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32 Questions and Answers by Bobbi Witt
Updated July 19th, 2018 | Bobbi has been a finance manager for over 15 years, with direct recruiting and hiring experience in her field.
Job Interviews     Careers     Business    

Question 1 of 32

Give me an example of how WACC can be used in a business?

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1.

Give me an example of how WACC can be used in a business?

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.

Bobbi's Answer #1

"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."

Bobbi's Answer #2

"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."

2.

What is working capital?

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.

Bobbi's Answer #1

"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."

Bobbi's Answer #2

"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."

3.

What happens on the income statement if inventory goes up by $10? Assuming you paid for it with cash.

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.

Bobbi's Answer #1

"Nothing. The income statement is not impacted, only the balance sheet and cash flow statements are impacted."

Bobbi's Answer #2

"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."

4.

What is a deferred tax asset and what is its purpose?

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....

Bobbi's Answer #1

"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."

Bobbi's Answer #2

"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)."

5.

If you were the CFO, what would keep you up at night?

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.

Bobbi's Answer #1

"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."

Bobbi's Answer #2

"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."

6.

What is a Stock Split and Stock Dividend?

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....

Bobbi's Answer #1

"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."

Bobbi's Answer #2

"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."

7.

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

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.

Bobbi's Answer #1

"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."

Bobbi's Answer #2

"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."

8.

Have you ever had a conflict with a boss? How was it resolved?

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.

Bobbi's Answer #1

"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."

Bobbi's Answer #2

"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."

9.

When should a company consider issuing debt instead of equity?

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.

Bobbi's Answer #1

"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)."

Bobbi's Answer #2

"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."

10.

What is the difference between cash base accounting and accrual accounting?

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.

Bobbi's Answer #1

"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."

Bobbi's Answer #2

"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."

11.

If you could pick one stock, which would it be and why?

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.

Bobbi's Answer

"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."

12.

What is deferred tax liability and what is its purpose?

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.

Bobbi's Answer #1

"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."

Bobbi's Answer #2

"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."

13.

Explain to me what Beta is in your own words? Why is it so important?

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.

Bobbi's Answer #1

"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."

Bobbi's Answer #2

"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."

14.

If I could use only one financial statement to review the overall health of the company, which statement would I use and why?

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.

Bobbi's Answer #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. That being said, it's important to view all three statements to truly get a full picture of the health of a company."

Bobbi's Answer #2

"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."

15.

Tell me an idea or suggestion you have made that was implemented in the finance area?

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.

Bobbi's Answer #1

"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)."

Bobbi's Answer #2

"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."

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32 Finance Interview Questions
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Interview Questions

  1. Give me an example of how WACC can be used in a business?
  2. What is working capital?
  3. What happens on the income statement if inventory goes up by $10? Assuming you paid for it with cash.
  4. What is a deferred tax asset and what is its purpose?
  5. If you were the CFO, what would keep you up at night?
  6. What is a Stock Split and Stock Dividend?
  7. How is it possible for a company to show positive net income but go bankrupt?
  8. Have you ever had a conflict with a boss? How was it resolved?
  9. When should a company consider issuing debt instead of equity?
  10. What is the difference between cash base accounting and accrual accounting?
  11. If you could pick one stock, which would it be and why?
  12. What is deferred tax liability and what is its purpose?
  13. Explain to me what Beta is in your own words? Why is it so important?
  14. If I could use only one financial statement to review the overall health of the company, which statement would I use and why?
  15. Tell me an idea or suggestion you have made that was implemented in the finance area?
  16. How is the income statement linked to the balance sheet?
  17. Why are increases in accounts receivable a cash reduction on the cash flow statement?
  18. A company purchases new equipment, walk me through the impact on the 3 financial statements.
  19. Is it possible for a company to show positive cash flows but be in grave trouble?
  20. 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?
  21. 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?
  22. What effect would an increase in accounts receivable have on the cash flow statement?
  23. What is goodwill and why do companies use it?
  24. If a company buys an asset, walk me through the impact on the 3 financial statements? The asset value is $1 million
  25. Have you heard of DCF method? If so, what is it and what does it measure?
  26. Explain what is the most complex work you have done in Excel?
  27. Tell me how to create a budget?
  28. Walk me through the financial statements?
  29. What is your experience level in working with CI or CIP?
  30. Do you find finance and accounting to be similar or different?
  31. What is financial modeling? Do you have experience doing any type of financial modeling? If so, tell me about it?
  32. What is ROI? Give an example of how your past employer measured ROI?
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