Finance Interview Questions & Answers

Question 1. What Is Working Capital?

Answer :

By definition, working capital is current assets minus current liabilities. The working capital figure shows a financial manager how much of an organization's cash is tied up in items such as accounts receivables and inventory. It also indicates how much cash is going to be required to pay off short term debt and obligations over the next year.

Question 2. Why Do Capital Expenditures Increase An Organization's Assets (pp&e), While Other Expenditures, Like Paying Taxes, Employee Salaries, Utility Bills, Etc. Do Not Increase An Organization's Asset Base, But Instead Show Up As Expenses On The Income Statement That Reduce Equity Via Retained Earnings?

Answer :

Unlike general expenses that provide benefit over a short period time (i.e., employee's work, taxes, etc.), capital expenditures provide benefit over a longer period of time. Due to the duration of their estimated benefit--usually several years--capital expenditures are capitalized on the balance sheet, where shorter term expenditures are expensed on the income statement. This is the difference between an asset and an expense.

Question 3. Explain To Me What A Cash Flow Statement Is And How It Works.

Answer :

You'll want to start with net income and then proceed line by line through the major adjustments (depreciation, deferred taxes, and working capital changes) required to arrive at cash flow from operations. In your explanation you'll also want to mention the following: Capital expenditures, purchase of intangible assets, sale of real assets, and purchase/sale of investment securities to find cash flow generated from investing activies.

• Issuance/repurchase of dept, sale of equity, and payment of dividends to find cash flow from financing activites.
• Adding the cash flows from operating, investing and financing activities your able to come up with the total change in cash.
• By taking the cash balance at the beginning of the period and adjusting it for the total change in cash you arrive at the cash balance at the end of the period.

Question 4. Is It Possible For A Company To Have Positive Cash Flow But Be In Serious Financial Trouble?

Answer :

Yes, it is. A company that is selling off inventory but delaying payables will show positive cash flow for a while even though they're in trouble. Another example would be where a company has strong revenues for the period but future forecasts show that revenues will decline. This would happen when a company hasn't focused on making sure there were new prospects/sales in the pipeline.

Question 5. Is It Possible For A Company To Show Positive Net Income And Still Go Bankrupt?

Answer :

Absolutely. A company that's experiencing a deterioration of working capital (i.e. decrease in accounts payable, increase in accounts receivable) can show positive net income but be in financial trouble in the future. It's also possible to show positive net income while in financial trouble by manipulating financial statements (e.g. revenue recognition, expense recognition, etc.)

Question 6. A Company Purchases A Piece Of New Equipment. Explain The Impact Of The Purchase On The Income Statement, Balance Sheet, And Statement Of Cash Flows.

Answer :

At the time of the purchase, there is a cash outflow (cash flow statement) and PP&E goes up (balance sheet). Over the life of the asset it is depreciated. This shows up a reduction in net income (income statement) and PP&E (balance sheet) decreases by the amount depreciated. At the same time retained earnings (balance sheet) also goes down. However, the depreciation is added back in the cash from operations section (cash flow statement) as it is a non-camsh expense the reduced net income.

Question 7. What Is Goodwill And How Is It Accounted For?

Answer :

Goodwill is an intangible asset that is defined as the excess value of the purchase price over the fair market value (book value) of an acquired business. For example, if Walmart is sold for $100 billion with PP&E book value of $50 billion, equity of $30 billion, and debt of $10 billion, then the goodwill paid for Walmart would be $30 billion--the total sales price ($100 billion) minus the book value (Assets-Liabilities) of $70 billion.

The organization acquiring Walmart would show a decrease in cash of $100 billion to finance the acquisition, an increase of $50 billion to PP&E, an increase of debt of $10 billion, and goodwill of $30 billion.

Question 8. Why Are Increases In Accounts Receivable A Cash Reduction On The Cash Flow Statement?

Answer :

Net income has to be adjusted to reflect an increase in accounts receivable since the company never actually received the funds. As the cash flow statement begins with net income, it shows a cash reduction what accounts received increases.

Question 9. What Is A Deferred Tax Asset And What Is Its Purpose?

Answer :

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.

Question 10. What Is A Deferred Tax Liability And What Is Its Purpose?

Answer :

A deferred tax liability is just the opposite of a deferred tax asset. The deferred tax liability occurs when a tax expense reported on the income statement is not paid to the IRS during the same period it is recognized--it's paid at a future date. Deferred tax liabilities can result when there are differences in depreciation expense between book reporting (GAAP) and IRS reporting which lead to differences income as reflected on a companies income statement versus what's reported to the IRS--and which results in lower taxes payable to the IRS (in the short run).

Question 11. What Is The Difference Between Real Money & Nominal Money?

