{"id":4144,"date":"2020-10-26T16:25:26","date_gmt":"2020-10-26T16:25:26","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&#038;p=4144"},"modified":"2020-11-25T19:37:12","modified_gmt":"2020-11-25T19:37:12","slug":"free-cash-flow","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/free-cash-flow\/","title":{"raw":"Free Cash Flow","rendered":"Free Cash Flow"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li style=\"font-weight: 400;\">Calculate free cash flow<\/li>\r\n<\/ul>\r\n<\/div>\r\nFree cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.\r\n\r\nThe formula for free cash flow is:\r\n\r\n[latex]\\text{operating cash flow}-\\text{capital expenditures}\u200b[\/latex]\r\n\r\nAssume the following statement of cash flows for Jonick Company:\r\n<table class=\"fin-table acctstatement\"><caption>Jonick Company\r\nStatement of Cash Flows\r\nfor the year ended December 31, 2019<\/caption>\r\n<tbody>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Cash flows from operating activities<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net income<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">$ 248,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Adjustments to reconcile net income to net cash provided by operating activities:<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Depreciation and amortization<\/td>\r\n<td class=\"r\">35,000<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Increase in current assets<\/td>\r\n<td class=\"r\">(36,000)<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Increase in current liabilities<\/td>\r\n<td class=\"r\">33,000<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gain on sale of investments<\/td>\r\n<td class=\"r\">(137,000)<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total adjustments<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">(105,000)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net cash from operating activities<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>\r\n$ 143,000<\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"3\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Cash flows from investing activities<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Purchase of property, plant, and equipment<\/td>\r\n<td class=\"r\">(144,000)<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net proceeds from sales and purchases of investments<\/td>\r\n<td class=\"r\">(20,000)<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net cash used in investing activities<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>\r\n(164,000)<\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"3\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Cash flows from financing activities<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Long-term borrowing<\/td>\r\n<td class=\"r\">83,000<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Dividends paid<\/td>\r\n<td class=\"r\">(20,000)<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net cash used in financing activities<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>\r\n63,000<\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"3\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Net increase in cash and cash equivalents<\/th>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">42,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Cash and cash equivalents at beginning of period<\/th>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">331,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Cash and cash equivalents at end of period<\/th>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\r\n$ 373,000\r\n<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"3\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Supplemental information:<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cash paid for interest<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">$ 55,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cash paid for income taxes<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">$ 66,000<\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"3\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nFree cash flow would be negative $1,000 (143,000 operating cash \u2212 144,000 capital expenditures).\r\n\r\nBecause FCF accounts for investments in property, plant, and equipment, it can be lumpy and uneven over time. Just looking at the balance sheet, we see that Buildings (net of accumulated depreciation) increased significantly from 2018 to 2019. Also, although the mortgage note payable did not increase, the company issued bonded indebtedness that increased cash and may have been used to purchase a new building.\r\n\r\nAs you can see, metrics like this don\u2019t often give the whole picture. They are most useful to identify hot spots, trends, and opportunities.\r\n\r\nFor example, take a look at this <a href=\"https:\/\/www.marketwatch.com\/investing\/stock\/f\/financials\/cash-flow\" target=\"_blank\" rel=\"noopener\">information for Ford Motor Company<\/a>:\r\n\r\n[caption id=\"attachment_5865\" align=\"aligncenter\" width=\"2814\"]<img class=\"wp-image-5865 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/16164726\/Screen-Shot-2020-11-16-at-8.46.23-AM.png\" alt=\"See caption for link to long description.