Accounting statements represent a company's earnings, but this is not the real cash that a company generates. Earnings data can be manipulated and

can be deceiving. Thus, corporate decision makers and security analysts focus on the free cash flow that a firm generates to analyze the company's

real cash position.

Which of the following statements best describes a firm's free cash flow?

Cash flows generated by operating the business

Residual cash flow after taking into account operating cash flows, including fixed$-$asset acquisitions, asset sales, and working$-$capital

expenditures

Suppose you are the only owner of a chain of coffee shops near universities. Your current caf$$s are doing well, but you are interested in starting a

fine$-$dining restaurant. You decide to use the cash generated from your existing business to enter into a new business. Your accountant provides you

with the following data on your current financial performance:

Financial update as of June $15$

Your existing business generates $$123,000$ in EBIT.

The corporate tax rate applicable to your business is $35\%.$

The depreciation expense reported in the financial statements is $$23,429.$

You don't need to spend any money for new equipment in your existing caf$$s; however, you do need $$18,450$ of additional cash.

You also need to purchase $$9,840$ in additional supplies$-$such as cloth tablecloths and napkins, and more formal tableware$-$on

credit.

It is also estimated that your accruals, including taxes and wages payable, will increase by $$6,150.$

Free cash flow can be used for various reasons, including distributing funds to the firm's shareholders and debtholders. Which of the following is not a

use of free cash flow?

Retiring debt$-$that is$,$ to pay off debt

Acquiring operating assets