Answer :

Nominal money is related to the measure of counting. nominal figure is what is written on the bill. where as real money relates to it's purchasing power.

for eg: if 10 units in nominal money can buy 2 chocolates in 1980 and 1 chocolate in 2000, in the same way, 10 units of nominal money is 10units of real money in 1980 and 5 units of real money in 2000.

Question 12. What Is Treasury Bills?

Answer :

Treasury Bills are money market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value.

Question 13. What Is Networth?

Answer :

Networth is the total assets minus total liabilities of a company.

Question 14. What Is Carecredits Healthcare Financing? How Does It Work?

Answer :

CareCredit's healthcare financing is unique. Unlike a traditional credit card, CareCredit offers financing specifically for healthcare treatments and procedures. These treatments can include much needed family dental work, cosmetic surgery or even veterinary services for your family's pet. It's easy to apply for CareCredit financing online at carecredit.com and you find out instantly if you are approved. CareCredit also gives you a 'No Interest' option, as well as an Extended Payment Plan (EPP) which helps you select a payment plan that works for you. This convenience allows you to start using your CareCredit account immediately. CareCredit healthcare financing is accepted at 100,000 practices, which makes finding a participating provider simple. 

Question 15. What Is The Difference Between Journal Entry & Ledger?

Answer :

• A journal is also called as a book of prime entry.
• transactions occured are first entered in this book to show which accounts should be debited and which should be credited. 
• on the basis of entries made in the journal, accounts are prepared, the book which contains the accounts is called a ledger. 
• transactions entered in the journal are classified according to their nature and posted in their respective accounts in ledger. 
• it is also called as book of final entry.

Question 16. What Are Debentures?

Answer :

A Debenture is " A certificate of agreement of loans which is given under the company's stamp and carries an undertaking that the debenture holder will get a fixed return and the principal amount whenever the debenture matures.

Question 17. Walk Me Through A Cash Flow Statement?

Answer :

• Start with net income, 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 total change of cash.
• Beginning-of-period cash balance plus change in cash allows you to arrive at end-of-period cash balance.

Question 18. 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?

Answer :

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.

Question 19. Why Are Increases In Accounts Receivable A Cash Reduction On The Cash Flow Statement?

Answer :

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.

Question 20. I Buy A Piece Of Equipment, Walk Me Through The Impact On The 3 Financial Statements.

Answer :

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).

Question 21. How Is It Possible For A Company To Show Positive Net Income But Go Bankrupt?

Answer :

Two examples include deterioration of working capital (i.e. increasing accounts receivable, lowering accounts payable), and financial shenanigans.

Question 22. Is It Possible For A Company To Show Positive Cash Flows But Be In Grave Trouble?

Answer :

Absolutely. Two examples involve 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

Question 23. How Is The Income Statement Linked To The Balance Sheet?

Answer :

Net income flows into retained earnings.

Question 24. What Is A Deferred Tax Liability And Why Might One Be Created?

Answer :

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.

Question 25. What Is A Deferred Tax Asset And Why Might One Be Created?

Answer :

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.

Question 26. What Is Put Option?

Answer :

A "Put option" gives the holder the right but not obligation to sell an asset by a certain date for a certain price.

Question 27. What Is Authorized Capital?

Answer :

Authorized capital is the maximum capital that a company is authorized to raise.

Question 28. What Is Discount Cash Flow Management?

Answer :

The DCF for an investment is calculated by estimating: the cash that you will have to pay out, and the cash which you expect to receive back. The timeframes that you expect to receive the payments must also be estimated. Each cash transaction must then be recalculated, by subtracting the opportunity cost of capital between now and the moment when you will pay or receive the cash.

Question 29. What Is Bull Market?

Answer :

A financial market of a group of securities in which prices are rising or are expected to rise.

Question 30. Different Types Of Insurance

Answer :

Types of insurance:
1. Auto insurance.
2. home insurance.
3. health insurance.
4. Disability.
5. casualty.
6. life.
7. property.
8. other types insurance.
9. insurance financing vehicles.
10. closed community self insurance.

Question 31. Who Is A More Senior Creditor, A Bondholder Or Stockholder?

Answer :

The bondholder is always more senior. Stockholders (including those who own preferred stock) must wait until bondholders are paid during a bankruptcy before claiming company assets.

Question 32. What Is Inflaition?

Answer :

In economic terms, inflation is the rise in the prices of goods and services in the given economy over a period of time. As the prices rise, each unit of the country's currency will buy fewer goods and services.

Question 33. What Kind Of Stocks Would You Issue For A Startup?

