Vivendi Universal Case - Assignment Example

In the case of EBITDA, deprecation and amortization which does not involve the payment of cash but represents estimated annual charges for tangible and intangible assets respectively are not taken into account. These charges relate to the portion of assets used up during the period. Operating free cash flow which is seen as a more useful measure is the net operating capital after tax with a deduction for expenditures on operating capital during the period (Brigham and Ehrhardt 2010). Increasing free cash flow (FCF) is seen as the means by which managers seek to improve their company’s valuation (Brigham and Ehrhardt 2010).

FCF takes into consideration interest and taxes as well as the company’s gross investment in operating capital in order to determine what is available to be distributed to investors. EBITDA does not differ from accrual earnings as it takes into consideration revenue earned during the current period but not yet received as well as expenses incurred but not yet paid. However, it does not take into consideration interest and taxes which relates to the net income earned during the period. Additionally, depreciation charges which seek to allocate the cost of operating assets over their estimated useful life and amortization charges on tangible assets for which amounts are capitalized in the accounts.

Operating free cash flow differs from accrual earnings because it not only focus on expenses incurred during the period and revenue earned during the period but also investments in operating capital – fixed or non-current assets and current assets. Earnings accrual does not take gross investment in operating capital into account. I believe that auditors should be held responsible for auditing such information since the income statement and the cash flow statement form part of the financial statements that they provide opinion on in there audit report.

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