32 Finance Interview Questions & Answers
1. If you were the CFO, what would keep you up at night?
How to Answer
This is one of the standard finance interview questions and can be given at any finance job level. Step back and give a high level overview of the company's current financial position. Highlight something on each of the three financial statements. Income statement: growth, margins, profitability. Balance sheet: liquidity, capital assets, and credit metrics. Can flow statement: short term and long term cash flow projection, and need to raise money or return capital.
Entry Level
"The cash flow and running out of cash would be my biggest fear. The income and balance sheet are resources and tools that are just as important, but running out cash would simply bankrupt the company."
Experience
"Running out of cash would be my biggest nightmare. Many companies have a yearly cash forecast built up by month, but also supplement it with a 13 week cash flow projection. Some of the things they're doing to help them manage cash are: expanding lines of credit and other debt facilities and managing accounts receivable and accounts payable days outstanding in order to speed up the cash flow cycle. Additionally, many with companies in the start up and growth stages are always working on their next round of funding to insure the company won't run out of money.
Secondly, ensuring the right financial people are hired and retaining them Finding good people is always difficult and networking with peers seems to be the best way to find good people in financial circles. Retaining good people requires proper training and a good CFO should be giving adequate time to this."
2. If you could pick one stock, which would it be and why?
How to Answer
Even if you don't have a preferred stock, you've likely discussed various stocks and their performance during economics classes or at a previous internship. In order to make sure that you give a comprehensive answer, pick a stock that reflects something about you. For example, if you have high-risk tolerance, mention this and explain why it's a key factor in your decision-making process.
Experience
"I'm interested in growth because I'm young and my risk tolerance is higher. Companies that pay dividends don't appeal to me because I don't need the recurring income, as I have a job to pay my bills. I would rather see companies use that money to fuel their growth in the short and long term. If we're looking at today, with all the uncertainty abroad, I would want to stick to a US-based stock, and I feel that with it being an election year, it has brought volatility into the market for opportunistic investments at specific times. I'm specifically interested in tech, and Netflix recently reported their earnings. They beat estimates on revenue and earnings, but missed widely on new subscriber growth, sending the stock down 16%. I think this signals a great buying opportunity, as Netflix still has a large market to capture abroad, and these headwinds are a short-term issue. Overall, long-term I feel the company is well positioned to significantly increase their growth and market share abroad. In conclusion, I wouldn't want a single stock to be more than 3-5% of my overall portfolio, as it is not advisable to over-invest in one specific equity, no matter how bullish I might be.
One key thing to remember is that there is no set response when it comes to determining which stock to invest in. What is important is picking a stock that you can stand behind and convincingly talking about the factors that influenced your decision. This is likely to impress the interviewer and get you one step closer to landing your dream job."
3. What is deferred tax liability and what is its purpose?
How to Answer
On a balance sheet, a tax that a company will owe on its income, but that has not yet been assessed. Because of differences between tax regulations and the GAAP, income may be recognized on a balance sheet for accounting purposes, but not for tax purposes. However, that income will eventually be recognized for tax purposes and income tax will then be assessed. This tax is called deferred income tax, and is recorded as a liability on the balance sheet.
Entry Level
"A deferred tax liability is a tax that is assessed or is due for the current period but has not yet been paid. The deferral comes from the difference in timing between when the tax is accrued and when the tax is paid. A deferred tax liability records the fact the company will, in the future, pay more income tax because of a transaction that took place during the current period, such as an installment sale receivable."
Experience
"Deferred Tax Liability (DTL) is reported on a firm's balance sheet and represents the net difference between the taxes that are paid in the current accounting period and the taxes that will be paid in the next accounting period. The liability occurs when the accounting income is greater than the taxable income.
For an example, a company is allowed to defer taxes on a percentage of its income and report this amount as a DTL on its balance sheet. When the tax is due, there will be an equal amount reduction in the DTL item and the cash and cash equivalents account on the balance sheet. In other words the DTL means an accrued tax on the books because book expenses did not match tax deductions for a particular year."
4. What is the difference between cash base accounting and accrual accounting?
How to Answer
Give a brief definition in your own words of cash base accounting and accrual accounting.
For Cash basis accounting, revenue is recorded when cash is received from customers, and expenses are recorded when cash is paid to suppliers and employees. For Accrual basis, revenue is recorded when earned and expenses are recorded when consumed. The timing difference between the two methods occurs because revenue recognition is delayed under the cash basis until customer payments arrive at the company. Similarly, the recognition of expenses under the cash basis can be delayed until such time as a supplier invoice is paid.
Entry Level
"Cash based accounting recognizes sales and expenses when cash actually flows out of the company. Accrual based accounting recognizes revenues and expenses as they are incurred regardless of cash flows. Accrual based accounting is the more popular method."
Experience
"I have only worked at companies that have used accrual accounting, meaning all revenue and expenses are recorded when they are incurred. Cash based accounting is recorded when the cash flows in and out of the business. An example of cash based and accrual accounting on the revenue side is: A company sells $10,000 of green widgets to a customer in March, which pays the invoice in April. Under the cash basis, the seller recognizes the sale in April, when the cash is received. Under the accrual basis, the seller recognizes the sale in March, when it issues the invoice.
