Common Finance Interview Questions (and Answers)

September 23rd, 2011| Written By Arkady Libman| 46 Comments Return to Posts

questionsWith the start of a new academic year, we know that finance interviews are again at the forefront of many of your minds.  Over the next few months, we’ll be publishing most frequently asked technical finance interview questions and answers across a variety of topics – accounting (in this issue), valuation, corporate finance – to get you prepared.

Before we get to accounting questions, here are some interview best practices to keep in mind when getting ready for the big day.

  1. Be prepared for technical questions. Many students erroneously believe that if they are not finance/business majors, then technical questions do not apply to them. On the contrary, interviewers want to be assured that students going into the field are committed to the work they’ll be doing for the next few years, especially as many finance firms will devote considerable resources to mentor and develop their new employees.
  2. One recruiter we’ve spoken to said “while we do not expect liberal arts majors to have a deep mastery of highly technical concepts, we do expect them to understand the basic accounting and finance concepts as they relate to investment banking. Someone who can’t answer basic questions like ‘walk me through a DCF’ has not sufficiently prepared for the interview, in my opinion”.
  3. Another added, “Once a knowledge gap is identified, it’s typically very difficult to reverse the direction of the interview.”
  4. Keep each of your answers limited to 2 minutes. Longer answers may lose an interviewer, while giving them additional ammunition to go after you with more complicated question on the same topic.
  5. It’s ok to say “I don’t know” a few times during the interview. If interviewers think that you’re making up answers, they’ll continue probing you further, which will lead to more creative answers, which will lead to more complicated questions and a slow realization by you that interviewer knows that you don’t really know. This will be followed by uncomfortable silence. And no job offer.

Now, on to Accounting Questions

Accounting is the language of business, so don’t underestimate the importance of accounting questions. Some are easy, some are more challenging, but of all of them allow interviewers to gauge your knowledge level without the need to ask more complex valuation/finance questions.Below we have selected most common accounting questions you should expect to see during the recruiting process.

Q: Why do capital expenditures increase assets (PP&E), while other cash outflows, like paying salary, taxes, etc., do not create any asset, and instead instantly create an expense on the income statement that reduces equity via retained earnings?

A: Capital expenditures are capitalized because of the timing of their estimated benefits – the lemonade stand will benefit the firm for many years. The employees’ work, on the other hand, benefits the period in which the wages are generated only and should be expensed then. This is what differentiates an asset from an expense.

Q: Walk me through a cash flow statement.

A. Start with net income, go line by line through major adjustments (depreciation, changes in working capital and deferred taxes) to arrive at cash flows from operating activities.

  • Mention capital expenditures, asset sales, purchase of intangible assets, and purchase/sale of investment securities to arrive at cash flow from investing activities.
  • Mention repurchase/issuance of debt and equity and paying out dividends to arrive at cash flow from financing activities.
  • Adding cash flows from operations, cash flows from investments, and cash flows from financing gets you to total change of cash.
  • Beginning-of-period cash balance plus change in cash allows you to arrive at end-of-period cash balance.
Q: What is working capital?

A: Working capital is defined as current assets minus current liabilities; it tells the financial statement user how much cash is tied up in the business through items such as receivables and inventories and also how much cash is going to be needed to pay off short term obligations in the next 12 months.

Q: Is it possible for a company to show positive cash flows but be in grave trouble?

A: Absolutely. Two examples involve unsustainable improvements in working capital (a company is selling off inventory and delaying payables), and another example involves lack of revenues going forward.in the pipeline

Q: How is it possible for a company to show positive net income but go bankrupt?

A: Two examples include deterioration of working capital (i.e. increasing accounts receivable, lowering accounts payable), and financial shenanigans.

Q: I buy a piece of equipment, walk me through the impact on the 3 financial statements.

