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Basic Question 1 of 7
True or False?
After the basic obligations of a business have been met, the portion of the annual net cash flows from operating activities that remains available for discretionary purposes is called free cash flow.
User Contributed Comments 7
| User | Comment |
|---|---|
| o123 | ** FCF is derived from CFO only! |
| xcye | Basic obligations of the business? Shouldn't that account for payment for the debt due? That's not included in the FCF calculation. |
| StanleyMo | Free cash flow is operating cash flow minus money spent on capital expenditures and acquisitions (listed under investment activities). |
| StanleyMo | xcye, the operating activities did consist of interested paid and income tax paid, please tae note. |
| gulfa99 | is capital expenditure an obligation? |
| oneashok | gulfa99, yes both fixed and working capital expenditure should be subtracted from CFO to arrive at the FCF |
| Davidrh | oneashok: that is not correct. CFO has already considered changes in working capital (A/R, A/P, and Inventories are a part of CFO already) |
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Learning Outcome Statements
calculate and interpret free cash flow to the firm, free cash flow to equity, and performance and coverage cash flow ratios
CFA® 2025 Level I Curriculum, Volume 2, Module 5.