An example of cash based and accrual accounting on the expense side is: A company buys $500 of office supplies in May, which it pays for in June. Under the cash basis, the buyer recognizes the purchase in June, when it pays the bill. Under the accrual basis, the buyer recognizes the purchase in May, when it receives the supplier's invoice.
The cash basis is only available for use if a company has no more than $5 million of sales per year (as per the IRS). It is easiest to account for transactions using the cash basis, since no complex accounting transactions such as accruals and deferrals are needed. Given its ease of use, the cash basis is widely used in small businesses. However, the relatively random timing of cash receipts and expenditures means that reported results can vary between unusually high and low profits."
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5. Explain to me what Beta is in your own words? Why is it so important?
How to Answer
Give the definition of Beta in your own words:
1. The beta of a company measures how the company's equity market value changes with the change of market overall. It is used in the Capital Asset Pricing Model (CAPM) to estimate the return of an asset.
2. Beta is an expression of how volatile an investment is compared to the overall market.
Entry Level
"Beta is a measure of the volatility of an investment compared with the market as a whole. The market has a beta of 1, while investments that are more volatile then the market have a bet greater then 1 and those that are less volatile have a beta less then 1."
Experience
"Beta is an expression of how volatile an investment is compared to the overall market. A beta of 1 indicates that the investment will move with the market. A beta of less than 1 means that the investment will be less volatile than the market. For example, if a stock's beta is 1.3, then theoretically it's 30% more volatile than the broad market. Beta can help investors choose investments that match their specific risk preferences. A risk-averse investor, for example, may want to avoid overweighting their portfolio with high-beta stocks to avoid excessive volatility."
6. When should a company consider issuing debt instead of equity?
How to Answer
Businesses often need external money to maintain their operations and invest in future growth. There are two types of capital that can be raised: debt and equity. Each type has its share of benefits and drawbacks.
Debt financing is capital acquired through the borrowing of funds to be repaid at a later date. Common types of debt are loans and credit. In addition, payments on debt are generally tax-deductible. The downside of debt financing is that lenders require the payment of interest, meaning the total amount repaid exceeds the initial sum. Also, payments on debt must be made regardless of business revenue (during economic slowdowns, slow down in sales, or new companies) this can be dangerous.
Equity financing refers to funds generated by the sale of stock. The main benefit of equity financing is that funds need not be repaid. Shareholders purchase stock with the understanding that they then own a small stake in the business. The business is then beholden to shareholders and must generate consistent profits in order to maintain a healthy stock valuation and pay dividends. Since equity financing is a greater risk to the investor than debt financing is to the lender, the cost of equity is often higher risk than the cost of debt.
Entry Level
"Debt is preferable for the following reasons:
1. Debt is less risky and a cheaper source of financing
2. Debt financing provides a tax shield, meaning payments on debt are generally tax deductible.
3. It helps the company to maximize the return on invested capital (financial leverage)."
Experience
"Debt is cheaper because it is paid before equity and has collateral backing. Debt ranks ahead of equity on liquidation of the business when comparing the cost of debt to the cost of capital
There are pros and cons to financing with debt vs equity that business needs to consider. It is not automatically a better to use debt financing simply because it's cheaper. A good answer to the question may highlight the tradeoffs, if there is any followup required."
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7. If I could use only one financial statement to review the overall health of the company, which statement would I use and why?
How to Answer
Pick a good answer to this question with justification. There is not a right or wrong answer to this question. I have listed two answers below:
1. Cash is king. The cash flow statement gives a true picture of how much cash the company generates. Ironically, it often gets the least attention.
2. The balance sheet because assets are the true driver of cash flow.
Entry Level
"Cash is king The cash flow statement gives a true picture of how much cash the company generates. Ironically, it often gets the least attention. That being said, it's important to view all three statements to truly get a full picture of the health of a company."
Experience
"The cash flow statement because it shows the actual liquidity of the company and how much cash it is generating and using. The balance sheet just shows a snapshot of the company at one time, without showing the performance of the company. The income statement has a number of non-cash expenses that may not actually be affecting the company's health. But the key to a great company is generating significant cash flow and also having a heal thing cash balance and this will show on the cash flow statement."
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8. Tell me an idea or suggestion you have made that was implemented in the finance area?
How to Answer
It's important here to focus on the word implemented. There's nothing wrong with having a lot of ideas, but they need to be vocalized. Be prepared with a story about an idea of yours that was take from idea to implementation and considered successful.
This is always a good question to showcase a person's thought process and ability to work with others.
Entry Level
"At my previous work, I had the idea to dedicate a few hours on Fridays to reviewing our efficiency. Our workload was lighter on Fridays anyway, so we were able to spend some time improving our work. I also implemented a cross-training program, which is still in practice. I was very interested in improving training, accountability, and efficiency if someone was absent (especially on the payroll side)."
Experience
"As a Controller and a senior level manager's, I'm in a position to not only have ideas, but to implement my ideas. On the flip side, I have to remain open to hear my employees ideas as well and to evaluate and implement new practices as well. I have found that listening to employees ideas and trying them ( if realistic), helps build morale, and cohesiveness within the office environment."
