Free cash flow

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 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 $$135,000$ in EBIT.

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

The depreciation expense reported in the financial statements is $$25,714.$

You don't need to spend any money for new equipment in your existing caf$$s; however, you do need $$20,250$ of additional cash.

You also need to purchase $$10,800$ in additional supplies$-$such as tableclothes and napkins, and more formal tableware$-$on

credit.

It is also estimated that your accruals, including taxes and wages payable, will increase by $$6,750.$

Based on your evaluation, you have

in free cash flow.

Can a company have negative free cash flow?

Yes

No