### CFA Practice Question

A financial analyst has gathered the following information from the balance sheet and income statement of a company:

What is the free cash flow?
A. 794
B. 399
C. 878
Explanation: Free cash flow = CFO - Capital expenditures = 794 - 395 = 399

CFO = 765 + 184 - 69 - 54 - 83 - 37 + 55 + 33 = 794. Gain or loss on sale of assets is CFO but the disposal of fixed assets is an investing activity. Therefore, the gains or losses should be removed from net income to prevent double-counting cash flows.

User Comment
eddeb If there were no CAPEX, I should have used Depreciation?
mtcfa NO... as depreciation is a non-cash expense. If there were noe CAREX, FCF would simply = CFO.
mtcfa Strike my last comment. However, if gains/losses are CFI, then why does the explanation add back the 33 to CFO???
george2006 the loss on sales of fixed asset net of tax is added to the regular net income to derive the final net income. There is no cash out flow, but only inflow (less than the book value at that time). So for CFO, we need to add it back like depreciation.
cFa106 I don't know why the loss on sales of fixed asset is net of tax. I think it simply equals the difference between the proceed from sale and carrying value of the asset.

Anyway, where is the proceed from sale in the calculation of capital expenditure? I think we can't calculate the FCF without knowing either the change in PPP account balance or the proceed in this situation.
chuong Easily, Net income is included (+) gain/(-)loss (after tax. Therefore, calculating the CFO it need to subtract (-) gain or add (+) loss on fixed asset sale
dimanyc Since there are numerous definitions of FCF, the question should technically give you the one it's looking for. FCF can also = CFO - CFI or =CFO-Dividends-Sales of PPE+Purchases of PPE
Yannicklin I think that the reasoning behind this issue about the gain/loss being a CFI is:-

Say if we consider it as a CFO, there should be no adjustment made to Net CF from operations..,right?? .BUT since we are subtracting profit from Net income or adding back loss to Net Income in order to have the NET CASH FLOW FROM OPERATIONS....it is as if this has NOT been recorded in CF from operations...

Don't know if this is the right explanation for it being a CFI.
JCopeland FCFF= CFO + AT IntExp + Change in NWC + Change in CapExp.
Merke To George2006, if there was a Gain on the sale of FA, what adjustments would be needed for NI and CFO?
achoi0 Relates to the indirect method to calculate CFO. If there was a gain on the sale of FA, subtract that gain from the net income
bsm9 And there are two more levels after this? What did I sign up for!?
katebako Gain or loss from sale of land is considered CFO under indirect method (+loss, -gain), while SALE proceeds and acquisition of fixed asset are considered CFI
ashish100 FCF = NI + Depreciation/Amortization - Change in working capital - Capex.

CFO = NI + Deprication/Amortization - Change in working capital.
ashish100 CapEx = Purchase of PPE - Gain/Loss on Sale of Equipment.

And thats the bottom line coz Warren E Buffett said so! #OmahaRattleSnake
kvs161985 Gain / loss from Sale of Fixed Asset
Add Gain/Loss value to income in Income Statement
Subtract Gain/Loss value in CFO to avoid double accounting.

In the above question - there is a loss on sale of FA, this can be written as

Income Statement -- Revenue + (-Loss) (This will eventually accounted to arrive at Net Income
CFO - NetIncome - (-Loss) = NetIncome + Loss
(Hence we see an add back in the above solution)
jeeychung Why do you exclude note payable? Isn't it also ST liability?
gcollier Why exclude notes payables? Can somebody explain?