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McMahon Inc. reported the following on the company’s statement of cash flows in Year 2 and Year 1: Seventy percent of the net cash flow used for investing activities was used to replace existing capacity. a. Determine McMahon’s free cash flow for both years. b. Has McMahon’s free cash flow improved or declined from Year 1 to Year 2?

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 16, Problem 8PEA
Textbook Problem
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McMahon Inc. reported the following on the company’s statement of cash flows in Year 2 and Year 1:

Chapter 16, Problem 8PEA, McMahon Inc. reported the following on the companys statement of cash flows in Year 2 and Year 1:

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

  1.        a.            Determine McMahon’s free cash flow for both years.
  2.       b.            Has McMahon’s free cash flow improved or declined from Year 1 to Year 2?

a.

To determine

Determine M’s free cash flow for both years.

Explanation of Solution

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, and acquisitions.

The following formula is used to calculate free cash flow.

Free cash flow = (Net cash provided by operating activitiesCash payments planned for investments in long-term assets)

Free cash flow is the balance of cash from operating activities. This balance remains after the payment of “long-term assets”. It signifies the amount of cash which leftover in the business after meeting the above expenditures in acquisition and expansion of business.

Working notes:

Calculate the net cash used for investing activities for Year 1:

Net cash used for investing activities for Year 1}=(Net cash used for investing activities for

b.

To determine

Explain whether free cash flow has improved or declined from Year 1 to Year 2.

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