IB Interview Questions: Accounting : Part-5

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In continuation to : IB Interview Questions: Accounting

In continuation : IB Interview Questions: Accounting : Part -2

In continuation : IB Interview Questions: Accounting : Part-3

In continuation : IB Interview Questions: Accounting : Part-4

The Cash Flow Statement

1. Describe Cash Flows from Operations (CFO) in Plain English

CFO reflects the cash generated by the operations (i.e. sales of goods and services) over a period of time. Another way to look at CFO is that it reflects cash Net Income.

To calculate CFO, we begin with Net Income, add back any non-cash charges and then make adjustments for changes in operating Assets and Liabilities (i.e. ‘Working Capital’).

2. Describe Cash Flows from Investing (CFI) in Plain English

The Cash Flows from Investing section of the Cash Flow Statement reflects reinvestments in the business (‘Capital Expenditures’ and/or Purchases of Intangibles), payment for Business Acquisitions, and the purchase or sale of Investment Securities (i.e. Stocks and Bonds).

3. Describe Cash Flows from Financing (CFF) in Plain English

The Cash Flows from Financing section of the Cash Flow Statement reflects cash in and out from Lenders and Investors.

With respect to our Lenders, this section reflects the cash flows from raising debt and cash outflows from paying off debt (note: this section does not include interest expense under US GAAP).

With respect to Investors, this section reflects cash inflows from raising Investor (or Equity) capital and cash outflows from Dividends and Share Buybacks.

4. If you could only have two of the three financial statements, which would you choose and why?

The Income Statement and Balance Sheet because you can derive a Cash Flow Statement from them.




5. What is the most important of the three financial statements?

The Cash Flow Statement is the most important of the three because it shows you the actual change in Cash.

The change in Cash is critical because a business will stop when it runs out of Cash.

By contrast, the Income Statement and Balance Sheet are presented on an Accrual Basis.


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