Question

1. What income statement line item(s) measure after-tax accounting profit for the “firm” from its underlying business? Explain.
2. Start with the accounting measure of after-tax operating profits to the firm (all investors) and, explain why the FCF to firm (FCFF) is:
   1. FCFF = Sales Revenues – operating costs – operating taxes – net investment in operating capital.

Answer 1

a. operating income is a measurement that shows how much of a company's revenue will eventually become profits. operating income is similar to a company's earnings before interest and taxes and is also referred to as the operating profit . The one big difference between operating income and EBIT is that EBIT includes any non-operating income the company generates

Operating income = gross income - operating expenses

b. FCF is an important measurement since it shows how efficient a company is at generating cash. Investors use free cash floe to measure a  whether a company might have enough cash, after funding operations and capital expenditure to pay investors through dividends and share buybacks.

free cash flow to the firm represented the amount of cash flow from operations available for distribution after depreciation expenses, taxes, working capital and investments are accounted for and paid. FCFF is essentially a measurement of company's profitability after all expenses and re investments

i. sales revenue are taken from the business income statement as are operating cost & taxes investments in new operating capital show up as increases in fixed assets on the business balance sheet.