Info

Change in NWC

$ 330

Net working capital thus increased by $330. Put another way, U.S. Corporation had a net investment of $330 in NWC for the year. This change in NWC is often referred to as the "addition to" NWC.

Conclusion Given the figures we've come up with, we're ready to calculate cash flow from assets. The total cash flow from assets is given by operating cash flow less the amounts invested in fixed assets and net working capital. So, for U.S., we have:

U.S. CORPORATION 2002 Cash Flow from Assets

Operating cash flow $547

- Net capital spending 130

- Change in NWC 330 Cash flow from assets $ 87

From the cash flow identity given earlier, we know that this $87 cash flow from assets equals the sum of the firm's cash flow to creditors and its cash flow to stockholders. We consider these next.

It wouldn't be at all unusual for a growing corporation to have a negative cash flow. As we see next, a negative cash flow means that the firm raised more money by borrowing and selling stock than it paid out to creditors and stockholders during the year.

A Note on "Free" Cash Flow Cash flow from assets sometimes goes by a different name, free cash flow. Of course, there is no such thing as "free" cash (we wish!). Instead, the name refers to cash that the firm is free to distribute to creditors and stockholders because it is not needed for working capital or fixed asset investments. We will stick with "cash flow from assets" as our label for this important concept because, in practice, there is some variation in exactly how free cash flow is computed; different users calculate it in different ways. Nonetheless, whenever you hear the phrase "free cash flow," you should understand that what is being discussed is cash flow from assets or something quite similar.

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