free_cash_flow - Finance 254 A Short Summary of Computing...

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Finance 254 A Short Summary of Computing Free Cash Flow Free Cash Flow From Operations : after tax operating cash flows - investment in assets = free cash flow operating income (EBIT) + depreciation = EBITDA - cash tax payments = after-tax cash operating cash flow change in current assets - change in non-interest bearing current liabilities = change in net operating working capital + change in GROSS fixed and other assets = investment in assets This method of computing free cash flow basically serves to adjust accrual measures of income to a cash measure . For instance, consider an increase in account receivable (a current asset). This means that we did not collect cash for some of our sales, but instead recognized that someone owes us money for goods or services provided. We are essentially extending credit to our customers in this case, which is bad for us because we do not have the cash today. Similarly, if our payables increase, we have essentially borrowed from suppliers. Look at this formula closely and compare it to an income statement.
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This note was uploaded on 09/19/2009 for the course FIN FIN 221 taught by Professor Fin221 during the Fall '09 term at University of Illinois, Urbana Champaign.

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