9. Have you ever had a conflict with a boss? How was it resolved?
How to Answer
Do not say no! Most interviewers will keep drilling deeper to find a conflict. The key is how you behaviorally reacted to conflict and what you did to resolve it. Your answer to this question might determine whether you get the job, so be careful to avoid making the following blunders: Don't give examples in which you and the manager had to stop working together entirely. Rather than criticizing a past manager, let the objective facts speak for themselves. If possible, try to discuss a conflict or dispute that did not stem from questionable behaviors on your own part.
Don't allude to frequent conflicts; this can give the impression that this is an issue you regularly face.
Try to avoid displaying a negative attitude when you give your answer, as this could lead a manager to think that you would bring a similar outlook on this job.
Entry Level
"I had a conflict with a manager earlier in my career. One of our team members skipped out on work six times in one month, and I was always asked to cover their shift last minute. I was frustrated and could not understand why my manager wasn't just terminating the employee. I reacted hastily, and the manager patiently reminded me that he had his reasons. He explained that he asked me to cover the shifts because he liked me and I was reliable. It turns out the absent employee had serious health concerns, and our manager was trying to be empathetic without disclosing the situation to our team. I felt terrible and learned that sometimes things aren't always as they seem. I apologized, and all was well."
Experience
"Yes, I have had conflict in the past. Never major ones, but there have been disagreements that needed to be resolved. I've found that when conflict occurs, it helps to fully understand the other person's perspective, so I can take time to listen to their point of view, and then I seek to work out a collaborative solution."
10. How is the income statement linked to the balance sheet?
How to Answer
This is a very important question to know how to answer and practice. The question will most likely be asked. It's a quick and short answer. There is not much of an explanation has to be given. This is the type of question that can easily be overlooked and one can overthink the answer. Slow down.
Entry Level
"That's a good question. The two financial statements are linked because net income flows into retained earnings."
Experience
"The balance sheet reports a company's assets, liabilities, and owner's equity. Generally, the amount of the owner's equity will have changed from the previous balance sheet amount due to:
the company's net income which flows into retained earning. The owner's additional investments in the business or the owner's withdrawals of business assets."
11. Why are increases in accounts receivable a cash reduction on the cash flow statement?
How to Answer
This is another brainteaser question, where one needs to stop and think about the relationship between accounts receivable and net income (increasing AR) , and the receiving of the actual cash which impacts the cash flow statement (increases the CFS when cash is received, but decreases the CFS when AR is increased on the income statement).
Entry Level
"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."
Experience
"When business buys raw materials for manufacturing / ready goods for trading, it pays the supplier cash - Cash Outflow. The raw material is converted into finished goods. At this point, there is an increase in stock (finished goods). Hence, increase in stock is assumed to be cash reduction in cash flow statement. On the other hand, if a good is sold, and there is immediate receipt of cash, then there is cash inflow and it negates the cash outflow that happened initially. If goods are sold on credit, there is no immediate cash inflow. In other words, the cash that was used to buy the goods initially has not returned to the business. Hence, increase in accounts receivables is cash reduction in cash flow statement."
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12. A company purchases new equipment, walk me through the impact on the 3 financial statements.
How to Answer
This is a yes or no answer and there question can be answered either yes or no. I have given two examples of how to answer this question by saying yes. And answering the question by saying no. Either way, both questions are correct, because the financial impact is correct. Using a case scenario question from a class or financial article, would be perfect to answer this question.
Entry Level
"On the Balance Sheet, the Fixed Assets will increase both assets and accumulated depreciation plus cash will decrease (if cash payment) or in the case of a credit purchase, liabilities will increase Accounts/Notes payable.
The Income statement will be impacted with an increase to the deprecation expense.
The Cash Flow statement will increase in the investment activities."
Experience
"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)."
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13. How is it possible for a company to show positive net income but go bankrupt?
How to Answer
The answer to this question will always be yes. No matter the situation, fraud exists in our society and a perfect example is Enron. What happened to Enron is why SOX was passed through legislation. Answer the question and then give an example, but there is not need to get hung up on the answer.
Entry Level
"Absolutely. If a company's accounts receivables continue to increase, but the company is not able to collect on the sale. And the accounts payables continue to increase and the company is unable to make payroll, or even pay-off long-term or short-term debt. Especially if loan notes gradually increase with higher interest rates and the company is able to make the payments or reconsolidate the debt. Or, there is just outright fraud occurring."
Experience
"Yes. Two examples include deterioration of working capital (i.e. increasing accounts receivable, lowering accounts payable), and financial shenanigans.
Financial shenanigans acts or actions designed to mask or misrepresent the true financial performance or actual financial position of a company or entity. Financial shenanigans can range from relatively minor infractions involving creative interpretation of accounting rules to outright fraud over many years."
14. Is it possible for a company to show positive cash flows but be in grave trouble?
How to Answer
This is a question that can easily stump a person, no matter how smart or prepared someone is for an interview. Which is why interviewers love to ask it. Do not get stuck or hung up on this question, no matter the experience level. Just answer the yes or no question and then another sentence to back up your answer, and move onto the next question.