A: Initially, there is no impact (income statement); cash goes down, while PP&E goes up (balance sheet), and the purchase of PP&E is a cash outflow (cash flow statement)

Over the life of the asset: depreciation reduces net income (income statement); PP&E goes down by depreciation, while retained earnings go down (balance sheet); and depreciation is added back (because it is a non-cash expense that reduced net income) in the cash from operations section (cash flow statement).

Q: Why are increases in accounts receivable a cash reduction on the cash flow  statement?

A: Since our cash flow statement starts with net income, an increase in accounts receivable is an adjustment to net income to reflect the fact that the company never actually received those funds.

Q: How is the income statement linked to the balance sheet?

A:  Net income flows into retained earnings.

Q: What is goodwill?

A: Goodwill is an asset that captures excess of the purchase price over fair market value of an acquired business. Let’s walk through the following example: Acquirer buys Target for $500m in cash. Target has 1 asset: PPE with book value of $100, debt of $50m, and equity of $50m = book value (A-L) of $50m.

  • Acquirer records cash decline of $500 to finance acquisition
  • Acquirer’s PP&E increases by $100m
  • Acquirer’s debt increases by $50m
  •  Acquirer records goodwill of $450m
Q: What is a deferred tax liability and why might one be created?

A: Deferred tax liability is a tax expense amount reported on a company’s income statement that is not actually paid to the IRS in that time period, but is expected to be paid in the future. It arises because when a company actually pays less in taxes to the IRS than they show as an expense on their income statement in a reporting period.

Differences in depreciation expense between book reporting (GAAP) and IRS reporting can lead to differences in income between the two, which ultimately leads to differences in tax expense reported in the financial statements and taxes payable to the IRS.

Q: What is a deferred tax asset and why might one be created?

A: Deferred tax asset arises when a company actually pays more in taxes to the IRS than they show as an expense on their income statement in a reporting period.

  • Differences in revenue recognition, expense recognition (such as warranty expense), and net operating losses (NOLs) can create deferred tax assets.

I hope you enjoyed this article.  Please feel free to write me with any comments or recommendations at alibman@wallstreetprep.com.

Best regards,

Arkady

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Written by Arkady Libman

alibman@wallstreetprep.com

Arkady co-authored many of Wall Street Prep’s training materials and has conducted corporate training for many of Wall Street Prep’s clients, including Enogex, Rosetta Resources, Hess Corporation, Silicon Valley Bank, RBC Capital Markets, Stifel Nicolaus, and FBR Capital Markets. In addition, Arkady conducts training programs at top business schools across the world, including Wharton, MIT Sloan, Wharton, Tuck, INSEAD, London Business School, and University of Michigan. Prior to joining Wall Street Prep, Arkady was an Associate within the Energy & Natural Resources of the Equity Research Group at FBR Capital Markets. Prior to joining FBRC in October 2001, Arkady was an Investment Banking Analyst within J.P. Morgan Chase’s Global Oil & Gas Group.

Leave a Comment

46 Responses

  1. November 7, 2014

    esther

    hello.
    the article is very helpful & useful. thank you. keep it up

  2. December 14, 2014

    MOHAMMED RHISWAN

    Very very very useful information. Thank you

  3. December 19, 2014

    Isha

    Was very helpful. Please keep adding more questions to this. :)

  4. January 15, 2015

    harish

    it’s very use full information if it is possible could u send to my mail id

    • January 15, 2015

      user headshot

      Haseeb Chowdhry

      Harish,

      Keep on looking for updates here – take care!

      Best,
      Haseeb

  5. January 19, 2015

    Gayathri.GV

    The above questions are really use full.

    • January 19, 2015

      user headshot

      Haseeb Chowdhry

      Thanks!

  6. January 20, 2015

    Lucy

    Hello

    Those are very useful and helpful answers.
    Thanks.

    • January 21, 2015

      user headshot

      Haseeb Chowdhry

      Great to hear – thanks!

  7. January 23, 2015

    Sunit Kumar jha

    Very valuable information for me.plz more adding question.

    Thank You

    • January 23, 2015

      user headshot

      Haseeb Chowdhry

      Not a problem – we will keep them coming!