\" width=\"2814\" height=\"644\" \/> See the <a href=\"https:\/\/course-building.s3-us-west-2.amazonaws.com\/Financial+Accounting\/Long+Descriptions\/FordOperatingActivities.txt\" target=\"_blank\" rel=\"noopener\">operating activities long description<\/a> here.[\/caption]\r\n\r\nNotice net income (before any extraordinary items) has dropped from $7 billion to $84 million. However, after adjusting from accrual basis to cash, operating cash flows have stayed fairly constant (the gray bar in the figure below).\r\n\r\n[caption id=\"attachment_5864\" align=\"aligncenter\" width=\"2784\"]<img class=\"wp-image-5864 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/16164722\/Screen-Shot-2020-11-16-at-8.46.32-AM.png\" alt=\"See caption for link to long description.\" width=\"2784\" height=\"346\" \/> See the <a href=\"https:\/\/course-building.s3-us-west-2.amazonaws.com\/Financial+Accounting\/Long+Descriptions\/FordNetOperatingCashFlow.txt\" target=\"_blank\" rel=\"noopener\">net operating cash flow long description<\/a> here.[\/caption]\r\n\r\nIn addition, the company invests in fixed assets at a fairly constant pace:\r\n\r\n[caption id=\"attachment_5863\" align=\"aligncenter\" width=\"2808\"]<img class=\"wp-image-5863 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/16164717\/Screen-Shot-2020-11-16-at-8.46.39-AM.png\" alt=\"See caption for link to long description.\" width=\"2808\" height=\"444\" \/> See the <a href=\"https:\/\/course-building.s3-us-west-2.amazonaws.com\/Financial+Accounting\/Long+Descriptions\/FordCapitalExpenditures.txt\" target=\"_blank\" rel=\"noopener\">capital expenditures long description<\/a> here.[\/caption]\r\n\r\nAnd so, Free Cash Flow is also fairly constant, ranging from $9 billion in 2015 to $10 billion in 2019.\r\n\r\n[caption id=\"attachment_5862\" align=\"aligncenter\" width=\"2772\"]<img class=\"wp-image-5862 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/16164711\/Screen-Shot-2020-11-16-at-8.46.46-AM.png\" alt=\"See caption for link to long description.\" width=\"2772\" height=\"428\" \/> See the <a href=\"https:\/\/course-building.s3-us-west-2.amazonaws.com\/Financial+Accounting\/Long+Descriptions\/NetChangeinCash.txt\" target=\"_blank\" rel=\"noopener\">free cash flow long description<\/a> here.[\/caption]\r\n\r\nFree Cash Flow by itself, as with any metric, won\u2019t tell you the whole story. In this case, we can see that Ford Motor Company has cash to use for dividends, debt payments, and other things in addition to reinvesting in capital assets, but we don\u2019t know for sure if that is adequate. We\u2019ll have to look at a much larger picture of the company to determine that.\r\n<h2>Variations on Free Cash Flow<\/h2>\r\nA variation of Free Cash Flow subtracts dividends from cash flows from operating income as well as capital expenditures. The resulting number would represent cash available for debt repayment and expansion. You probably wouldn\u2019t want to compare one company\u2019s Free Cash Flow computed after dividends with another company that computes a more traditional FCF, but for an intra-company analysis over time, you could use whichever measure makes the most sense, as long as you are consistent.\r\n\r\nInvestment bankers and analysts who need to evaluate a company\u2019s expected performance with different capital structures will use variations of free cash flow like Levered Free Cash Flow which is adjusted for interest payments and borrowings, and Free Cash Flow per Share. Some investors calculate a quick estimate of Free Cash Flow by simply adding depreciation expense back to net income to get a rough estimate of cash from operations and from that, they subtract capital expenditures. Again, if all you are looking at is trend analysis, or if you are comparing companies using the same methodology for each, this quick method may be adequate. In any case, it is important to know exactly what you are comparing.\r\n<div class=\"textbox tryit\">\r\n<h3>PRACTICE QUESTION<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23869\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li style=\"font-weight: 400;\">Calculate free cash flow<\/li>\n<\/ul>\n<\/div>\n<p>Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.<\/p>\n<p>The formula for free cash flow is:<\/p>\n<p>[latex]\\text{operating cash flow}-\\text{capital expenditures}\u200b[\/latex]<\/p>\n<p>Assume the following statement of cash flows for Jonick Company:<\/p>\n<table class=\"fin-table acctstatement\">\n<caption>Jonick Company<br \/>\nStatement of Cash Flows<br \/>\nfor the year ended December 31, 2019<\/caption>\n<tbody>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Cash flows from operating activities<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Net income<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">$ 248,000<\/td>\n<\/tr>\n<tr>\n<td>Adjustments to reconcile net income to net cash provided by operating activities:<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Depreciation and amortization<\/td>\n<td