How does "free cash flow" differ from net profit?
A)It is determined by accrual basis accounting.
B)It takes into consideration a firm's ongoing investment in working capital and fixed assets.
C)It ignores depreciation and taxes.
D)It is less expensive.

Question

Quizplus · Accepted Answer

Free cash flow takes into consideration a firm's ongoing investment in working capital and fixed assets, whereas net profit only subtracts total expenses from total revenue without considering these factors. Option A is incorrect because both free cash flow and net profit can be determined by either accrual or cash basis accounting. Option C is incorrect because depreciation and taxes are considered in the calculation of free cash flow. Option D is incorrect because the cost of calculating free cash flow is not relevant to its definition.

How Does "Free Cash Flow" Differ from Net Profit