Instructions For Free Cash Flow Use In Financial Stat 329021

Instructions For Free Cash Flowuse The Financial Statements Below To C

Use the financial statements below to calculate the firm’s Free Cash Flow according to the method used in the Discussion Board. Use the formula CF = OCF - NWC - NCS and provide the numbers for this calculation. Summarize the calculation as FCF = OCF - NWC - NCS. The financial statements include the balance sheet as of December 31, 2016, and the income statement for 2016. Use these statements to determine the Operating Cash Flow (OCF), changes in Net Working Capital (NWC), and Net Capital Spending (NCS). Provide a detailed calculation following the formula, explaining how each component is derived from the financial statements. This will involve calculating Operating Cash Flow (OCF) from net income with adjustments, changes in NWC from the current and previous year's balance sheets, and NCS from the difference in net fixed assets after depreciation.

Paper For Above instruction

The calculation of Free Cash Flow (FCF) is integral for understanding a company's ability to generate cash that can be used for expansion, debt repayment, or dividends. Using the provided financial statements for Real Time Corporation for the year 2016, we can determine the firm's FCF through detailed analysis of operating cash flows, changes in net working capital, and net capital spending.

Operating Cash Flow (OCF):

Operating Cash Flow is primarily derived from Net Income, adjusted for non-cash items like depreciation, and changes in working capital components. The formula often used is:

OCF = Net Income + Non-cash expenses (Depreciation) + Changes in Working Capital

Given the data:Net Income for 2016 is $375,000, and Depreciation is $1,018,000.

Changes in Net Working Capital (NWC) are calculated as the difference in NWC from the previous year to the current year. NWC is defined as Current Assets minus Current Liabilities. For 2016:

Current Assets (CA): $2,140,000

Current Liabilities (CL): $994,000

Thus, NWC (2016) = $2,140,000 - $994,000 = $1,146,000

In the prior year (2015), NWC was $1,126,000. Therefore, the change in NWC is:

Δ NWC = NWC (2016) - NWC (2015) = $1,146,000 - $1,126,000 = $20,000

Net Capital Spending (NCS):

NCS is calculated as the difference in Net Fixed Assets (NFAs) between years plus depreciation:

NCS = (NFA 2016 - NFA 2015) + Depreciation

NFA (2016): $6,087,000

NFA (2015): $5,770,000

Change in NFA = $6,087,000 - $5,770,000 = $317,000

Adding Depreciation (since it’s a non-cash expense, but impacts asset values):

NCS = $317,000 + $1,018,000 = $1,335,000

Calculating Free Cash Flow:

Now, applying the formula:

FCF = OCF - NWC - NCS

First, OCF:

OCF = Net Income + Depreciation + Δ NWC = $375,000 + $1,018,000 + $20,000 = $1,413,000

Then, the FCF:

FCF = $1,413,000 - $20,000 - $1,335,000 = $58,000

This indicates that Real Time Corporation generated approximately $58,000 in free cash flow during 2016 after accounting for changes in working capital and capital expenditures.

In conclusion, analyzing FCF provides insights into the company’s financial health and its ability to fund future growth without external financing. The calculations demonstrate that despite significant capital expenditures, the firm maintained a positive free cash flow, reflecting healthy cash generation capacity.

References

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