Question

Use the data below to compute 2014 FCF (Free Cash Flow):

	2014	2013
Cash	15	18
Short-term investments	10	68
Accounts receivable	368	318
Inventories	551	418
Property, plant & equipment (net)	925	872
Accounts payable	46	32
Short-term debt	95	64
Accrued liabilities	149	135
Long-term debt	662	582
Common stock	130	130
Retained earnings	771	712
Net revenue	3148	2854
Depreciation expense	111	91
Interest	88	62
Taxes	80	82
Net income	255	123

(Round to the nearest whole dollar)

Answer should be 117

Answer 1

For free cash flows we will calculate cash from operations as per below:

In calculating the cash from operations, we will start with the net income. We will add back the non cash item of depreciation in it. Then we will adjust the amount for increase or decrease in cash due to increase or decrease in current assets or current liabilities.Like, an increase in current assets will reduce cash, so we will deduct it and a decrease in current assets will increase cash, so we will add it. Similarly, an increase in current liabilities will increase cash, so it will be added and a decrease in current liabilities will reduce cash, so it will be deducted.

Description	Amount
Cash from operations:
Net income	$255
Adjustments to reconcile net income to net cash from operating activities
Add: Depreciation	$111
Add: Decrease in short term investments	- $58
Less: Increase in accounts receivable	$50
Less: Increase in inventories	- $133
Add: Increase in accounts payable	$14
Add: Increase in short term debt	$31
Add: Increase in accrued liabilities	$14
Add: Decrease in cash	- $3
Net cash flows from operations	$281

Next we will calculate capital expenditure as below:

Capital expenditure = Ending property plant & equipment + Depreciation expense - Beginning property plant & equipment

Capital expenditure = $925 + $111 - $872 = $164

Now, Free cash flows are given by:

Free cash flows = Cash from operations - Capital expenditure

Free cash flows = $281 - $164 = $117