1/22/2014

Common Finance Interview Questions (and Answers)

About Us | Contact Us | View Cart
Our Products
My Account

Like

1.2k

Share

143

Free Resources

Self-Study Programs

Public Courses

Interview Prep Courses

Corporate Training

University Training

IB Industry Overview

IB Industry Resources

IB Salary Overview

Excel Shortcuts

Visit the WSP Blog

Common Finance Interview Questions (and Answers)

Posted on September 23, 2011 by Matan Feldman | 10 Comments

By Arkady Libman, Managing Director, Wall Street Prep With the start of a new academic y ear, we know that finance interv iews are again at the forefront of many of y our minds. Ov er the nex t few months, well be publishing most frequently asked technical finance interv iew questions and answers across a v ariety of topics accounting (in this issue), v aluation, corporate finance to get y ou prepared. Requisite plug here: If you are in immediate need of complete help, visit our finance interview prep page, for details on enrolling in prep videos and interview guides. Now w ithout further ado. COMMON FINANCE INTERV IEW QUESTIONS (AND ANSWERS) Before we get to accounting questions, here are some interv iew best practices to keep in mind when getting ready for the big day . 1 . Be prepared for technical questions. Many students erroneously believ e that if they are not finance/business majors, then technical questions do not apply to them. On the contrary , interv iewers want to be assured that students going into the field are committed to the work they ll be doing for the nex t few y ears, especially as many finance firms will dev ote considerable resources to mentor and dev elop their new employ ees. 2. One recruiter wev e spoken to said while we do not ex pect liberal arts majors to hav e a deep mastery of highly technical concepts, we do ex pect them to understand the basic accounting and finance concepts as they relate to inv estment banking. Someone who cant answer basic questions like walk me through a DCF has not sufficiently prepared for the interv iew, in my opinion. 3. Another added, Once a knowledge gap is identified, its ty pically v ery difficult to rev erse the direction of the interv iew. 4. Keep each of y our answers limited to 2 minutes. Longer answers may lose an interv iewer, while giv ing them additional ammunition to go after y ou with more complicated question on the same topic. 5. Its ok to say I dont know a few times during the interv iew. If interv iewers think that y oure making up answers, they ll continue probing y ou further, which will lead to more creativ e answers, which will lead to more complicated questions and a slow realization by y ou that interv iewer knows that y ou dont really know. This will be followed by uncomfortable silence. And no job offer. NOW ON TO ACCOUNTING QUESTIONS Accounting is the language of business, so dont underestimate the importance of accounting questions. Some are easy , some are more challenging, but of all of them allow interv iewers to gauge y our knowledge lev el without the need to ask more complex v aluation/finance questions.Below we hav e selected most common accounting questions y ou should ex pect to see during the recruiting process. Q: Why do capital expenditures increase assets (PP&E), w hile other cash outflow s, 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 ex penditures are capitalized because of the timing of their estimated benefits the lemonade stand will benefit the firm for many y ears. The employ ees work, on the other hand, benefits the period in which the wages are generated only and should be ex pensed then. This is what differentiates an asset from an ex pense. Q: Walk me through a cash flow statement. A. Start with net income, go line by line through major adjustments (depreciation, changes in working capital and deferred tax es) to arriv e at cash flows from operating activ ities. Mention capital ex penditures, asset sales, purchase of intangible assets, and purchase/sale of inv estment securities to arriv e at cash flow from inv esting activ ities. Mention repurchase/issuance of debt and equity and pay ing out div idends to arriv e at cash flow from financing activ ities. Adding cash flows from operations, cash flows from inv estments, and cash flows from financing gets y ou to total change of cash. Beginning-of-period cash balance plus change in cash allows y ou to arriv e at end-of-period cash balance.

http://www.wallstreetprep.com/blog/finance-interview-questions-and-answers/

1/4

1/22/2014
Q: What is w orking capital?

Common Finance Interview Questions (and Answers)

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 receiv ables and inv entories and also how much cash is going to be needed to pay off short term obligations in the nex t 1 2 months. Q: Is it possible for a company to show positive cash flow s but be in grave trouble? A: Absolutely . Two ex amples inv olv e unsustainable improv ements in working capital (a company is selling off inv entory and delay ing pay ables), and another ex ample inv olv es lack of rev enues going forward.in the pipeline Q: How is it possible for a company to show positive net income but go bankrupt? A: Two ex amples include deterioration of working capital (i.e. increasing accounts receiv able, lowering accounts pay able), and financial shenanigans. Q: I buy a piece of equipment, w alk 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) Ov er 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 ex pense 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 receiv able is an adjustment to net income to reflect the fact that the company nev er actually receiv ed those funds. Q: How is the income statement linked to the balance sheet? A: Net income flows into retained earnings. Q: What is goodw ill? A: Goodwill is an asset that captures ex cess of the purchase price ov er fair market v alue of an acquired business. Lets walk through the following ex ample: Acquirer buy s Target for $500m in cash. Target has 1 asset: PPE with book v alue of $1 00, debt of $50m, and equity of $50m = book v alue (A-L) of $50m. Acquirer records cash decline of $500 to finance acquisition Acquirers PP&E increases by $1 00m Acquirers debt increases by $50m Acquirer records goodw ill of $450m

Q: What is a deferred tax liability and why might one be created?

