Question

This is a 2-part question.

Part 1) Indicate which section of the statement of cash flows should contain each of the following items, and whether each item would result in an inflow or outflow of cash. The sections are Operating, Investing, and Financing.

(a) Amortization of a patent
(b) Increase in accounts payable
(c) Paid cash dividends to common stockholders
(d) Purchased equipment with cash
(e) Increase in inventory

Part 2) Please explain how to calculate free cash flow and the importance of free cash flow to investors.

Answer 1

1	(a) Amortization of a patent	Operating
	(b) Increase in accounts payable	Operating
	(c) Paid cash dividends to common stockholders	Financing
	(d) Purchased equipment with cash	Investing
	(e) Increase in inventory	Operating
2	Free cash flow is the cash that organization generates through operations, less the cost of expenditure on assets.
	In other words, Free cash flow is the cash that left after paying the operating cost and capital expenditure
	Free cash flow = Operating cash flow - capital expenditure
	Investors use this measures to know that the organization have sufficient cash, after paying operating cost
	and capital expenditure, to pay dividends to investors.