class=\"r\">35,000<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Increase in current assets<\/td>\n<td class=\"r\">(36,000)<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Increase in current liabilities<\/td>\n<td class=\"r\">33,000<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Gain on sale of investments<\/td>\n<td class=\"r\">(137,000)<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Total adjustments<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">(105,000)<\/td>\n<\/tr>\n<tr>\n<td>Net cash from operating activities<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><br \/>\n$ 143,000<\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"3\"><\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Cash flows from investing activities<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Purchase of property, plant, and equipment<\/td>\n<td class=\"r\">(144,000)<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Net proceeds from sales and purchases of investments<\/td>\n<td class=\"r\">(20,000)<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Net cash used in investing activities<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><br \/>\n(164,000)<\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"3\"><\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Cash flows from financing activities<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Long-term borrowing<\/td>\n<td class=\"r\">83,000<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Dividends paid<\/td>\n<td class=\"r\">(20,000)<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Net cash used in financing activities<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><br \/>\n63,000<\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"3\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Net increase in cash and cash equivalents<\/th>\n<td class=\"r\"><\/td>\n<td class=\"r\">42,000<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Cash and cash equivalents at beginning of period<\/th>\n<td class=\"r\"><\/td>\n<td class=\"r\">331,000<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Cash and cash equivalents at end of period<\/th>\n<td class=\"r\"><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span><br \/>\n$ 373,000<br \/>\n<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"3\"><\/td>\n<\/tr>\n<tr>\n<td>Supplemental information:<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Cash paid for interest<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">$ 55,000<\/td>\n<\/tr>\n<tr>\n<td>Cash paid for income taxes<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">$ 66,000<\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"3\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Free cash flow would be negative $1,000 (143,000 operating cash \u2212 144,000 capital expenditures).<\/p>\n<p>Because FCF accounts for investments in property, plant, and equipment, it can be lumpy and uneven over time. Just looking at the balance sheet, we see that Buildings (net of accumulated depreciation) increased significantly from 2018 to 2019. Also, although the mortgage note payable did not increase, the company issued bonded indebtedness that increased cash and may have been used to purchase a new building.<\/p>\n<p>As you can see, metrics like this don\u2019t often give the whole picture. They are most useful to identify hot spots, trends, and opportunities.<\/p>\n<p>For example, take a look at this <a href=\"https:\/\/www.marketwatch.com\/investing\/stock\/f\/financials\/cash-flow\" target=\"_blank\" rel=\"noopener\">information for Ford Motor Company<\/a>:<\/p>\n<div id=\"attachment_5865\" style=\"width: 2824px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-5865\" class=\"wp-image-5865 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/16164726\/Screen-Shot-2020-11-16-at-8.46.23-AM.png\" alt=\"See caption for link to long description.\" width=\"2814\" height=\"644\" \/><\/p>\n<p id=\"caption-attachment-5865\" class=\"wp-caption-text\">See the <a href=\"https:\/\/course-building.s3-us-west-2.amazonaws.com\/Financial+Accounting\/Long+Descriptions\/FordOperatingActivities.txt\" target=\"_blank\" rel=\"noopener\">operating activities long description<\/a> here.<\/p>\n<\/div>\n<p>Notice net income (before any extraordinary items) has dropped from $7 billion to $84 million. However, after adjusting from accrual basis to cash, operating cash flows have stayed fairly constant (the gray bar in the figure below).<\/p>\n<div id=\"attachment_5864\" style=\"width: 2794px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-5864\" class=\"wp-image-5864 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/16164722\/Screen-Shot-2020-11-16-at-8.46.32-AM.png\" alt=\"See caption for link to long description.\" width=\"2784\" height=\"346\" \/><\/p>\n<p id=\"caption-attachment-5864\" class=\"wp-caption-text\">See the <a href=\"https:\/\/course-building.s3-us-west-2.amazonaws.com\/Financial+Accounting\/Long+Descriptions\/FordNetOperatingCashFlow.txt\" target=\"_blank\" rel=\"noopener\">net operating cash flow long description<\/a> here.