FP&A Interview Questions And Answers

Compiled By: Ankit Pandey

Source: Google

Compiled By: Ankit Pandey

S Source : Google
1.What does FP&A teams do ?
1.Financial Planning and Analysis (FP&A) teams play a crucial role in companies by
performing budgeting, forecasting, and analysis that support major corporate decisions of the
CFO, CEO, and the Board of Directors.

Very few, if any, companies can be consistently profitable and grow without careful financial
planning and cash flow management. The job of managing a corporation’s cash flow typically
falls to its FP&A team and its Chief Financial Officer (CFO).

2. What is budgeting and forecasting ?

2. Budgeting: Budgeting refers to projecting the revenues and costs of the company for the
future specific period that the business wants to achieve. It is a detailed statement of an
enterprise’s financial activity, which includes revenue, expenses, investment, and cash flow for a
particular period (often a year).
Forecasting refers to estimating what actually will be achieved by the company.
A forecast is an assessment of possible future events. At the initial planning stage, it is
compulsory to prepare to forecast possible actions for the business in the future. Forecasts are
prepared for sales, production, cost, procurement of material, and financial need of the business.

3. What’s the difference between budgeting and forecasting?

3. Budgeting is setting a plan for the future while forecasting is creating an estimate of what will
actually happen. Budgeting is a collaborative process, typically set once per year, and is static
(unless it’s a rolling budget).
A forecast is based on incoming data and sets the most probable expectation of what will
transpire, and is typically updated once a quarter.

4.Types of Budgets and Budgeting Methods ?

4.There are four common types of budgets that companies use: (a) incremental, (b) activity-
based, (c) value proposition, and (d) zero-based.

a.Incremental budgeting
Incremental budgeting takes last year’s actual figures and adds or subtracts a percentage to
obtain the current year’s budget. It is the most common type of budget because it is simple and
easy to understand.

b. Activity-based budgeting
Activity-based budgeting is a top-down type of budget that determines the amount of inputs
required to support the targets or outputs set by the company.

c.Value proposition budgeting is really a mindset about making sure that everything that is
included in the budget delivers value for the business. Value proposition budgeting aims to avoid
unnecessary expenditures – although it is not as precisely aimed at that goal as our final
budgeting option, zero-based budgeting.

d. Zero-based budgeting
As one of the most commonly used budgeting methods, zero-based budgeting starts with the
assumption that all department budgets are zero and must be rebuilt from scratch. Managers
must be able to justify every single expense.
5.What is the difference between billing and revenue?
5.Billing is the cash flow that allows companies to keep their doors open and includes all
account receivables (invoices sent to the customer). Once these invoices are paid, the amount is
converted to cash and used to pay bills, employees, etc. Projects are evaluated according to
costs, budget, timeline, and scope.
Revenue is how much is earned on a project and accounts for labor, materials, and
subcontractor costs. You have to spend money on a job (costs) in order to earn money on a job
(profit) – a concept referred to as earned revenue.

6.Walk me through the three financial statements ?

6.The balance sheet shows a company’s assets, liabilities, and shareholders’ equity, and is a
snapshot in time.
The income statement outlines the company’s revenues and expenses over a period of time
(quarter/year).
The cash flow statement shows the cash flows from operating, investing, and financing
activities over a period of time. The three financial statements all fit together to show a picture of
the company’s financial health.

7.How does an inventory write-down affect the three statements?

7.This can be one of the more challenging FP&A interview questions.
Here is the answer: On the balance sheet, the asset account of inventory is reduced by the
amount of the write-down, and so is shareholders’ equity.
The income statement is hit with an expense in either COGS or a separate line item for the
amount of the write-down, reducing net income.
On the cash flow statement, the write-down is added back to Cash from Operations, as it’s a
non-cash expense, but must not be double-counted in the changes of non-cash working capital.

8.What are the hallmarks of a good FP&A financial model?

8.First off, explain the main objectives of the FP&A department: measuring historical
performance, evaluating future business needs, highlighting issues and strengths in the business,
clearly communicating the most relevant financial information to management, instilling
confidence in the quality of information presented. A good financial model must address all of
these and be simple enough for anyone to understand, yet complex enough to handle all of the
necessary detail of the business.

9.How do you create a rolling budget or forecast model?

9.If it’s a monthly rolling forecast, you input the historical data that comes in each month at the
front of the model and extend a forecast out beyond that. When you need to add a new month to
the forecast, it should be at the end of the model. The model “rolls over” every month (or
whatever time period is used) by extending the model out one column. The same approach can
be applied to a quarterly forecast model.

10.How do you model revenues for a company?

10.This is one of the most common FP&A interview questions. There are three common ways
to forecast revenues: bottom-up, top-down, and year-over-year.

A bottom-up approach to financial modeling involves starting with individual products/services,

estimating average prices/fees per product or service and then growth rates.