Example:
It sure can. An example involves unsustainable improvements in working capital.
That's a very good question and one that came up in one of my classes and I remember it very well, because I was stumped on the answer at first. (Giving a long explanation as the one above is always a good tip to remember, because it buys the interviewee more time to think about their answer and it doesn't leave a lot of silence as you are preparing to answer the question.)
Entry Level
"Absolutely. An examples involves 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."
Answer Example
"Yes. And there are many different ways this can occur. A common explanation for a company with a net loss to report a positive cash flow is depreciation expense. Depreciation expense reduces a company's net income, but it does not involve a payment of cash in the current period.
Another explanation involves accrual accounting. A corporation must report its expenses as they are incurred and that is often before the corporation pays the invoice. For example, a corporation with an accounting year ending December 31 might have a huge expense at the end of 2012, but the invoice is not due until January 2013. The 2012 net income was reduced, but the corporation's cash is not reduced until 2013. These are just two examples, but is very common for the cash flow to be positive."
15. What is a Stock Split and Stock Dividend?
How to Answer
This question is simply asking for the definition in your own words and give an example. Keep it clear and concise, along with the example.
Here are a few ways to start off the answer:
1. A stock split is when a company splits its stock into 2 or more pieces. For example a 2 for 1 split. I have not worked in a company where there has been a stock split, but an example is....
2. A stock split is when a company splits its stock into 2 or more pieces. For example a 2 for 1 split. Since, I have just graduated from college, an example and scenario studied in my academic class is....
3. A stock dividend occurs when the company uses the amount of money that would be paid as a cash dividend to purchase additional common shares for the shareholder. In my experience, a company chose to split their stock because....
Entry Level
"A stock split is when a company splits its stock into 2 or more pieces. For example a 2 for 1 split. A company splits its stock for various reasons. One of the reasons is to make the stock available for the investors who invest in the stock of the companies which are inexpensive. The probability of growth for those stocks also increases. Stock Dividend is when the company distributes additional shares in lieu of cash as dividends."
Experience
"A stock dividend occurs when the company uses the amount of money that would be paid as a cash dividend to purchase additional common shares for the shareholder. A stock split happens when a company issues two or more new shares for every existing share an investor holds. When an investor considers purchasing stock that has issued a stock dividend or that has been split, the investor needs to consider whether the company's goals in issuing a stock dividend or making a stock split match the investor's goals for wanting to invest in the company. If the investor's goals and the company's goals are incompatible, the investor should consider investing in another company. Companies that are pursuing growth will want to keep any cash they have to invest in the company. In this case, a stock dividend is issued.
A stock split occurs when a company feels its stock is above the popular price range for their stock. The company uses the split to bring the stock price into the desired range."
16. If there is $20,000 of aged accounts receivable that will be fully written off, what impact will this have on each of the financial statements?
How to Answer
This answer is very straight forward, so do not get hung up on it: The direct write-off method allows a business to record Bad Debt Expense only when a specific account has been deemed uncollectible. The account is removed from the Accounts Receivable balance and Bad Debt Expense is increased. Accounts Receivable on the balance sheet will be debited by $20k and Bad Expense on the income statement gets debited $20k.
Entry Level
"Accounts Receivable on the balance sheet will be debited by $20k and Bad Expense on the income statement gets debited $20k."
Experience
"The direct write-off method allows a business to record Bad Debt Expense only when a specific account has been deemed uncollectible. The account is removed from the Accounts Receivable balance and Bad Debt Expense is increased. Accounts Receivable on the balance sheet will be debited by $20k and Bad Expense on the income statement gets debited $20k."
17. Please tell me how your experience would be a fit for this position? or Based upon the job description, what do you find most exciting about this job opportunity?
How to Answer
These two questions are asking for the same type of answer and will be one of the first questions asked in an interview. the interviewee needs to very clear and concise. Your answer will be a balance between actual experience/education and soft skill answer. It's best to be honest. To answer this question start off by naming one or two strengths you possess that will be important in this role.
Ensure you have thoroughly read the job description in great detail and take two job requirements and give an example of your experience, strength, or education/certification.
Entry Level
"This job will be the kickoff to what I hope will be a great career. I've researched what your company does and I have a passion for getting involved in that kind of work and contributing to the best of my ability, yada, yada. (You need to do your homework on the company... what do they do... how do you fit into that world... etc... this will set you apart from others). One of the job requirements that stood out for me was detailed oriented (give an example. This is a quality I possess and a very important one in finance. My previous boss provided positive feedback on numbers occasions about my attention to detail (or several of my professions provided this feedback to me on both my papers and speeches.)"
Experience
"In my prior position I was tasked with the responsibility of creating a new budget and forecast format. The financial ERP system did not have this capability. My Excel skills are strong intermediate and was able to create a since spreadsheet that included both the budget and forecast on separate sheets. I created two macros that allowed the user to download row data each month from the financial statements and it would automatically update, each time the Macro Icon Button was selected. This is an example of a complex task I was given, and finished the project on time and provided a tool for both the CEO, CFO and all financial managers to use. The forecast and budget tool was only going to be used within my department, but Senior Management reviewed the tool and requested a template to be created and has been implemented throughout the company. This example showcases my Excel skills, ability to meet deadlines, create a tool for Senior Management to use and make financial decisions, and the ERP system that was used is the same used at this company. All of these are skills were listed in the job description and ones that I feel are key and crucial to be successful in this role."
