"Walk me through how you'd get from Net Income to Free Cash Flow" is a question that shows up in some form in almost every technical finance interview — for IB analyst roles, PE internships, and even Big 4 Transaction Services interviews. It's popular precisely because there's no shortcut: you either know the four adjustments cold, or you don't.

The Structure Interviewers Want to Hear

Before touching any numbers, state the goal out loud: you're converting an accrual-accounting figure (Net Income) into a cash figure (Unlevered Free Cash Flow) by reversing out non-cash items, adding back financing costs, and adjusting for the actual cash spent on the business. Framing it this way — rather than jumping straight into "add D&A, subtract CapEx" — signals that you understand why each step exists, not just that you memorized it.

The Four Steps, in Order

Step 1 — Add Back D&A

Depreciation & Amortization reduced Net Income on the income statement, but no cash actually left the business when D&A was recorded. Add it straight back.

Step 2 — Add Back the After-Tax Interest Expense

This is the step candidates most often skip or get wrong. Unlevered FCF is meant to be neutral to how the company is financed, so the interest expense that was subtracted to get to Net Income needs to be added back — but only net of the tax shield it generated, since that tax saving was real. The formula is Interest Expense × (1 − Tax Rate), not the full pre-tax interest figure.

Step 3 — Subtract CapEx

Capital expenditures never appear on the income statement at all, which is exactly why it's easy to forget this step under interview pressure. CapEx is real cash spent on new or replacement fixed assets, and it has to come out.

Step 4 — Subtract the Increase in Net Working Capital

Growing receivables and inventory tie up cash (a use of cash); growing payables frees it up (a source of cash). Net these three together — increase in AR, plus increase in inventory, minus increase in AP — and subtract the result.

Put together as a single formula: Unlevered FCF = Net Income + D&A + Interest Expense × (1 − Tax Rate) − CapEx − Increase in Net Working Capital.

A Worked Example

The case Free Cash Flow from the Statements runs through exactly this calculation with real figures — Net Income, D&A, interest expense, CapEx, and working capital movements for a sample company — so you can check your mental math against a fully worked model answer, including the common mistakes interviewers are specifically listening for.

Before You Get Here, Make Sure the Basics Are Locked In

This question assumes you're already fluent with the underlying statements. If the cash flow statement or how the three statements connect isn't second nature yet, it's worth reviewing Connect the Three Statements first — the FCF build is really just a more targeted version of that same logic, isolated down to a single cash-generation number.