A: Deferred tax liability is a tax ex pense amount reported on a company s income statement that is not actually paid to the IRS in that time period, but is ex pected to be paid in the future. It arises because when a company actually pay s less in tax es to the IRS than they show as an ex pense on their income statement in a reporting period. Differences in depreciation ex pense between book reporting (GAAP) and IRS reporting can lead to differences in income between the two, which ultimately leads to differences in tax ex pense reported in the financial statements and tax es pay able to the IRS. Q: What is a deferred tax asset and w hy might one be created? A: Deferred tax asset arises when a company actually pay s more in tax es to the IRS than they show as an ex pense on their income statement in a reporting period. Differences in rev enue recognition, ex pense recognition (such as warranty ex pense), and net operating losses (NOLs) can create deferred tax assets. I hope y ou enjoy ed this article. Please feel free to write me with any comments or recommendations at alibman@wallstreetprep.com. Best regards, Arkady
Share this: Facebook 52 Twitter 6 Email Print More

http://www.wallstreetprep.com/blog/finance-interview-questions-and-answers/

2/4

1/22/2014

Common Finance Interview Questions (and Answers)

This entry was posted in Inv estment Banking Interv iew Prep and tagged accounting, finance interv iew, financial modeling, interv iew prep, inv estment banking, v aluation. Bookmark the permalink.

10 RESPONSES TO COMMON FINANCE INTERVIEW QUESTIONS (AND ANSWERS)

Scott McCarthy | September 21, 2011 at 10:39 pm | Reply

Great Adv ice! And so true on it being OK to say I dont know. Lov ing the new blog.

Pingback: Investment Banking InterviewThe Prospectus Musings on Investment Banking

Elaine | December 27, 2011 at 4:44 pm | Reply

This is for a job interv iew with Farmers insurance I need the answer to: Tell us why we should inv est our capital into y our business? I need the answer to this question: Why do y ou think y ou would be a good canadiate for this position?

Matan | December 27, 2011 at 4:59 pm | Reply

Tell us w hy w e should invest our capital into your business? V ery broadly the answer is going to be because the business will generate a high return. But this is a v ery broad (and likely insufficient answer). To effectiv ely answer this question, y ou need to qualify some things specifically , what is the business? Is it an early stage, growth stage, or mature stage company ? What industry does it operate in? Why does it need capital? The other side of the question is about the inv estor? Who is the inv estor? What is the inv estors inv estment horizon, risk tolerances, and objectiv es? Those are the questions y ou will want to ask (if it wasnt already clear from the question) before div ing in and prov iding an answer. For ex ample, and early stage angel inv estor may be far less interested in historical returns on inv ested capital and growth rates than more qualitativ e elements of the firm, the addressable market, etc. Meanwhile, a lender is far more interested in things like interest cov erage, and v arious other credit statistics. Why do you think you w ould be a good canadiate for this position? This is another ex tremely broad question and one that y ou will almost certainly get at any place y ou interv iew. It is completely open ended, and simply an opportunity to tell y our story . What sets y ou apart from other candidates. For an inv estment banking position, for ex ample, this is an opportunity for prospectiv e analy sts and associates to talk about and identify specific ex amples and anecdotes that highlight how they work well in teams, are willing to work ex tremely hard and long hours, and are passionate about finance and working with both numbers and people.

TRA | June 14, 2012 at 12:36 pm | Reply

Could y ou help me with the questions why does a future or position in finance/treasury ex cite y ou? I am a liberal arts major, fresh out of school, so I dont know what to say !

krits | June 26, 2012 at 12:05 am | Reply

I hav e a question that was asked in one of the interv iew. Can the customer hav e both debit and a credit note.. if y es how? Also the 1 st question they ask in the interv iew would be whts the diff bw debit and credit . As i am from a science background i cant analy se the basic transaction and answer for which i need to learn basic .. How do v analy se simple journal account.. Please help me . thnx a lot

abhishek | September 28, 2012 at 1:52 pm | Reply

I hav e few interv iews in the line.. Can y ou mail or post few more questions related to accounts/equity /deriv ativ es/banking?? Pls do it ASAP

Haseena | April 10, 2013 at 9:33 am | Reply

Can y ou mail or post few more questions related to accounts. Commonly asked question in interv iews

SHABEER ALI | April 13, 2013 at 8:44 am | Reply

http://www.wallstreetprep.com/blog/finance-interview-questions-and-answers/ 3/4

1/22/2014
Job or Fianance in .Hope y our reply soon Thanks and Regards, Shabeer

Common Finance Interview Questions (and Answers)

Its really helpful..I appreciate y our effort.Here I am kindly requesting to y ou get more normal interv iews qustion which is related to Accountant

ashvani tyagi | June 21, 2013 at 1:33 am | Reply

hello sir please send me the latast finance question for interv iew . i hav e complete MBA in finance .

Questions? Call us at 1-800-646-3575

2012 Wall Street Prep., Inc. All Rights Reserved

Learn Financial Modeling | Public Courses | Interview Prep | Corporate Training | University Training | Investment Banking Resources | Blog | Terms & Privacy

http://www.wallstreetprep.com/blog/finance-interview-questions-and-answers/

4/4