I am working on a financial reporting question and for now I don’t see why the answer is the way that it is; i.e. I don’t see anything in the vignette that makes this question different.
Question: Calculate 2006 FCFF
Answer: FCFF = NI + NCC - WCInv - FCInv + Interest(1-tax)
Given: 2006 NI=800 2006 NCC = 341 2006 Interest = 411, tax rate is 34%, therefore interest expense = 411*(1-.34) = 271.3 2006 Capital Spending = FCInv = 241 2005 Working Capital = 350 MM
Here comes the question. It is given that Total Current Assets = 3,646 due to: cash 1,125 accounts receivable 1,081 inventories 1,253 prepaid expenses 187
It is given that Total Current Liabilities = 2,470 due to: notes payable 11 current portion of long term debt 425 accounts payable 1,065 accrued compensation 51 accrued liabilities 591 Income taxes payable 327
The answer given is: FCFF = 800 + 341 + 271.3 - 241 - (487 - 350)
The 487 - 350 is the WCInv, however I would have simply subtracted Current Liabilites from Current Assets to arrive at WC 2006, i.e.
WC 2006 = 3,646-2,470 = 1,176
However, the answer did the following to compute 2006 WC:
(1,081 + 1,253 + 187) - (1,065 + 51 + 591 + 327)
Why are they removing cash from current assets and why are they removing notes payable and current portion of long term debt from current liabilities?
If you have any pointers for finding an answer please let me know. Could the answer we wrong? Thanks in advance.