Answer :

A startup typically has more risk than a well-established firm. The kind of stocks that one would issue for a startup would be those that protect the downside of equity holders while giving them upside. Hence the stock issued may be a combination of common stock, preferred stock and debt notes with warrants (options to buy stock).

Question 34. What Is Trial Balance?

Answer :

It is statement of balances of all the accounts in the ledger prepared to prove the arithmetical accuracy of the books of accounts.

Question 35. What Is Your Investing Strategy?

Answer :

Different investors have different strategies. Some look for undervalued stocks, others for stocks with growth potential and yet others for stocks with steady performance. A strategy could also be focused on the long-term or short-term, and be more risky or less risky. Whatever your investing strategy is, you should be able to articulate these attributes.

Question 36. What Is Demat Account? What Is The Use Of It?

Answer :

Demat means Dematerialisation of share, in simple it is an account with which a person can trade in security market without which a person cannot buy or sell any share in security market.

Question 37. What Is Retained Earnings?

Answer :

When a company or corporation earns a profit or surplus, that money can be put to two uses it can either be re-invested in the business called retained earnings or it can be paid to the shareholders as a dividends.

Question 38. What Is The Difference Between Asset Management And Invest Management?

Answer :

Investment and asset are really close in meaning.Investment is when you put your money in stock, bond or other financial instruments. Whereas Asset is what you own generally reffered to land, proprietorship , factory, etc.

Question 39. Why Would An Investor Buy Preferred Stock?

Answer :

An investor that wants the upside potential of equity but wants to minimize risk would buy preferred stock. The investor would receive steady interest-like payments (dividends) from the preferred stock that are more assured than the dividends from common stock.

The preferred stock owner gets a superior right to the company's assets should the company go bankrupt.

A corporation would invest in preferred stock because the dividends on preferred stock are taxed at a lower rate than the interest rates on bonds.

Question 40. What Is Crossover Rate?

Answer :

Crossover rates have to do with the amount of earnings that are generated by two different but similar projects. The crossover rate is the point at which the two projects achieve the same net present value. In terms of investments,calculating a crossover rate between two similar securities can help an investor determine what to buy and what to sell.

Question 41. Define Fair Value?

Answer :

Fair Value is an accounting expression, originally defined by the SEC.Under GAAP, the Fair Value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties, other than in a liquidation. On the other side of the balance sheet, the Fair Value of a liability is the amount at which that liability could be incurred or settled in a current transaction between willing parties, other than in a liquidation.

If available, a quoted market price in an active market is the best evidence of Fair Value and should be used as the basis for the measurement. If a quoted market price is not available, preparers should make an estimate of Fair Value using the best information available in the circumstances. In many circumstances, quoted market prices are unavailable. As a result, making estimates of Fair Value is often difficult.

Question 42. What Is Meant By Take Over?

Answer :

In business, a takeover is the purchase of one company by another.

Question 43. What Is Secondary Market?

Answer :

Secondary market refers to market where securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange.

Question 44. What Is Call Option?

Answer :

Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date.

Question 45. What Is Raroc?

Answer :

RAROC is a risk-adjusted framework for profitability measurement and profitability management. It is a tool for measuring risk-adjusted financial performance. And it provides a uniform view of profitability across businesses (Strategic Business Units / divisions). RAROC and related concepts such as RORAC and RARORAC are mainly used within (business lines of) banks and insurance companies. RAROC is defined as the ratio of risk-adjusted return to economic capital.

Question 46. What Is The Internal Rate Of Return(irr) Of Eurekaforbes?

Answer :

Internal Rate of Return is that rate of Return at which the net present value is equal to Zero or it is the Rate which equates the present value of the cash inflows to the cash outflows.

Question 47. What Is Eps?

Answer :

Earning per share thats portion of stehcompay profit.

Question 48. What Is Hedging?

Answer :

Hedging is a tool to minimize the risks. It is thus like an 'insurance' where one pays a premium but gets an assured amount in case of some uncertain event to the extent of the loss actually suffered on an equally opposite position for which the hedge was done. Thus, hedger is different from arbitrageur and speculators, as the intention here is not to maximize the profit but to minimize the loss.

E.g. In Capital Markets, suppose an investor has an equity portfolio of Rs. 2 lacs and the portfolio consists of all the major stocks of NIFTY. He thinks the market will improve in the long run but might go on a downside in the shortrun. NIFTY today stands at 4300. To minimize the risk of downfall, he enters into an option contract by buying NIFTY-PUT of strike 4300 at a premium of, say, Rs. 100. Thus, the actual amount paid is Rs. 5,000(lot size of NIFTY is 50). Also, the number of NIFTY-PUTs to be bought will vary on the beta of the portfolio so as to completely hedge the positon. 

Question 49. What Is The Punch Line Of Job?

