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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Analyzing the Statement of Cash Flows

Manning Company reported the following information for 2019: cash provided by operating activities, $425,000; cash used by investing activities, $200,000; average debt maturing over the next 5 years, $80,000; capital expenditures, $275,000; cash dividends, $60,000.

Required:

Compute free cash flow and the cash flow adequacy ratio. (Note: Round ratios to two decimal places.) Comment on each ratio.

To determine

Introduction:

A company’s free each flow represents the cash flow that a company is able to generate after considering the maintenance or expansion of its assets (Capital expenditures) and the payment of dividends. Having positive free cash flow allows a company to pursue profit generating opportunities. However. negative free cash flow is not necessarily a bad thing, For example, a company making large investments in productive assets (large capital expenditures) may show negative fret cash flow. If these investments provide a high rate of return, this strategy will be good for the company in the long run.

In money related bookkeeping, a cash flow explanation, otherwise called the announcement of cash flows, is a fiscal summary that demonstrates how changes in monetary record records and salary influence cash and cash reciprocals, and separates the examination to working, investing, and financing activities.

To choose:

Compute free cash flow and the cash flow adequacy ratio. Comment on each ratio.

Explanation

Free cash flow = Net cash flow from operating activity − Capital expenditure − cash dividend

=$425,000$275,000$60,000=$90,000

Cash flow adequacy ratio

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