Dear Exparts, Please teach me the following question. If a firm has negative fre

Question

Dear Exparts,

Please teach me the following question.

If a firm has negative free cash flow, it has not sold or reduced any current or fixed assets, yet it shows an increse in cash as reported on its balance sheet what could have caused this situation? Which of the following statements is correct? And why is the reason?

a There is an increse in company's depreciation and amortization expenses.

b There is a change in the company's inventory accounting.

c The company had a sharp increse in its accrued liabilities.

d The company sold a new issue of common stock.

e The company made a large capital investment early in the year.

Explanation / Answer

d is correct.

Free Cash Flow = Operating Cash Flow - Capital Investment

Now, the company has negative free cash flow and yet it cash on balance sheet increases. If the firm is not generating free cash flow, the only other way it can increase it cash level is through financing activities, i.e., get a loan or raise equity capital. Hence, the company would have sold new common stock to raise equity capital and its cash levels.

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