Resources  ❯  Accounting Terms

Free Cash Flow

[free kash floh]

What is the definition of Free Cash Flow?
The amount of cash that a company has available after accounting for the capital expenditures necessary to maintain or expand its asset base. It is a useful measure for investors to assess the financial health and profitability of a company.
Using Free Cash Flow in an Example

A corporation generated $500 million in revenue and had operating costs of $300 million and capital expenditures of $100 million. The free cash flow would therefore be $100 million, calculated by subtracting the capital expenditures from the operating cash flow ($500 million - $300 million - $100 million).

Using Free Cash Flow in a sentence

During the financial review, the CFO highlighted the increase in free cash flow as a positive indicator of the company's improved operational efficiency and strategic capital investments.

Related Terms

FASB

The Financial Accounting Standards Board (FASB) is an independent, private, non-governmental authority in the United States responsible for establishing and improving financial accounting and reporting standards.
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FIFO

An accounting method of valuing inventory under which the costs of the first goods acquired are the first costs charged to expense, commonly known as First In, First Out.
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FOB

Indicates the point at which title to goods passes from the seller to the buyer, specifying the party responsible for freight charges and risk of loss during transportation.
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FOB Destination

A shipping term indicating that the seller is responsible for the transportation costs and risks until the goods reach the buyer's specified delivery location.
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FOB Shipping Point

A shipping term that indicates that the buyer is responsible for the transportation costs and risk of loss from the point of origin.
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Face Value

The nominal value of a security or financial instrument as stated by the issuer, which is the amount due to be paid at maturity. It does not fluctuate with market value.
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Factoring

The financial transaction where a business sells its accounts receivable to a third party, known as a factor, at a discount in exchange for immediate cash.
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Factoring: Over-Advances

A financial scenario where a business receives an advance from a factor that exceeds the value of its receivables, effectively creating a loan against anticipated inventory sales.
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Factory Overhead Costs

Various production-related costs that cannot be practically or conveniently traced to an end product, including indirect materials, indirect labor, and other indirect expenses incurred in the manufacturing process.
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Fair Credit Reporting Act

A federal law enacted in 1971 designed to regulate the collection, dissemination, and use of consumer information, including consumer credit information. It provides individuals with the right to view and correct inaccuracies in their credit reports and ensures that consumer reporting agencies maintain the confidentiality, accuracy, relevance, and proper utilization of the information.
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Fair Market Value

The price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.
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Favorable Variance

A financial measure indicating that actual revenues are higher than projected revenues or actual costs are lower than projected costs, resulting in a positive impact on a company's profitability.
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Federal Income Taxes

Taxes levied by the federal government on the annual net income of individuals, businesses, and other legal entities.
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Federal Reserve Bank

One of the 12 regional banks that make up the Federal Reserve System, each responsible for implementing the central bank's monetary policy and regulating the financial institutions within its jurisdiction to ensure compliance with banking regulations.
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Federal Reserve System

The central banking system of the United States, established by the Federal Reserve Act of 1913, which includes 12 Federal Reserve Banks and is governed by the Federal Reserve Board. It is authorized to regulate monetary policy, supervise member banks, bank holding companies, and international operations of US banks, as well as US operations of foreign banks.
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Fiduciary

A fiduciary is a person or entity who holds a legal or ethical relationship of trust with one or more other parties, typically taking care of money or assets for another person. A fiduciary must act in the best interest of the party whose assets they are managing.
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Filing of Returns

The mandatory submission of specified forms by taxpayers who meet statutory requirements, completed in accordance with prescribed formats and within set deadlines to be recognized as valid.
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Finance

The discipline concerned with the management, investment, and allocation of money and other financial assets, including the processes of acquiring and managing resources.
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Financial Accounting Standards

Official regulations issued by the Financial Accounting Standards Board (FASB), which are integral to Generally Accepted Accounting Principles (GAAP) in the United States. These standards guide the preparation of financial reports to ensure accuracy, consistency, and transparency.
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Financial Accounting Standards Board (FASB)

An independent, private, non-governmental authority in the United States responsible for the establishment and interpretation of Generally Accepted Accounting Principles (GAAP).
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Financial Institution

An organization engaged in various financial activities, such as commercial banking, investment banking, securities trading, credit services, investment management, insurance provision, and real estate financing.
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Financial Leverage

The use of borrowed capital (debt) to finance the purchase of assets with the objective of increasing potential returns to equity shareholders. Financial leverage is effective if the firm earns more on the assets purchased than the interest costs of the debt.
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Financial Statements

Financial statements are structured presentations of an entity's financial position and the transactions that led to changes in that position over a period. They typically include balance sheets, income statements, and cash flow statements, among others, to provide insights into the entity's financial health and operational results.
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Finished Goods

Products that have been completely manufactured and are ready to be sold to customers.
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Finished Goods Inventory

Finished Goods Inventory refers to the inventory account that contains products that have completed the manufacturing process and are ready for sale.
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Firm

A business entity, often referred to as a company, which can engage in commercial, industrial, or professional activities. The term can also refer to a specific kind of instruction in trading where an order to buy or sell is given without the need for further confirmation.
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First In, First Out (FIFO)

An accounting method for inventory valuation where the costs of the earliest goods purchased are the first to be recognized in cost of goods sold, with the ending inventory costs based on the most recently purchased items.
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Fiscal Year

