How is the free cash flow calculated?



Q36. Free cash flow
How is the free cash flow calculated?

A36.
Free cash flow = (A) – (B) – (C)
Where,
(A) = Cash flows from operating activities
(B) = Capital expenditures
(C) = Cash dividends

[Entity 36-a]
Cash flows from operating activities = $970,000
Capital expenditures = $250,000
Cash dividends = $110,000
Free cash flow
= $970,000 – $250,000 – $110,000
= $610,000

[Entity 36-b]
Cash flows from operating activities = $950,000
Capital expenditures = $220,000
Cash dividends = $80,000
Free cash flow
= $950,000 – $220,000 – $80,000
= $650,000

[Note]
Entity 36-b generated more free cash flow than did Entity 36-a.

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