  8. January 27, 2015

    Julius

    This was awesome, perfect prep!

    Thanks so much.

    • January 27, 2015

      user headshot

      Haseeb Chowdhry

      Great to hear! Thanks!

  9. February 11, 2015

    Kalpana

    Thank you so much for your valuable guidence…!

    • February 11, 2015

      user headshot

      Haseeb Chowdhry

      Not a problem – enjoy!

      • February 18, 2015

        swathi

        hai its very useful.. can you plz more adding question for experience ppl.

        • February 18, 2015

          user headshot

          Haseeb Chowdhry

          Keep on the lookout for newer material – thanks!

  10. February 12, 2015

    Sultan Ahmed Khan

    Thanks

  11. February 20, 2015

    kalpana

    Very nice and useful collection of questions related to accounts and finance. Thanku

  12. March 1, 2015

    ashok

    Thanks it’s very helpful. Generally when we go for interview we usually receive a set a pratical Q and then asked to solve. Can u pls help us with such Q.

    • March 1, 2015

      user headshot

      Haseeb Chowdhry

      Ashok,

      Try creating question ‘scenarios’ for yourself. Let’s say you have an Apple tree. How can you value that Apple tree? Stuff as simple as that will get you started and will get you to a point where you can explain a DCF very simply to a person. Thanks.

      Haseeb

  13. March 16, 2015

    k.lalitha

    very fantastic article was very informative

  14. March 16, 2015

    manoj

    Financial question and answer is very much useful for me……

  15. March 31, 2015

    Muhammad Aslam

    Massive information.thanks ……….

  16. April 4, 2015

    v.Mithilesh

    it’s like refreshing the entire degree subj………… use full for us…….

  17. April 6, 2015

    Aks

    That was a very helpful quick recap of the accounting section.
    But where are questions from Valuation and corporate finance?

  18. April 12, 2015

    Priya

    Your article given more information and my suggestion is you can add little more information

    • April 12, 2015

      user headshot

      Haseeb Chowdhry

      Thanks Priya – stay tuned for new and exciting content!

  19. April 12, 2015

    jyoti kshirsagar

    Wow….thankuu so muchhhh….i ws so helpful

  20. April 15, 2015

    Pawan

    This article is very useful specifically for people who are looking for hard core accounting job. Request you to please provide some interview Q/A and tips for MBA Finance people who are looking job other than hard core accounting job. Thanks.

    • April 15, 2015

      user headshot

      Haseeb Chowdhry

      Pawan,

      Look at the link I provided on 4/6 – thanks!

  21. April 18, 2015

    sathish

    Thank you verymuch these basic financial qustions are very hellped me good jo ….

  22. April 21, 2015

    Johannes Aphane

    This is great. thanks

  23. April 26, 2015

    yousuf

    nice job, thanks

  24. May 13, 2015

    kumaras

    It’s really Good.. i enjoyed it… Thanks..

  25. May 16, 2015

    Md. robiul Islam

    Many Many Thanks !

  26. May 27, 2015

    Brett

    I’ve read this article over before several of my interviews and it was extremely helpful.

    Thank you!

  27. June 10, 2015

    Suzy Anna

    Hi,
    It is very very useful continue with the spirit.
    And thank

  28. June 29, 2015

    Jesofa

    These questions are really good. They are essential things to know in financial reporting. Thanks for helping, would practice repeatedly.

    • June 29, 2015

      user headshot

      Haseeb Chowdhry

      Thanks!

  29. July 7, 2015

    santosh kumar

    It is very helpful for the people and keep doing it.

    • July 7, 2015

      user headshot

      Haseeb Chowdhry

      Thanks!

      • July 10, 2015

        rodrick

        enjoyed,Thanks

        • July 10, 2015

          user headshot

          Haseeb Chowdhry

          Awesome thanks!

  30. July 25, 2015

    shiavm divedi

    very important knowledge. thank you sir………