In a model, which components of working capital are typically modeled explicitly due to their impact on cash flow?

• A. Accounts receivable, accounts payable, and inventory.
• B. Only cash.
• C. Long-term debt and equity.
• D. Non-current assets.

Answer: (A)

The key idea is that working capital drives cash flow through timing differences in everyday operations. The components that are modeled explicitly are accounts receivable, accounts payable, and inventory because they sit between revenue and cash receipts, between expenses and cash payments, and in how long you hold inventory. Changes in these items show up as cash inflows or outflows in the operating section and affect the net cash available. Modeling them explicitly lets you see how quickly you convert sales into cash, how long you fund operations with supplier terms, and how inventory levels tie up or release cash.

Long-term debt and equity are financing items, not part of the day-to-day operating cash cycle, and non-current assets impact cash flow mainly through investing activity rather than operating cash flow. So the trio of receivables, payables, and inventory is what you typically model to capture the cash-effect of working capital.