Free cash flow

Accounting statements represent a companys 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 companys real cash position.

Which of the following statements best describes free cash flow?

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

Cash flows generated by operating the business

Suppose you are the only owner of a chain of coffee shops near universities. Your current cafes 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 $75,000 in EBIT.
	The corporate tax rate applicable to your business is 25%.
	The depreciation expense reported in the financial statements is $14,286.
	You dont need to spend any money for new equipment in your existing cafes; however, you do need $11,250 of additional cash.
	You also need to purchase $6,000 in additional suppliessuch as tableclothes and napkins, and more formal tablewareon credit.
	It is also estimated that your accruals, including taxes and wages payable, will increase by $3,750.

Based on your evaluation you have in free cash flow.

Free cash flow can be used for various reasons, including distributing it to stockholders and debtholders. Which of the following is not a use of free cash flow?

Acquiring operating assets

Distributing dividends to stockholders