Walk me through the financial statements?
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.
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.
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.
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