How do you get from EBITDA to free cash flow?

Wrong, you shouldn't include the interest tax shield

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I learned the concept from the Breaking into Wall Street ib interview prep course.

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That's because these are corporate finance questions, not economics or accounting Take a corporate finance class

If it is a cash expense then it has impacted your CF by reducing CF for the FY. This goes into the Income Statement. The expense is again captured on the Income Statement, is this what you are trying to say?

I'm not entirely understanding the wording..

I think I understand what you're asking...but I'm struggling to understand why there would be an impact on just these two without a BS impact as well...?

If there's an expense running through your IS that also impacts the CF outside of your Net Income line.....shouldn't that cash be hung up somewhere on the balance sheet as well?

In which case, you're really adjusting the CF for the impacts to the BS, not the IS.

Income Statements can be gamed -- things can be reserved, CapEx can be scheduled for end of quarters/years so as to not spin depreciation, etc. You can prepay expenses that will sit on the Balance Sheet and affect Cash but not your IS. When you recognize those expenses, it affects your IS and BS, but not Cash. That said, the expense recognition will flow through your Net Income line to your starting point for Changes in Cash -- which ultimately needs to be adjusted.

It depends whether you are talking about non cash charges or charges on the income statement that aren't actually paid until post period end. Non cash charges will simply be added back on the cash flow to get the true net cash movement and will also have to appear on the balance sheet somewhere. For example depreciation is a non cash charge on the IS, this is added back on the CF but deducted from PPE on the BS so the accounting equation still balances.

For charges on the income statement that are not actually paid until post period end, a balance sheet item will be created to ensure the accounting equation balances. For example say a company gets a bill for electricity that isn't paid until after the period ends, the charge is still put through the income statement for the period (accrual accounting) and a liability is created on the balance sheet to balance the accounting equation.

Here is an example:

Warranty expense (estimate) - Company A estimates that 2% of XYZ widgets will be returned based on historical data; In 2016 Company A sold 1,000 of XYZ widgets at a cost of $10 each. So, for CY '16 a warranty expense will be recorded for $200 (.02 * $10 * 1,000) with a subsequent warranty liability. No cash effect yet, but an expense is recognized lowering income on the IS. Let's assume a 40% tax rate. $200 decrease in EBT and since expenses reduce taxes paid our $200 decrease in EBT is $120 [200*(1-.4)]. NI is down $120, but the creation of the $200 warranty liability becomes a source of cash (think of it as cash we owe but don't have to pay back yet). Net Change in cash of +$80. With L (warranty liability $+200)+ SE (Retained Earnings -$20) changing by +$80

We calculate taxes off EBIT in this case, not from EBT. This overstates the actual tax we pay because as you said it is calculated off EBT. But we reflect the tax shield in the cost of debt.

Any chance you or someone can explain better why you calculate taxes off of EBIT and not EBT? Thanks