Definition of Cash Flow
Cash flow refers to the amounts of cash that a company, investment or project generates. The cash that a company generates is different from the company’s net income (which is measured using the company’s revenues and expenses under the accrual basis of accounting).
A company’s significant cash flows are reported in the statement of cash flows, which is organized as follows:
- Cash flows from operating activities
- Cash flows from investing activities
- Cash flows from financing activities
- Supplemental disclosures of significant noncash changes in the above sections
Definition of Free Cash Flow
Free cash flow is a metric often used by financial analysts. It is calculated by using two amounts reported on a company’s statement of cash flows:
- Total/Net amount of cash flows from operating activities, minus
- Capital expenditures (which is a separate item reported under cash flows from investing activities)
Example of Free Cash Flow
Assume that during the most recent year a corporation had cash flows from operating activities of $300,000 and had capital expenditures of $225,000. The corporation’s free cash flow was $75,000.
Occasionally, dividends paid to stockholders during the recent year are also deducted in calculating free cash flow.
