Wall Street Prep

Common Finance Interview Questions (and Answers)

Finance interview questions to be ready for

With 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. If you’re looking for interview prep resources beyond this article, be sure to take a look at our Interview Prep training package.

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

Finance interview best practices

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.

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”.

Another added, “Once a knowledge gap is identified, it’s typically very difficult to reverse the direction of the interview.”

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.

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.

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.

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Finance interview questions: accounting

Accounting is the language of business, so don’t underestimate the importance of accounting-related finance interview 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 and found these finance interview questions hepful. Please feel free to add any comments or recommendations in the comments section below.

Good luck in your interview!

 

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Sven
Sven

Q: I have a question of how to calculate net debt when there are derivatives used. Here is the information published by the company on it’s balance sheet: Short term borrowing 1,200 Long term borrowing 6,700 Cash and marketable securities 800 But then in a different part of the report it says: Net debt of the company at year end was $6,850 million being total debt of $7,900 million less cash and marketable securities of $800 million and the $250 million fair value of derivative instruments utilized as a hedge on the Group’s interest bearing liabilities. Q: What is the… Read more »

Haseeb Chowdhry
Haseeb Chowdhry

Sven,

If the company believes these derivative positions can readily be exchanged for cash, that’s fine, but typically I haven’t seen the fair value of derivatives included within the net debt calculation. I would stick with our definition of cash and equivalents, which typically includes Cash, ST investments and LT investments. Hope this helps – thanks.

Best,
Haseeb

Sven
Sven

Thanks Haseeb, that’s very helpful. For what it’s worth the company says the derivatives are interest rate swaps so I guess the fair value will change as interest rates change. To be conservative, I guess it makes sense to ignore the derivative positions as you have suggested.
Sven

Haseeb Chowdhry
Haseeb Chowdhry

I agree with your approach – thanks.

– Haseeb

Muhammad Salik
Muhammad Salik

as it is stated that these derivatives are for hedging purposes, then it is irrelevant what is the market position or fair value of derivatives also their position that is long/short. the company must have locked in all relevant risks and certain of their value.

Haseeb Chowdhry
Haseeb Chowdhry

Muhammad,

Hedges don’t always work; we can assume what you are suggesting but for internal firm purposes it’s important to keep track of the outstanding positions. In the context of valuation, I agree with your points. Good hearing from you Muhammad! Hope all is well!

Best,
Haseeb

deewakar jha
deewakar jha

Dear sir,

I am pursuing my MBA in finance and currently in second year and the placements are on the doorstep. I request you to keep publishing these kind of articles along with I think, if you will write on how to answer the questions related to the resume, which really drives the interview.

Awaiting your positive response.

Thanks for your support.

Deewakar Jha
ph-9738337737
Bangalore.

Tijjani Kachallah
Tijjani Kachallah

Epic article and love the prompt answers given to questions asked.

Ayushi
Ayushi

Nice article!!

Dharmesh
Dharmesh

Respected sir,
I have completed my MBA in HR and FINANCE .I don’t know the whats types of questions asked in the finance interview.
Please tell me sir.

Haseeb Chowdhry
Haseeb Chowdhry

Dharmesh,

We have a really good set of courses that discuss technical and behavorial finance questions, and they cover all the topics candidates should expect to know to ace their interviews – good luck!

Anil kumar
Anil kumar

Really it was very good but provide in pdf.

Haseeb Chowdhry
Haseeb Chowdhry

Thanks for the suggestions – much appreicated!

Bagcagul
Bagcagul

Really interesting article. Thanks!

lava kumar
lava kumar

nice

PEACE CHIMEZIE
PEACE CHIMEZIE

Epic Article. Most interesting article read.

Ashwini
Ashwini

It’s really useful………. thanks

Clotilda
Clotilda

This is good and helpful

Anup Mondal
Anup Mondal

Thanks.
Perfect articles.

BHAGWAN PEDANEKAR
BHAGWAN PEDANEKAR

THANK YOU SIR

Hiren
Hiren

Nice article!

Anshu Kumari
Anshu Kumari

Can you explain this question in more detail :-
Q: Is it possible for a company to show positive cash flows but be in grave trouble?

Haseeb Chowdhry
Haseeb Chowdhry

Anshu,

The point of this question is to demonstrate that there are other potential issues that a company can mask. If it’s just shedding old inventory, or booking many more payables, or it has a horrible sales retention rate and there’s significant change of loss in sales going forward, these are all signs of a company in grave trouble, despite currently managing its cash flow.

Anand M K
Anand M K

Thank you so much for the article Sir! Really appreciate a lot. This made my confidence boosted as I was searching for Finance Questions to be asked by the interviewer. Really thanks once again Sir.