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18. What effect would an increase in accounts receivable have on the cash flow statement?
How to Answer
If the business is using the indirect method, then the cash flow statement will be impacted if AR is increased or decreased. The cash flow statement shows how cash changed from the end of last year to the end of this year. In order to calculate this, we need a starting point.
The general rule of thumb is that assets are indirectly related to their change in balances whereas liabilities are directly related to their change in balances.
Entry Level
"An increase in accounts receivables shows up as a decrease on the cash flow statement. The opposite is true if accounts receivable decreases. This means that cash was collected during the year, but sales weren't reported in net income. Thus, net income should be increased."
Experienc
"If the business is using the indirect method, then the cash flow statement will be impacted if AR is increased or decreased. An increase in accounts receivable during the year means that sales were made during the year, but the cash was not collected. This means that the net income includes non-cash sales that must be removed. Thus, an increase in accounts receivables shows up as a decrease on the cash flow statement.
An increase in accounts receivable during the year means that sales were made during the year, but the cash was not collected. This means that the net income includes non-cash sales that must be removed. Thus, an increase in accounts receivables should decreases show up as a decrease on the cash flow statement.
The opposite is true if accounts receivable decreases. This means that cash was collected during the year, but sales weren't reported in net income. Thus, net income should be increased."
19. What is goodwill and why do companies use it?
How to Answer
The goodwill of a business is typically determined by subtracting the fair market value of the tangible assets from the total business value. Business goodwill is also determined by the capital surplus earnings method, which calculates the fair market value of the business assets, determines the fair rate of return on said assets and subtracts the return from the company's total earnings. The resulting excess earnings is the goodwill of the company.
Entry Level
"Goodwill is an intangible asset that arises when one company purchases another for a premium value. The value of a company's brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology represent goodwill.
Goodwill is considered an intangible asset because it is not a physical asset like buildings or equipment. The goodwill account can be found in the assets portion of a company's balance sheet."
Experience
"Goodwill happens to be an intangible asset which is defined as an excess value of the price of purchase over market value in any business that has been acquired.
An example can be used to explain this. If Walmart has been sold for over a 100 billion dollars with PP&E book with value of over 50 billion, an equity which is of 30 billion and another debt of 10 billion.
The goodwill is then paid for at Walmart and it would be of 30 billion- the whole sale price minus the value of the book which is of 70 billion."
20. What is a deferred tax asset and what is its purpose?
How to Answer
This question is simply asking for the definition in your own words and give an example. Keep it clear and concise, along with the example.
Examples of how to answer the question:
1. A deferred tax asset is when a company pays more in taxes to the IRS than they actually owe. My past company recognized deferred tax when.....
2. A deferred tax asset is when a company pays more in taxes to the IRS than they actually owe. I studied this in my accounting and a scenario would be when a company.....
3. A deferred tax asset is when a company pays more in taxes to the IRS than they actually owe. In my experience, deferred tax recognized by a company because....
Entry Level
"A deferred tax asset (as its name suggests) is when a company pays more in taxes to the IRS than they actually owe (as shown as an expense on their income statement). This is an asset because it can be used to offet future tax expense in the future. Deferred tax assets can result from differences in revenue recognition, expense recognition, and net operating losses."
Experience
"A deferred tax asset or liability is created when a corporation has a difference between the deduction for net income as shown on the income statement and a deduction for taxable net income. The total asset or liability amount is calculated as the taxable amount of that difference. The provision for deferred tax recognizes a future liability arising from past transactions and events. Tax legislation allows the company to defer settlement of the liability for several years.
For example, a deferred tax asset of $100,000 from the previous year could be applied to before-tax income of $250,000 this year, resulting in taxable income of $150,000 ($250,000 - $100,000)."
21. If a company buys an asset, walk me through the impact on the 3 financial statements? The asset value is $1 million
How to Answer
To answer this question, give a made up situation or a real-life scenario based on experience. An entry-level answer will be 3-4 sentences and an experienced answer should provide much detail. If you were to be unsure and get stuck answering this question, just remember the basics of how an asset affects the balance sheet first and start there. In an interview, even the best and smartest people get nervous and forget stuff. This is a basic question to understand the very first financial statement that would be impacted by this purchase.
Entry Level
"On the Balance Sheet, cash will decrease by $1 million on the asset side, and increase the asset for equipment $1 million. Recording the debit and credit on the Balance Sheet. On the Income Statement there will be no impact on the first year and then the recording of depreciation expense on the purchased equipment. The Cash Flow Statement will have a decrease to cash."
Experience
"If an asset is purchased by a business for $1million the impact to each of the 3 financials statements would be:
First on the Balance Sheet, cash will decrease by $1 million; decreasing the asset side of the balance sheet and at the same time the asset will be recorded as equipment for $1 million which will increase the asset side of the balance sheet by the same amount. Hence, the balance sheet of the company will be recorded.
