The Daily Technical #08

Good morning. Welcome to the eighth edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
Walk me through the cash flow statement.

Start with the Basics. Address the two methods by which cash flow statements are organized (direct and indirect) briefly. Note that the indirect method is the more common approach.

The statement is broken down into three sections:

Cash from Operations:

• Start with net income.

• Add back non-cash expenses like depreciation, amortization, and stock-based compensation. Why? Because these don't actually impact cash.

• Adjust for changes in working capital (current assets and liabilities). Working capital is the company's day-to-day operating liquidity.

Cash from Investing:

• List capital expenditures (capex), which are typically big-ticket items like new machinery or buildings.

• Include investments in other businesses or divestitures. Anything that impacts long-term growth goes here.

Cash from Financing:

• Show how the company is raising capital. Are they issuing shares or taking on debt?

• Subtract repurchases of stock or debt repayments and reflect dividends paid out to shareholders.

• Sum all three sections for the net change in cash. Add this to your beginning cash balance to find your ending cash balance.

Common Mistakes

1. Ignoring Non-Cash Adjustments:
   It's easy to skip things like depreciation because they don't move cash right away, but they matter. Forgetting them could mess up your entire cash flow analysis.

2. Mixing Up Sections:
   Putting capex under financing or dividends under investing can confuse your interviewer.

3. Missing the Summary:
   Forgetting to conclude with the net change in cash and the ending balance can leave your explanation feeling incomplete. Always close the loop.

Key Takeaways / TLDR

• Always split the cash flow statement into the three sections: operations, investing, and financing.

• Adjust for Non-Cash Items: depreciation and changes in working capital.

• End with the net change in cash and the updated cash balance.

TODAY’S QUESTION
What is working capital?

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THAT’S A WRAP
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See you tomorrow,

The HirePrep Team