Free cash flow (FCF)and net income (NI)differ in the following ways:
I.Net income accrues to shareholders, calculated after interest expense; free cash flow is calculated assuming all flows go to equity holders.
II.Net income is calculated after various noncash expenses, including depreciation; FCF adds back depreciation.
III.Capital expenditures and investments in working capital do not appear in net income calculations; they do reduce free cash flows.
IV.Net income is never negative; free cash flows can be negative for rapidly growing firms, even if the firm is profitable, because investments can exceed cash flows from operations.

Question

Quizplus · Accepted Answer

Net income is calculated after interest and noncash expenses like depreciation, while FCF adds back depreciation and considers capital expenditures and working capital investments. However, net income can be negative, so statement IV is incorrect.

Free Cash Flow (FCF)and Net Income (NI)differ in the Following