Secondly, on the Income Statement there will be no impact on the first year of the income statement, but after the first year the company will have to charge depreciation expense on the purchased equipment which the company will show reflected on the Income Statement.
Thirdly, on the Cash Flow Statement, assuming that only cash has been paid by the company to purchase the equipment. The Cash Flow from Investing will result in the cash outflow of $1million, so a decrease to cash."
22. Have you heard of DCF method? If so, what is it and what does it measure?
How to Answer
In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flows are estimated and discounted by using cost of capital to give their present values. The DCF is a valuation tool used to find the intrinsic value.
If you are new in accounting and finance career, you might get asked basic terminology questions and how its relevant to a business in the interview. The reason this is done, is to ensure the person understands the concept.
Entry Level
"Discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analyses use future free cash flow projections and discounts them, using a required annual rate, to arrive at present value estimates."
Answer Example
"Calculating the sum of future discounted cash flows is the gold standard to determine how much an investment is worth. DCF is a valuation tool used to find the intrinsic value and then begin running them through the steps: calculate FFCF (explaining what it is), calculate the WACC (also explaining what it is), discount the FFCF using the WACC to get to the present value, calculate the terminal value (explain what it is), discount the terminal value using the WACC to get to the PV and then add this figure to the PV for the discounted FFCF. Then depending on how it's going I may finish up with the benefits of using a DCF analysis and then briefly mention alternative valuation tools."
23. What happens on the income statement if inventory goes up by $10? Assuming you paid for it with cash.
How to Answer
On the Cash Flow Statement, Inventory is an asset so that decreases your Cash Flow from Operations - it goes down by $10, as does the Net Change in Cash at the bottom. On the Balance Sheet under Assets, Inventory is up by $10 but Cash is down by $10, so the changes cancel out and Assets still equals Liabilities & Shareholders' Equity. There are no changes to the Income Statement. This is a trick question.
Entry Level
"Nothing. The income statement is not impacted, only the balance sheet and cash flow statements are impacted."
Experience
"The cash flow statement is decreased, since inventory is and asset in the Cash Flow from Operations section. On the balance sheet under the assets, inventory is increased by $10, but cash is decreased by $10. So the changes on the balance sheet cancel out to balance. There are no changes to the income statement."
24. Explain what is the most complex work you have done in Excel?
How to Answer
This is a question that will give you an opportunity to showcase your Excel knowledge. Excel is something that will be used every day, so being comfortable is a must. If you know VBA, macros, pivot tables, how to create a macro shortcut button or any other advanced level knowledge. Explain any type of project that you have done both professionally or educationally. Here are some examples of applications of Excel that you might want to talk about, if applicable:
1. Constructing dashboards in Excel to measure and track business metrics;
2. Putting together cash flow or revenue projections over time;
3. Using Excel as a project management dashboard to track progress across multiple workstreams;
4. Automating day-to-day tasks using spreadsheets with IF statements and other conditional logic; or
5. Performing back-of-the-envelope calculations to estimate sales volume in various business scenarios.
Entry Level
"My current job is my first job as a Financial Analyst and my Excel skills were a strong beginner and two years later, I'm creating dashboards with Pivot Tables, and correcting many of my co-works VBA errors. The most complex Excel work I have done was with a group of two other co-workers where we were tasked with a project to create a workable Summary Dashboard that rolls up over 15 different manufacturing plants and consolidates all monthly performance into a single dashboard tab. There were 3 of us and we split the work up. My part included more formulas and behind the scenes. I was responsible for mapping all 1500 GL accounts onto the dashboard. This took us a little over 3 months."
Experience
"In my experience as a Senior Finance Manager, financial modeling is quantitative analysis used to forecast or project hypothetical situations (normally financial or pricing). Financial Modeling plays an important role in long-term planning, expansion, development, cost planning, etc. Early in my career, I had worked for a small company with annual sales of $6m. As lead Senior Manager for this company, we were faced with many financial obstacles, to the point where the bank could seize the company's assets since we were in default of the Debt Covenants. I created a financial model including all three financial statements: P&L, BS, and CF Statement. The models looked at 3 financial scenarios the company had to flex for options to become in good standing with the bank. One of the options created and the one the company decided to move forward on was to offer a higher discount on AR to bring in cash on a faster basis over the next 6 months and to require cash payments and milestone payments on any sales project over $25,000. This was forecasted to pull cash payments forward to meet all debt payments and allow the company to have a cash reserve to cover 2 months worth of all company expenses."
25. What is working capital?
How to Answer
Technically working capital Working Capital = Current Assest - Current Liabilities
In short It is Excess of Current Assets minus Current Liabilities which can be utilised as a Working Capital to run the Day today business.
Entry Level
"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."
Experience
"Working capital is a common measure of a company's liquidity, efficiency, and overall health. Because it includes cash, inventory, accounts receivable, accounts payable, the portion of debt due within one year, and other short-term accounts, a company's working capital reflects the results of a host of company activities, including inventory management, debt management, revenue collection, and payments to suppliers.
