Help with understanding FCFF

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johankent30

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I am having trouble with truly understanding the formulas for FCFF and FCFE. I understand the method behind calculating FCFF from NI as NI+NCC+I(1-t)-FCInv-WCinv however I am struggling with why FCFF calculated from CFO as CFO + I(1-t) - FCInv does not include WCInv.
I understand how to calculate CFO by changing balance sheet accounts from accrual to cash method and I believe this is why WCinv is not included under the CFO method however I can’t seem to completely figure it out and get it to stick… Thanks!
 
It seems to be in inventory conversion cycle, it could take a long before inventories’ conversion into cash. That’s why it is also excluded from Quick Ratio.
 
I found explanation here:
http://www.investinganswers.com/financial-dictionary/financial-statement...
Part of WC (Inventory and receivables) and LT assets invests are not included into FCFF because those funds are part of operating cycle and are not available to shareholders. Depreciation is expense but not an expenditure, ,also is tax deductible, which means that generates cash so it should be adjusted (added back).
 
johankent30 wrote:
I am having trouble with truly understanding the formulas for FCFF and FCFE. I understand the method behind calculating FCFF from NI as NI+NCC+I(1-t)-FCInv-WCinv however I am struggling with why FCFF calculated from CFO as CFO + I(1-t) - FCInv does not include WCInv.
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It’s a simple mathematical identity. It directly follows from CFO = NI + NCC -WCinv. If you substitute this into the first equation you get the second formula.
 
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