Maphuti seleka
Maphuti seleka

I’m having interview at tax worx and I don’t know what type of questions I will be asked and it’s been 2years since I did accounting and this will be my 1st internship after my N6 achievement in financial management.

Scott McCarthy
Scott McCarthy

Maphuti,

I apologize but this website cannot ask specific questions about interviews at certain companies. What I would suggest, generally, is that you review tax accounting concepts and do some research on the type of work this company focuses on. Hope this helps!

tayyaba
tayyaba

thanks a lot

vishnu
vishnu

Thank you

Haseeb Chowdhry
Haseeb Chowdhry

What is the specific current asset? Is it inventory? The answer will be very different from buying equipment. Let’s run through a purchase of inventory:

1) Buying Inventory
Debit: Inventory
Credit: Cash

Inventory then sits on the balance sheet until it is recognized as a Cost of Goods Sold per the matching principle.

2) Recognizing COGS
Debit: COGS
Credit: Inventory

Let me know if you have any additional questions – thanks!

Hashmat faqiri
Hashmat faqiri

Dear sir: I have interview in Finance and banking and I need your help that how to prepare myself for it. Method of questions.

PJ Usak
PJ Usak

If you buy a Current Asset for $100 how does it flow through the three financial statements?

Is this the same answer as buying equipment?

Haseeb Chowdhry
Haseeb Chowdhry

Al Mamun,

Typically basic finance questions talk about your background, why you want to work in finance, and why you want to work in a specific investment bank. If you can answer all of those questions properly, that’s a good start to acing the qualitative portion of the finance interview. Let me know if you have any specific questions – more than happy to help – thanks!

Best,
Haseeb

Al-mamun
Al-mamun

sir,at first take my salam. Sir i can’t answer properly in viva question about finance.Although finance was major in my BBA programmer.what kind of question comes from basic finance. sir please suggest me,,which question can i follow, have you any fdf file “the basic question about finance in viva ” please help me sir.

Opubor Efemena
Opubor Efemena

This was very helpful. Thank you very much.

vishnu
vishnu

sir,
sorry for the question actually my doubt is a firm’s expenses (2016) they not accounted that year then the next year they paying cash to that party then what will be the entry
plz help

vishnu
vishnu

Dear sir
if the company not disclosing a expense rs.5000 for the date 01-03-2016 (the expenses not accounting in that year)
and the payment to made to that party on 01-05-2017 through bank. then how will it shown ( the expenses is for past year)
and i am really sorry to disturbing you
with regards
vishnu

Haseeb Chowdhry
Haseeb Chowdhry

Hashmat,

Have you looked into our Technical Finance Prep online course? That course does a great job of covering all topics expected during interviews, in detail. Thanks!

vishnu
vishnu

dear sir
in an pantnership firm the previous expenses paid in current year and it would in previous as payable. now the amount is paid then what will be the entries
plz give me a answer

Haseeb Chowdhry
Haseeb Chowdhry

Vishnu,

I think you are describing an accrued expense, so when you recognize the expense, the journal entry would be the following:

1) Debit – Expense
2) Credit – Accrued Expense (Liability)

When cash is used to pay the expense, this would be the following entry:

1) Debit – Accrued Expense (Liability)
2) Credit – Cash

Hope this helps – thanks!

Haseeb Chowdhry
Haseeb Chowdhry

Vishnu,

Are you referring to accrued expenses? Accrued expenses typically arise when a company has to declare expenses before actually paying them out in cash. Think of this example – a company’s employees get paid every 2nd and 4th Thursday, but the company has to disclose the expenses not paid in cash in a given period to close the books for the period. Let me know if you need any additional clarification – thanks!

Best,
Haseeb

Haseeb Chowdhry
Haseeb Chowdhry

Vishnu,

If you are following accrual accounting you need to ensure that expense is recognized as an accounts payable – and then you are just paying down the accounts payable. When you say expense, is it an expense related to a supply purchase. If so, the COGS would have already been recognized if you sold those goods. This pertains to you paying back a supplier a year later, in which you would have booked a payable at the time you initially purchased the supplies last year. Hope this helps.

Haseeb

Carlos Esqueda
Carlos Esqueda

Thank you!! 🙂

K Masthan
K Masthan

Please send some short tips for Basic Of Accounts Interview questions

Ganesh
Ganesh

thank you

Christha
Christha

Thank you so much. 🙂

Haseeb Chowdhry
Haseeb Chowdhry

Great!

Haseeb Chowdhry
Haseeb Chowdhry

From our discussions with investment banks and prospective candidates, we’ve made a concerted effort to cover the most common questions asked. Thanks!

Zulaikha Madina Zahari
Zulaikha Madina Zahari

Thank you. This helped me so much.