Positive working capital generally indicates that a company is able to pay off its short-term liabilities almost immediately. Negative working capital generally indicates a company is unable to do so. This is why analysts are sensitive to decreases in working capital; they suggest a company is becoming overleveraged, is struggling to maintain or grow sales, is paying bills too quickly, or is collecting receivables too slowly.
One of the most significant uses of working capital is inventory. The longer inventory sits on the shelf or in the warehouse, the longer the company's working capital is tied up."
26. Tell me how to create a budget?
How to Answer
This is a subjective question so take a few seconds to think and gather your thoughts. Showcase your knowledge of what information is needed to create a budget and why you need the information. Answer why the information is relevant. When someone is in an interview, the mind can go blank (d. Think logically on how to answer this question and what are the basic information needed to do a budget. When in doubt use the KIS method (Keep IT Simple) and do not overthink the question. The whole idea of an interview and this type of question will allow the interviewer the ability to to see how the interviewee, reacts to the question and if they can think on their feet. Slow down and think about the answer.
Entry Level
"In order to determine the budget , we have to create the, scope baseline, schedule baseline, WBS, activity list, resources calendar, cost baseline including contingency reserve, then management reserves. Understand all the above details is a very important. It's important to the project because after determining the ROM budget, the sponser and stakeholders will decide if they need to this project or not , or shall go for other projects suitable for them."
Experience
"In my opinion, a good budget is one that has buy in from all departments in the company, is realistic yet strives for achievement, has been risk adjusted to allow for a margin of error, and is tied to the company's overall strategic plan. In order to achieve this, the budget needs to be an iterative process that includes all departments. It can be zero based (starting from scratch each time), or building off the previous year, but it depends on what type of business you're running as to which is better. It's important to have a good budgeting/planning calendar that everyone can follow."
27. Walk me through the financial statements?
How to Answer
Be careful on this question. Do not say too much if you do not know each of the financial statements. This is truly a make or break question. Anyone that can not answer this question, will not be hired and the interview will be over very quickly. If someone has a finance or accounting degree or has professional experience, the expectation any interviewer will have is the person knows about the financial statements. What's important is the interviewee can tell the interviewer how they have used each statement in their work experience, or in a educational class and how they are relevant. To seal the deal on this answer, explain how all of them tie together.
Entry Level
"The balance sheet shows the assets, liabilities and equity of the company. The income statement breaks down the company's costs/expenses and revenue. The cash flow statement reflects all the cash, investments, operating and financial activities. My current role in Accounts Receivable for a small company has me wearing many hats. In my position I process the order and once completed, I then invoice the order and will receive the money and make collection calls. The work order includes labor and expenses and will stay on the balance sheet in WIP until it becomes a finished good and then moves to finished goods inventory. The processed invoices impact the income statement in the sales revenue. Most of what I do impacts the balance sheet and income statement, and the cash flow statement is reviewed by management."
Experience
"I am currently a Senior Level Corporate Finance Manager and spend all my time analyzing and reviewing the 3 financial statements, but focus mainly on the Cash Flow Statement. I review the income statement to show me the companies sales , expenses, and net income for a specific time period. The balance sheet is reviewed to double check the information on the cash flow statement and to take a snapshot of the company's resources (assets) and funding (liabilities and equity) for the resources.
As I mentioned earlier, the statement of cash flows is the statement I spend most of my time reviewing. This statement 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. The Cash flow statement allows senior level management to look at possible financial scenarios and levers on a financial module. For example, when a company has maxed out their current potential both in building capacity and sales order capacity, then the next option is to start looking into building expansion and purchase of additional capital. My first tool is to review the cash flow statement and look at the percentage of cash versus debt. Look at the trend in sales revenue versus net income and then create a financial model of the different scenarios."
28. What is your experience level in working with CI or CIP?
How to Answer
CI or CIP stands for Capital improvement or Capital Improvement Process. This is a project the company is investing in and generally its over $5000. All costs and expenses are reported on the spreadsheet until the asset is put into service. Provide the definition in your own words and an example.
Entry Level
"CI or CIP stands for Capital improvement or Capital Improvement Process. Basically, a capital improvement is performed to boost an asset's condition beyond its original or current state. Examples can include adding an addition to a building, purchasing new equipment, upgrading to energy efficient lighting, or any other major, value-adding improvements."
Experience
"CI or CIP stands for Capital improvement or Capital Improvement Process. Capital projects are major repairs, replacements and upgrades, which require larger - and not always planned-for - outlays of time, effort and expense. Most of the projects are over $5000. Capital expenditures can include the purchase of new or updated equipment, updating of electrical, OSHA and safety requirements, etc."
29. Do you find finance and accounting to be similar or different?
How to Answer
This is not a question to spend a lot of time on. Give your opinion and state why in 2-4 sentences and then an example from one's education or professional experience. Make sure you are very clear. Finance and Accounting have many similarities, but they are different disciplines.
Entry Level
"In my current role, I am a Financial Analyst in the General Ledger Department for a fortune 500 company, and I performed both finance and accounting functions on a daily basis. Based on my current experience, I find finance and accounting to cross paths in my job. I partake in month end close on the financial recording and spend the rest of the month analyzing the data for trends, anomalies, preparing financial modeling and financial reports for mid to senior level managers."
