How to Answer: What is the difference between cash flow as presented on the Statement of Cash Flows and Free Cash Flow?
Advice and answer examples written specifically for a Finance Manager job interview.
23. What is the difference between cash flow as presented on the Statement of Cash Flows and Free Cash Flow?
How to Answer
This is a technical question that tests whether you know the difference between two common measures of cash flow. The main difference is Free Cash Flow excludes cash from financing activities (loan proceeds, dividends paid) while the Statement of Cash Flows includes those inflows and outflows.
Answer Example
"Free Cash Flow is typically defined as cash that is available for financing and dividends to shareholders. Therefore, free cash flow excludes financing activities such as loan proceeds and repayments and dividends to shareholders, while the statement of cash flows includes those items in the calculation of cash flow generated."
User-Submitted Answer
"The Statement of Cash Flow is used to measure cash and cash equivalents entering and leaving the company, whereas Free Cash Flow is used in the valuation of the company. Statement of Cash Flow is done by summing up operating, investing, and financing activities, while Free Cash Flow is operating cash flows less capital expenditure."
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Our Professional Interview Coach
Chad Wilson Reviewed the Above Answer
You have done well to accurately answer this technical question by identifying the basic difference between the two common measures of cash flow. Good job! I have included an example below of how this response could be restated to improve clarity.
"The Statement of Cash Flows is used to measure cash and cash equivalents entering and leaving the company and is calculated by adding up operating, investing, and financing activities, whereas Free Cash Flow is used for the valuation of the company and is calculated by deducting capital expenditures from the operating cash flow."