Which financial statement is primarily used to derive cash flow projections for DCF analysis?

The cash flow statement is the primary financial statement used to derive cash flow projections for Discounted Cash Flow (DCF) analysis because it provides a clear view of the actual cash generated and spent by a company during a specific period. This statement breaks down cash flows into three main categories: operating activities, investing activities, and financing activities, allowing analysts to see how much cash the business is generating from its core operations, how it is investing that cash, and how it is changing its capital structure.

In DCF analysis, the focus is on the free cash flows, which represent the cash available to all investors, including equity and debt holders. This makes the cash flow statement vital for understanding the cash position of the company, differentiating it from other statements that may not reflect cash movements as clearly. The income statement, for instance, accounts for revenues and expenses on an accrual basis, which can sometimes misrepresent the actual cash flow if large amounts of revenue are recognized before cash is received. Similarly, the balance sheet provides a snapshot of the company’s financial position at a specific time but does not show how cash flows have changed over that period. The statement of shareholder equity provides insights into equity changes but does not directly relate to cash flows. Therefore, the