Note: We continue our series on investment banking interview questions with this investment banking interview financial statements question example. For this question, you’ll need basic accounting knowledge.
How to answer this question
Ultimately, your answer shouldn’t last more than 2-3 minutes. Focus on the major parts of the three financial statements. For example, if you forget to mention assets when discussing balance sheet but instead go off and discuss non-consolidated interests for 3 minutes, you clearly failed to separate essential from non-essential information and thus failed answering the question.
Poor answers to this question would be answers that don’t focus on the meaty parts of each financial statement. If you find yourself discussing specific accounts in detail, you are straying from the general picture, which is what this question focuses on.
Great answers to this question are structured and presented strategically. A great answer will be high level and will provide commentary on the general purpose of each statement while still highlighting key aspects.
Sample great answer
“The three financial statements are the income statement, balance sheet, and statement of cash flows.
The income statement is a statement that illustrates the profitability of the company. It begins with the revenue line and after subtracting various expenses arrives at net income. The income statement covers a specified period like quarter or year.
Unlike the income statement, the balance sheet does not account for the entire period and rather is a snapshot of the company at a specific point in time such as the end of the quarter or year. The balance sheet shows the company’s resources (assets) and funding for those resources (liabilities and stockholder’s equity). Assets must always equal the sum of liabilities and equity.
Lastly, the statement of cash flows is a magnification of the cash account on the balance sheet and accounts for the entire period reconciling the beginning of period to end of period cash balance. It typically begins with net income and is then adjusted for various non-cash expenses and non-cash income to arrive at cash from operating. Cash from investing and financing are then added to cash flow from operations to arrive at net change in cash for the year.”
For a deeper dive, check out this video.