Technical / Accounting
Cash Flow Statement
Master the cash flow statement: operating, investing, and financing activities explained for investment banking interviews.
"Revenue is vanity, profit is sanity, but cash is king." — Alan Miltz
Concept
The cash flow statement tracks all cash inflows and outflows during a period. It reconciles the beginning cash balance to the ending cash balance by categorizing every cash movement into three buckets: operating, investing, and financing activities. Unlike the income statement, it strips out accrual accounting fiction and shows what actually hit the bank account.
Intuition
The income statement can lie through accrual timing. The balance sheet is a snapshot that hides the movie. The cash flow statement shows the actual movement of cash—the one thing a company cannot fake.
Bankers obsess over CFO because it funds everything: debt service, CapEx, acquisitions, dividends. A company with negative CFO must raise external capital or die. A company with strong CFO has options.
(CFO minus CapEx) is the ultimate input. It's what's actually available to distribute to capital providers after maintaining the business.
Components
Cash Flow from Operations (CFO)
What It Is
Cash generated or consumed by the company's core business. This is the most scrutinized section because it shows whether the business model actually produces cash.
How to Calculate It
Two methods exist:
Indirect Method (used by 99% of companies):
Interview Script
The cash flow statement tracks actual cash inflows and outflows over a period, reconciling beginning to ending cash by categorizing movements into operating, investing, and financing activities. Unlike the income statement which uses accrual accounting, it shows what actually hit the bank account—cash is the one thing a company can't fake. Bankers focus heavily on Cash Flow from Operations because it funds debt service, CapEx, and dividends, and ultimately drives Free Cash Flow, which is the key valuation input.