Common Finance Interview Questions and Answers
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 the most frequently asked technical finance interview questions and answers across a variety of topics – accounting (in this issue), valuation, and corporate finance – to ensure that you’re prepared.
Finance Interview: Questions and Answers
Before we get to accounting questions, here are some interview best practices to keep in mind when getting ready for the big day.
1. Be Prepared for Finance Technical Interview 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.
Learn More → Investment Banking Primer
2. 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.
3. Practice Building Financial Models
Learning is most effective from deliberate practice, so ensure you spend enough time building models from scratch.
The accounting and valuation concepts tested in interviews are easier to comprehend when working though an actual model, as opposed to memorizing answers from an interview guide.
Finance Interview Questions: Accounting Concepts
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 interview 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, and 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 the total change of cash.
- Beginning-of-period cash balance plus the change in cash allows you to arrive at the 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 a 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 a book value of $100, a debt of $50m, and equity of $50m = book value (A-L) of $50m.
- Acquirer records cash decline of $500 to finance the 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 helpful. Please feel free to add any comments or recommendations in the comments section below.
Good luck with your interview!
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… Read more »
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.
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… Read more »
these questions are very helpful for the interview. Thank you so much….
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.
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 ”… Read more »
This was very helpful. Thank you very much.
Can you please provide me bunch of questions that usually ask at the time of interview.
Very much on point. Thanks!
Hello dear team I enjoyed this platform it help me to generate more exposure on various finance knowledge.
Thank you for providing such a nice interview questions and answer. It helped me a lot.
Thank you this is great work..keep on providing such stuff…more about financial statements and how to do them.
Thank you it must be useful
Hello Sir/Madam, My self Shaikh Qutuboddin, am an MBA grad in Finance also am working as finance and accounts executive in a Multinational Corporationsin Audit, Reconciliation, Revenue and Disbursement Statement preparation so am looking for a job in Financial Planning and Analyst, please advice me what should i prepare for… Read more »
Really it was very good but provide in pdf.
Really interesting article. Thanks!
Epic article and love the prompt answers given to questions asked.
Epic Article. Most interesting article read.
It’s really useful………. thanks
This is good and helpful
THANK YOU SIR
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?
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.
thanks a lot
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?
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
Thank you!! 🙂
Please send some short tips for Basic Of Accounts Interview questions
Thank you so much. 🙂
Thank you. This helped me so much.
pls sir wats d link to join if i want to get basic accounting questions nd your update
thanks for your question and answers, it has help me improve my project issues about financial system assignment
Are you sure these are the most common questions?
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.
Precise and informative points for job seekers.
Thanks, hope it’s useful for my interviews
Precise and clear answers.
Very Informative and well written.
“well explained answers in short way”
Thanx sir and my help in english speeking in job intarview