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Using statements to calculate Free Cash Flow

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Discuss the data as found on the financial statements that are used to calculate free cash flow (FCF) for a firm.

Graduate Level

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FCF is a measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow represents the cash that a company is able to generate after spending money required to maintain or grow assets.

3 Methods used to calculate and associated Financial Statement/Locations:

Simple: Use the cash flow statement to get both the cash flow from operations and the capital expenditures (capex) or money spent on investments that improve capital assets such as repairing a roof, installing a new floor, or building a factory. Section 1 should be operating; Section 2 will be your Investing activities.

If the statement of cash flows is unavailable you can also get FCF from the Income statement, and a couple periods of ...

Solution Summary

Discusses how to derive the free cash flow of the firm step by step from without using the statement of cash flows. Also describes where free cash flow figures can be located by using other financial statements. Solution describes all data points on financial statements and shows calculations to arrive at Free cash flow using a number of formulas derived from the data points.

See Also This Related BrainMass Solution

Calculating a manufacturing budget and statement of free cash flow. Complete with MS Word and Excel files including charts and formulas.

Examples including Thome Company, Russell Inc and Alpha- Omega company case studies.

Thome Company uses a flexible budget for manufacturing overhead based on direct labor hours. Variable manufacturing overhead cost per direct labor hour are as follows.

Indirect labor $1.00
Indirect materials $0.60
Utlilities $0.40

Fixed overhead cost per month are supervision $4,000, depreciation $1,200, and property taxes $800. The company believes it will normally operate in a range of 7,000-10,000 direct labor hours per month.

Pepare a monthly manufacturing overhead flexible budget for 2014 for the expected range of activity, using increments of 1,000 direct labor hours.

Each of the items below must be considered in preparing a statement of cash flows for Alpha-Omega Co. for the year ended December 31, 2014. For each item, state how it should be shown in the statement of cash flows for 2014.
a. Issued bonds for $150,000 cash.
b. Purchased equipment for $200,000 cash.
c. Sold land costing $50,000 for $50,000 cash.
d. Declared and paid a $20,000 cash dividend.

The management of Russel Inc. is trying to decide whether it can increase its dividend. During the current year, it reported net income of $875,000. It had cash provided by operating activities of $643,000, paid cash dividends of $80,000 and had capital expenditures of $280,000. Compute the company's free cash flow, and discuss whether an increase in the dividend appears warranted. What other factors should be considered?

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