Akinwunmi zainab
Akinwunmi zainab

Hi,

pls sir wats d link to join if i want to get basic accounting questions nd your update

Haseeb Chowdhry
Haseeb Chowdhry

Shweta,

Goodwill arises when a company pays above the fair market value of the net assets of a target company in an M&A situation. It is an asset that counts for how much the acquirer “overpaid” for the target. I hope this helps – thanks!

Allan
Allan

thanks for your question and answers, it has help me improve my project issues about financial system assignment

Raymond
Raymond

Are you sure these are the most common questions?

sonu
sonu

thank u

SHWETA PATIL
SHWETA PATIL

Hello Sir I have a doubt in goodwill calculation, like goodwill it is reputation of company, then also we will treat it asset and keep in balance sheet with measuring in amount so how you calculate in amount.
can i get explanation.

Romya Ranjan Dash
Romya Ranjan Dash

Precise and informative points for job seekers.

Pounraj
Pounraj

Thanks, hope it’s useful for my interviews

Naveed
Naveed

Precise and clear answers.

Haseeb Chowdhry
Haseeb Chowdhry

Thank you!

Narayana
Narayana

Very Informative and well written.

Thank You

AMIT
AMIT

“well explained answers in short way”
Thanks

AMIT
AMIT

THANKS SIR

vijay
vijay

Thanx sir and my help in english speeking in job intarview

Haseeb Chowdhry
Haseeb Chowdhry

Thanks!

mounuddin ansari
mounuddin ansari

it’s really precise and understandable ans.
thank u sir

Haseeb Chowdhry
Haseeb Chowdhry

Ramesh,

Please reach out to support@wallstreetprep.com for this request – thanks!

Haseeb

Shweta
Shweta

Thank you sir.

RAMESH Chauhan
RAMESH Chauhan

Want to connect directly for more interviews questions and answers

Shweta
Shweta

Very Informative and well written. Thank You!

Haseeb Chowdhry
Haseeb Chowdhry

Thanks!

mamta sharma
mamta sharma

thnk u sir for the efforts u had made for the interseted readers with proper explaination of the important topics

Haseeb Chowdhry
Haseeb Chowdhry

Stay tuned for more content online, but I encourage you to also visit http://www.wallstreetoasis.com for additional interview content.

Vijay Gowda
Vijay Gowda

All are use full questions & Answers. Thank u

Haseeb Chowdhry
Haseeb Chowdhry

Thanks!

AMI
AMI

Like Rohit Sharma I am also in need of many more such Q&A to help me in my upcoming interviews.
I don’t know how to contact IBD for mock interviews. So in the interim your prompt help in providing many more such Q&A will be helpful.

Haseeb Chowdhry
Haseeb Chowdhry

Rohit – I would reach out to peers who are currently working in IBD and conduct mock interviews with them – that’s the best approach!

Pervez
Pervez

Short & simple & more helpful.
Thank you.

Haseeb Chowdhry
Haseeb Chowdhry

No problem – thanks!

Rohit Sharma
Rohit Sharma

Can you please provide me bunch of questions that usually ask at the time of interview.

Haseeb Chowdhry
Haseeb Chowdhry

Deewakar – there are a lot of good resources to focus on MBA interview prep – please check them out – we are focused on IBD training specifically so we can’t promise we’ll write content in line with MBA interview prep. Hope this helps!

tajamul hussain
tajamul hussain

i am going to appear in junior executive finance interview, what are the possible questions which they may ask me?????????

Ambarin Anwar
Ambarin Anwar

Very informative article. Its going to be of very great help in my preparations for upcoming interviews.

Shannan Wilson
Shannan Wilson

Tajamul,
Check out our IB Interview Prep Pack Plus for help with your interview. It includes 200+ of the most common technical questions with sample answers and 30 sample behavioral interview questions!

Shannan Wilson
Shannan Wilson

Hi Adefioye,
We offer the Wall Street Prep IB Interview Prep Pack Plus which includes 200+ of the most common technical questions with sample answers and 30 sample behavioral interview questions. We also offer IB Interview Prep Pack Plus
& The Premium Package which Everything in the IB Interview Prep Pack Plus, Complete financial modeling training program and Certification in Financial and Valuation Modeling. I hope this helps!
Shannan

Shannan Wilson
Shannan Wilson

Hi Kamal,
We offer the Wall Street Prep IB Interview Prep Pack Plus which includes 200+ of the most common technical questions with sample answers and 30 sample behavioral interview questions. We also offer IB Interview Prep Pack Plus
& The Premium Package which Everything in the IB Interview Prep Pack Plus, Complete financial modeling training program and Certification in Financial and Valuation Modeling. I hope this helps!

Mamatha
Mamatha

I had been searchIng for basics to prepare myself for interview. I’m glad your article helped me .