Experience
"I find that both finance and accounting have many similarities, but are technically different. The higher I have progressed upward in my career, from mid to senior level positions, the more distinct the disciplines have become. Accounting is the ability to accurately and timely report all the financial transactions that have occurred within a timeframe. Finance is the management of the financials and assets of the business."
30. Give me an example of how WACC can be used in a business?
How to Answer
For this question give the technical definition and an example either professionally or educationally of when you have measured it. WACC is the weighted average cost of capital and is a financial metric used to measure the total cost of all capital sources: preferred shares, common shares, and debt.
If you are new in accounting and finance career, you might get asked basic terminology questions and how its relevant to a business in the interview. The reason this is done, is to ensure the person understands the concept.
Entry Level
"WACC is the weighted average cost of capital and is a financial metric used to measure the total cost of all capital sources: preferred shares, common shares , and debt. Its used in financial modeling as the discount rate to calculate the net present value of a business."
Experience
"When deciding how to fund a new project, the cost of funds and return of the project help managers quantify their options. Debt and equity are usually in the calculation of WACC and sometimes preferred stock. WACC is extremely useful to investors and senior level managers to see if future investments or purchases are worthwhile to undertake. The higher the WACC percentage the more risk the investment, the lower the WACC percentage the lower the risk investment. Since WACC is an increase to debt, it's important to ensure the additional debt payments can be paid in a timely manner and without sacrificing the daily cost of running the business."
31. What is financial modeling? Do you have experience doing any type of financial modeling? If so, tell me about it?
How to Answer
Give a technical definition of financial modeling in your own words and then give an example of your experience with financial modeling. If you do not have any experience that is okay, but always be honest. Most students coming out of college have experience with financial modeling projects, so I would be very surprised if a college graduate did not do a financial modeling project to discuss. Financial Modeling and forecasting is simply What If scenarios (what if the company wants to pay down debt with more cash? what if the company wants to have a price increase on goods?, etc.) Key words to include in your description are: spreadsheet, what if scenarios, Use INDEX AND MATCH instead of V-lookup to query data, use the CHOOSE function to build the scenarios, and make sure to know the difference between inputs and outputs. Don't forget to mention any type of 3D modeling experience (Any employer will find this to be a strength).
Entry Level
"Financial Modeling gives the company a projected snapshot into the present and future of a what-if scenario. For example, as an entry level Financial Analyst at company ABC, my Finance Manager asked me to build a 5 year projection forecast to determine what impact a 5% increase of materials each year would have to the bottom line. In my model, the control was to keep sales pricing the same YOY (year over year). The model was to show how much costs would increase from a particular supplier, as we purchased nearly 65% of all purchased from this supplier. Historical data over a 10 year period showed an average of 5% increase from this supplier."
Experience
"In my experience as a Senior Finance Manager, financial modeling is quantitative analysis used to forecast or project hypothetical situations (normally financial or pricing). Financial Modeling plays an important role in long term planning, expansion, development, cost planning, etc. Early in my career, I had worked for a small company with annual sales of $6m. As lead Senior Manager for this company, we were faced with many financial obstacles, to the point where the bank could seize the company's assets since we were in default of the Debt Covenants. I created a financial model including all three financial statements: P&L, BS and CF Statement. The models looked at 3 financial scenarios the company had to flex for options to become in good standing with the bank. One of the options created and the one the company decided to move forward on was to offer higher discount on AR to bring in cash on a faster basis over the next 6 months and to require cash payments and milestone payments on any sales project over $25,000. This was forecasted to pull cash payments forward to meet all debt payments and allow the company to have a cash reserve to cover 2 months worth of all company expenses."
32. What is ROI? Give an example of how your past employer measured ROI?
How to Answer
The answer to this question is very straightforward. Literally give the definition of ROI. Then provide an example of when you used ROI in your professional experience or in your educational classes. If you do not have any personal experience and have been working in the finance field for a few years, then provide an example of how your current or previous employer uses ROI.
Entry Level
"ROI stands for Return on Investment and can be calculated at any level of the company to measure the profitability and efficiencies within the company. A Simple way to measure ROI is net profit divided by total assets. When reviewing metrics on the balance sheet, the ROI is important to help management make critical business decisions. Especially when considering if the dollars invested in capital, is returning the expected ROI for every dollar invested when compared to actual."
Experience
"ROI is the amount of profit received with respect to invested capital. At my prior job, I reviewed reports of ROI on a daily basis to measure and calculate all the different capital improvement projects occurring within the manufacturing plant and to review the over/under process of each project. I was the controller of a small to midsize company with $53m in sales revenue and $12m in capital projects, which was equivalent to 22% of our total revenue. Ninety percent of the capital projects were funded by loans and there was not any room for error on the 8 projects. Due to the high level of risk, the labor, costs and expenses were reviewed and tracked everyday at a micro level. The company could not afford to absorb additional expenses from cash, and needed the additional capital funding to achieve the next level of sales revenue of $100m plus. Payback for the projects was projected within 3.8 years, due to the increase in sales volume, coming from the government contracts that were in place. With a 22 cent return on every dollar invested within 4 years, this was a risk I signed off on."
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