- CFA Exams
- CFA Exam: Level I 2021
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 23. Understanding Cash Flow Statements
- Subject 3. Cash Flow Statement Analysis
CFA Practice Question
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.
Correct Answer: True
Free cash flow is the portion of the annual net cash flows from operating activities that remains available for discretionary purposes after the basic obligations of the business have been met.
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) |