XYZ Company reported the following on their statement of cash flows in 2016 and

ID: 2583883 • Letter: X

Question

XYZ Company reported the following on their statement of cash flows in 2016 and 2017:

2016 2017

Net Cash flow from operating activities $353,000 $374,000

Net Cash flow used for investing activities (287,000) (276,000)

Net cash flow used for financing activities (54,000) (46,000)

Eighty percent of the net cash flow used for investing activities was used to replace existing capacity.

a) Calculate their free cash flow for 2016 and 2017.

b) Has their free cash flow improved or declined from 2016 to 2017?

Explanation / Answer

Solution:

Part 1 – Free Cash Flow

Free Cash Flow is a way of looking a business’s cash flow to determine what is available for distribution to the securities holder. FCF can be calculated by various ways.

From Cash Flow Statement, Free Cash Flow is the different between Cash Flow from Operating Activities and Cash Flow from Investing Activities.

Free Cash Flow

2016

2017

Net Cash flow from operating activities (A)

$353,000

$374,000

Net Cash flow used for investing activities (B)

($287,000)

($276,000)

Free Cash Flow (A+B)

$66,000

$98,000

Part 2 –

2016 FCF is $66,000

2017 FCF is $98,000

It means the Free Cash Flow is improved from 2017 to 2017

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