Question

a)How are the changes in working capital computed?

b)How do we get the net change in cash value?

c) What is the free cash flow?

Answer 1

a)

Calculation of Changes in Working Capital

= Previous Working Capital – New Working Capital

= (Previous Current Assets – Previous Current Liabilities)

– (New Current Assets – New Current Liabilities)

= (Previous Current Assets – New Current Assets)

+ (New Current Liabilities – Previous Current Liabilities)

Change in Working Capital is a cash flow item and we can see here that the amount keeps fluctuating for each of the compared days.

Working capital changes affect the cash flow and that means that any of the assets or liabilities have an impact will change the working capital.

If current assets are increasing, cash is being used.

If current liabilities are increasing, less cash is being used.

This means the company is stretching out payments or getting money upfront before the service is provided.

Therefore, if we need to see “Change in Working Capital”, we need to determine whether current operating assets or current operating liabilities are increasing/decreasing.

If the final value for Change in Working Capital is negative, that means that the change in the current operating assets has increased higher than the current operating liabilities. Cash has been used, and this reduces Free Cash Flow.

Factors changing the Working capitals are:

Changes in Accounts Receivables

Changes in Inventories

Changes in Prepaid Expenses

Changes in current assets

Changes in Accounts Payable

Changes in Deferred Revenue

Changes in Income Tax Payables

Changes in Current Liabilities.

Now, these changes occur due to purchase or selling of goods, paying or receiving cash from payables or receivables or purchasing current assets or creating other current liabilities.

b)

To find the net change in cash from a cash flow statement, we will add together the net cash flows from operating, investing and financing activities.

Calculating Operating Activities

Find the amount of net cash flow from operations in the “operating activities” section of the cash flow statement. This amount represents the overall positive or negative cash flow the company generated from its primary business operations, such as selling products and paying expenses.

A cash flow statement shows negative amounts in parentheses and positive amounts without parentheses. In this example, the net operating cash flow as on 30 Jun 2019 is (22M)

Calculate Investing Activities

Identify the net cash flow from investing activities in the “investing activities” section. The net cash flow from this section is the overall cash flow from buying and selling long-term assets and investments. When a company invests in assets to expand its business, it typically has negative net cash flow from investing activities. In this example, only on 30 June 2019, it is negative 113 million in net cash flow from investing activities while the years indicate that the investments made have been sold off and cash flowed in.

Calculating Financing Activities

Find the amount of net cash flow from financing activities in the “financing activities” section. This amount reveals the company’s total cash flow from issuing and buying its stocks and bonds and from paying dividends. In this example, except for 31^st Dec 2019, all the other days' cash flow is negative and that means a huge portion of cash is used for paying dividends and raising long term debts.

Calculate Net Change in Cash

Add the net cash flows from each of the three sections to calculate the company’s net change in cash. A positive result represents an increase in cash, while a negative number represents a decrease. Concluding the example, Net change is cash has remained negative for all the compared data.

c) Free cash flow (FCF) is the cash produced by processing the cash outflows for running operations and maintaining its capital assets. Net income and earnings though represents profitability, they include non-cash expenses of the income statement and excludes spending on equipment and assets as well as changes in working capital from the balance sheet. On the contrary, FCF do excludes these non-cash expenses such as Depreciation while considering equipment and asset spending and also the changes in working capital.