Question

Free Cash Flow The focus on traditional financial statements is data rather than cash flow. However, cash flow is important to investors, managers, and stock analysts. Therefore, decision makers and security analysts need to modify financial statement data provided to them. An important modification is the concept of free cash flow (FCF). Many analysts regard FCF as being the single and most important number that can be developed from the income statements, even more important than net income. The equation for free cash flow is:

Answer 1

Answer and Explanation:

The focus on traditional financial statements is accounting data rather than cash flow. At the same time, it is also important for investors, managers, and stock analysts.

Moreover, the decision who makes and the security analyst need to change the data of the financial statements i.e provided to them according to the needs of the company

It becomes more important than the net income

Therefore for computing the free cash flow, the following equation is required

Free cash flow = EBIT × (1 - tax rate) + depreciation & amortization expenses - (capital expenditure + change in net operating working capital)