A top-down approach involves starting with the overall market size, estimating a company’s
market share, and then translating that into revenue.

A year-over-year approach involves taking last year’s revenue and increasing it or decreasing it
by a certain percentage.
11.How do you model working capital for a company?
11.There are three core components of working capital – accounts receivable, inventories,
and accounts payable. These items are usually modeled to match what is happening with
revenues and cost of sales by using “turns” or “days” ratios (e.g., inventory turns or inventory
days). For example, you could look at the historic relationship between revenues and accounts
receivable by calculating receivable days. Next, you would forecast receivable days – linking it to
forecast revenues.

12.What makes a “good” budget?

12.This is one of the somewhat subjective FP&A interview questions. In our opinion, a good
budget is one that has buy-in from all departments in the company (if possible), is realistic, yet
strives for achievement, has been risk-adjusted to allow for a margin of error, and is tied into the
company’s overall strategic plan.

13. What is Variance Analysis ?

13. Variance analysis can be summarized as an analysis of the difference between planned and
actual numbers. The sum of all variances gives a picture of the overall over-performance or
under-performance for a particular reporting period. For each item, companies assess their
favorability by comparing actual costs to standard costs in the industry.

14.How would you value a company?”

14.There are three common valuation methods
a) The multiples approach in which you multiply the earnings of a company by the P/E ratio of
the industry in which it competes.
b) Transactions approach where you compare the company to other companies that have
recently sold/been acquired in that industry.
c) The Discounted Cash Flow approach, in which you discount the values of future cash flows
back to the present.

15.Which is cheaper debt or equity? Why?

15. Debt because: It is paid before equity / may have security. Ranks ahead on liquidation

16. Company has learned that due to a new accounting rule, it can start capitalizing R&D
costs instead of expensing them.
Part a) What is the impact on EBITDA?
Part b) What is the impact on Net Income?
Part c) What is the impact on cash flow?
Part d) What is the impact on valuation

Part a) EBITDA increases by amount capitalized;

Part b) Net Income increases, the amount depends on depreciation and tax treatment;
Part c) Cash flow is almost constant – however, cash taxes may be different due to depreciation
rate
Part d) Valuation is constant – except for cash taxes impact/timing on NPV

17.What is the use and purpose of Excel Pivot Table, VLOOKUP, HLOOKUP,
SUMIF, and Index Match?

a.Pivot Table is an interactive way to quickly summarize large amounts of data. It is used
to summarize, sort, reorganize, and group. It allows us to extract the significance from a
large, detailed data set.
 b.VLOOKUP: It is a function that makes Excel search for a certain value in a column, to
return a value from a different column in the same row.

c.HLOOKUP: Stands for Horizontal Lookup. It is a function that makes Excel search
for a certain value in a row, to return a value from a different row in the same column.

d.SUMIF: SUMIF is the function used to sum the values according to a single criterion.
Using this function, you can find the sum of numbers applying a condition within a
range. Similar to the name, this will sum if the criteria given is satisfied. This function
is used to find the sum of particular numbers within a large data set.
INDEX MATCH: The INDEX MATCH formula is the combination of two functions
in Excel: INDEX and MATCH.
=INDEX() returns the value of a cell in a table based on the column and row
number.
=MATCH() returns the position of a cell in a row or column.
Combined, the two formulas can look up and return the value of a cell in a table based
on vertical and horizontal criteria.

18. Ind As 115 – Five step model for Revenue Recognition.

18. Revenue recognition shows the transfer of promised goods or services in an amount that
reflects how a business expects to be compensated.
Note: Learn these 5 steps by hearts. Inside these points just have a idea, what does it means.

1.Identify the contract with the customer

2.Identify the performance obligations in the contract
3.Determine the transaction price
4.Allocate the transaction price to the performance obligations in the contract
5.Recognize revenue when, or as, the entity satisfies a performance obligation

Step 1: Identify the contract with the customer

The contract can be written, verbal, or implied and is based on your company’s ordinary
practices. The contract should outline payment terms and any other rights of your business and
the customer related to the goods or services that will be transferred.

Step 2: Identify the performance obligations in the contract

Once you’ve established the contract, identify each promise you make to the customer - the
performance obligation. A performance obligation is a distinct good or service, or a series of
distinct goods or services, that are substantially the same and have the same pattern of transfer
to the customer.

Step 3: Determine the transaction price

The contract may include fixed consideration, variable consideration, or both types. If it includes
variable consideration, estimate the amount of variable consideration you’re entitled to. You can
use the expected value method or most likely amount method to calculate this amount.

