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Calculating the investment in working capital is pretty simple most of the time. However, there are some cases that are not so clear. For example, if a company makes an acquisition mid-year or if it is subject to currency exchange rates because it does much of its business outside the US, the interpretation of balance sheet working capital line items may require more analysis.

One of the businesses I own -- Faro Technologies (FARO) -- had both those circumstances this year. Faro acquired another business in March '05 and also does about 50% of its business outside the US so exchange rates play a big role.

Faro's beginning AR balance as of 1/1/05 was $22,484M and the balance as of 10/1/05 was $28,424M for an investment in AR of $5,940M. However, the change in AR on the cash flow statement (cumulative 9 months) for this year shows an increase of $7,409. The 'purchase' of the acquired company's AR will be buried in the Investing section of the cash flow statement, and the effect of exchange rates shows up at the bottom in the reconcilation section because the exchange rates affect many balance sheet accounts.

Have any of you encountered situations like this, and if so, how have you handled them with your calculation of investment in working capital?

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