2 Apex Company prepared the statement of cash flows for the current year that is
ID: 2580709 • Letter: 2
Question
2 Apex Company prepared the statement of cash flows for the current year that is shown below Apex Company Statement of Cash Flows-Indirect method operating activities Net income Adjustments to convert net income to cash basis: points Depreciation Increase in accounts receivable (61,9ee) (25,2e0) Increase in inventory Decrease in prepaid expenses Increase in accounts payable 54,7e0 Decrease in accrued 1iabilitie Increase in income taxes payable Net cash provided by (used in) operating activities Investing activities: Pr ceeds from the sale of equipment (9,5ee) 31,5ee 3, 2ee 15,7ee (41,see Additions to plant and equipment Net cash provided by (used in) investing activities Financing activities: Increase in bonds payable Increase in common stock Cash dividends (145,8ee) 39,8ee 29,10e Net cash provided by (used in) financing activities Net decrease in cash and cash equivalents Beginning cash and cash equivalents 9e.50e (13,8ee) 28,9ee Ending cash and cash equivalents $ 15,190 Required Compute Apex Company's free cash flow for the current year. (Negative amount should be Indicated by a minus sign.) Answer is complete but not entirely correct. ree cash flow (88,500) Prey 2 of 4 NextExplanation / Answer
Capital expenditure is the amount spend by company on acquiring new fixed assets or maintaing the old one. It also refers to the investment done in new projects by the firm. The expense will be considered as capital expenditure when it will improve the useful life of the asset.
Free cash flow represents the cash that can be used by the company as per its prefernces. It is calculated by subtracting capital expenditure and dividend paid in cash from the net cash flow from operating activities.
DIvidends are generally paid by the company on regular basis. It is very rare that company stops paying dividend if they do so then investors start loosing interest in the company. Therefore, while calculating free cash flow we have considered dividends also and subtracted the same from net cash flow from operating activities.
The free cash flow represents the cash which is available with company for expansion of business, to pay its debt and loans or to buy back its shares etc. Also note that the higher the free cash flow, higher will be the value of shares of company.
The formula to calculate free cash flow will be as follows:
Free cash flow = Net cash flow from operating activities - capital expenditure - dividend paid in cash
Free cash flow = $31,500 - $120,000 (Plant and equipment) - $29,100
Free cash flow = - $117,600
The free cash flow for Apex company for current year is - $117,600. The negative free cash flow indicates that company is making huge investments with expectation of higher returns.
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