<\/p>\n<\/div>\n<p>In addition, the company invests in fixed assets at a fairly constant pace:<\/p>\n<div id=\"attachment_5863\" style=\"width: 2818px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-5863\" class=\"wp-image-5863 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/16164717\/Screen-Shot-2020-11-16-at-8.46.39-AM.png\" alt=\"See caption for link to long description.\" width=\"2808\" height=\"444\" \/><\/p>\n<p id=\"caption-attachment-5863\" class=\"wp-caption-text\">See the <a href=\"https:\/\/course-building.s3-us-west-2.amazonaws.com\/Financial+Accounting\/Long+Descriptions\/FordCapitalExpenditures.txt\" target=\"_blank\" rel=\"noopener\">capital expenditures long description<\/a> here.<\/p>\n<\/div>\n<p>And so, Free Cash Flow is also fairly constant, ranging from $9 billion in 2015 to $10 billion in 2019.<\/p>\n<div id=\"attachment_5862\" style=\"width: 2782px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-5862\" class=\"wp-image-5862 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/16164711\/Screen-Shot-2020-11-16-at-8.46.46-AM.png\" alt=\"See caption for link to long description.\" width=\"2772\" height=\"428\" \/><\/p>\n<p id=\"caption-attachment-5862\" class=\"wp-caption-text\">See the <a href=\"https:\/\/course-building.s3-us-west-2.amazonaws.com\/Financial+Accounting\/Long+Descriptions\/NetChangeinCash.txt\" target=\"_blank\" rel=\"noopener\">free cash flow long description<\/a> here.<\/p>\n<\/div>\n<p>Free Cash Flow by itself, as with any metric, won\u2019t tell you the whole story. In this case, we can see that Ford Motor Company has cash to use for dividends, debt payments, and other things in addition to reinvesting in capital assets, but we don\u2019t know for sure if that is adequate. We\u2019ll have to look at a much larger picture of the company to determine that.<\/p>\n<h2>Variations on Free Cash Flow<\/h2>\n<p>A variation of Free Cash Flow subtracts dividends from cash flows from operating income as well as capital expenditures. The resulting number would represent cash available for debt repayment and expansion. You probably wouldn\u2019t want to compare one company\u2019s Free Cash Flow computed after dividends with another company that computes a more traditional FCF, but for an intra-company analysis over time, you could use whichever measure makes the most sense, as long as you are consistent.<\/p>\n<p>Investment bankers and analysts who need to evaluate a company\u2019s expected performance with different capital structures will use variations of free cash flow like Levered Free Cash Flow which is adjusted for interest payments and borrowings, and Free Cash Flow per Share. Some investors calculate a quick estimate of Free Cash Flow by simply adding depreciation expense back to net income to get a rough estimate of cash from operations and from that, they subtract capital expenditures. Again, if all you are looking at is trend analysis, or if you are comparing companies using the same methodology for each, this quick method may be adequate. In any case, it is important to know exactly what you are comparing.<\/p>\n<div class=\"textbox tryit\">\n<h3>PRACTICE QUESTION<\/h3>\n<p>\t<iframe id=\"lumen_assessment_23869\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23869&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23869\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-4144\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Free Cash Flow. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Principles of Financial Accounting. <strong>Authored by<\/strong>: Christine Jonick. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/web.ung.edu\/media\/university-press\/Principles-of-Financial-Accounting.pdf?t=1601063299615\">https:\/\/web.ung.edu\/media\/university-press\/Principles-of-Financial-Accounting.pdf?t=1601063299615<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":90270,"menu_order":20,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Free Cash Flow\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Principles of Financial Accounting\",\"author\":\"Christine Jonick\",\"organization\":\"\",\"url\":\"https:\/\/web.ung.edu\/media\/university-press\/Principles-of-Financial-Accounting.pdf?t=1601063299615\",\"project\":\"\",\"license\":\"cc-by-sa\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-4144","chapter","type-chapter","status-publish","hentry"],"part":857,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/4144","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/users\/90270"}],"version-history":[{"count":9,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/4144\/revisions"}],"predecessor-version":[{"id":6613,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/4144\/revisions\/6613"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/parts\/857"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/4144\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/media?parent=4144"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=4144"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/contributor?post=4144"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/license?post=4144"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}