A period of 12 consecutive months chosen by an entity as its accounting period, which may or may not align with the calendar year.
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Fixed Annuity

An investment contract sold by an insurance company that guarantees fixed payments to an annuitant either for life or for a specified period.
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Fixed Assets

Tangible long-term assets used in the continuing operation of a business that are not expected to be converted into cash within a year. These assets are essential for the business's operations and are unlikely to change frequently.
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Fixed Costs

Costs that do not vary with the level of production or sales, and remain constant regardless of changes in business activity levels within a certain range.
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Fixed Price

A predetermined price at which goods, services, or securities are sold, not subject to change under normal circumstances.
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Fixture

An attachment to real property that is intended to be permanent and would likely cause damage to the property if removed.
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Floor

In finance and accounting, 'floor' can refer to the minimum value, rate, or price set for assets, stocks, or interest rates. Specifically, it denotes the lowest price limit at which inventory can be valued, accounting for net realizable value minus a normal profit margin. It can also indicate the minimum level that interest rates or currency values are structured not to fall below, or in trading, the area of a stock exchange where active trading occurs.
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Flotation Cost

The expenses incurred by a company in issuing new stocks or bonds, including underwriting fees, legal fees, and registration fees.
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Forecast

Prospective financial statements that predict an entity's expected financial position, results of operations, and cash flows based on current and historical data.
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Forecasted Balance Sheet

A financial statement that projects the assets, liabilities, and equity of a business at a future date, based on current data, trends, and projections.
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Forecasted Income Statement

A financial statement that estimates the expected revenue, expenses, and net income of a business for a future period.
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Forecasting of Cash Flow

The process of estimating the future financial transactions of a business, specifically focusing on the cash receipts and cash payments expected in a future period.
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Foreclosure

The legal process by which a lender or creditor seizes property when the borrower fails to make required payments on a mortgage or loan, as stipulated in the contract.
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Foreign Corporation

A corporation that is incorporated under the laws of a country or state other than the one in which it primarily operates. The tax obligations of a foreign corporation in a host country depend on its level of economic engagement, such as having a Nexus or effectively connected income within that country.
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Foreign Currency Translation

The process of converting the financial statements of a company's foreign operations from the local currency into the functional currency of the parent company. Unrealized gains or losses due to exchange rate fluctuations are included in stockholders' equity until the foreign operation is substantially liquidated.
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Foreign Exchange

Foreign exchange involves the trading of currencies from different countries against each other and the instruments employed in making payments between countries.
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Foreign Tax Credit

A nonrefundable tax credit that U.S. taxpayers can claim on their federal income tax return for income taxes paid or accrued to a foreign government, which helps to mitigate the issue of double taxation on the same income.
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Form 10-K

An annual report required by the SEC from exchange-listed companies, which provides a comprehensive overview of the company's financial performance and includes the balance sheet, income statement, and cash flow statement. It is due within 90 days after the end of the company's fiscal year.
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Form 10-Q

An SEC filing that serves as a quarterly report, required to be filed 45 days after the end of each of the first three quarters of a company's fiscal year, detailing its financial performance.
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Form 8-K

An SEC filing required when a publicly held company experiences a significant event that could affect its financial condition or the value of its stock, necessitating prompt disclosure to shareholders and the Securities and Exchange Commission.
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Form W-4

A form used by employees to indicate their tax situation to employers, specifying exemptions and the amount to withhold for federal income taxes and Federal Insurance Contributions Act (FICA) taxes.
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Franchise

A legal arrangement where the owner of a trade name, known as the franchisor, allows another party, known as the franchisee, to use the name on a non-exclusive basis to sell goods or services. This agreement often includes strict supervisory powers for the franchisor over the franchisee, who operates as an independent business.
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Franchise Tax

A state tax levied on corporations for the privilege of doing business under a corporate charter in that state.
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Fraud

Willful misrepresentation by one person of a fact with the intent to deceive another person, leading to damage or harm.
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Free On Board (FOB)

A shipping term used to indicate the point at which the ownership and responsibility of goods pass from the seller to the buyer. 'FOB destination' means the seller retains risk of loss until the goods reach the buyer's location, whereas 'FOB shipping point' means the buyer assumes responsibility once the goods leave the seller's premises.
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Freight In

Transportation charges on merchandise purchased for resale, typically recorded as part of the inventory cost on the balance sheet.
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Freight Out

Transportation charges on merchandise sold, categorized as an operating expense in accounting.
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Full Disclosure

The requirement in financial reporting to provide all material facts relevant to a transaction or financial statement to ensure transparency and fairness.
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Fund Accounting

A method of accounting and presentation where assets and liabilities are grouped according to their specific purpose, primarily used by non-profit organizations and government entities to ensure and demonstrate compliance with funding and operational objectives.
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Fundamental Analysis

A method of evaluating a security that involves examining economic, financial, and other qualitative and quantitative factors. Fundamental analysts study anything that can affect the security's value, from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors like the effectiveness of the company's management.
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Funding

In finance, funding refers to the process of refinancing a debt prior to its maturity, often through the issuance of bonds to raise capital. This process is also known as refunding.
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Future Contract

A legally binding agreement to buy or sell a standardized quantity of a commodity or financial asset at a predetermined price at a specified time in the future.
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Future Value

The amount that an investment is expected to grow to by a specified future date when invested at a compound interest rate.
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