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<FONT size="2" color="red" face="verdana, arial, helvetica, san-serif"><b>Free Cash Flow:</font></b>
<FONT size="-2" color="#000000" face="verdana, arial, helvetica, san-serif">
This is a commonly used term that points to the net cash available for distribution to the company’s investors. 
<p>
Free Cash Flow therefore implies positive cash flow from operations. From this the company will spend on new capital equipment (or upgrade on old equipment) necessary to maintain the present and future success of the company. The balance remaining is the Free Cash Flow.  
<p>
Free Cash Flow formula: <br>
Cash flow from operations less capital expenditure
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Burn Rate:</font></b>
<br>
<FONT size="1" color="#000000" face="verdana, arial, helvetica, san-serif">This is another of those cash flow related terms used on a regular basis by the great financial minds. 
<p>
The burn rate is the rate at which a company uses up (burn through) its cash. It is usually used to describe how emerging companies burn through their initial financing. 
<p>However, it may also be used to describe the pace at which any company experiencing declining financial performance is burning through its cash. 
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<font face="arial, verdana, helvetica" size="4" color="blue"><B>The Cash Flow Statement</font> <font face="arial, verdana, helvetica" color=blue size=2>Part 2</font><br><font face="arial, verdana, helvetica" size=2>may be the most important statement of them all</B><BR></font> 
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<div>As you know, when a balance sheet shows aggregate Assets greater than or less than Total Liabilities plus Equity, it is easy to conclude that something went wrong in the preparation of the financial accounts, as a correctly completed balance sheet should always show total assets equaled to total liabilities plus equity. 
<p>
Another simple test of the accuracy of the financial accounts is the cash flow statement, because if a completed cash flow statement shows changes in cash which when added to the opening cash balance (cash balance on the prior period balance sheet) does not add back to the closing cash balance (cash balance on this period’s balance sheet), then it is clear that something went wrong when the Cash Flow Statement was prepared. 
<p>

After completing your cash flow statement, you should close it by ensuring that the cash balance reconciles back to the cash balance on the balance sheet. 
<p>
There are two main method of preparation for the cash flow statement. The <b>Indirect</b> method is the more common of the two, but the <b>Direct</b> method has been gaining exposure over the years. In the example shown above (part 1), the cash flow statement was prepared using the Indirect method, and as you can see the approach used is to reconcile net income to cash.
<p>
The need for a cash flow statement arise from the fact that financial accounts is prepared on what is known as the accrual basis, matching expenses to revenue in the period in which they are incurred and not when they’re paid. This accrual basis accounting process leads to the calculation of net income (revenue less expenses), which bears no relationship to the actual flow of cash. 
<p>
In adjusting the accrual-based financials, the cash flow statement seeks first to adjust net income and then to calculate cash flow from investing and financing activities. Net income is adjusted in the Cash Flow from Operations section of the cash flow, adding back to net income all non-cash charges and subtracting all non-cash income. 
<p>
Examples of non-cash charges are shown below: 
<ol>
<li>Depreciation</li>
<li>Bad Debts</li>
<li>Provisions</li>
<li>Accrued charges</li>
</ol>
Examples of non-cash income are shown below:
<ol>
<li>Accounting gains (e.g. gain on sale of fixed assets)</li>
<li>Equity in earnings of affiliated companies  </li>
<li>Deferred income taxes  </li>
</ol>
The company’s net income/loss is the first item on the cash flow statement. The non-cash charges listed above, along with other non-cash charges are added to the income statement (as shown below):

<p>
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<pre>Net Income/(Loss)			$100,000
     <b>Add non-cash charges:</b>
<pre>Plus depreciation 			  $5,000
<pre>Bad Debt write-off		 	  $2,000
     <b>Less non-cash gains:</b>
<pre>Gain on sale of business		 $10,000
<pre>Equity - earnings of affiliates		  <u>$1,000</u>
<pre>	<b>Adjusted Net Income		 $96,000</b>
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<p>
“Adjusted net income” as shown above is sometimes referred to as Funds Flow and represents the adjusted net income on the Cash Flow Statement before the effects of changes in working capital is factored in. Assessing and applying changes in working capital is the necessary final step to completely convert accrual base net income to cash base net income.
<p>
The main working capital items are Accounts Receivable, Inventory and Trade Payable. These are <b>not</b> the only working capital items, but they are the main ones, and the next balance sheet you review will quite likely have these three items listed among a few others. 
<p>
Why would the change in a working capital item, Accounts Receivable for instance, be relevant to the determination of cash based net income? Relevancy comes from knowing what is Accounts Receivable, and <b>where</b> it comes from. Accounts receivable is the unpaid (customers have not yet paid their invoices) portion of the company’s revenue, and should therefore be <b>removed</b> from net income to determine cash-base net income. The example below should add some clarity:


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<font face="Verdana,Arial,helvetica" size="-2"><a href="http://Accountingbase.com/CashFlow3.html">Go to Cash Flow part 3</a>
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<a href="http://Accountingbase.com/CashFlow.html">Return to Cash Flow part 1</a>
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