How would you answer this technical question?
Why do you use net income as suppose to FCF to add to the equity portion of your balance sheet?
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Because balance sheet is done on the accruals basis rather than the cash basis. You include non-cash items in the balance sheet and in order for it to balance, you have to be consistent.
If your company ignores conventional accounting and works on the cash basis, then retained earnings would indeed be FCF but I have NEVER seen this.
I am not an expert, but here would be my best response knowing I'm more or less taking an educated guess:
"I am not certain of the answer here, but my thought would be that FCF does not include the affects of non-cash expenses like D&A or CapEx which are included in your NI calculation. The number reflected under retained earnings on the BS needs to balance with the inputs into those accounts under assets."
Again, might not be right, but I wanted to take a stab before the more knowledgeable responders take over.
That was along my line of thinking. Those affects* are reflected in the B/S, so in order to balance, NI would be appropriated to equity.
*Noted
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