The investment banking interview question we’re going to go over today is “Which financial statement is the most important?” This is a very basic and very common technical question that can come up in summer internship and full-time interviews. Here’s exactly how you should answer it.
“The most important financial statement is the Cash Flow Statement. It tells us how much cash is coming in and going out of the company. The reason the Cash Flow Statement is the most important, is that when we evaluate the health of a business –that is, whether the company has sufficient cash to keep running – and when we try to determine the valuation of the company, we base it on how much free cash flow it generates.
We can calculate free cash flow directly from the Cash Flow Statement. It’s just Cash Flow from Operations minus CapEx. But we can’t do it using just the Income Statement or just the Balance Sheet. That’s why the Cash Flow Statement is the most important.”
This is exactly how we would answer the question: “which financial statement is the most important?”. The key here is to try to demonstrate that you understand why. Most candidates correctly identify that the Cash Flow Statement is the most important because in finance we care about cash flow. But very few of them are able to pinpoint exactly why. If you can explain that it’s because you can calculate free cash flow using solely the Cash Flow Statement, that’ll show interviewers you actually “get it”.
Other IBD Interview Questions
Walking the interviewer through the three financial statements.
Walk me through a DCF.
Walk me through a merger model.