Obermeyer Corporation issued the following statement of cash flows for 2017.

OBERMEYER CORPORATION Statement of Cash Flows-Indirect Method For the Year Ended December 31, 2017 Cash flows from operating activities Net income $59,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on disposal of equipment Increase in inventory Decrease in accounts receivable $ 9,100

(a) Compute free cash fl ow for Obermeyer Corporation.

(b) Explain why free cash flow often provides better information than “Net cash provided by operating activities.”

Solutions

Expert Solution

(a)

Free cash flow = $73,700 – $27,000 – $15,000 = $31,700

($73,700 - $27,000 - $15,000 = $31,700)

(Net cash provided by oper. act. – Purch. of equip. – Pmt. for div. = Free cash flow)

(b)

Cash provided by operating activities fails to take into account that a company must invest in new plant assets just to maintain the current level of operations. Companies must also maintain dividends at current levels to satisfy investors. The measurement of free cash flow provides additional insight regarding a company’s cash-generating ability.

(a)

Free cash flow = $73,700 – $27,000 – $15,000 = $31,700

($73,700 - $27,000 - $15,000 = $31,700)

(Net cash provided by oper. act. – Purch. of equip. – Pmt. for div. = Free cash flow)

Junaid answered 2 years ago

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