Answer :

No matter how efficiently goods / services are produced, if they cannot be delivered to the customer in the quickest possible time it is vain.

Question 50. What Is The Entry For Deprecation?

Answer :

• Depreciation Account Dr
• Accomulated Deprecitation Account Cr

Question 51. What Is Preference Capital?

Answer :

Preference Capital is the capital which carries preference over Equity capital at the time of Payment of dividend and at the time of winding up of the comapany.

Question 52. What Are The Two Most Basics Financial Statements Prepared By The Companies?

Answer :

Financial statements are prepared in two forms:

Balance Sheet is a position statement as it refers to a particular date. It is also referred to as Statement of Sources and Application of Funds. It informs about the various sources used by the organization which are technically known as liabilities to raise the funds which are referred as assets.

Profitability Statement also known as Profit and Loss Account. It is a period statement as it refers to a particular period.

Question 53. What Are The Various Systems Of Accounting? Explain Them.

Answer :

There are two systems of Accounting:

1. Cash System of Accounting: This system records only cash receipts and payments. This system assumes that there are no credit transactions. In this system of accounting, expenses are considered only when they are paid and incomes are considered when they are actually received. This system is used by the organizations which are established for non profit purpose. But this system is considered to be defective in nature as it does not show the actual profits earned and the current state of affairs of the organization.

2. Mercantile or Accrual System of Accounting: In this system, expenses and incomes are considered during that period to which they pertain. This system of accounting is considered to be ideal but it may result into unrealized profits which might reflect in the books of the accounts on which the organization have to pay taxes too. All the company forms of organization are legally required to follow Mercantile or Accrual System of Accounting.

Question 54. Explain Balanced Capitalization.

Answer :

Capitalization is a collection of share capital, loans, reserves and debentures. It represents permanent investment in companies and it also removes the need of long-term loan plans. It is used to show the reality of the industry by promoting competition, development, profit and investment between individuals, companies and businesses. Balance capitalization is part of this Capitalization only where it is compared to the relative importance, value and other things to make it proportionate in every sense. In balance capitalization debits and credits should be equal on both sides and the share should be shared among all in equal proportions.

Question 55. What Is Capital Structure? What Are The Principles Of Capital Structure Management?

Answer :

Capital structure is a term which is referred to be the mix of sources from which the long term funds are required for business purposes which are raised to improve the capital of the company. To fund an organization plan this capital structure is required which is the combination of debt and equity. The management ensures the capital structure accesses which are needed to fund future growth and enhance financial performance. 

Question 56. What Are The Principles Of Capital Structure Management?

Answer :

The principles of capital structure management which are essentially required are as follows:

1. Cost Principle
2. Risk Principle
3. Control Principle
4. Flexibility Principle
5. Timing Principle

Question 57. What Is Composite Cost Of Capital? Explain The Process To Compute It?

Answer :

Composite cost of capital is also known as weighted average cost of capital which is a measurable unit for it. It also tells about the component costs of common stock, preferred stock, and debt. Each of these components is given a weight on the basis of the associated interest rate and other gains and losses with it. It shows the cost of each additional capital as against the average cost of total capital raised. The process to compute this is first computing the weighted average cost of capital which is the collection of weights of other costs summed together.

The formula is given as:
WACC= Wd (cost of debt) + Ws (cost of stock/RE) + Wp (cost of pf. Stock)

In this the cost of debt is calculated in the beginning and it is used to find out the cost of capital and other weights of cost is been calculated after the calculation each and every individual weight of the component is added and then it gives the final composite cost.

Question 58. What Are Adjustment Entries? Why Are They Passed?

Answer :

Adjustment entries are the entries which are passed at the end of each accounting period to adjust the nominal and other accounts so that correct net profit or net loss is indicated in profit and loss account and balance sheet may also represent the true and fair view of the financial condition of the business.

It is essential to pass these adjustment entries before preparing final statements. Otherwise in the absence of these entries the profit and loss statement will be misleading and balance sheet will not show the true financial condition of the business.

Question 59. What Is Cost Accountancy? What Are The Objects Of Cost Accountancy?

Answer :

Cost accountancy is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability as well as the presentation of information for the purpose of managerial decision making.

Following are the objects of Cost Accountancy :

• Ascertainment of Cost and Profitability
• Determining Selling Price
• Facilitating Cost Control
• Presentation of information for effective managerial decision
• Provide basis for operating policy
• Facilitating preparation of financial or other statements

Question 60. What Is The Difference Between Costing And Cost Accounting?

Answer :

Costing is the process of ascertaining costs whereas cost accounting is the process of recording various costs in a systematic manner, in order to prepare statistical date to ascertain cost.