Step 4: Allocate the transaction price to the performance obligations in the contract
Assign a price to each performance obligation in the contract. Base the prices on relative
standalone selling prices like the sale of similar goods or services, a contractually stated price,
or a list price.
If you can’t directly observe a standalone selling price, you can estimate the price using one of
these methods: adjusted market assessment, expected cost plus margin, or residual.
Step 5: Recognize revenue when, or as, the entity satisfies a performance obligation
You’ll either recognize revenue over time or at a point in time. If recognizing revenue over time,
apply a single method of measuring progress for each performance obligation. Apply this
method to any similar performance obligations and remeasure the progress at the end of each
reporting period.
You can recognize revenue at a point in time if the performance obligation doesn’t meet the
criteria to recognize revenue over time. The performance obligation is met at the most practical
point in time when the customer gains control of the asset.

19. How Does GAAP Mandate the Accounting of Revenue?

19.Generally accepted accounting principles (GAAP) require that revenues are recognized
according to the revenue recognition principle, a feature of accrual accounting. This means
that revenue is recognized on the income statement in the period when realized and earned—
not necessarily when cash is received.
The revenue-generating activity must be fully or essentially complete for it to be included in
revenue during the respective accounting period. Also, there must be a reasonable level of
certainty that earned revenue payment will be received. Lastly, according to the matching
principle, the revenue and its associated costs must be reported in the same accounting
period.

20. Unearned Revenue Journal Entries.

20. Two entries will be passed

a. When the unearned revenue is Received:

Bank A/c Dr. XXX

To unearned revenue A/c Cr. XXX

b. When the unearned revenue is Earned:

Unearned revenue A/c Dr. XXX

To Revenue A/c Cr. XXX

21. Briefly explain Ind As 116 Leases.

21. Ind AS 116 sets out the principles for the recognition, measurement, presentation, and
disclosure of leases. The objective is to ensure that lessees and lessors provide relevant
information in a manner that faithfully represents those transactions.
This information gives a basis for users of financial statements to assess the effect that leases
have on the financial position, financial performance and cash flows of an entity.

Ind AS 116 introduces a single lessee accounting model and requires a lessee to recognise
assets and liabilities for all leases with a term of more than 12 months, unless the underlying
asset is of low value. A lessee is required to recognise a right-of-use asset representing its right
to use the underlying leased asset and a lease liability representing its obligation to make lease
payments.

Identifying a lease:
Below conditions need to be fulfilled if the contract is to be classified as lease: Identified asset.
Lessee obtains substantially all of the economic benefits. Lessee directs the use.

Presentation:
A lessee shall either present in the balance sheet, or disclose in the notes: Right-of-use assets
separately from other assets. Lease liabilities separately from other liabilities.
Types of Leases:
Financial lease-
A lease is classified as a finance lease if it transfers substantially all the risks and rewards
incidental to ownership of an underlying asset.
Operating lease-
A lease is classified as an operating lease if it does not transfer substantially all the risks and
rewards incidental to ownership of an underlying asset.
● Whether a lease is a finance lease or an operating lease depends on the substance of the
transaction rather than the form of the contract.

22. What is Capital budgeting? Give an example of a capital budgeting decision.

22.Capital budgeting is the process a business undertakes to evaluate potential major projects
or investments. Construction of a new plant or a big investment in an outside venture are
examples of projects that would require capital budgeting before they are approved or
rejected. As part of capital budgeting, a company might assess a prospective project's lifetime
cash inflows and outflows to determine whether the potential returns that would be generated
meet a sufficient target benchmark. The capital budgeting process is also known as
investment appraisal.
Capital budgeting decisions are often associated with choosing to undertake a new project or
not that expands a firm's current operations. Opening a new store location, for example,
would be one such decision.

23.What are the different methods of evaluating a project or investment?

● Payback period: The payback period calculates the length of time required to recoup
the original investment. Payback periods are typically used when liquidity presents a
major concern.
● Internal Rate of Return: The internal rate of return (or expected return on a project) is
the discount rate that would result in a net present value of zero. An IRR which is
higher than the weighted average cost of capital suggests that the capital project is a
profitable endeavor and vice versa. The IRR rule is as follows:
○ IRR > Cost of Capital = Accept Project
○ IRR < Cost of Capital = Reject Project
● Net Present Value: The net present value approach is the most intuitive and accurate
valuation approach to capital budgeting problems. Discounting the after-tax cash flows by the
weighted average cost of capital allows managers to determine whether a project will be
profitable or not.

24.what does it means if cash flows from operation activity is negative ?

24. A negative figure in cash flow from operating activities indicates that the organisation has
not been operating profitably and is short of cash to repay its creditors and to find the financing
of its asset replacement/business expansion.

25. How would you become an excellent financial planning Analyst ?

25. There are three skills that financial planning analysts should master.

 The first skill is the skill of analytics. As you can understand, an advanced level of
knowledge and application is necessary to master this skill.
 The second skill is the art of presentation. It’s not enough to interpret data. You also
need to present it to the organization’s key people so that critical decisions can be
made at the right time.
 The third skill is a soft skill. It is the ability to say things clearly and excellent
interpersonal skills.