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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Free cash flow

Sweeter Enterprises Inc. has cash flows from operating activities of $539,000. Cash flows used for investments in property, plant, and equipment totaled $210,000, of which 75% of this investment was used to replace existing capacity.

  1. a. Determine the free cash flow for Sweeter Enterprises Inc.
  2. b. How might a lender use free cash flow to determine whether or not to give Sweeter Enterprises Inc. a loan?

a.

To determine

Free cash flow:

Free cash flow is defined as an evaluation of financial performance of a company. It shows the cash which is generated after paying on capital expenditures. Such cash is used for production, expansion, development of new products, acquisitions, payment of dividends, and repayment of debts.

The following formula is used to calculate free cash flow.

Free ash flow = (Net cash provided by operating activites - Cash payment planned for investments in long-term investments - Cash dividends )

To Determine: The free cash flow for S Enterprises Incorporation.

Explanation

Free cash flow is the balance of cash from operating activities. This balance remains after the payment of “long-term assets, dividends, and repayment of debts to creditors”.

It signifies the amount of cash which leftover in the business after meeting the above expenditures in acquisition and expansion of business.

Working note:

Calculate the amount of cash paid for maintaining property, plant and equipment:

Cash paid for maintainingproperty, plant and equipment

b.

To determine

To Explain: The use of free cash flow by lender to determine whether or not to give a loan.

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