McMahon Inc. reported the following on the company’s statement of cash flows in 2014 and 2013:

McMahon Inc. reported the following on the company’s statement of cash flows in 2014 and 2013:











2014 2013
Net cash flow from operating activities $ 294,000 $ 280,000
Net cash flow used for investing activities (224,000) (252,000)
Net cash flow used for financing activities (63,000) (42,000)


Seventy percent of the net cash flow used for investing activities was used to replace existing capacity.

a. Determine McMahon’s free cash flow for both years.
b. Has McMahon’s free cash flow improved or declined from 2013 to 2014?


Answer:










a. Net cash flow from operating activities………………… $ 294,000 $ 280,000
Less: Investments in fixed assets
to replace existing capacity………………………… (156,800)* (176,400)**
Free cash flow………………………………………………… $ 137,200 $ 103,600
* 70% × $224,000
** 70% × $252,000
b. The change from $103,600 to $137,200 indicates a positive trend.