COMMON 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 technical 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 theyll be doing for the next few years, especially as many finance firms will devote considerable resources to mentor and develop their new employees. 2. One recruiter weve 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 cant answer basic questions like walk me through a DCF has not sufficiently prepared for the interview, in my opinion. 3. Another added, Once a knowledge gap is identified, its typically very difficult to reverse the direction of the interview. 4. 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. 5. Its ok to say I dont know a few times during the interview. If interviewers think that youre making up answers, theyll 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 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 interviewers to gauge your knowledge level without the need to ask more complex valuation/finance questions.Below we have selected most common accounting 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, 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.

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 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. Lets walk through the following example: Acquirer buys Target for $500m in cash. Target has 1 asset: PPE with book value of $100, debt of $50m, and equity of $50m = book value (A-L) of $50m.

Acquirer records cash decline of $500 to finance acquisition Acquirers PP&E increases by $100m Acquirers 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 companys 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. Please feel free to write me with any comments or recommendations at alibman@wallstreetprep.com. Best regards,

Arkady

This entry was posted in Investment Banking Interview Prep and taggedaccounting, finance interview, financial modeling, interview prep, investment banking, valuation. Bookmark the permalink. 7 RESPONSES TO COMMON FINANCE INTERVIEW QUESTIONS (AND ANSWERS)

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

Great Advice! And so true on it being OK to say I dont know. Loving the new blog.

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Pingback: Investment Banking InterviewThe Prospectus Musings on Investment Banking

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

This is for a job interview with Farmers insurance

I need the answer to: Tell us why we should invest our capital into your business?

I need the answer to this question: Why do you think you would be a good canadiate for this position?

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

Tell us why we should invest our capital into your business? Very broadly the answer is going to be because the business will generate a high return. But this is a very broad (and likely insufficient answer). To effectively answer this question, you 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 investor? Who is the investor? What is the investors investment horizon, risk tolerances, and objectives?

Those are the questions you will want to ask (if it wasnt already clear from the question) before diving in and providing an answer. For example, and early stage angel investor may be far less interested in historical returns on invested capital and growth rates than more qualitative elements of the firm, the addressable market, etc. Meanwhile, a lender is far more interested in things like interest coverage, and various other credit statistics.

Why do you think you would be a good canadiate for this position? This is another extremely broad question and one that you will almost certainly get at any place you interview. It is completely open ended, and simply an opportunity to tell your story. What sets you apart from other candidates. For an investment banking position, for example, this is an opportunity for prospective analysts and associates to talk about and identify specific examples and anecdotes that highlight how they work well in teams, are willing to work extremely hard and long hours, and are passionate about finance and working with both numbers and people.