from buying things on credit and delaying payment of expenses are called spontaneous because they arise
in the normal process of carrying on the operations of the business, not from borrowing money at interest. Continue reading…
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