Free Cash Flow

Well, I was looking through my references and found one decent resource. If you do understand the following explanation, great!. I will pull all the information together and provide a case study on a company to open the door on why we are learning all of this. If this all makes no sense still, fear not! I will provide a much more thorough explanation in laymen terms. Especially for those that do not know how to read the balance, income and cash flow sheets.

From Wikipedia, the free encyclopedia

In corporate finance, free cash flow (FCF) is cash flow available for distribution among all the securities holders of an organization. They include equity holders, debt holders, preferred stock holders, convertible security holders, and so on.

Element	Data Source
Net Income	Current Income Statement
+ Depreciation/Amortization	Current Income Statement
– Changes in Working Capital	Prior & Current Balance Sheets: Current Assets and Liability accounts
– Capital expenditure	Prior & Current Balance Sheets: Property, Plant and Equipment accounts
= Free Cash Flow

Note that the first three lines above are calculated for you on the standard Statement of Cash Flows.

Element	Data Source
Net Income	Current Income Statement
+ Depreciation/Amortization	Current Income Statement
– Changes in Working Capital	Prior & Current Balance Sheets: Current Assets and Liability accounts
= Cash Flows from Operations	same as Statement of Cash Flows: section 1, from Operations

Therefore

Element	Data Source
Cash Flows from Operations	Statement of Cash Flows: section 1, from Operations
– Capital Expenditure	Statement of Cash Flows: section 2, from Investment
= Free Cash Flow

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